Bail-out
Also called: Bailout · Topic: Banking Regulation, NPAs and Financial Stability · NCERT: Beyond NCERT
Meaning
A bail-out rescues a failing bank or firm with money from outside. This is usually government or taxpayer money, or capital put in by other institutions at the state's direction. The failing institution's creditors and depositors are protected, and the cost falls on outsiders. The concern is moral hazard: if banks expect to be rescued, they may take more risks.
Example
Under the Yes Bank Reconstruction Scheme (March 2020), SBI led a group of investors that put fresh capital into Yes Bank. In the same year, Lakshmi Vilas Bank was merged into DBS India, which protected its depositors.
Don't confuse with
- Bail-in: here the losses are absorbed inside the bank. Creditors, and sometimes large depositors, have their claims written down or turned into shares, and no outside money is used.
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-in