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By Fiona Mann of the Bank's Prudential Policy Division
Following the financial crisis, there is renewed interest in harnessing discipline from holders of bank debt in support of financial stability. Bondholders in theory have incentives to constrain risk-taking that align well with those of regulators.
Initiatives have started to address some of the obstacles to effective discipline from bank bondholders. Greater transparency in public disclosures allows creditors to better assess the underlying risks of banks. Measures have also been put in train to remove expectations - or the materialisation - of government support for banks. These steps are likely to improve both the capacity and the motivation of bondholders to exert discipline on risk-taking.
Creditors have limited formal say in the strategic decisions of companies. Reforms to redress weak incentives for creditors, together with a growing volume of deeply subordinated debt, may catalyse bondholders and bank issuers to re-evaluate how they engage with each other.
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