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Joe Barbieri has Bachelors' degrees in both Civil Engineering and Commerce from the University of Toronto. He has worked in the Financial Services field for over 13 years, with over 10 years on the institutional side of the business. He has covered positions from Fund Accounting to Investment... More
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  • What Is A Bail-In Bond? 0 comments
    Apr 4, 2014 4:58 PM

    A bail-in bond is a source of money available for financial institutions should they be threatened with insolvency. If the institution is functioning profitably, funding will come from its profits. Should it get into trouble however, there are other options. The first one is bankruptcy, which states that the institution cannot survive any longer, and will be discontinued. Whoever is owed money from the institution will not get paid. Other options require getting outside help or financing from other parties. There can be mergers or takeover deals where a competitor would run the company that is in distress and use its resources to allow it to flourish. Since financial institutions are deemed to be very important, and their failure would cause economic damage, bankruptcy is not a good option. Mergers have already happened in the financial services industry, but that creates a higher concentration of assets which will lead to more damage should a larger institution go bankrupt.

    Since 2008, there have been other alternatives which are "bail outs" and "bail-ins". A bail out is using taxpayer money to help financial institutions in distress. While this may sound prudent, there needs to be accountability to the taxpayers as to how this money is being used. The bail-out has had a lot of criticism for this reason. The bail-in uses depositor money to help a financial institution in distress. The more general definition cites the bondholders or lenders to the institution as the parties providing the funding, but this is not always true as was evident in Cyprus (5).

    Looking at it logically - if an institution gets into trouble, who has the resources to help? Creditors are the same parties as the competitors and government unless the bondholders are made up of individuals. What this means is that the everyday people have to bail out the institutions. Whether they do it with their bonds or deposits is not of much consequence unless you argue that bondholders are richer stakeholders than depositors. This may be true but to what extent, and does it matter? If I own a $1000 bond, or have $10,000 in deposits, I may very well be the same person.

    A bail-in bond does not remedy the cause of the problem. How do these institutions get into trouble in the first place? Should they be bailed out or bailed in at all? Should depositors or bondholders be the ultimate guarantors of an institution? Are your deposits considered yours or are they property of the institution? These questions need to be clarified if help for institutions is to be done properly.







    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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