Bail-in is one of the resolution tools the Central Bank of Iceland’s Resolution Authority may apply in order to recapitalise banks deemed to be failing or likely to fail. The use of the bail-in tool developed as a resolution measure in the wake of the 2008-2009 crisis, based on criteria from the international Financial Stability Board (FSB)[1]. In general, bail-in is considered the most desirable resolution method for systemically important banks if they are failing.
In short, it can be said that instead of bailing a bank out using public money, the failing bank is bailed in using funds from creditors, essentially recapitalising the bank from within. Bail-in entails writing down obligations (equity and liabilities) or converting them to new capital. When the bail-in tool is used, the claim priority according to the Act on Resolution of Credit Institutions and Investment Firms is always retained, so that creditors’ status should always be the same as it would have been in the event of winding-up proceedings.
Broadly speaking, the bail-in tool can take two main forms. An open bank bail-in entails bailing in a recapitalised bank that continues to operate as it did before it failed. A closed bank bail-in, on the other hand, involves applying the bail-in tool concurrent with the establishment of a new so-called bridge bank, which takes over some of the old bank’s assets and liabilities.
The bail-in method selected – including the decision on whether to choose open or closed bail-in – depends to a large extent on the valuation carried out at the time of resolution. As a result, bail-in can be a relatively flexible resolution measure, as it can be applied in more than one way, depending on the credit institution’s position at the time it fails.
The write-down and conversion of equity and liabilities are measures that require coordination between the Central Bank’s Resolution Authority, securities depositories, bank supervisors, and securities market supervisors. In particular, this coordination is needed for decisions on suspending trading with financial instruments and/or removing them from trading altogether, as well as decisions on resuming trading with such instruments. In some instances, it may be necessary to admit new instruments for trading on the exchange. More likely than not, the listing would take account of exemptions that apply in the securities market in cases involving resolution, including the exemption from prospectus preparation requirements. Such matters always depend on circumstances, however.
In using the bail-in tool, it may prove necessary to carry out a conversion to equity using instruments other than share capital, as assessing the value of a failing bank is subject to uncertainty. If this should occur, ownership of the interim instrument is temporary, and the assumption is that it will be exchanged as soon as possible for share capital, in line with the final calculation of the conversion share price at the time of the bail-in.
The chart below explains more clearly the order of operations and the timeline for execution of bail-in in Iceland.
Disclaimer:
This page describes how the Central Bank of Iceland Resolution Authority is likely to carry out the bail-in process. Information on this page is published in accordance with the European Banking Authority (EBA) Guidelines to resolution authorities on the publication of the write-down and conversion and bail-in exchange mechanic (EBA/GL/2023/01).
This description is not binding upon the Resolution Authority. It is intended to explain, to the extent possible, the process that ensues if it is decided to use bail-in as a resolution method upon activation of a resolution plan. In providing this description, the Resolution Authority aims to prepare the parties concerned, with the goal of ensuring efficient and effective use of the bail-in tool. The execution of bail-in will always depend on the circumstances prevailing at the time the resolution plan is activated; therefore, the process may deviate from that described here.
The description is updated on a regular basis so as to reflect at all times the Resolution Authority’s position on bail-in execution. It was last updated on 29 December 2023.
[1] Bail-in Execution Practices Paper - Financial Stability Board (fsb.org)