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It is good practice to set aside some money for difficult times, whenever possible. For banks, adopting this prudent approach is a requirement: they must keep a reserve of funds to cover potential losses and protect their capital. This helps reduce the risk of failure, an event that could have serious consequences for many households and businesses, including other banks.
It may happen that a bank exhausts its capital or has significantly reduced it and is unable to rebuild it. This is a serious problem, a genuine crisis, which could lead to its failure. If conditions allow, however, a special authority - the Resolution Authority - can intervene to resolve the crisis. Typically, the Resolution Authority seeks a bank to which the assets and liabilities of the failing bank can be transferred in order to protect depositors and customers. In some cases, however, it may be necessary to use the bail-in tool. It may be helpful to understand what it is and how it works, especially if you want to invest in a bank’s shares or bonds.
The bail-in can also apply to some firms offering investment services. For simplicity, though, we will refer only to banks.
What is the bail-in?
Bail-in is an English term meaning 'internal rescue'. But why 'internal'? Because the costs are borne by the shareholders - that is, the owners of the bank; if necessary, also by the bondholders — the bank's creditors (bonds are debts issued by the bank); and, if needed, even by depositors holding more than €100,000. The process follows a clear hierarchy based on the riskiness of financial instruments: those who have invested in riskier instruments are called on first to bear the losses.
Shares are the riskiest instruments, followed by subordinated bonds, then ordinary unsecured bonds, and finally deposits.
The rescue is 'internal' because there is no external aid from the State (bail-out). The purpose of the bail-in is precisely to avoid state intervention, for two reasons. First, the State would use public money, that is taxpayers' funds: effectively, all citizens would pay for the rescue. Second, it prevents the bank from taking reckless risks, thinking 'if things go wrong, the State will bail us out'.
The bail-in was introduced by the European Union in 2014 and has been in force in Italy since 1 January 2016, following costly bail-outs of some European banks using public funds. A European body, the Single Resolution Board, has the power to use bail-in for the largest banks; for others, the power lies with the respective national resolution authorities. In Italy, this authority is Banca d'Italia.
How does the bail-in work?
So, we have a bank in crisis because losses have wiped out or drastically reduced its capital. The aim of the bail-in is to 'absorb' those losses and restore the capital (recapitalise).
Shareholders are the first to be involved: the resolution authority reduces or cancels the value of the bank's shares to cover the losses. Shareholders, however, cannot lose more than they would have had if the bank had failed; in other words, they can lose all the money invested, but nothing beyond that.
If the shareholders' contribution is not enough, bondholders are then involved. The resolution authority converts the bank's bonds into shares (thus increasing capital) or, in more serious cases, reduces their value (thus lowering debt). It does this first with subordinated bonds; if that is insufficient, it also applies to ordinary unsecured bonds. Like shareholders, bondholders cannot incur losses greater than what they would have faced in a failure scenario.
Finally, if more funds are needed, depositors with more than €100,000 in the bank, such as in current or savings accounts, are involved. These customers lose the amount exceeding €100,000; the remainder is protected by the Interbank Deposit Protection Fund.
Important
The procedure does not include:
deposits up to €100,000 (thanks to deposit guarantee schemes);
guaranteed bonds;
financial instruments held in securities accounts (excluding the bank's shares and bonds mentioned above);
valuables kept in safe deposit boxes.
As these are excluded, they do not lose value and are not converted into capital.
Furthermore, the bail-in does not affect loans granted by the bank.
When is it used?
The resolution authority may choose to use the bail-in or other interventions. However, a bank being in crisis is not enough to trigger it. Three other conditions must be met:
the bank cannot overcome the crisis through private measures, such as issuing new shares (capital increase) or being acquired by another institution;
the bank cannot overcome the crisis even with interventions by the supervisory authority (in Italy, Banca d'Italia), for example by removing management and appointing temporary administrators;
the rescue is in the public interest: this means that maintaining the bank's services is necessary to prevent the failure of a single financial institution from spreading to other banks and intermediaries, thereby threatening the stability of the entire national banking system..
Only under these circumstances can the resolution authority intervene and, if necessary, apply the bail-in.
Consult the FAQs for answers to specific questions about bail-in rules and deposit protection.
In these FAQs, for simplicity, we talk about banks and banking crises, but the rules also apply to other financial market entities: banking groups and some firms providing investment services.
The answers to the FAQs are published for informational and financial education purposes only
The law establishes how bail-in works (see in particular Legislative Decrees no. 385/1993, no. 58/1998 and no. 180/2015, and EU Regulation no. 806/2014), and Banca d'Italia can only provide its own interpretation. The law may be interpreted differently by the judicial authorities (national and European) and is also applied by other entities (e.g., Single Resolution Board, deposit guarantee schemes..
Yes. The European bail-in rules apply also to financial instruments issued by the bank under resolution, which were purchased or subscribed by customers before that date.
The bail-in applies to securities issued by a bank under resolution, even if they are deposited with a different entity (for example, another bank).
The bail-in does not apply to securities placed by a bank under resolution on behalf of other issuers, unless those issuers themselves are under resolution. If the issuer of the security is under resolution, the bail-in applies to the security even if placed by a bank not under resolution.
The bail-in may apply to certificates of deposit that are akin to financial instruments: this occurs when certificates of deposit are issued with the same value and rights as part of a single operation conducted by the bank. In other cases, certificates of deposit are considered deposits and are subject to the relevant legal protection; therefore, they are protected up to €100,000 by a deposit guarantee scheme and excluded from bail-in (see FAQ no. 10.1).
In any case, at the time of purchase, it is important that the customer checks the information documentation provided or delivered by the bank, as the bank is obliged to indicate in such documentation whether the certificate of deposit is protected by a guarantee scheme or not.
In customer operations, in a repurchase agreement (PCT) a bank sells a number of securities to a customer and commits to repurchase them at a predetermined price and date: if the bank does not repurchase, the customer keeps the securities, which thus serve as collateral.
In the event of the resolution of the bank that signed the PCT contract, the bail-in applies or not to the customer's claims against the bank arising from the PCT depending on the characteristics and fate of the security used as collateral.
Claims arising from the PCT are excluded from bail-in provided that the security used as collateral was not issued by an entity also under resolution (or issued by an entity that cannot be put under resolution, such as government securities: see FAQ no. 6).
If the issuer of the security used as collateral in the PCT is also under resolution and the value of the collateral security has been reduced following the bail-in, the claim against the bank arising from the relevant PCT contract is itself subject to bail-in for the portion not covered by the collateral.
No. Bail-in does not apply to national or foreign government bonds, nor to securities of supranational issuers such as the EIB (European Investment Bank) or the EBRD (European Bank for Reconstruction and Development) (see also FAQ no. 2).
Bail-in applies to amounts owed by banks both as principal and as interest.
No. Postal savings products — namely postal savings books and postal savings bonds — and Bancoposta current account deposits are not subject to bail-in. Bail-in applies to securities placed by Bancoposta on behalf of banks under resolution (see FAQ no. 3).
Nothing. Bail-in does not affect loans granted by the bank under resolution to its customers.
10.1 What is a deposit?
Deposits mean all forms of savings collection in which the bank has a repayment obligation: for example, deposits include current account balances, cashier's cheques and similar credit instruments, term deposits (deposit accounts), passbooks or savings books, certificates of deposit that do not have the characteristics of financial instruments (see FAQ no. 4).
Savings collection forms carried out by the bank through issuance of financial instruments (e.g., bonds) are not deposits, even if a repayment obligation is provided by the bank.
10.2 When is a deposit protected by a deposit guarantee scheme?
Deposits are protected by a deposit guarantee scheme up to €100,000, except for certain exceptions provided by law. For example, deposits related to transactions for which a final conviction for money laundering or use of illicit funds has been issued, deposits made in the name and on behalf of public entities (see FAQ no. 16), or deposits for which anti-money laundering regulations have not been complied with due to failure to identify the holder (see also FAQ no. 14) are not protected.
The €100,000 limit is calculated on the amount attributable to each individual depositor per bank (see FAQ no. 12); in the case of joint accounts, the limit is calculated with reference to each individual joint account holder (see FAQ no. 13).
Deposits of sums deriving from certain events listed by law (for example, sale of property, divorce, retirement, end of employment, disability, death) are protected for the entire amount, exceeding the €100,000 limit, if the bank's compulsory liquidation or resolution is initiated within nine months of their crediting.
10.3 What is a deposit guarantee scheme?
A deposit guarantee scheme is an entity recognised by Banca d'Italia that intervenes to protect, within the limits defined by law, deposits held with a bank under resolution or compulsory liquidation.
The deposit guarantee schemes operating in Italy are the Interbank Deposit Protection Fund (FITD) and, for cooperative credit banks, the Cooperative Credit Depositors' Guarantee Fund (FGDCC). Every Italian bank belongs to one of these schemes and provides its customers with specific information on deposit protection methods.
All banks in other EU Member States belong to the deposit guarantee schemes of their home state. Banks from non-EU countries operating in Italy belong to FITD or to an equivalent foreign guarantee scheme.
For more information on participating banks and the operation of the two Funds, see www.fitd.it and www.fgd.bcc.it (and their FAQ sections).
In the event of compulsory liquidation of a bank, the guarantee scheme to which the bank belongs reimburses protected depositors directly: information on reimbursement procedures and timing is available at www.fitd.it and www.fgd.bcc.it.
The amount of deposits exceeding €100,000 may be subject to bail-in.
However, if the deposit is held by an individual, micro-enterprise, small or medium-sized enterprise (i.e., a business with annual turnover below €50 million), the amount exceeding €100,000 may be subject to bail-in only after bail-in has been applied to all other debts of the bank.
The protection threshold of €100,000 is calculated on the amount attributable to each individual depositor per bank, regardless of the number of deposits held with that bank. For example, if a person has two deposits with the same bank (€80,000 and €70,000 respectively, totalling €150,000), the protected amount will be €100,000; the excess amount (€50,000) may be subject to bail-in.
If, instead, a person has two deposits of €100,000 and €110,000 respectively, with two different banks (under liquidation or resolution), protection covers both deposits up to €100,000; bail-in may apply only to the second deposit for the amount exceeding €100,000, i.e., €10,000.
If the deposit is held by an individual, micro-enterprise, small or medium-sized enterprise, the amount exceeding €100,000 (in the examples €50,000 and €10,000 respectively) may be subject to bail-in only after bail-in has been applied to all other debts of the bank (see FAQ no. 11).
For joint accounts, protection up to €100,000 applies to the share of each joint holder, considered individually. For example, if a deposit of €220,000 is in the name of two joint holders (so each has a right to half of the deposit), the total protected amount will be €200,000 (€100,000 per joint depositor); only the excess (€20,000) may be subject to bail-in (if the deposit is held by an individual, micro-enterprise, small or medium-sized enterprise, the €20,000 may be subject to bail-in only after bail-in has been applied to all other debts of the bank: see FAQ no. 11).
This rule has an exception when joint holders hold the deposit as participants in a non-legal entity (e.g., an unrecognised association or a partnership): in this case, the deposit is considered to belong to the non-legal entity and protection applies up to €100,000, with any excess subject to bail-in. For example, a €220,000 deposit held by a cultural association or a general partnership, even if there are multiple deposit holders, is treated as a single entity deposit and protected up to €100,000; the remaining €120,000 may be subject to bail-in.
All deposits up to €100,000 are protected by the deposit guarantee scheme (see FAQ no. 10); protection is excluded when the identification of the holder has not been carried out pursuant to anti-money laundering regulations (see FAQ no. 10.2).
Bail-in applies to deposits denominated in euros and in foreign currency. Deposits in foreign currency enjoy the same protection as those in euros (see FAQ no. 10).
No. Deposits of public entities made in their own name and on their own behalf — such as those managed by banks in treasury service operations — are not protected by a deposit guarantee scheme (see FAQ no. 10.2).
Yes. Like other deposits, they are protected up to €100,000; they may therefore be subject to bail-in for amounts exceeding that sum.
What protections are available for investors purchasing financial instruments?
In general, it is good practice, before purchasing a financial instrument, to be aware of its characteristics and risks. Banks and other entities providing investment services must comply with detailed transparency and fairness obligations, which are strengthened in the case of so-called retail investors (i.e., individual savers, professionals, or small and medium enterprises without specific financial knowledge). Only products suitable for their needs may be placed with such clients, unless they decide otherwise. For more information, see the website of the competent authority (www.consob.it).
Bail-in is ordered by Banca d'Italia for smaller Italian banks or by the Single Resolution Board for larger European banks or those operating cross-border in the euro area; the decision can be challenged before the Italian administrative courts or the courts of the European Union.
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