“Bail-in” is a term that was popularized following the 2008 financial crisis and refers to a resolution mechanism designed to enable failing banks to continue their operations without having to use taxpayers’ money. In a bail-in, the bank’s creditors are required to bear some of the burden by having a portion of their debts written off. This may include bondholders and depositors with deposits exceeding certain insured amounts.
The goal of a bail-in is to prevent bank insolvencies from spreading panic and chaos within the financial system, a phenomenon known as a “bank run.” This is a departure from the “bail-out” approach, where external parties, usually governments, inject capital into the struggling institution.
The term “bail-in” gained recognition after its introduction into banking regulations by the Financial Stability Board in 2011 and its subsequent implementation in the European Union and other jurisdictions.
However, it’s important to note that the implementation of a bail-in is subject to local laws and regulations. In some countries, insured deposits are excluded from any potential bail-in actions, safeguarding small savers from losing their money.