Contractual Recognition Of Bail-In

Contractual Recognition of Bail-in

Brexit has redirected and sharpened the focus of many on matters which, Brexit aside, might not have merited as much attention. One of those matters is the contractual recognition of bail-in in loan documents (and other documentation). We give a quick overview of what it is, why and when it is needed and what documents it affects.

1. What is "bail-in"?

Broadly speaking, "bail-in" empowers a national authority (a 'resolution authority') to cancel, reduce or modify a failing financial institution's liabilities either by writing down those liabilities or, in the case of debt or other capital instruments, converting them into equity. It is therefore a significant tool that permits interference with property rights to effect the resolution of a failing financial institution by recapitalisation. In practical terms, bail-in shifts losses on to shareholders and creditors, such as bondholders, thereby avoiding either liquidation or