Reform bank capitalisation

Author: | Published: 1 Dec 2008

There is nothing like a crisis to challenge some of our most deeply held assumptions. The unprecedented need for financial institutions to recapitalise on a huge scale has exposed weaknesses in the capital raising process and the functioning of the markets. It also questions some fundamental assumptions about shareholders' rights. Can, or indeed even should, they always be reconciled with the need to recapitalise quickly in a crisis?

Looking back at 2008, the recapitalisations of financial institutions have been many and varied, either as ad hoc capital raisings or as part of wider, government-sponsored schemes to restore the proper functioning of the banking system. There has been no one-size-fits-all; they have included pre-emptive offerings to existing shareholders, capital injections by strategic investors, government-sponsored liquidity and guarantee programmes, rescue mergers and acquisitions, partial nationalisations, full nationalisations and a combination of the above.

Most recently, US financial institutions have tended to favour...