Bail-in is a mechanism that enables financial institutions to recapitalize themselves in times of financial distress or insolvency, relying on their creditors’ funds. In a bail-in, the creditors of a failing financial institution, such as bondholders and depositors, take losses to help recapitalize the institution.
Bail-in is different from a traditional bailout, where government funds are used to rescue a failing institution. This is intended to maintain stability in the financial sector, avoid systemic risk and reduce the moral hazard associated with bailouts.
Bail-in typically involves the conversion of debt into equity or the write-off of debt, which can be triggered by a pre-defined set of conditions, such as a decline in the institution’s capital ratios or the failure of certain business operations. The documentation of the debt instruments specifies the conversion or write-off process, including the conversion price, the ratio of equity to debt, and any other relevant terms.
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