What is a Bank Bail-in?

New Zealand may soon not be the only developed country without bank deposit insurance, but with a policy of bank bail ins. A “bail in” means it is the savers who have funds with a failing bank whose deposits are used to prop up a failing bank.

If you’re unaware of what happens to your deposits when a bank fails in New Zealand then check out this article: Bank Failures | Could they happen in NZ | The Reserve Bank thinks so

A bank bail-in is a process through which a bank or financial institution can be rescued from bankruptcy by using its depositors money. It is the opposite of a bailout, which is when a government or central bank provides funding to a struggling institution.

So, how does a bail-in work? In essence, a bail-in requires the bank’s creditors (i.e. it’s depositors) to take a loss on their debt. Basically, that means you as a depositor / creditor, will be the one to cover a banks bad debts.

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It often involves converting some of the debt owed by the bank into equity, or exchanging it for assets such as government bonds. This means that the creditors will have to accept a reduced amount of money or a different form of security in order to get their money back.

The bail-in process is designed to protect taxpayers from having to pay for a bank’s bad decisions. It is also used to protect depositors and other creditors by ensuring that they receive at least some of their money back, rather than having to write it off completely.

In recent years, the use of bail-ins has increased as governments have sought to reduce the cost of rescuing banks and other financial institutions. This has been especially true since the global financial crisis of 2008, when many countries used bail-ins instead of bailouts to prevent taxpayers from having to foot the bill for bank rescues.

For those looking to better understand what a bail-in is, it is important to remember that it is a financial rescue process that does not involve taxpayer funds. Instead, a bail-in requires the bank’s creditors to accept a loss on their debt, often by converting it into equity or exchanging it for assets such as government bonds. By doing this, the bank can be saved from bankruptcy without the need for government funds, allowing both depositors and taxpayers to be better protected.

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