Starting with bank funding, the bail-in rules transfer risk from taxpayers to unsecured bondholders. In this way, they counterbalance the perceived implicit subsidy from which some very large or highly interconnected institutions have benefited, leading to excessively low funding costs, particularly in good times.
As a result of this increased risk, holders of bailinable liabilities may be expected to ask, everything being equal, for a higher return. The cost of funding for such liabilities would reflect more accurately their actual risks. How will this affect banks’ overall cost of funding? This is not easy to answer definitively. There are many factors that we have to take into account.