When banks hit turbulent waters, the term ‘bail-in’ often makes headlines and sparks confusion among everyday Australians. As the global economy faces new risks in 2025—from persistent inflation to digital asset volatility—understanding bail-ins is more important than ever. Unlike the more familiar ‘bail-out,’ where governments rescue banks with taxpayer money, a bail-in puts the onus on the bank’s own creditors and sometimes depositors. So, how does this work in Australia, and should you be concerned about your hard-earned savings?
What Is a Bail-In? The Mechanics and Rationale
A bail-in is a financial rescue tool that allows a troubled bank to convert certain debts owed to creditors—and in rare cases, large depositors—into equity or write them off. This recapitalises the bank from within, avoiding a government-funded rescue. The logic is simple: those who took the risk by investing or lending to the bank bear the cost if things go south, rather than the general taxpayer base.
Globally, bail-ins became a focus after the 2008 financial crisis. Australia, like many advanced economies, has adapted its banking regulations to include bail-in provisions as part of its broader strategy to maintain financial stability.
- Bail-out: Government injects funds; taxpayers cover the cost.
- Bail-in: Bank’s creditors and investors absorb losses; taxpayers shielded.
For Australian banks, bail-ins are governed by the Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Act 2018, which grants APRA—the prudential regulator—the authority to impose losses on certain creditors in a crisis.
Bail-Ins and Your Money: What’s Protected, What’s at Risk?
One of the biggest worries for Australians is whether their bank deposits could be lost in a bail-in scenario. Here’s what you need to know in 2025:
- Deposits up to $250,000 per account holder, per bank, are guaranteed by the Financial Claims Scheme (FCS). This means retail customers’ everyday savings, transaction, and term deposit accounts are protected even if a bank fails.
- Bail-in tools primarily target:
- Unsecured bank bonds and subordinated debt
- Hybrid securities (e.g., capital notes issued by banks)
- Large deposits above the $250,000 FCS threshold
For example, in 2025, if a major Australian bank faces insolvency, APRA could require holders of the bank’s subordinated bonds or hybrid notes to have their investments converted into shares or partially written off. Everyday savers with less than $250,000 in the bank are insulated by the FCS. But investors holding bank-issued capital notes or large corporate depositors may be exposed.
Recent Policy Developments: APRA’s 2025 Crisis Playbook
In response to ongoing global banking shocks—such as the 2023 US regional bank failures and continued crypto market volatility—APRA has ramped up its focus on crisis preparedness for 2025. Key updates include:
- Revised minimum loss-absorbing capacity (LAC) rules: As of January 2025, Australia’s major banks must hold more Tier 2 capital, which can be converted or written down in a crisis. This strengthens the effectiveness of bail-in powers.
- Enhanced disclosure requirements: Banks must now clearly communicate the bail-in risk attached to new hybrid securities and subordinated debt, giving investors more transparency.
- Stress-testing for bail-in scenarios: APRA is conducting regular stress tests with banks to model how bail-ins would play out and ensure the FCS is ready to respond if needed.
This means that while the odds of a bail-in affecting the average Aussie depositor remain extremely low, investors in bank-issued securities and large corporate clients should be aware of the potential risks and read the fine print.
Bail-In in Action: Global Examples and What Australia Can Learn
Bail-ins are not just theoretical. In Europe, they’ve been used to resolve failing banks without government rescues. For example:
- Banco Popular (Spain, 2017): Shareholders and junior bondholders lost their investments when the bank was sold for €1. Retail depositors were protected.
- Cyprus (2013): Large uninsured depositors at two banks took haircuts, while smaller depositors were shielded.
Australia’s approach is more cautious, with strong depositor protection and APRA’s robust oversight. Still, the lesson is clear: understanding where your money sits on a bank’s balance sheet—and the regulatory protections in place—is crucial for making informed decisions.
How Should Aussies Respond in 2025?
For most Australians, bail-ins are nothing to panic about. The FCS remains one of the world’s strongest deposit insurance schemes. However, if you’re investing in bank hybrids, subordinated notes, or have large deposits, it’s smart to:
- Check whether your investments are subject to bail-in risk
- Spread large deposits across banks if you exceed the $250,000 FCS cap
- Read all disclosure documents for hybrid securities and understand potential loss scenarios
Staying informed is your best defence against the unexpected.
