Definition of 'Bail-In'
There are two main types of bail-ins:
* **Voluntary bail-ins:** In a voluntary bail-in, the bank's shareholders and creditors agree to accept a haircut on their investments in order to recapitalize the bank. This can be done through a debt-to-equity swap, or by writing down the value of deposits.
* **Involuntary bail-ins:** In an involuntary bail-in, the government can force shareholders and creditors to accept a haircut on their investments in order to recapitalize the bank. This can be done through a debt-to-equity swap, or by writing down the value of deposits.
Bail-ins are controversial because they can impose losses on innocent investors and depositors. However, they are seen as a necessary tool to prevent the failure of a large bank from causing a systemic crisis.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 gave the U.S. government the authority to use bail-ins to resolve failing banks. However, the law has not yet been used to resolve a bank failure.
In Europe, the European Banking Authority has issued guidelines on how to use bail-ins. These guidelines require banks to have a bail-inable debt buffer of at least 1% of their risk-weighted assets. The buffer can be used to recapitalize a bank in the event of a failure.
Bail-ins are a complex and controversial topic. However, they are an important tool for preventing the failure of large banks and protecting the financial system from systemic crises.
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