Bail-In
A bail-in is a resolution mechanism in which a failing bank’s shareholders and creditors absorb losses instead of taxpayers.
Meaning in Practice
Under a bail-in, equity and certain debt instruments are written down or converted into equity to recapitalize the bank. This process follows a predefined creditor hierarchy. Depositors are generally protected up to insured limits.
Why It Matters
Bail-ins aim to reduce moral hazard and protect public finances. They ensure that investors bear risks associated with bank investments. This strengthens market discipline within the banking sector.
Market Impact
The possibility of bail-in affects bank funding costs and risk pricing. Subordinated debt holders demand higher yields to compensate for potential loss absorption. Clear resolution frameworks can reduce uncertainty during crises.
Example
During a banking crisis, regulators may convert subordinated bonds into equity to stabilize a failing institution without using public funds.