The core structural tool introduced by modern bank resolution frameworks is the Bail-in mechanism. This tool reverses the old bailout model by forcing a failing bank’s shareholders and creditors to absorb losses internally, protecting public funds.
The Statutory Loss Absorption Sequence
When a resolution authority activates a bail-in, it writes down or converts the bank’s liabilities into equity in a strict, sequential order, known as the Creditor Hierarchy:
[1. Equity Common Shares] ---> [2. Additional Tier 1 Capital] ---> [3. Tier 2 Subordinated Debt]
                                                                            |
                                                                            v
[Exempted Accounts: Depositors] <--- [5. Senior Unsecured Debt] <----------+

By wiping out equity holders and subordinated bondholders before imposing losses on senior unsecured creditors, the bail-in mechanism forces investors to bear the risks of the institution while protecting retail depositors from financial losses.
 
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