During the financial crisis, certain national authorities imposed losses on holders of senior unsecured debt obligations of financial institutions either in connection with or as a condition to capital injections or other recapitalisation efforts. In the aftermath of the financial crisis, the notion that holders of senior unsecured debt of financial institutions should bear losses prior to any taxpayer funded recapitalisations has gained momentum and this approach is now reflected in various regulatory proposals. It is reflected globally in new legislation and regulatory proposals that banks and other financial institutions be required to issue debt with ‘bail-in’ features – that is debt subject to write-down or to conversion into equity under certain circumstances. In the EU, a consultation paper setting out the technical details of a proposed framework for bank resolution contemplated the imposition of bail-in features for certain debt. Additional clarity is expected before the end of this year with the publication of a draft EU Directive on Recovery and Resolution Plans. It is anticipated that the approach outlined in the directive might include enhanced powers for regulatory authorities to write off or convert into equity all senior unsecured debt, subject to certain exemptions, and a requirement that banks issue specified amounts of ‘bail-in’ debt. In the United States, the orderly liquidation authority provisions under the Dodd-Frank Act create a construct for creditor hair cuts in the context of a liquidation.
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