Earlier I mentioned that bail-in may leave unsecured depositors exposed to a higher loss given default. But it doesn’t stop there. There are at least four further potential knock-on effects:
Collateralised bonds (covered bonds, MBS) become more attractive to investors. But encumbrance limits restrict the amount of funding that is available to issuers and reign in the ability of banks to leverage their balance sheet.
Encumbrance makes other forms of funding a lot more expensive as unsecured depositors and senior bond holders recognise their now weakened position.
Retail funding becomes increasingly more competitive (expensive) as banks try and hoover up alternative uncollateralised funding sources.
The cost of borrowing from a bank will rise. This rebalancing favours savers. Is financial repression doomed?