bailin

Bail-in is a financial resolution mechanism in which the losses of a failing bank are borne by the bank’s creditors and, in some cases, large depositors, rather than by the government or taxpayers. The purpose is to recapitalize the institution so it can continue operating and to reduce the likelihood of public sector bailouts.

In practice, a resolution authority may enact a bail-in by writing down or converting qualifying debt into equity, or by otherwise absorbing losses through a designated bail-in instrument. The order of loss absorption typically starts with shareholders, then moves to unsecured creditors, including subordinated and certain senior debt. Insured retail deposits are generally protected up to statutory limits, and some critical functions or guaranteed deposits may be treated differently depending on national rules. The objective is to preserve critical functions, maintain financial stability, and minimize contagion, while ensuring those who funded the bank bear the costs of the failure.

Legal frameworks for bail-in exist in several jurisdictions. In the European Union, the Bank Recovery and Resolution Directive and related regulations formalize bail-in as part of a banking union, with cross-border coordination under the Single Resolution Mechanism. In the United States, bank resolution is handled through the FDIC and orderly liquidation procedures rather than a formal bail-in, though the underlying principle of burden-sharing exists in policy discussions.

Critics point to potential market disruption and funding costs for banks, while supporters argue that bail-in reduces moral hazard and protects taxpayers by ensuring market discipline and orderly resolution.