Bonds are a form of debt and as such, they rank higher than equity. This gives them a better claim to get their money back when business turns sour since the equity holders have an obligation to repay their creditors. Following the financial crisis, when governments injected hundreds of billions into banks, most banks bondholders were left untouched – even those holding subordinated, or junior, debt.
The Bank Recovery and Resolution Directive (BRRD), provides resolution authorities with a set of resolution tools and powers. These include the power to sell or merge the business with another bank, to set up a temporary bridge bank to operate critical functions, to separate good assets from bad ones and to convert into shares or write down the debt of failing banks (bail–in). In addition, bank capital instruments must be written down or converted when the relevant authority determines that the bank is no longer viable, which may occur before the point of resolution.
These unsecured bonds issued by credit institutions and investment firms with specific features that enable them to be converted into shares or written down at a certain trigger event or at the discretion of the supervising authority are therefore called bail in able bonds.
Clients should be aware that as holders of these unsecured liabilities they do not benefit from the preferred creditor status as they are not depositors, who are eligible for deposit guarantee scheme coverage.
Firms should give fair, clear and not misleading information about the risks of financial instruments subject to the resolution regime and the procedures for the suitability/appropriateness assessment should carefully consider the nature and characteristics of the instruments, including their complexity, possible returns, risks and liquidity.