Bail-in: Meaning and How It Works

What is a bail-in

A bail-in is when a failing bank's own shareholders and creditors absorb its losses, through write-downs or conversion of their claims into shares, instead of the government paying to rescue it.

Bail-in vs bailout

Worked example (hypothetical)

Hypothetical Bank A makes a loss larger than its shareholders' equity. The resolution authority (the official body that handles failing banks) applies a bail-in:

1. Shareholders are wiped out or heavily diluted.
2. Holders of junior and subordinated bonds see their bonds written down or converted into new shares.
3. If losses remain, senior unsecured bondholders take a cut.
4. If still not enough, uninsured deposits above the deposit insurance limit may be partly converted into shares.
5. Insured deposits and secured claims are protected.

After this, Bank A has fewer debts and new owners, the former creditors, and it keeps operating without public money.

Formal definition and edge cases

In the EU, the bail-in tool is set out in the Bank Recovery and Resolution Directive (BRRD). Internationally, the Financial Stability Board's TLAC standard and the EU's MREL rule require large banks to hold enough debt that can be bailed in.

Points experienced readers should know:

• Creditor hierarchy. Losses follow the legal ranking of claims. Junior claims absorb losses before senior ones.
• No creditor worse off. Creditors should not lose more than they would have lost in normal insolvency. If they do, they may be entitled to compensation.
• Excluded liabilities. Covered (insured) deposits, secured liabilities and some short-term interbank claims are usually outside the bail-in.
• Contractual vs statutory. Contingent convertible bonds (CoCos, counted as Additional Tier One capital) can be written down by the terms of the bond itself, before any statutory bail-in. In the Credit Suisse rescue, these bonds were written off completely while shareholders still received something, which surprised many investors.
• Rules differ by country. Deposit protection and resolution powers depend on local law. Readers in Pakistan should check the regulator's official material for the rules that apply to them.

Where you see the term

• News: bank failures and rescues, such as the Cyprus banking crisis, where large uninsured deposits were converted or written down.
• Bond documents and rating reports: clauses on loss absorption, "bail-in-able debt" and MREL or TLAC levels.
• Markets: talk of a bail-in can widen bank credit spreads, cause price gaps in bank shares and bank-share CFDs, and trigger a flight to quality.

Prices of bank shares and leveraged CFDs on them can move sharply during such events, and leveraged trading can lose money fast. See risk management.

Related terms

• Bank run
• Financial contagion
• Default
• Counterparty
• Collateral
• Credit crunch
• Fractional reserve banking
• Fat tails and tail risk
• Trading glossary

Frequent questions

What does bail-in mean in simple words?

The bank's owners and lenders cover the losses themselves, instead of the government covering them.

Can depositors lose money in a bail-in?

Insured deposits are normally protected. Deposits above the insured limit can be affected, depending on local law.

What is the main difference between a bail-in and a bailout?

In a bailout, outside money from the state rescues the bank. In a bail-in, the losses are absorbed by claims already inside the bank.

Who loses money before anyone else in a bail-in?

Shareholders lose before anyone else. Holders of junior and subordinated debt come next, and senior creditors after that.

Is a bail-in the same as bankruptcy?

No. A bail-in is meant to keep the bank operating, while bankruptcy closes it down and sells its assets.