The Ins And Outs Of Bank Bail-Ins And Bail-Outs

Following the Financial Crisis in 2008, investors became all-too-familiar with how a government bailout works. The U.S. government stepped in and bailed out big banks and the auto industry with taxpayer money during the worst of the crisis.

The U.S. government has now made more than $67 billion in profits for taxpayers from the Financial Crisis bailouts, but they were widely criticized at the time. Many argued that U.S. taxpayers should have no responsibility to assume the risks of struggling companies.

The Bail-In

In 2013, Cyprus experimented with a new type of financial relief: the bail-in. When the Bank of Cyprus essentially became insolvent, uninsured bank depositors were forced to surrender nearly half of their deposits in exchange for shares of bank stock.

Related Link: How Political Ignorance Threatens Democracy

The key difference between a bail-in and a bail out is whether assistance for the failing company comes from outsiders (such as taxpayers) or insiders (such as depositors or bondholders).

Since the Financial Crisis, regulators in both the EU and the US have changed the laws to make bail-ins the first line of defense against failing banks that pose a systemic risk.

In the US, all accounts at FDIC-insured financial institutions are insured by the government for up to at least $250,000.

Visit http://bit.ly/BZTeach for more awesome educational content!