Bailin refers to the use of private sector money, rather than public money, to deal with a failed or failing bank.
Under bailin, private sector creditors of the bank suffer a share of the bank's losses.
Broadly, there are two forms of bailin:
- Statutory bailin; and
- Contractual bailin.
The term is derived from 'bailout', which refers to the use of public money these circumstances.
1. Statutory bailin
A technique used as part of the resolution of a failed bank under statutory authority.
The Resolution Authority (RA) makes an assessment of the extent of expected losses and reconstructs the bank's capital accordingly.
In reconstructing the bank's capital the RA imposes losses on creditors, including preferred shareholders and depositors.
The allocation of the total expected losses follows the creditor hierarchy that would apply in a liquidation, until the total expected losses are covered.
The remaining (surviving) layers of debt are partially converted to equity to recapitalise viable parts of the business.
The viable parts of the business are thus enabled to continue under new ownership.
The RA is normally given significant discretion in how the reconstruction - including bailin - is applied.
2. Contractual bailin
Contractual bailin refers to a provision in the terms of certain bank debt that are to be converted automatically to equity or written off, if conditions specified in the contract obtain.
Sometimes written bail-in or bail in.