Even though bail-out programs clearly have its advantages, but it is recommended for government to use bail in approach and wind-down plan which are better than bail-out to prevent banks from becoming insolvent. A bail-in approach refers to the process of saving a bank by making it use up its internal resources. It would allow the bank to know how much debt they own to creditors or to convert it to equity. A bail-in can be used in the event of a failure of a systemic bank such as before a bankruptcy and under current proposals. Moreover, it tends to focus on imposing losses on the creditors of failing financial institutions rather than on taxpayers. Therefore, it replicates how creditors would incur losses if the bank becomes insolvent, while ensuring that the bank still can operate and provide important services to its customers. By quickly managing the issues of sickly organizations, they could also help to stabilize the system of financial by removing uncertainty. Thus, the bail-in could be seen as a form of insurance against bank insolvency (Financial Times, 2014).
Furthermore, governments believe that big companies have bigger chance to collapse, therefore by using bail-in approach, the governments could tackle the “too big to fail” problem. A bail-in also helps to ensure that in the future, the taxpayers are not required to bear the burden of the failed bank (Financial Times, 2014).
Second recommendation is to apply a wind-down plan to prevent bank from experiencing bankruptcy in the future. By applying a wind-down approach which will not require a tax subsidy over the rest of the financial system, government could protect taxpayers from bailing out’s necessity. Besides that, the wind-down plan is able to increase market discipline as it could exclude implicit government guarantee. The last is to anticipate some of the spillover cost that may happen if the bank becomes insolvent in the future. Therefore, wind-down plan can be described as a form of maintaining a business continuation plan (Herring, 2009).
By implementing the wind-down approach, the moral hazard can be reduced, as the bank’s insolvency can be managed in such a way, thus it will impose losses on...