into their lending activity. 12 a very recent paper, to be presented in this conference, suggests that banks more reliant on relationship lending are in a better position to shield borrowers from shocks. finally, any assessment of the effect of bail - in on bank lending and ultimately on economic welfare should take into account the general equilibrium benefits of reallocating risk to those who have the ability to monitor and eventually absorb it : shareholders and debt - holders. as noted by paul tucker, there is no place to hide risk : if the risk in banking is not incorporated in the yields of bonds issued by banks themselves, then it will be reflected in higher to give a flavour of the issues markets will have to consider, we can look at the literature on contingent convertibles bonds tied to market evaluation, or cocos – see among others, o. hart and l. zingales, 2011, “ a new capital regulation for large financial institutions ”, journal of antitrust enforcement, vol. 13, pp. 453 – 490. the literature have shown that if bail - in takes place at too low share values, a “ death spiral ” can occur whereby the bail - in leads to a decrease in stock prices which triggers additional bail - in ( p. hillion and t. vermaelen, 2004, “ death spiral convertibles ”, journal of financial economics, vol. 71, pp. 381 – 415 ). at the same time, it is essential that the conversion is triggered early enough and leads to enough dilution of existing shareholders. if not, then the conversion of the debt into capital will increase the value of the firm for shareholders after losses arise, with the perverse effect of increasing risk - taking incentives ( see c. berg and t. kaserer ( 2012 ), “ does contingent capital induce excessive risk - taking and prevent an efficient recapitalization of banks? ”, new york university and humboldt university. ) a somewhat related issue is that banks may have a perverse incentive to increase the risk of its assets ’ returns in order to transfer value from contingent capital investors to the original bank shareholders ( g. pennacchi, 2011, “ a structural model of contingent capital ”, federal reserve bank of cleveland, working paper no. 10 - 04 ). in principle, this is less an issue in the case of mandatory bail - ins, since the conversion of debt into equity occurs at the point of nonviability. in practice, however, it

, 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. let me list four of them. first, the systemic importance of the bank. the greatest effect of the new bail - in rules should in principle be on those banks that would in the past have benefited most from an implicit guarantee. in other words, it should affect more significantly systemically important financial institutions ( sifis ). and among the sifis, it should affect the riskiest banks the most. second, the bank ’ s liability structure. for those banks that fall short of the bail - inable debt requirements, the directive will force them to increase their unsecured liabilities, since secured ones cannot be bailed - in. this could increase overall funding costs, as it would require banks to adapt their liability structure such that more costly debt plays a greater role. but equally, the higher share of senior unsecured liabilities could also result in a lower level of encumbered assets, possibly lowering the overall cost of funding. indeed, asset encumbrance makes balance sheets more complex and poses significant challenges to investors in assessing banks ’ riskiness, which may result in higher risk premia for unsecured debt, especially at a time where the overall demand for collateral assets is expected to increase. 5 moreover, we need to consider the effect on the overall cost of funding from the strengthening of depositor protection, which has a potential to reduce the relative interest rate paid on deposits compared to unsecured debt. while depositors have, in normal times, low sensitivity to risk and any decline in their cost is expected to be limited ; deposits typically represent a large share of the overall bank debt. as a result, even small reductions in the remuneration of deposits could produce a significant impact on the overall cost of funding. on top of this, banks that already meet the minimum bail - inable debt requirement may adjust their liability structure to incorporate a larger fraction of deposits. third, to assess the