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Home > Financial Stability > Carrying out a bail-in

Carrying out a bail-in

Carrying out a transfer of business  |  Carrying out a bail-in

​The aim of a bail-in is to stabilise the failed firm and ensure that it can continue to provide critical functions, without any immediate need to split up the firm. This is achieved using the firm’s own resources: that is, the interests of existing shareholders are cancelled, diluted or transferred; and the claims of unsecured creditors are written down sufficiently to absorb the losses incurred. Creditor claims are converted into equity to recapitalise the firm.

Where possible the bail-in will be carried out in a holding company of the failing firm, for example where a group issues debt to external investors from a holding company. This would allow losses to be absorbed and the firm to be recapitalised without operating companies themselves needing to enter resolution. This should help to maintain the critical functions located in those operating companies.

The main stages of a bail-in transaction within the UK resolution framework are described below.

  • In the run up to a resolution, the Bank would create a draft resolution instrument that would give legal effect to the bail-in, including the write-down and/or conversion of outstanding regulatory capital instruments. As part of this preparation, the Bank would identify those liabilities that may be within scope for the bail-in on the basis of an initial valuation exercise, for example shares, subordinated debt and unsecured senior creditors.
  • During the resolution weekend, the Bank would confirm which liabilities are included within the bail-in, and the FCA may suspend trading in those instruments. One way of executing the bail-in would be for the Bank to transfer the legal title of the shares to a third-party commercial bank appointed by the Bank to act as a depositary. The Bank is also likely to appoint a resolution administrator, acting under the Bank’s direction.
  • Certificates of entitlement will be issued by the firm to investors holding a liability that is potentially within scope of the bail-in. These represent a potential right to compensation, and provide a mechanism for former creditors to be provided with shares or other instruments in due course. The depositary bank will maintain legal title for these certificates until the final valuation is complete.
  • During the period immediately after the resolution weekend, further detailed valuation work will be undertaken by the authorities in order to determine the final terms of the write down of liabilities within scope of the bail-in. Once the valuation work is complete, the final terms of bail-in will be announced, including the terms on which the certificates of entitlement will be exchanged for shares in the firm.
  • Following a bail-in, the firm in resolution (or a successor firm) will continue to be authorised and regulated by the PRA and by the FCA (as market conduct regulator, and in the case of many investment firms, prudential regulator). Each will assess whether the firm complies with their threshold conditions and other regulatory requirements in the usual way. Approval of any change in control as a result of the bail-in will be required.

In line with the ‘no creditor worse off’ safeguard, any shareholders and creditors directly affected by the resolution must not be left worse off than if the whole firm had been placed into insolvency. 

Key Resources

​A practical process for implementing a bail-in resolution power
Speech given by Andrew Gracie, Director, Special Resolution Unit, Bank of England at the British Bankers’ Association, London, 17 September 2012
Federal Deposit Insurance Corporation and the Bank of England Release Joint Paper on Resolving Globally Active, Systemically Important Financial Institutions
News Release, 10 December 2012