Bail-in is a very effective tool that can help banks get out of a difficult situation. It can also be used to bail out banking institutions that are on the verge of collapse. Check out what you should know about it!
What is a bail-in? Definition of the term
Bail-in is a mechanism used by the central bank to support the banking sector and save it from collapse. It is a form of banking intervention in which the bank’s own assets are applied as a means of covering losses and further stabilization. In a bail-in, the central bank does not add any funds to the bank, but uses the bank’s own accumulated assets.
The bail-in was originally introduced in 2008 as part of an economic stimulus plan to help banks survive the financial crisis without the need for state bailouts. The principle has been introduced in many countries, including Germany and the UK.
What is a bail-in based on?
Bail-in is a form of bank restructuring that involves a bank using its own assets to settle liabilities to its customers. It is a method by which a bank is forced to cover its liabilities and other debts from its own assets, instead of seeking financial assistance from the government. This action is more efficient and allows the bank to avoid insolvency.
Bail-in is designed to prevent a bank from failing, which is why it is used when a bank is in distress. When a bank is in a state of insolvency, then the government may decide to use the bail-in procedure. This means that selected assets of the bank will be converted into money, which will be used to pay off the bank’s debts.
Bail-in – the origin of the concept
The concept of bail-in was invented in response to the financial crisis of 2008-2009. At that time, many banks suffered from reckless decisions and irresponsible management. Governments and financial institutions began to look for a way to mitigate the crisis and prevent similar situations in the future.
Bail-in was introduced in 2013 by the EU’s Banking Restructuring System Directive. This mechanism has been implemented in many European Union countries and has been recognized as an effective way to protect financial stability.
