Bail-ins and bail-outs

Since the start of 2016, there has been a rule in the EU that no bank can be “bailed out” by an EU state without first attempting a”bail-in”. That is EU regulations now ensure that those who own a bank’s capital (bond holders) and those that own the bank (shareholders) must first sacrifice before those who do not directly profit from the bank (taxpayers) can intervene.

This is different from 2008, when no such rules existed. During that time, state bailouts would rescue private investors at the cost of the public purse. Private investors were not responsible for being the first responders to protect their investments. Now however, EU rules dictate that bondholders must sacrifice first. These are individuals who are owed payment first. Then shareholders, who generally sacrifice from tangential collapsing share prices – and the loss of any dividends.

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