Michael Moore 18 November 2020

What is Bail-in?

Put simply, Bail-in is where a bank can grab your money which you have in that bank.

To understand how this works we really need to see how banking works.

When you put your money into the bank, the bank then ‘owns’ your money but has a debt to you for those funds. In effect the bank has borrowed your money and uses it as they see fit.

Just as you can borrow from the bank, the bank can borrow from you but it is at your discretion. The bank does not come to you and ask to borrow the money. You simply offer to lend the funds to the bank when you open an account and use the bank as a deposit machine to retain your funds. In fact you lend the funds in favour of the bank although they do not point this out to you.

The bank becomes in effect your creditor. They are indebted to you. A debt may be owed by sovereign state or country, local government, company, or an individual or a bank. Commercial debt is generally subject to contractual terms regarding the amount and timing of repayments of principal and interest. Loans, bonds, notes, and mortgages, all types of debt.

Bail-out is usually understood as being a situation where governments are forced to recue private institutions from financial failure. But there is a new term called a bail-in. A bail-in occurs when say a government rescues a borrower and gives then the funds to pay their debt usually from someone else.

According to The Economist, the magazine that coined the term "bail-in", a bail-in occurs when the borrower's creditors are forced to bear some of the burden by having a portion of their debt written off. For example, bondholders in Cyprus banks and depositors with more than 100,000 euros in their accounts were forced to write-off a portion of their holdings. This approach eliminates some of the risk for taxpayers by forcing other creditors to share in the pain and suffering.

This is like when you are