DP19846 The Credit Suisse Dilemma
The collapse of Credit Suisse highlights the limitations of bail-in mechanisms in preventing bailout. Regulatory authorities, faced with the decision of triggering bail-inable debt, may ultimately opt for alternative solutions, effectively sidestepping these mechanisms. This paper explores what we term the "Credit Suisse Dilemma"—a paradox where bail-in bonds, designed to reduce government intervention during a banking crisis and decrease the tax burden, can inadvertently increase the scale of such intervention if banks are bailed out without converting these bonds into equity. We present a simple model illustrating this paradox and discuss ways to address the dilemma, including a novel exchange mechanism whereby banks would replace bail-in bonds with higher levels of common equity at a pre-determined conversion ratio.
