While avoiding the complexity, costs and moral hazard of deposit insurance, ex ante the prospect of bank creditor recapitalisations may provide creditors with an incentive to monitor their bank and insist on levels of capital closer to the socially optimal level. A credible creditor recapitalisation option may avoid the need for and inefficiency induced by a deposit insurance regime.
It may avoid the need for intrusive regulatory oversight. It seeks to protect the taxpayers interest. It may significantly reduce the public subsidy to depositors and other bank creditors arising from the put option they have not paid for and reduce the excess returns to bank shareholders from running an undercapitalised bank.