Bail-in

A bail-in is the opposite of a bailout: rather than injecting public funds into a failing financial institution, resolution authorities write down or convert into equity the claims of the bank's own shareholders, bondholders, and sometimes large uninsured depositors. The goal is to recapitalise the bank from within, preserve critical functions (payments, deposits, lending), and protect taxpayers from absorbing losses generated by private risk-taking.

The concept gained traction after the 2008 global financial crisis, when governments spent hundreds of billions rescuing banks deemed "too big to fail." Policymakers sought a mechanism that would maintain financial stability while restoring market discipline. The 2013 Cyprus banking crisis is widely cited as the first high-profile application: uninsured depositors at Bank of Cyprus and Laiki Bank took significant haircuts as a condition of the eurozone assistance package.

In the EU, bail-in is codified in the Bank Recovery and Resolution Directive (BRRD, Directive 2014/59/EU), which took effect in January 2015 with the bail-in tool fully applicable from January 2016. It establishes a strict creditor hierarchy: equity is wiped out first, then subordinated debt, then senior unsecured debt, and finally uninsured deposits above €100,000. Insured deposits (up to €100,000 under the Deposit Guarantee Schemes Directive) are excluded. Under BRRD rules, at least 8% of total liabilities must typically be bailed in before any resolution fund or public support can be used.

Globally, the Financial Stability Board's Total Loss-Absorbing Capacity (TLAC) standard, finalised in 2015 for global systemically important banks, requires institutions to maintain a buffer of bail-inable liabilities. In the United States, the Dodd-Frank Act's Orderly Liquidation Authority and the Federal Reserve's "single point of entry" strategy serve similar functions.

Critics argue bail-ins can trigger bank runs, contagion, or political backlash when ordinary savers or pensioners hold subordinated debt — concerns illustrated by Italy's 2015–2016 resolutions of four regional banks.