Social media is hysterically worried about the Financial Resolution and Deposit Insurance (FRDI) Bill under Parliament’s consideration: bank deposits are at risk, depositors’ money would be used to recapitalise banks in difficulty. The Bill does not quite propose this, and it can be ensured that depositors’ money is not used for the purpose, using the provisions of the Bill themselves.The Bill seeks to prevent a fire in a tiny part of the integrated financial system from flaring into a conflagration that burns up the entire system. Orderly resolution of the bits that get into trouble is what the Resolution Corporation proposed under the Bill would do.Social media did not cook up the story of bank deposits being used to salvage a bank in trouble. In the 2012-13 banking crisis in Cyprus, bail-in of a proportion of bank deposits over a threshold did take place: deposits over a threshold saw a portion being converted into equity that went to absorb bank losses. But this is not what the FRDI Bill proposes.This is what the Bill says: Clause 52(4) “(t)he Corporation shall, by regulations, specify the liabilities or classes of liabilities of a specified service provider, which may be subject to bail-in;(5) The appropriate regulator may, in consultation with the Corporation, require specified service providers or classes of specified service providers to maintain liabilities that may be subject to bail-in and the terms and conditions for such liabilities to contain a provision to the effect that such liabilities are subject to bail-in.”Unless the Corporation specifies bank deposits as a class of liability that could be bailed in, deposits are safe. Section (5) makes it clear that the essential aim is to make financial firms hold designated liabilities — deposits, bonds, preferential shares — that are explicitly subject to bail-in, in case of trouble.However, the Bill does not specifically exclude bank deposits. Section 7 of the same Clause 52 excludes deposits covered by deposit insurance from bail-in, suggesting the possibility that deposits in excess of the insured amount could be bailed in.Section 7 says, “(t)he bail-in instrument or scheme under this section shall not affect… (h) such other liabilities as may be specified by regulations made by the appropriate regulator in consultation with the Corporation and the Central Government.” Parliament could make the present section (h) section (i), and introduce a new section (h) that specifically excludes bank deposits.Cyprus resorted to bail-in during a financial crisis. India is enacting a law to prevent crises and can ask banks to build up loss-absorbing capacity apart from the capital that is now counted towards capital adequacy in relation to risk-weighted assets. Special bonds could be issued that make it clear that they are liable to be bailed in, in extreme circumstances, and a capital buffer built up, on the lines of the capital buffer that systemically important banks are required to, as per the recommendations of the Financial Stability Board, a key component of the global financial architecture.Of course, there is a cost to creating and maintaining large capital buffers. But safety has a price.Let us understand that what the FRDI Bill proposes is to enhance the degree of security ordinary people’s savings have at present, not take away from it. Deposit insurance covers only Rs 1 lakh. Deposits in public sector banks enjoy the implicit guarantee that the sovereign would not let the people down.With what assurance do people put their money in private banks? There is the trust that sound regulation by the RBI would keep deposits safe. Yet, this trust is not absolute. In 2008, the government had to come out with a clarification to prevent a run on ICICI Bank, following a rumour. The stake the sovereign has in maintaining the stability of large banks is not diluted by the FRDI Bill. It just gives the sovereign a tidy way to tackle problems in financial firms, if they do arise.The problem is not with the FRDI Bill. The problem is that we do not have reform of banking procedures to minimise the risk of their taking bad decisions that might land them in crisis and in the arms of the Resolution Corporation.Banking decisions should not be based on whispered advice from ministers and babus, or commissions for managers, but on creditworthiness of the projects seeking loans. Project viability should be scrutinised not just by a clutch of bankers at the time of sanction but continuously over the life of the project, by multiple agencies, as would happen if the bond market were to fund long-term projects.Bankers’ remuneration must be so structured as to align their personal and banking interests. It must be liberal, but tiered: a decent fixed component, a larger chunk linked to medium-term performance of the bank and the largest chunk linked to long-term performance, the variable portions also being subject to clawback.These reforms are not part of the resolution procedure but are vital, to avert the need for resolution.Views expressed here are the authors own, and not Economictimes.com's