What happened in Cyprus looks very new to people not familiar with Bail-Ins. We are more familiar with Bail-outs, government or other parties coming to the rescue of misbehaving too big to fail institution.
In the case of a bail-in, not just in banks, regulators would have the power to impose losses on bondholders while leaving untouched other creditors of similar stature, such as derivatives counterparties. By quickly addressing the problems of sickly institutions, they would also help stabilize the financial system by removing uncertainty.
David Kotok guest wrote a good article on this at Barry Ritholtz’s blog. I urge folks interested in the subject to read it.
New Zealand, which is moving away from bailout to a complete system of bail-in, is an example of a place where banking has become more dangerous. The government of New Zealand has essentially declared that insurance is too costly and cannot be ...
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