Bail-In

An opposite term to the “bailout” (giving a loan to a company or country which faces serious financial difficulty) is the “bail-in” In May 1998, The Independent (UK) declared:
 
“Bailing out the banks is out of fashion; instead, ‘bailing in the private sector’ is the new buzz phrase. If the banks want more power, then they also have to take more responsibility.”
 
Under a “bail-in,” existing debts are restructured, such as bondholder restructurings. The recapitalization from within uses private capital, not public money. The term “bail-in” was popularized by “From bail-out to bail-in” (The Economist, March 25, 1999), and “From bail-out to bail-in” (The Economist, January 28, 2010). The Cyprus fiscal situation in March 2013 was termed a “bail-in.”
 
   
The Independent (UK)
Attacks put IMF’s future in doubt
Both left and right in Washington are saying the world fund must change or go, reports Andrew Marshall
ANDREW MARSHALL   SUNDAY 24 MAY 1998
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Bailing out the banks is out of fashion; instead, “bailing in the private sector” is the new buzz phrase. If the banks want more power, then they also have to take more responsibility.
 
The Economist
From bail-out to bail-in
Investors are worried that the rules for emerging-market finance are changing. Unfortunately, the rules may not change enough
Mar 25th 1999 | WASHINGTON, DC
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Understandably, then, rich-country governments are keen to involve bondholders in restructurings—a process known as “bailing in”. But there is little agreement on how best to achieve this. The Europeans hope the Pakistani bonds will set a precedent. But although the Americans agree in principle, they are more worried about the potential impact on countries’ future access to private capital.
 
Google Books
Bailouts Or Bail-Ins:
Responding to Financial Crises in Emerging Markets
By Noriel Roubini and Brad Setser
Washington, DC: Institute for International Economics
2004
Pg. 3:
A bail-in—either an agreement by creditors to roll over their short-term claims or a formal debt restructuring—also can give a country some time to right itself. But it requires that the country, with the implicit backing of the IMF, breaks its contractual promise to pay creditors in full and on time. Doing so risks triggering a broader loss of confidence in the country’s currency and banking system.
Pg. 182:
See “From Bail-out to Bail-in,” The Economist, March 27, 1999, to get a flavor of the debate between the US and the European members of the G-7 during the tail end of the Clinton administration.
 
OCLC WorldCat record
The road to better resolution from bail out to bail in
Author: Thomas F Huertas; London School of Economics and Political Science. Financial Markets Research Centre.
Publisher: London : Financial Markets Group Research Centre, [2010]
Series: LSE Financial Markets Group special paper series, 195.
Edition/Format:   Book : English
   
The Economist
From bail-out to bail-in
In a guest article, Paul Calello, the head of Credit Suisse’s investment bank, and Wilson Ervin, its former chief risk officer, propose a new process for resolving failing banks
Jan 28th 2010
A “bail-in” process for bank resolution is a potentially powerful “third option” that confronts this problem head-on. It would give officials the authority to force banks to recapitalise from within, using private capital, not public money. The concept builds on time-tested procedures that have been used to keep airlines flying and industrial firms going even as their capital structures were being reorganised. It accelerates those procedures to address the unique circumstances of financial firms operating in today’s fast-moving markets. If done correctly it should strengthen market discipline on banks and reduce the potential for systemic risk.
 
The Economist
Facilitate creditor negotiations
Bail-in roundtable: Speak softly and carry a big stick
Jan 29th 2010, 15:42 by Glenn Hubbard | Columbia Business School
PAUL CALELLO and Wilson Ervin have written a thought-provoking piece on how to resolve troubled complex financial institutions.
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One very attractive feature of the Calello-Ervin proposal and related bail-in proposals is that by specifying clear resolution mechanisms, they may facilitate easier renegotiation among creditors. One reason, for example, that sovereign debt restructurings have been so difficult is that the presence of the global taxpayer (in the form of the IMF) contributes uncertainty about the size of the pie to be divided. In the case of the complex financial institutions, the too-big-to-fail doctrine and the prospect of shifting risk to taxpayers makes private resolution very difficult. As Mssrs Calello and Ervin note, clear resolution authority can solve this problem.
     
Wordreference.com
Alabama Boy
9th February 2010, 6:19 PM
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“Bail-in” is a newly coined term defined in the article you are reading “From bail-out to bail-in”
 
The article takes a long time to define the term, but it is clear that the idea is instead of giving money to the financial institution to stay afloat (“bail-out”), it would involve an emergency take-over of the institution by regulators to restructure the existing debts and write them down (declare these debts as irrecoverable).
 
This would immediately cause losses to some shareholders but allow the financial institution to protect the remaining shareholders rather than collapsing completely. (This is “bail-in” - staying afloat by using resources from within.)
   
Financial Crisis? It’s A Pyramid, Stupid
SUNDAY, 21 MARCH 2010
From bail-in to bail-out: letter to The Economist
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On 3 February 2010 the author of this blog sent the following letter to the Editor of The Economist. The reader are invited to draw their own conclusions why it was not published.
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To the Editor of The Economist
Sir
The “bail-in” proposed by Paul Calello and Wilson Ervin “bail-in” “From bail-out to bail-in” fails to address the real reason for the banks’ liquidity crunch: that the loan to deposit ratio was greater than 100%, creating rapid growth via the money multiplier (which every economics student studies as the process of “deposit creation”). This makes a liquidity risk a certainty, a probabilistic inevitability. When the banking system’s exploding liabilities outstripped their ability to get hold of cash, central banks stepped in, in effect printing money to restore banks’ liquidity through quantitative easing.
 
The Calello-Ervin proposal does not deal with this. It does not state at what level the money multiplier would be sustainable and how to keep it below that limit. Instead, it spreads the liquidity risk among shareholders and creditors of different financial institutions, meaning that the next (and inevitable) credit crunch will be more severe and still more widespread than the one at the end of 2008.
 
An analogy would be a tank in which gas pressure is growing at an uncontrolled rate. Making the tank stronger only delays the inevitable (and much larger) explosion.
     
THe Wall Street Journal—Real Time Economics
March 19, 2013, 10:11 AM
Secondary Sources: Cyprus Bail In
By Phil Izzo
–Cyprus Bail-In: Willem Buiter sees positives in the Cyprus plan. “The Cypriot bank creditor bail-in is a net positive for the euro area, first, because it paves the way for more extensive debt restructuring of excessively indebted banks as well as other private sector entities and sovereigns. Such accelerated debt restructuring is necessary for the euro area to return to sustainable growth soon – without risking a lost decade to follow the lost half decade since 2008.