By Lucy Chennells and Venetia Wingfield of the Bank’s Resolution Directorate.
During the financial crisis, several governments bailed out failing financial institutions because letting the firms fail and enter insolvency would have caused excessive disruption to the critical services that these institutions provide and to the wider financial system. Following the crisis, the framework for managing the failure of financial firms was reformed and a new tool, known as bail-in, was developed. Bail-in allows the authorities to make sure that shareholders and creditors of a firm bear the costs of failure, without recourse to public funds.
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