Bail-in [TLAC;MREL]

Bail-in is a resolution tool that recapitalizes failing banks by converting debt into equity or writing down liabilities, contrasting with bail-outs using taxpayer funds. During bail-in, authorities can convert subordinated debt, senior unsecured debt, and even large deposits (exceeding insurance limits) into common equity to absorb losses and recapitalize the bank. For example, Cyprus’s 2013 banking crisis saw deposits above €100,000 converted to equity. The hierarchy typically preserves insured deposits, secured claims, and critical operational liabilities while converting capital instruments first, then subordinated debt, senior debt, and finally uninsured deposits. Europe’s Bank Recovery and Resolution Directive requires banks to maintain minimum requirements for own funds and eligible liabilities (MREL) available for bail-in. Similar U.S. requirements (Total Loss Absorbing Capacity or TLAC) ensure sufficient bail-inable debt. Benefits include protecting taxpayers, maintaining critical banking services, and imposing market discipline. However, bail-in risk increases funding costs and may trigger contagion if creditors flee similar banks. The 2023 Credit Suisse resolution used bail-in for AT1 bonds, controversially wiping them out while preserving some equity value.