Last updated by The POOG on September 06, 2020.

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The IMF and Bank Bail-in

The discussion of the bail-in begins with the work of the FSB which we reviewed in

Definition of Terms

Bail-in: the ability of resolution authorities to impose losses on private stakeholders in a failing bank in order to recapitalize the bank[1].

Bail-out: the ability of a government to provide public funds to restore the solvency of a failing bank[1].

Hierarchy of claims:

Moral Hazard: is a situation in which one party gets involved in a risky event knowing that it is protected against the risk and the other party will incur the cost (The Economic Times).

The Perceived Risks of Bail-out and Their Fallacies

There has been a relatively recent move from the traditional method of resolving a failed bank, the bail-out, to the much lower profile bail-in. We will examine the most common reasons fro this move as well as a few that are either not acknowledged or are unconsidered.

After the global financial crisis, public bail-outs came to be viewed as too expensive, too inequitable, and too harmful to market discipline.

Moral Hazard

References

  1. Dell’Ariccia, G., Peria, M.S.M., Igan, D., et al. Trade-offs in Bank Resolution. IMF. February 9, 2018, ISBN/ISSN: 9781484341001/2617-6750. PDF.
  2. Zhou, J., Rutledge, V., Bossu, W. et al. From Bail-out to Bail-in: Mandatory Debt Restructuring of Systemic Financial Institutions. IMF. April 24, 2012. PDF.
  3. Agarwal, R. and Kimball, M. Breaking Through the Zero Lower Bound. IMF. October 23, 2015. PDF.