How does bail-in work and what is the creditor hierarchy during resolution?

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AcadiFi · Accepted Answer

Bail-in is the statutory power (under BRRD in Europe, OLA/Title II in the US, BIA in the UK) allowing resolution authorities to write down or convert liabilities to absorb losses and recapitalize a failing bank without taxpayer support. Creditor hierarchy (EU BRRD, harmonized 2019): 1. CET1 — first to absorb losses (shares wiped) 2. AT1 — contingent convertibles triggered or written down 3. Tier 2 subordinated debt — written down or converted 4. Senior non-preferred / non-preferred senior — bailed-in next 5. Senior preferred (ordinary senior unsecured) 6. Eligible deposits from natural persons and SMEs above €100k 7. Covered deposits up to €100k — excluded from bail-in (DGS-protected) Excluded liabilities: covered deposits, secured liabilities to extent of collateral, client money, interbank liabilities <7 days, trade payables to non-financial services providers. ```mermaid flowchart TD A[Losses] --> B[1 CET1 Wiped] B --> C[2 AT1 Converted] C --> D[3 Tier 2 Bailed-in] D --> E[4 Senior Non-Preferred] E --> F[5 Senior Preferred] F --> G[6 Large Deposits] H[Excluded] -.Protected.-> I[Covered Deposits < 100k] H -.Protected.-> J[Secured Claims] ``` Example: Hallsted Regional Bank fails in 2027. Regulator applies bail-in: shareholders lose everything (−€800M), AT1 converts to equity (€450M), T2 written down 80% (€600M absorbed), 25% of senior non-preferred converted to equity (€1.1B). Bank recapitalized to 12% CET1 without taxpayer support. Critical functions continue uninterrupted. 2023 Credit Suisse resolution deviated: AT1 wiped before equity, triggering €17B in bondholder losses and litigation; reshaped European AT1 pricing.

How does bail-in work and what is the creditor hierarchy during resolution?

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