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 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.
Importance of Bail-In
- It’s helping 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.
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 organization solvent rather than face the alternative of losing the full value of their investments or deposits in a crisis. Governments also would prefer not 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.