Moody's Investors Service says Australian regulators remain cautious over whether to mandate a bank creditor bail-in regime and, until this changes, local banks will benefit from a ratings uplift. The introduction of "a credible bail-in regime" could, however, result in a transfer of risk towards banks' creditors and a reduction in "support assumptions underpinning the banks' senior debt ratings", the ratings agency has warned via a "special comment" - effectively a new position paper - released yesterday. "The policymakers' cautious stance is supportive of the Australian banks' senior unsecured debt ratings, since it lowers the likelihood of a statutory bail-in regime being introduced in Australia in the near term," said Ilya Serov, a Moody's vice president and senior credit officer. Moody's conclusions are based on the first batch of second-round submissions to the Australian Financial System Inquiry, published on 29 August 2014 in response to the FSI's Interim Report. These submissions included those from the Australian Prudential Regulation Authority and the Reserve Bank of Australia and reveal a "nuanced" stance towards bail-in, according to Moody's. This approach recognises "the higher-than-usual costs of introducing a bail-in regime in a banking system characterised by a high degree of interconnectedness [like Australia's] and reliance on offshore wholesale funding", Serov noted. The Moody's report repeats other widely held opinions, such as those circulated by UBS Australia's banking analysts last week, that requiring the banks to hold higher levels of bail-inable gone-concern loss-absorbing capital, coupled with a strengthening of APRA's crisis resolution powers, appears to be the industry's preferred policy alternative.In Moody's view, the approach favoured by APRA and other regulators means senior unsecured creditors of the major national and larger regional banks benefit from "a high likelihood" that the government would provide support if required. Nevertheless, this "cautious approach" is at odds with the views of the Financial Stability Board - and Australia is a signed up member of the FSB - which increases the probability that Australia may ultimately be pressured to adopt a bail-in regime. With that in mind, Moody's pointed to the concentration and inter-connectedness of Australia's bank industry, where the four majors account for over 80 per cent of all loans, and questioned the resolve of the government to let banks fail: "... even if Australia ultimately introduces a bail-in regime, we would need to evaluate the likelihood that it would be used as the primary policy tool to resolve a troubled bank," Moody's concluded.