Bail in / bail out (the solvency risk)

Abstract

Modern banking industries operate in a complex macroeconomic environment which cyclically enters the stages of global economic crises. One of the consequences of these cyclical stages is the serious threat to the financial position of banks. In the case of big, systemically important banks that are mainly internationally active through subsidiaries in different countries, the risk of insolvency has suggested that this could result in much broader implications for the economic and financial sector of the country. In order to prevent the collapse of large, systemically, and beyond, important banks, the European Parliament and the Council adopted a framework for the recovery and resolution of credit institutions and investment firms, which introduced the 'bail-in 'mechanism with the aim of transferring the burden of bank recovery to the private sector.

Keywords

• 'bail in'
• 'bail out'
• rules and procedures for bank recovery and resolution