How a Bail-In Could Save the Italian Financial System: Quicktake Q&A

The term bailout became well known -- and widely hated -- during the 2008 financial crisis as governments around the world spent almost $1 trillion to rescue their banks from collapse. The term bail-in was coined after the crisis by bankers who wanted to assure the public that the biggest lenders could survive without any more taxpayer handouts. So bail-in is supposed to be the antidote to bailout.

A bail-in forces creditors of a bank to shoulder losses when the firm fails. Banks go belly-up when their shareholder equity is wiped out, which happens when loans or investments they’ve made go sour. When you bail in the creditors -- typically through a debt-for-equity swap -- they become new shareholders of the bank while it goes through a resolution process similar to bankruptcy. It’s less disruptive because the bank can continue functioning with the fresh capital from the creditors. Although it was originally construed as part of a quick resolution mechanism, the term bail-in has come to cover every case of creditor loss-sharing when a bank gets in trouble.