Bail-in is one of the four resolution tools available to European resolution authorities under the Bank Recovery and Resolution Directive (BRRD). When a bank is failing or likely to fail, the authority can write down the claims of shareholders and creditors, or convert them into equity, to absorb losses and recapitalise the institution without recourse to public funds.
How bail-in works
The resolution authority first establishes, through an independent valuation, the extent of the losses. Shareholders are wiped out or severely diluted first; the bank's capital instruments and liabilities are then written down or converted in a fixed sequence until losses are absorbed and the institution meets its capital requirements again.
The sequence follows the creditor hierarchy: Common Equity Tier 1 absorbs losses first, followed by Additional Tier 1, Tier 2, other subordinated debt, senior non-preferred instruments and, in extremis, ordinary senior liabilities. A minimum bail-in of 8% of total liabilities and own funds is required before any resolution financing arrangement may contribute.
Creditor hierarchy
Exclusions
Certain liabilities can never be bailed in: covered deposits (up to EUR 100,000, protected by deposit guarantee schemes), secured liabilities including covered bonds to the extent of their collateral, client assets, interbank liabilities with an original maturity below seven days, and liabilities to employees, trade creditors and tax authorities. The resolution authority may also exclude other liabilities in exceptional circumstances, subject to strict conditions.
Bail-in and MREL
For bail-in to be usable in practice, banks must hold enough loss-absorbing capacity at all times. That is the purpose of MREL — the minimum requirement for own funds and eligible liabilities — which resolution authorities set bank by bank. Instruments counting towards MREL are exactly the layers that stand first in the bail-in sequence.
No creditor worse off
The NCWO safeguard guarantees that no shareholder or creditor may be left worse off under resolution than they would have been in normal insolvency proceedings. If the ex-post valuation shows a breach, affected creditors are compensated from the resolution fund.