Bail-Ins versus Bail-Outs

The global financial crisis and attendant “too-big-to-fail” (TBTF) issues have generated extraordinary policy shifts and large-scale public support of key financial institutions. Bail-outs, specifically support packages from central banks and governments acting as lenders of last resort to resolve liquidity and/or solvency problems, are familiar responses but they have the disadvantage of potentially high taxpayer costs and increased moral hazard. As such, various reform initiatives have been proposed as part of credible and effective resolution tools with increased emphasis being given to so-called “bail-ins”.

But what exactly are “bail-ins” and how can they help solve the TBTF problem? The following references provide some useful insights…

From Bail-out to Bail-in: Mandatory Debt Restructuring of Systemic Financial Institutions, IMF Staff Discussion Note, 24 Apr 2012
From bail-out to bail-in, The Economist, 28 Jan 2010
From bail-out to bail-in, The Economist, 25 Mar 1999
Bail-in liabilities: Replacing public subsidy with private insurance, KPMG, Jul 2012
Financial Times lexicon