The Global Shift Toward Bail-In Regimes — And What Assets Are at Risk

With the markets moving towards a apex, alongside the underlying ability to refinance likely coming up with tensions, liquidity will inherently be squeezed, thus we could conceivably see the first world wide use of Bail-in’s.

Since the Global Financial Crisis, many jurisdictions have re-written the rules of financial rescue. The traditional taxpayer-funded bail-out model has increasingly been replaced with bail-in frameworks. These give governments, regulators, and resolution authorities the legal ability to impose losses on private creditors — and, in some cases, certain classes of depositors or policyholders — to stabilise distressed banks, insurers, pension schemes, or sovereign balance sheets.

The underlying logic is simple: governments are now too indebted, and financial systems too large, to be rescued by public funds alone. The cost is pushed inward, into the balance sheets of citizens and institutions.

What follows is a high-level informational exploration of:

• which assets can be subject to bail-ins,

• how this varies by country or region,

• and why USD stablecoins — backed by short-term US Treasury bills — may be perceived by some as comparatively insulated.

What Is a Bail-In?

A bail-in occurs when a financial institution in distress recapitalises itself by forcibly converting or writing down liabilities — instead of receiving external funding.

Mechanisms Include:

• Forced conversion of bonds to equity

• Write-down of subordinated debt

• Haircuts on uninsured deposits

• Seizure or freeze of certain investment assets

• Suspension of withdrawals or redemptions

Governments implemented these frameworks largely through post-2008 legislation: EU BRRD, UK Banking Act amendments, US Dodd-Frank Title II, Canada’s Bail-In Regime, Australia’s Crisis Resolution Powers, etc.

2. Asset Types Potentially Subject to Bail-Ins

Below is a general mapping. Every bullet is unless otherwise marked.

2.1 Bank Liabilities

• Tier 1 capital instruments

• AT1 / CoCos

• Tier 2 subordinated debt

• Senior unsecured bonds

• Uninsured deposits (amounts above deposit-insurance limits)

• Certain wholesale funding instruments

• Large corporate deposits

• Interbank loans

2.2 Insurance Company Liabilities

• Policyholder funds in participating funds

• Annuity products depending on jurisdiction

• Insurer-issued bonds

• Reinsurance receivable streams

• Cash-value insurance accumulations (specific to local law)

2.3 Pension Funds

• Ability to suspend indexation

• Ability to convert defined-benefit promises

• Ability to haircut accrued rights in distress

• “Stability levies” or compulsory allocations into government debt

• Forced investment guideline changes (e.g., shifting into sovereign bonds)

2.4 Government Debt Crises

When sovereigns themselves face stress:

• Capital controls

• Forced conversion of foreign-currency assets into local currency

• Limits on withdrawal of cash or foreign exchange

• Mandatory purchases of sovereign bonds by pensions or banks

• Taxes on financial assets

• Restrictions on moving assets abroad

3. Country / Region Summaries

3.1 European Union (BRRD – Bank Recovery and Resolution Directive)

Hierarchy subject to bail-ins:

• Equity

• AT1

• Tier 2

• Senior unsecured debt

• Corporate deposits

• Deposits above €100,000 (retail or SME)

• Derivative close-outs

Exemptions:

• Insured deposits under €100,000

• Secured liabilities (covered bonds)

Insurance and pensions:

• Insurers can be subject to resolution but the mechanics vary

• Certain pension schemes can be forced to de-risk or suspend indexation

3.2 United Kingdom

Bank bail-ins under the Banking Act / PRA powers:

• Equity, AT1, Tier 2

• Senior unsecured

• Large corporate and institutional deposits

• Deposits > £85,000 (FSC-protected limit)

Insurance:

• The PRA/FCA can ring-fence with-profits funds

• Potential reduction of bonuses in participating funds

Pensions:

• Defined-benefit schemes may be “rescued” via PPF, often with reduced benefits

3.3 United States (Dodd-Frank, FDIC OLA)

Bank liabilities subject to bail-in:

• Equity

• Subordinated debt

• Unsecured debt

• Wholesale funding

• Deposits above the FDIC insurance limit ($250,000)

Insurance:

• State-regulated; guarantees vary widely

Pensions:

• ERISA limits hard seizure; cuts usually come through PBGC takeovers

Sovereign insolvency:

• The US is unique: it can issue currency and has deep capital markets.

• Political or financial stress can manifest through inflation rather than seizure.

3.4 Canada (Bail-In Regime)

Assets subject to conversion/write-down:

• Equity

• Subordinated debt

• Senior unsecured debt issued after 2018 (NVB – Non-Viability Bail-In instruments)

Deposits:

• Deposits under CAD 100,000 insured

• Deposits over limit remain theoretically bail-in-able

3.5 Australia

• APRA’s crisis-resolution powers allow conversion/write-down of bank capital instruments

• Debate exists around whether deposits can be frozen or “transferred”

3.6 New Zealand (Open Bank Resolution – OBR)

One of the clearest bail-in systems.

Potentially haircut:

• Any uninsured deposit

• Business accounts

• Investor cash accounts

• Wholesale deposits

Exempt:

• Deposits covered by deposit protection scheme (newly introduced)

3.7 Japan

• Resolution tools similar to EU

• Life insurers have legal precedent for cutting guaranteed returns during crisis

3.8 China

• Resolution powers allow seizure, merger, or transfer

• Capital controls can be imposed rapidly

• Corporate deposits at risk in stress scenarios

• Insurance and pensions subject to government direction

3.9 Switzerland

Switzerland has one of the most explicit and powerful bail-in regimes in the world, strengthened after the Credit Suisse failure.

1.1 Assets Subject to Bail-In

• Equity

• AT1 / CoCo bonds

• Tier 2 subordinated debt

• Senior unsecured debt

• Large institutional deposits

• Deposits above CHF 100,000 (uninsured portion)

• Interbank liabilities

• Derivatives (subject to close-out)

1.2 Exemptions

• Insured deposits up to CHF 100,000

• Secured liabilities

• Covered bonds

• Client custody assets held off balance sheet

1.3 Insurance & Pensions

• Swiss insurers can be restructured; policy benefits can be reduced

• Swiss pension funds (2nd pillar) can adjust conversion rates, reduce future accrual

1.4 Special Feature — Swiss “Too Big To Fail” TBTF Rules

Switzerland enforces extremely high capital requirements for UBS (and formerly CS), but also grants regulators sweeping conversion authority.
The Credit Suisse event in 2023 demonstrated that AT1 holders can be wiped to zero ahead of equity, which was highly unusual globally.

3.10 Singapore

Singapore has a very strict and well-defined bail-in architecture (MAS: Monetary Authority of Singapore).

2.1 Bail-In-Able Instruments

• Equity

• AT1 capital securities

• Tier 2 capital securities

• Senior unsecured bonds (that meet bail-in criteria)

• Wholesale funding

• Large corporate deposits

• Deposits above the insured limit (SGD 75,000)

2.2 Deposit Insurance (SDIC)

• Up to SGD 75,000 insured per depositor per bank

2.3 Exemptions

• Secured liabilities

• Covered bonds

• Client custody assets

2.4 MAS Powers Over Non-Banks

• Insurers may be subject to forced run-off or portfolio transfer

• Pension system (CPF) is government-backed and effectively captive; member balances may be subject to changes in rules, where the government can alter interest, access, withdrawal, or allocation rules

3.11 Europe — Full Continental Overview

Europe as a whole is governed by the EU Bank Recovery and Resolution Directive (BRRD I & II).

This is separate from the broader political term “Europe” including non-EU states, so this will include:

• EU BRRD countries

• Eurozone specifics (ECB SRB powers)

• Non-EU Europe (Norway, Iceland, etc.)

EU BRRD (All EU Member States)

(Examples: France, Germany, Italy, Spain, Netherlands, Sweden, Denmark, etc.)

Bail-In Order

1. Equity

2. AT1 capital

3. Tier 2 capital

4. Senior unsecured debt

5. Large corporate deposits

6. Retail/SME deposits above the €100,000 insurance threshold

7. Derivatives (subject to close-out)

Deposit Insurance (EDIS / national schemes)

• €100,000 insured per depositor per bank

Target for Minimum Bail-In Buffer (MREL)

All EU banks must hold a minimum percentage of liabilities that can be bailed-in.

3.1.1 Insurance Sector

• Solvency II gives regulators authority to reduce benefits in failure

• Participating fund bonuses can be suspended

• Insurance bonds subordinated to policyholder claims may be written down

3.1.2 Pensions

• EU occupational pensions can adjust benefits

• Indexation can be suspended

• Certain cross-border pension funds may face forced de-risking

• Governments can impose forced allocation to sovereign bonds in stress

Eurozone (ECB + Single Resolution Board)

Covers: Germany, France, Italy, Spain, Netherlands, etc.

Extra Powers

• The SRB can impose bail-ins without national government approval

• Can override national deposit insurance schemes

• Can transfer assets and liabilities to a “bridge bank”

• Can freeze deposits during the resolution weekend

Non-EU Europe

Norway

• Bail-in powers similar to BRRD

• Deposit insurance: NOK 2 million

• Senior debt and uninsured deposits can be bailed-in

Iceland

• Post-2008 framework allows full depositor bail-ins if necessary

• Capital controls historically used

• Priority deposits are protected but others can be written down

Liechtenstein

• Harmonised with EEA and EU BRRD

• €100,000 deposit insurance threshold

Sweden

• BRRD equivalent

• Deposits over SEK 1,050,000 can be bailed-in

4. Why Governments Prefer Bail-Ins Now

• Public debt levels are too high to support bail-outs.

• Banking systems are too large relative to GDP.

• Policymakers want to avoid political backlash from taxpayer bail-outs.

• Regulators prefer “automatic stabilisers” over discretionary fiscal rescue.

5. Why Some View USD Stablecoins as Relatively Insulated

5.1 Structure of Leading USD Stablecoins

Many regulated USD stablecoins (USDC, PYUSD, USDP) claim to hold:

• Short-term U.S. Treasury bills

• Reverse repos with the Federal Reserve or primary dealers

• Cash at regulated banks

A bank deposit is a liability of a bank, which can be bailed-in.
A stablecoin reserve (USDC, PYUSD, etc.) is invested in short-dated U.S. Treasury bills.

This shifts risk from:

• Bank resolution → to U.S. sovereign credit

T-Bills Are Far Above the Bank Hierarchy

• T-bills are senior sovereign obligations

• They sit outside bank capital structures

• They cannot be bailed-in by a bank resolution authority

Liquidity: T-Bills Are the Global Benchmark

• Deepest market

• Full fungibility

• Daily settlement

• Institutional-grade collateral

Capital Controls & Access

Stablecoins in self-custody wallets cannot be seized as easily as bank deposits:

• No bank holiday

• No bail-in hierarchy

• No guaranteed haircut

• No forced conversion into local currency

This does not eliminate regulatory risk, only bank insolvency risk.

5.2 Comparative Risk vs Banks or Insurance Companies

• Bank deposits are liabilities of private banks, exposed to bank resolution frameworks.

• Insurance cash values or annuities are liabilities of insurance companies, exposed to insurer solvency regimes.

• Pension assets are subject to political risk, funding rules, and forced allocation.

• Government bonds held in a stablecoin reserve are obligations of the U.S. Treasury, not of a commercial entity.

• The U.S. government can issue currency and roll over debt, reducing default probability relative to private financial institutions.

• Holding a stablecoin backed by T-bills shifts exposure from commercial banks to sovereign debt markets.

• Bail-in rules apply to banks; owning a stablecoin backed by T-bills avoids being a bank creditor entirely.

5.3 Liquidity Advantage

T-bills are:

• Fully fungible

• Deeply liquid

• Easily redeemable

• Globally accepted collateral

Many see these as a safer underlying than bank deposits subject to bail-ins.

5.4 Capital Controls

• Stablecoins, when self-custodied, are difficult to subject to domestic capital controls

• Bank accounts can be frozen; crypto wallets cannot (unless custodial)

The world has shifted from taxpayer bail-outs to depositor, bondholder, and policyholder bail-ins. The legal frameworks giving governments and regulators these powers have been quietly implemented in virtually every advanced economy.

Because of this shift, some analysts argue that USD stablecoins — whose backing consists primarily of short-term U.S. Treasury debt — may represent a comparatively insulated vehicle, as they move the underlying risk from banks to the sovereign debt of the United States.

This does not eliminate risk — it simply changes it:
from private-sector insolvency to sovereign-level monetary, regulatory, and liquidity dynamics.

The Illusion of “Government-Backed” Protection

The term government-backed creates a comforting psychological anchor. It invites the public to believe that their deposits, policies, or pension assets are ultimately guaranteed by the state. In practice, this confidence is built on layers of assumptions — many of which may not hold during a systemic crisis.

Deposit Insurance Funds Are Insufficient

Deposit insurance schemes such as the FDIC (United States), FSCS (United Kingdom), SDIC (Singapore), and EU national guarantee systems do not hold anywhere near the capital required to cover even a medium-sized banking failure, let alone a cascading systemic event.

• The FDIC’s Deposit Insurance Fund is only sized to cover a tiny fraction of U.S. deposits.

• The UK FSCS and European equivalents operate similarly — small pools relative to the total deposit base.

• “Government-backed” in this context effectively means: the government promises to step in if the fund runs out, not that the money exists today.

Governments Must Raise Money They Don’t Have

If multiple banks fail at once, the government’s theoretical support becomes a practical challenge:

1. Raise funds by issuing new government debt
   The state must sell new bonds into a market that is simultaneously observing:

   • banking collapses

   • deposit seizures

   • bail-ins

   • collapsing trust

2. Hope there are willing buyers
   When confidence collapses, global investors often:

   • dump the sovereign debt

   • demand higher yields

   • retreat to cash, commodities, or foreign currencies

3. Or print the money
   If buyers refuse or yields spike too high, the state may resort to monetisation:

   • central bank purchases of sovereign debt

   • emergency liquidity injections

   • expansion of the monetary base

Printing Money During a Crisis Creates Its Own Spiral

If governments respond to banking failures by expanding the money supply, the sequence may become:

• Loss of confidence →

• Depositor bail-ins →

• Run on banks →

• Sovereign forced to print →

• Currency debasement →

• Public flees to safety (foreign currency, commodities, crypto) →

• Further weakening of sovereign bonds and the local banking system

In other words:
the very act of “backstopping” the system can accelerate the loss of trust in that system.

The Safety Net Is Not Pre-Funded — It Is Confidence-Funded

Deposit insurance only works so long as:

• the public believes it will work

• investors keep buying the sovereign’s bonds

• the currency retains credibility

But a bail-in event is, by definition, a breach of trust.
When a government seizes deposits or forces losses on citizens’ financial assets, confidence — the real foundation of “government backing” — evaporates.

This Is Where USD Stablecoins Enter the Discussion

Some analysts argue that stablecoins offer an alternative exposure:

• They are not dependent on deposit insurance funds.

• They are not claims on a commercial bank.

• Their backing is short-term U.S. Treasury debt — the deepest, most liquid sovereign market in the world.

• They avoid the bail-in hierarchy entirely by shifting from:

  • private-sector liabilities
    to

  • sovereign short-term obligations

This does not eliminate risk — it reframes it.
But for many, shifting risk from:

• the solvency of a private bank
  to

• the credit of the U.S. Treasury
  is seen as a more stable anchor, especially in environments where governments might be forced to seize, freeze, or haircut citizen assets to stabilise failing institutions.