Bail-In

What is Bail-In?

Definition

A bail-in is a means of providing help by the creditors of a company on the verge of failure by writing off debt the company is owed or converting the debt into equity, thereby, bearing some of the burdens. It is almost similar to a bail-out only that bail-outs seeks help from external companies, organizations, or governments using taxpayers’ money to fund failing businesses.

Bail-Ins VS Bail-Outs

• They are both funding means for companies in distress

• Creditors are obliged to bear losses in bail-ins while bailouts keep creditors from losses

• Bailouts have to do with external investors rescuing a distressed company by injecting money to settle all outstanding debts while bail-ins occur when the creditors of a distressed company themselves bear the burden of writing off some debts.

Bail-ins, though unpopular amongst the majority, serves as a new approach to help lessen the number of taxpayers’ funds used to support distressed companies. Bail-outs may be more popular among investors, bail-in is also an economic strategy. Europe first engaged this strategy by using it to solve many of its financial or institutional related challenges. To support the European use of the bail-in strategy, the Bank of International Settlement (BIS) has openly stated how bail-ins can be applied focusing on integrations in the EU.