Bail-In

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A bail-in is the rescue of a failing bank by imposing losses on its shareholders and creditors, including by writing down or converting their debt into shares, rather than using taxpayers' money.

In a bailout, governments inject public funds to save a bank. In a bail-in, the bank's own investors bear the cost. Shareholders are wiped out or diluted first, then certain creditors, such as holders of subordinated and senior unsecured bonds, have their claims reduced or converted into equity, rebuilding the bank's capital.

The approach was adopted after the 2008 financial crisis, when bailouts cost taxpayers heavily. The European Union's Bank Recovery and Resolution Directive, international standards set by the Financial Stability Board and similar laws in other countries give authorities bail-in powers.

For example, during the Cypriot banking crisis in 2013, large depositors at two major banks saw part of their deposits above the insured limit converted into bank shares or written off.

Insured deposits, up to the deposit insurance limit, are generally protected from bail-in. Large banks must hold a minimum amount of capital and bail-in-able debt, so that losses can be absorbed in a failure. Investors in bank bonds now face greater risk, which they are compensated for through higher yields.

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