In layman's terms, what happens to the average Joe, in a "bank bail-in"?

Question

I've come across some scare stories that a "bail-in", being the opposite of a bail-out, is where a bank uses deposits to restructure their capital, and that the average Joe with savings above a certain threshold has their money taken from their account, and in exchange they are issued with some kind of promise or share from the bank.

Apparently this happened in the 2012–2013 Cypriot financial crisis where "47.5% of all bank deposits above €100,000 were seized."

Despite studying university level economics, I'm a layman, and find official documentation on this subject utterly impenetrable:

• Bail-in powers implementation (gov.uk)
• Executing bail-in: an operational guide from the Bank of England (bankofengland.co.uk)
• Bank of England sets out bank rescue rules (bbc.co.uk)

What's the straight non-scare-story easy-to-understand version of this?

Can a bank can literally just decide that your money is now theirs? If so, when & how?

Answer 1

One thing that's clear from those documents is that a bank can't just decide by itself to do a bail-in. The regulators do it to the bank.

Imagine a bank is going bankrupt. If that happens, the shares will become worthless. The creditors of the bank will hope for a payout of some of their money from the liquidators, but they won't get all of it back. Those creditors includes any savers whose savings are above the limit of the deposit protection scheme.

Instead, the regulator will grab the shares from the shareholders and hand them to the creditors. But a proportion of the creditors' money will be written off. The creditors be left hoping that the bank recovers, and those shares become worth something again.

The shareholders lose out, as they no longer have the shares. But they were going to lose anyway if the bank went bust.

Answer 2

A bail-in makes sense when you consider depositors to be creditors of the bank. Absent a bank insurance program like the US FDIC, if the bank suddenly runs out of money, the depositors lose everything. Better is for the depositors with enough money to accept IOUs for a period of time, to give the bank a chance to clean up their balance sheet, pay off some debt, and hopefully get solvent again, and then the depositors/creditors can avoid losing their money.