What is the difference between Bail-outs and Bail-ins
In this article, we will look at the bail-outs and bail-ins and what can be done to make them more effective.
The public bailouts around the world have always raised a lot of public outcry. The problem with the bail-outs is the cost to the taxpayer.
In bail-ins, the banks contribute to rescue their debtors. The two financial actions are necessary because the problems faced by a single financial institution can easily spread to the rest of financial actors in a situation known as financial contagion.
The bail-outs and bail-ins are used to minimize the negative impacts on a country’s economy and prevent the outcomes of bankruptcy from cascading to other areas of the sector. This explains why governments around the world come into the rescue (bail-out) of important financial institutions in their territory.
A lot of criticism has been leveled at the use of taxpayers’ money for bail-outs. Those who oppose it argue that the bail-outs gives large banks an incentive to participate in excessive risk-taking because they know that they will be protected by their government.
In Kenya a number of bail-out has been undertaken for companies such as Mumias, Kenya Airways and Mumias Sugar Company among others but what we have seem is poor performance even after the bail-out.
There is need for ways to be devised to prevent the use of taxpayers’ money for bailouts. A number of guidelines have been set such as Basel III which is aimed at reducing default risk of the individual banks.
There is a lot of pressure for failing banks to be helped via ‘bail-ins’ as a good alternative for bail-outs. This is a situation whereby the private sector makes a contribution towards rescuing of banks which are in distress.
Bail-ins are not just in theory, there are a few cases in practice. The Rescue of Long Term Capital Management (LTCM) back in 1998. The Federal Bank of New York supervised 14 banks who agreed to participate in the recapitalization plan which is valued at USD $3.6 billion.
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