Bail-in: why banks in Europe can be rescued at the expense of depositors
- Zener Group
- Jan 21
- 3 min read
After the 2008 financial crisis, European regulators came to the conclusion that banks could no longer be rescued at the expense of taxpayers.
This led to the emergence of a new legal construct called bail-in, a mechanism for internal bank recovery whereby losses are covered by the bank's own creditors, including depositors.
Today, bail-in is neither exotic nor theoretical. It is a practice enshrined in European law that regulators can resort to in the event of a banking crisis.
What is bail-in in simple terms?
Bail-in is a procedure whereby:
Part of the bank's liabilities are written off or converted into capital;
Losses are borne by the bank's shareholders and creditors;
The state (and taxpayers) are involved as a last resort.
This is the opposite of a bail-out, where the bank is rescued at the expense of the budget.
Key legal principle: whose contribution is whose money?
From a legal point of view, a bank deposit in Europe is not a deposit but a loan to the bank.
When you place money on deposit:
Ownership of the funds is transferred to the bank;
The depositor becomes an unsecured creditor;
The bank undertakes to return an equivalent amount, but not the same money.
This principle is enshrined in the civil and banking law of most EU countries.
Legal basis for bail-in in the EU
BRRD Directive. The legal basis for bail-in is the Bank Recovery and Resolution Directive (BRRD), which applies in all EU countries.
It gives regulators the right to:
Write off bank capital;
Convert debts into shares;
Involve creditors, including depositors, in covering losses in excess of the guaranteed limit.
Source (text of the directive):
Waterfall order
A strict hierarchy is legally established:
Shareholders
Subordinated debt
Senior unsecured debt
Deposits above €100,000
Guaranteed deposits (usually protected)
This is not an arbitrary decision by the bank – it is a mandatory legal requirement.
Why deposit guarantees do not override bail-in
The EU has a deposit guarantee scheme covering up to €100,000 per person per bank.
However:
This guarantee does not legally protect against bail-in;
It only promises compensation through a guarantee fund;
Payments may be delayed;
Funds are not always fully backed by real money.
In addition, corporate accounts, temporary balances and non-resident accounts often have less protection.
Precedents: bail-in has already been applied Cyprus, 2013
Deposits over €100,000 were partially written off and converted into bank shares.
Switzerland, 2023 (Credit Suisse). Although Switzerland is not part of the EU, the case demonstrated the logic: subordinated creditors were written off to zero.
Why bail-in is beneficial to states
From the regulators' point of view:
The burden on the budget is reduced;
Financial stability is maintained;
Moral hazard is reduced (banks do not count on being bailed out).
From a legal perspective, it is a transfer of responsibility from society to financial market participants.
What this means for depositors and businesses
The legal reality is as follows:
A deposit is a risky financial instrument;
Large account balances are subject to systemic risks;
In a crisis, the priority is the stability of the system, not the interests of individual depositors.
That is why large clients are increasingly using:
Bank diversification;
Segregated and custodial structures;
Physical assets;
Distribution of liquidity across jurisdictions.
Conclusion
Bail-in in Europe is possible not because of malicious intent, but because of the law.
It is legally built into the architecture of the EU financial system as a crisis management tool.
The European model is based on simple logic:
if you profit from the banking system, you also share in its risks.
Understanding this is key to financial literacy in modern Europe.
