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Measures Aimed at Enhancing the Loss Absorbency of Regulatory Capital at the Point of Non Viability

by Marianne Ojo of the University of Bremen & Oxford Brookes University

September 2010

Abstract: The Basel Committee's recent consultative document on the "Proposal to Ensure the Loss Absorbency of Regulatory Capital at the Point of Non Viability" sets out a proposal aimed at "enhancing the entry criteria of regulatory capital to ensure that all regulatory capital instruments issued by banks are capable of absorbing losses in the event that a bank is unable to support itself in the private market."

As well as demonstrating its support of the Basel Committee's statement that a public sector injection of capital should not protect investors from absorbing the loss that they would have incurred (had the public sector not chosen to rescue the bank), this paper also highlights identified measures which have been put forward as means of rescuing failing banks - without taxpayer financing. Furthermore, it highlights why the controlled winding down procedure also constitutes a means whereby losses could still be absorbed in the event that a bank is unable to support itself in the private market.

JEL Classification: D53, K2, E58, G01.

Keywords: capital, insolvency, financial crises, moral hazard, Basel III, Investor Compensation Schemes Directive, bail outs, equity, liquidity.

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