What Is Bail-in?

A “bail-in” is literally an “internal rescue”. The term refers to a precise method for resolution of the banking crises, perhaps the most-discussed method of all, and bases itself on the involvement, exclusively and directly, of share-holders, bond-holders and deposit holders. Bail-in has been normatively defined by the European Union in the directive 2014/59, in which the banking crises resolution framework is brought to a new evolutionary stage in comparison with the traditional method based on public rescue of banks in crisis (“bail-out”).

The Great Recession beginning 2007-2008 and the succeeding sovereign debt crisis of the Eurozone were, in large measure, the result of the instability of the private system, banking above all, which was stretched by the contradictions of a financial system left too free to itself and become extremely unstable.

The continuous state of instability of the international banking world led to the inflow into the financial system of tens of billions of euros through the so-called bail-outs (external rescues): nations committed to intervene directly in the capital of the banks in crisis, nationalising temporarily part of the shares (as happened with the British Northern Rock in 2008) for then to put them back on the market in conditions of greater security.

Such policies led to the progressive emergence of a clear asymmetry: the State was spending billions to cover-over the problems due, among other things, to too-lax management, or in the worst case to unscrupulous management without management`s responsibilities being highlighted and without the possibility of having control of the institutions in the long term.

These policies led to the progressive emergence of a clear asymmetry: the State spent billions to cover the problems caused, among other things, by too lax management or, in the worst case, unscrupulous management whereby managemental responsibilities were not highlighted and where the possibility of having control of the institutions in the long term was lacking.

In this context, and especially in the germano-centric Europe, in the years of rigour and austerity the idea of making the banks pay for their recovery matures. In 2012 the From bail-out to bail-in paper from the International Monetary Fund introduced definitively the concept of internal rescue. The European Union would soon adopt such “advice”. And political evolution was to look at first hand on Italy.

When Europe introduced the normatives on bail-in, Italy, then governed by Matteo Renzi, was not tardy in adopting the content of the directive cited above. In this directive, come into force on the first day of 2016, is indicated the principal of the hierarchical accountability of the stakeholders of a bank in crisis for which the bail-in procedure is launched.

The Directive applies in general to failing institutions confronted with elevated quantities of toxic securities or products of difficult disposal on the financial system. The bank is first offered the possibility of transferring the activities in crisis to a third institution, in order to seek a notable capital gain from their commercialisation and securitisation. Only in the case of the failure of this route are the bail-in normatives invoked.

In the case of application of bail-in, writes Wired, it is the shareholders of the bank itself and the holders of equities, followed by bond holders or those who have in their portfolios more-or-less risky bonds issued by the bank, and, last, account holders whose accounts exceed the 100,000 euros threshold, who must pay for the recovery Plan. Such instruments are either transformed, in proportional measure, into assets, with which the bank can construct safety buffer, or devalued unilaterally to reduce the institution`s exposure.

So we are speaking of an extremely invasive procedure that is implemented in a generalised manner in the name of non-state intervention in the economy. Indeed, in article 56 of the directive it is explicitly written that that the State can interfere only in extremis after the completion of, and failure of, the bail-in procedure. Applications of this discipline have been, to use a euphemism, questionable. And Italy has experienced it several times.

The severe economic-financial crisis of 2011-2013 has bequeathed to Italy a profound instability in the banking system, onto which has been added the harsh consequences of the vigilance of the European Central Bank, which has forced our institutions in greatest difficulty to write-off non-performing loans, so accelerating the deterioration of their position on the market.

Antonio Patuelli, the President of the Italian Banking Association (Abi), was, already in 2016, finding unconstitutional aspects to bail-in., presaging the harsh effects of its systemic application.

The Banca Marche, Banca Popolare dell’ Etruria, Cassa di Risparmio di Ferrara, Cassa di Risparmio di Chieti were the first institutions subjected to such traumatic treatment. An equity stake of close to 3 billion euros was literally written-off, thousands of account holders and buyers lost their savings completely before the crisis spread to Veneto institutions (Banca di Vicenza and Veneto Banca) and two major groups, Ubi and Intesa San Paolo, took over ownership of the failing societies.

Problem solved? Not at all. The institutions Carige, Mps and Popolare di Bari demonstrate how not even bail-in can be a solution, and that, on the contrary, very often its effect is the cancellation of smaller institutions from the national bank geography, while, for larger banks (like the three in question), commissioning or public intervention ultimately become inevitable.

Irony of fate, the overlap between normatives on bail-in and questionable European decisions (like the Tercas case) has led to public costs higher than anticipated for Italy for the banking crises of the last five years, costs amounting to 30 billions of euros. Not counting the thousands of cases of savers literally ruined by the zeroing of their securities or savings.


Translation by John Lanigan