Bail-In Definition
A bail-in refers to the rescue of a financial institution that is on the brink of failure by making its creditors and depositors take a loss on their holdings. This strategy is considered as an alternative to bailouts, which involves government intervention, or even insolvency.
Bail-In Key Points
- A bail-in helps to relieve financial stress on a struggling company by making its creditors bear some of the burden.
- It’s often seen as a more sustainable solution compared to bailouts as it does not require the use of taxpayer money or government intervention.
- A bail-in generally requires a restructuring of the institution’s debt and equity structure.
- It may lead to a reduction in the value of shares or bonds of the company.
What is a Bail-In?
A bail-in is a process where the creditors of a struggling financial institution are forced to bear some of the burden by cancelling a part of or all of the principal of their claims or by converting them into shares or other securities. This measure is usually taken to prevent the company from going bankrupt and to rehabilitate it.
Why is Bail-In Used?
Bail-in is employed as an alternative to bankruptcy or taxpayer-funded bailouts when a financial institution is in financial distress. This process can help to prevent the spread of financial instability, protect the deposits of the firm’s customers, and maintain the continuity of its essential functions.
Where are Bail-Ins Used?
Bail-ins can be used in any country that has incorporated a bail-in policy into its financial stability framework. This includes most developed economies like in the European Union and the United States, which used bail-ins during the 2008 financial crisis.
When are Bail-Ins Applied?
Bail-ins are applied when a financial institution is in severe financial distress but its failure is perceived to have system-wide implications that policymakers wish to avoid. It is an emergency measure taken to keep the financial institution afloat.
Who Decides on a Bail-In?
The decision to execute a bail-in is typically made by financial regulatory authorities. They take this decision based on an evaluation of the potential impact of the institution’s failure on the greater financial system.
How are Bail-Ins Executed?
Bail-ins are executed by converting a part or all of the company’s debt into equity, thereby giving the creditors a stake in the future of the business. This change in the nature of the creditor’s claim often results in effective recapitalization. The process of bail-in itself therefore potentially reinforces the company’s balance sheet, in turn providing confidence to the market about the financial health of the institution.
