Definition
A bail-in is a method of resolving a failing bank by forcing its own creditors, rather than taxpayers, to absorb the losses. It is the counterpart to a bail-out: where a bail-out injects public money to save an institution, a bail-in writes down or converts the claims of those who lent to or deposited with the bank. The mechanism was adopted across the European Union under the Bank Recovery and Resolution Directive following the 2008 financial crisis.
The creditor hierarchy
Losses are imposed in a defined order. Shareholders are wiped out first, followed by subordinated bondholders, then senior bondholders, and finally uninsured depositors, meaning balances above the guaranteed limit. Insured deposits below the statutory threshold are protected. The first prominent use of depositor bail-in occurred in the 2013 Cyprus banking crisis, where uninsured depositors at the Bank of Cyprus absorbed a substantial haircut on balances above the 100,000-euro guarantee.
Implications for savers
The bail-in framework reframes a bank deposit as an unsecured loan to the bank rather than safe storage. For balances above insurance limits, this means a portion of your funds can legally be converted to absorb the institution's losses during a resolution. This legal reality is one reason self-custody of bearer assets is discussed as a way to hold value that is not simultaneously a creditor claim on a leveraged intermediary.
See also Fractional Reserve Banking and the Bank Run.
In Simple Terms
A bail-in is a method of resolving a failing bank by forcing its own creditors, rather than taxpayers, to absorb the losses. It is the…