Bail-in
Topic: Banking Regulation, NPAs and Financial Stability · NCERT: Beyond NCERT
Meaning
A bail-in rescues a failing bank by making its own creditors take the losses. Sometimes large depositors do too. Their claims are cut down (written down) or turned into shares (equity) in the bank. Outside money is not used. The aim is to protect taxpayers. The risk is that depositors may panic and pull out their money.
Example
In Cyprus (2013), large bank deposits were converted into equity. In India, Yes Bank's AT1 bonds were written down in 2020. Credit Suisse's AT1 bonds were written down in 2023. These are contractual bail-ins, because the bond terms allowed the write-down. In India, the bail-in clause in the FRDI Bill 2017 scared depositors, and the Bill was withdrawn in 2018.
Don't confuse with
- Bail-out: the money comes from outside, usually taxpayers or a state-directed investor. In a bail-in, the bank's creditors and depositors bear the loss.
Related concepts
- High-Quality Liquid Assets
- Liquidity Coverage Ratio
- Net Stable Funding Ratio
- Global Systemically Important Bank
- Domestic Systemically Important Bank
- Too big to fail
- Moral hazard
- Prompt Corrective Action
- Deposit insurance
- Bail-out