A heavily indebted financial institution may be offered bail-in as a relief or rescue solution.

What Is a Bail-In?

A bail-in relieves a financial institution that is on the verge of collapsing by nullifying dues owed to creditors and depositors. 

The investors or the share/deposit holders stuck in a falling establishment would rather keep the institution debt-free instead of giving up the entire investment or deposit in a disaster. Similarly, the government would not want an establishment to collapse, as bankruptcy on a bigger scale can lead to a bigger chance of systematic issues for the economy.

Understanding Bail-In

Most stakeholders support bail-ins and their applications because they are so simple to obtain. Europe has taken on bail-ins to solve many of its most significant challenges. The Bank of International Settlement (BIS) has also been open about how you can use bail-ins with a target of incorporation in the European Union. 

Bail-ins are majorly used for these three reasons:

  • An establishment on the verge of failure uses a bail-in to cancel the dues owed to clients or customers

  • The establishment or government does not own the money needed for a bailout

  • The underlying structure needs a bail-in to reduce the amount of taxpayers’ savings assigned

Bail-Outs vs Bail-In?

A bailout is when an outside investor, like a government, relieves an establishment that is on the verge of failure by giving it financial support. Bailouts put the taxpayer at risk, whereas bail-ins distribute the risk to the creditor. It helps to keep interest rates low and creditors happy. In contrast, bail-ins are used when liquidation is not an option for creditors or if using a bailout is politically tricky.

How to Prevent a Bank Bail-In?

A bank bail-in can be prevented by taking various steps. Firstly, a stakeholder must keep a close eye on the market and verify the financial security of any institution they choose to do business with. Banks are only supposed to use money from bank accounts that go above the limit of $250,000 secured by the FDIC.

A stakeholder must ensure that their money is protected by ensuring that the bank balance does not exceed the specified amount ($250,000 for the FDIC). They also need to be in constant contact with any changes to federal government guidelines relating to financial matters and banking.