4.3.4.1 Reasons for introducing the bail-in tool

The bail-in can best be explained by contrasting it with the bailout. With a bank bailout, the State – and thus the taxpayer – bears most of the burden of rescuing and restructuring the bank, while with a bail-in, the costs of the rescue and restructuring of the bank are primarily born by the shareholders and creditors of the bank (through a write down or conversion of their capital instruments). The bail-in tool thus minimises the costs of the resolution of a failing bank borne by the taxpayers.1

In addition to minimising the costs borne by the taxpayers, the bail-in removes the implicit guarantee. The implicit guarantee followed from the expectation that a Member State would bail out a failing bank.2 Usually banks that were considered to be “too big to fail” enjoyed such an implicit guarantee. The guarantee was implicit, because there was no explicit ex ante commitment by the State to bail out the bank in case of financial difficulties. Rather, it was the expectation that the bank would be bailed out. This expectation could create moral hazard. By removing the implicit guarantee, the bail-in reduces moral hazard and strengthens market discipline.

Bank bailout led to creditor inertia.3 Because of the implicit guarantee, investors in banks knew that their investments were relatively safe. As a consequence, they had little incentive to monitor the bank. The bail-in tool will give these investors a stronger incentive to monitor the health of a bank during normal circumstances.4 It has, however, been questioned whether investors really are in a position to influence the course of affairs of the bank.5

Another reason to introduce the bail-in tool in the BRRD is harmonisation. Some Member States had already introduced some form of bail-in. Diverging approaches across Member States could lead to different funding costs for banks with the same creditworthiness. This would undermine the internal market and the level playing field.