What Is a Bail-In?
A bail-in provides relief to a financial institution on the brink of failure by requiring the cancellation of debts owed to creditors and depositors. A bail-in is the opposite of abailout, which involves the rescue of a financial institution by external parties, typically governments, usingtaxpayers’ money for funding.
Bailouts help to prevent creditors from taking on losses, while bail-ins mandate creditors to take losses.
Key Takeaways
- A bail-in helps a financial institution on the brink of failure by requiring the cancellation of debts owed to creditors and depositors.
- Bail-ins and bailouts are both resolution schemes used in distressed situations.
- Bailouts help to keep creditors from losses while bail-ins mandate that creditors take losses.
- Bail-ins have been considered across the globe to help mitigate the burden on taxpayers as a result of bank bailouts.
Understanding Bail-In
Bail-ins and bailouts arise out of necessity rather than choice. Both offer options for helping institutions in a crisis. Bailouts were a powerful tool in the 2008 Financial Crisis, but bail-ins have their place as well.
Investors and deposit-holders in a troubled financial institution would prefer to keep the organizationsolventrather than face the alternative of losingthe full value of their investments or deposits in a crisis. Governments also would prefernot to let a financial institution fail because large-scale bankruptcy could increase the likelihood of systemic problems for the market. These risks are why bailouts were used in the 2008 Financial Crisis, and the concept of "too big to fail" led to widespread reform.
Requirements for a Bail-In
While most investors are familiar with bailouts and their uses, bail-ins are also a stratagem of economists. Europe has incorporated them to solve many of its greatest challenges. TheBank of International Settlement (BIS)has also spoken openly about how bail-ins can be used with a focus on integrations in the European Union. In these scenarios, bail-ins can be used in cases wherein a full government bailout is unlikely.
Typically, bail-ins are instituted for one of three reasons:
- A financial institution's collapse is not likely to create a systemic problem and lacks "too big to fail" consequences.
- The government does not possess the financial resources necessary for a bailout.
- The resolution framework requires that a bail-in be used to mitigate the number of taxpayers’ funds allocated.
Depositors in the U.S. are protected by theFederal Deposit Insurance Corporation(FDIC), which insures each bank account for up to $250,000. In a bail-in scenario, financial institutions would only use the amount of deposits that are in excess of a customer's 250,000 balance.
Real-World Examples of Bail-In
Cyprus and European Union resolutions provide two examples of bail-ins in action.
The Cyprus Experiment
While the public became familiar with the subject of bailouts in the aftermath of the Great Recession of 2008, bail-ins attracted attention in 2013 after government officials resorted to thestrategyin Cyprus - a popular offshore tax haven. As discussed in The National Herald, the consequences werethat uninsured depositors (defined in the European Union as people with deposits larger than 100,000 euros)in the Bank of Cyprus lost a substantial portion of their deposits.
In return, the depositors received bank stock. However,the value of these stocks did not equate to most depositors’ losses.
European Union
In 2018, the European Union began looking at more broadly incorporating bail-ins into its resolution framework. In aspeech at the IADI-ERC International Conference, Fernando Restoy from the Bank for International Settlements discussed the bail-in plans. In the European Union, a new resolution framework is being considered that would potentially incorporate both bail-ins and bailouts. Bail-ins would be involved in the first phase of a resolution, requiring a specified amount of funds to be written off before bailout funds would become available.
FAQs
A bail-in helps a financial institution on the brink of failure by requiring the cancellation of debts owed to creditors and depositors. Bail-ins and bailouts are both resolution schemes used in distressed situations. Bailouts help to keep creditors from losses while bail-ins mandate that creditors take losses.
What is the meaning of bail-in? ›
A bail-in forces bondholders and other creditors of a company on the verge of failure to bear some of the burden by writing off debt they are owed or converting it into equity. This is in contrast to a bailout, the rescue of a firm by external parties like taxpayers.
What is the meaning of bail ins? ›
A bail-in is the opposite of a bailout. Instead of relief funds coming from outside (taxpayers), the funds come from inside (shareholders and depositors).
Can a bank take your money in a bail-in? ›
In a bail-in, banks use the money from depositors and unsecured creditors to help them avoid failure. This also includes depositors whose account balances are more than the FDIC-insured limit. 1 Banks have the authority to take control of any capital that fits the criteria per the law.
What is an example of a bank bail-in? ›
An example of a bail-in scenario was in the Cyprus financial crisis in 2013. The biggest banks in Cyprus required an emergency rescue deal which required numerous creditors, debt holders, and shareholders to take on a portion of the costs.
What is the definition and meaning of bail? ›
Britannica Dictionary definition of BAIL. [noncount] : an amount of money given to a court to allow a prisoner to leave jail and return later for a trial. ◊ The bail paid by a person accused of a crime is returned when the person comes back to court for a trial.
What is the difference between a bailout and a bailin? ›
A bail-in is the opposite of a bailout, which involves the rescue of a financial institution by external parties, typically governments, using taxpayers' money for funding. Bailouts help to prevent creditors from taking on losses, while bail-ins mandate creditors to take losses.
Can banks seize your money if the economy fails? ›
Your money is safe in a bank, even during an economic decline like a recession. Up to $250,000 per depositor, per account ownership category, is protected by the FDIC or NCUA at a federally insured financial institution.
Can the government take money from your bank account in a crisis? ›
The government generally can't take money out of your bank account unless you have an unpaid tax bill (and before they go to that extreme, they will send you several notifications and offer you multiple opportunities to pay your outstanding taxes).
What does bail in law mean? ›
Bail is a sum of money a defendant pays to be released from custody and remain in the community while their criminal matter is finalized. It is a form of pretrial release.
#1: Don't keep more than $250,000 in any one bank.
Three accounts mean $750,000, and so on. We also recommend clients keep their accounts in different banks. That way, if any one bank does fail and you're forced to wait for an insurance payout (however that might happen), you still have access to most of your savings.
What is a bail-in action? ›
"Bail-In Action" means the exercise of any Write-down and Conversion Powers.
What is the meaning of bail-in powers? ›
'Bail-in' refers to powers exercisable by resolution authorities in the relevant EU Member States to rescue troubled European banks by writing-down their debt or converting bonds into equity.
Does the Dodd-Frank Act allow banks to take your money? ›
The Dodd-Frank Act. The law states that a U.S. bank may take its depositors' funds (i.e. your checking, savings, CD's, IRA & 401(k) accounts) and use those funds when necessary to keep itself, the bank, afloat. Instead of that bank going bankrupt and the bank's assets sold off to be given back to its depositors…
Does the FDIC bail out banks? ›
Between the lines: Because the FDIC was never designed to bail out uninsured depositors, by law it has to levy a "special assessment" to get back that $15.8 billion. The assessment is based on the amount of uninsured deposits at U.S. banks, over and above $5 billion per bank.
Which banks were bailed out in 2008? ›
In 2008, nearly 1,000 companies received bailout funds through the Troubled Assets Relief Program (TARP). Some of the biggest bank bailout recipients included Bank of America, Citigroup, JPMorgan Chase and Wells Fargo. Other businesses like General Motors and Chrysler also received funds through TARP.
What does bail on mean in slang? ›
As slang we use as a verb, to cancel something or leave somewhere. For example: “I'm so annoyed Lizzy bailed on the party tonight!” Meaning Lizzy is not coming to the party, she cancelled last minute. Or “This festival is so boring, let's bail”.
What does bail-in law mean? ›
Bail is a sum of money a defendant pays to be released from custody and remain in the community while their criminal matter is finalized. It is a form of pretrial release.
What is the meaning of bail-in phrasal verb? ›
1. phrasal verb. If you bail someone out, you help them out of a difficult situation, often by giving them money. They will discuss how to bail the economy out of its slump. [
