The market gives regulators some credit. U.S. banks’ credit default swaps are not baking-in a much higher chance of the government stepping in than they are for ordinary companies. The 10-year credit default swap spread on six large U.S. banks is around 110 basis points, in line with spreads on corporate company debt.
Meanwhile, investors are receiving a premium for debt that is expected to take losses in a bail-in versus that which isn’t, charging banks for the support governments once volunteered. In Europe, the spread between senior debt eligible and ineligible to be hit is about 50 basis points for Santander. Bank of America’s holding-company debt pays a premium of about 30 basis points to its bank securities. Estimates for the historic subsidy for too-big-to-fail banks range from 25 basis points to 80 basis points, according to the Bank of England.
Dimon might still be wrong. Banks haven’t yet issued enough debt. In extreme cases, losses have exceeded bail-inable reserves. Cross-border banks may prove harder to resolve if authorities squabble over losses. Yet bond investors suggest regulators cannot be relied on to wimp out.
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