Bail-in doubts

Bail-in doubts

Context

The government needs to re-­examine the proposed financial resolution legislation

Concerns about Bail-in clause

Introduced in Parliament this August, it has caused great anxiety about the safety of funds parked by millions of households in bank deposits — fears that it will enable banks to be ‘bailed in’ by depositors’ funds rather than being ‘bailed out’ by taxpayers (or potential buyers)

Recapitalisation

The government has promised a ₹2.11-lakh crore recapitalisation plan for public sector banks that are now taking haircuts on defaulted loans being put through the Insolvency and Bankruptcy Code. When banks, in turn, face collapse, the fear is that depositors could face similar haircuts or write-downs on the value of their savings in the bank and perhaps be issued securities instead

• Rationale for this provision:This provision in the FRDI Bill is purportedly with an eye on resolving bankruptcy scenarios among financial entities, some of which could be too big to fail or systemically important.

Finance minister’s view

A lot of corrections’ could still take place; the Bill is currently being reviewed by a parliamentary committee whose report will be considered by the Cabinet

Global debate over bail-in clause

As a resolution tool for stressed financial firms, the bail-in clause has been the subject of much debate, but it remains the least well-established across the world. Even the committee framing the FRDI law has noted that it should typically be used where continuing a firm’s services is considered vital but its sale is unviable — not as a lazy default option. If lenders don’t believe that a bail-in plan would salvage a firm, triggering the clause could end up causing a run on the bank instead of preventing one

PS: Provisions of the FRDI Bill has already been discussed in earlier briefs