What is the resolution regime for banks?
Banking & Finance (2nd edition)
Austria has implemented the Directive 2014/59/EU (“BRRD”) by adopting the Federal Act on the Recovery and Resolution of Banks (“BaSAG”), thereby creating a national legal framework for dealing with banks that are failing or likely to fail. The BaSAG contains provisions (i) prescribing the preparation of recovery plans by banks and by the resolution authorities, including powers to remove obstacles to a resolution (“prevention”), (ii) enabling supervisory authorities to intervene at an early stage, including related additional powers to intervene (“early intervention”) and (iii) forming the basis for the establishment of a national resolution authority and for entrusting the authority with the necessary powers and tools (“resolution”). The following resolution tools are at the FMA’s disposal: (i) the sale of business tool, (ii) the tool to establish a bridge institution (bridge bank), (iii) the asset separation tool and (iv) the tool for bailing-in of creditors (bail-in). The bail-in tool is one of the core elements of the BRRD. It provides the resolution authority with the possibility to write down the eligible liabilities in a cascading contribution to absorb losses of an institution, or to convert them into equity capital.
The resolution regime for banks is based on the Resolution of Credit Institutions and Investment Firms Law (‘’Resolution Law’’). The Resolution Law designates the CBC as the resolution authority. The resolution authority shall draw up a resolution plan for each ACI that is not part of a group subject to consolidated supervision. The resolution plan will include the actions that the CBC can take. The resolution measures that the resolution authority may apply include (a) the sale of operations measure, (b) the measure to transfer assets, rights or liabilities to a bridge institution, (c) the measure to transfer assets and rights to an asset management company, (d) the bail-in measure.
A credit institution may become subject to resolution under the Finnish Act on the Resolution of Credit Institutions and Investment Firms (1194/2014) (Resolution Act), implementing the amended EU Banking Resolution and Recovery Directive (BRRD).
The board of a credit institution must notify the FFSA without delay if it considers that the institution fulfils the criteria for placing it under resolution in accordance with the Resolution Act. The FFSA in turn must inform the Financial Stability Authority of the notification. On receipt of notification or after consulting with the FFSA, the Financial Stability Authority must assess whether the criteria for placing the institution under resolution are fulfilled. If the criteria are fulfilled, the Financial Stability Authority must make a decision on placing the institution under resolution. After the institution has been placed under resolution, the Financial Stability Authority will decide on measures regarding the institution’s activities, assets and liabilities, according to the terms of the Resolution Act. Resolution tools available to the Financial Stability Authority include:
- write-downs and conversions of liabilities;
- sales of business; and
- bridge institutions and asset management vehicles.
The operations of a troubled Finnish deposit bank can be discontinued as provided for under the Act on the Temporary Suspension of the Operations of a Deposit Bank (1509/2001, as amended) (Suspension Act), which also implements the relevant provisions of Directive 2001/24/EC on the reorganisation and winding up of credit institutions (Credit Institutions Directive).
One of the main purposes of the Suspension Act is to provide the means for preventing the sudden and large withdrawal of deposits. When a deposit bank is evidently unable to meet its obligations, it must notify this to the Financial Stability Authority, the Bank of Finland and the FFSA without delay. Such notification is not required if the deposit bank has already made a notification under the Resolution Act.
The Financial Stability Authority can order the operations of the bank to be temporarily suspended for up to one month if it is evident that the continued operations would severely risk the stability of the financial markets, the undisturbed operation of payment systems or the benefit of the creditors. In addition, the Financial Stability Authority can, for special reasons, order the suspension to be continued for an additional period of one month at a time. The suspension period cannot, however, exceed six months in aggregate. The FFSA will appoint a representative to supervise compliance with the suspension order.
Once the operations of a deposit bank have been suspended, the bank must without delay draw up a plan indicating the manner in which the bank intends to reorganise its financial position or, in cases where such measures cannot be presented, the manner in which the bank intends to terminate its operations. If the bank fails to draw up the reorganisation plan within the given time or if the contemplated reorganisation measures are not deemed sufficient, the Financial Stability Authority must make a proposal to the FFSA.
A deposit bank cannot be declared bankrupt or ordered into liquidation while its operations are suspended. The processing of applications relating to bankruptcy or liquidation of the bank will be adjourned until the expiry of the suspension. While the operations of a deposit bank are suspended, the Financial Stability Authority can, however, apply to begin the administration procedure referred to in the Act on Company Administration (47/1993). This presupposes, among other things, an account of the preconditions for the administration proceedings or the consent of the bank and at least two creditors whose claims equal at least one-fifth of the bank’s known debts.
In general, the suspension triggers an automatic stay, providing the bank with general protection from its creditors, both secured and unsecured. Consequently, the bank cannot repay its debts and the creditors are prohibited from taking action to enforce their claims. This stay remains in force until the suspension expires. Therefore, the suspension means that the bank is, at the outset, prohibited from repaying any deposits. The suspension of operations can expire where:
- the deposit bank’s financial standing has improved so that the suspension is no longer necessary;
- administration proceedings for the deposit bank are commenced; or
- the maximum six-month period has lapsed without either of the two alternatives above occurring. In this case, the expiry is likely to be followed by bankruptcy.
With the exception of deposit banks under the above regime, credit institutions cannot be subject to administration or other rehabilitation proceedings.
Directive No 2014/59/EU of 15 May 2014 (BRRD), establishing a European framework for the recovery and resolution of credit institutions and investment firms, was transposed into French law under Ordi-nance No 2015-1024 of 20 August 2015, and supplements the framework created by Law No 2013-672 of 26 July 2013 on the separation and regulation of banking activities which set up a resolution college.
In addition, the Single Resolution Mechanism (SRM) defined in 2014 under Regulation No 806/2014, es-tablishes uniform rules and a uniform procedure for the resolution of credit institutions and certain in-vestment firms in the framework of a Single Resolution Mechanism and a Single Resolution Fund. Under the SRM, responsibilities for resolution are split between:
- the Single Resolution Board (SRB) located in Brussels, and
- the national resolution authorities (NRAs) of participating Member States.
In France, the ACPR has exclusive responsibility for certain entities: credit institutions considered less significant (not supervised by the ECB), nearly all investment firms, branches of third-country banks, and the banking systems in Monaco and in the French overseas territories.
With regard to these entities, the ACPR is charged of the following duties:
- preparing resolution plans;
- assessing the resolvability of an entity;
- taking decisions aimed at reducing or removing obstacles to the implementation of resolu-tion measures;
- determining whether an entity is failing or likely to fail;
- implementing resolution measures.
In France, the costs entailed by resolution are financed from two separate funds: either the Single Reso-lution Fund (SRF) or the National Resolution Fund (NRF).
In addition to and parallel with the information provided under Question 21, the BRSA may, upon fulfilment of certain criteria, (a) revoke the operation license or (b) transfer the management and audit of a bank (the “Distressed Bank”) to the SDIF and the SDIF would fulfill the necessary operations for financial restructuring or the bankruptcy and liquidation of the same.
A. In Case of Revocation of Operation License
Following the publication in the Official Gazette of the BRSB’s decision on transfer the Distressed Bank’s management and audit to the SDIF, any execution and bankruptcy proceeding initiated against the Distressed Bank shall be stayed and no further execution or bankruptcy proceedings shall be initiated against the same. Upon stay of execution and bankruptcy proceedings, the SDIF will make the payments of the insured deposits and participation funds first and shall request from the relevant court to declare the Distressed Bank bankrupt and the respective court shall decide on the bankruptcy of the Distressed Bank within 6 months. In case that the respective court decides on the bankruptcy, claims of the SDIF against the bankrupt bank shall be preferred. If the respective court does not declare the Distressed Bank bankrupt, voluntary liquidation of the Distressed Bank shall be performed without being subject to the liquidation procedures provided for the joint stock companies (anonim şirket) under the Turkish Commercial Code.
B. In Case of Transfer of the Management and Audit
The SDIF shall be entitled to:
(i) cease the Distressed Bank’s operations temporarily; and/or
(ii) transfer assets and liabilities of the Distressed Bank to another bank in part or in full; and to request from the BRSB to revoke the Distressed Bank’s operation license; or
(iii) provide financial aid to the Distressed Bank by acquiring its shares and by purchasing damages corresponding to such acquired shares; or
(iv) to acquire the remainder of the Distressed Bank’s shares by paying the share price to the Distressed Bank’s shareholders; or
(v) to request from the BRSB to revoke the Distressed Bank’s operation license.
If majority or all of the shares of the Distressed Bank is transferred to the SDIF as per (iii) and/or (iv) above, the SDIF shall be entitled:
(i) for providing financial and technical aid to (a) transfer the Distressed Bank’s assets and liabilities in part or in full to another bank; or (b) merge the Distressed Bank with an existing bank willing to merge with the Distressed Bank; or
(ii) for the purposes of strengthening and restructuring the Distressed Bank’s financial structure and limited to the cases where it is deemed necessary by the SDIF; to
- increase the Distressed Bank’s capital;
- revoke punitive interests arising from mandatory reserve and general liquidity requirements;
- purchase the Distressed Bank’s subsidiaries, real estate and other assets or to pay advance payments in return of taking the same as collateral;
- make deposits for the purpose of satisfying the Distressed Bank’s liquidity needs;
- acquire the Distressed Bank’s receivables or damages;
- perform any transaction in relation to the Distressed Bank’s assets and liabilities and to convert the same into cash; or
(iii) to sell the Distressed Bank’s assets on a discounted or another basis to third parties and take all measures it deems necessary; and
(iv) to transfer the Distressed Bank’s shares to third parties upon approval of the BRSB.
In case that the above-mentioned act and/or transactions cannot be completed within 9 months (which can be extended for 3 more months by the Board of SDIF), the BRSB shall revoke the operation license of the Distressed Bank upon the request of the SDIF.
Swiss banks are subject to a special resolution regime regulated in the Banking Act and BIO-FINMA.
Before FINMA may initiate resolution proceedings (restructuring or liquidation) with respect to a bank, one of the following prerequisites must be met: (i) there is justified concern that the bank is over-indebted, i.e., the bank is not yet insolvent, but insolvency can reasonably be expected to occur imminently and the bank no longer is or likely no longer will be in a position to avoid insolvency by its own efforts in a sustainable way; (ii) the bank has serious liquidity problems; or (iii) the bank fails to fulfil the applicable capital adequacy requirements after expiry of a deadline set by FINMA. If the requirements are met, FINMA may also order protective measures.
FINMA may only initiate restructuring proceedings rather than liquidation proceedings if (i) restructuring proceedings are likely to result in the recovery of the relevant bank, or the continued provision of certain banking services by the relevant bank or another entity, and (ii) the creditors of the relevant bank are likely to fare better in restructuring proceedings than in liquidation proceedings. In restructuring proceed-ings, FINMA has a variety of tools, including bail-in and the transfer of assets, to try to successfully restructure the bank.
The Slovak Republic implemented the Directive 2014/59/EU (the “BRRD”) into Slovak law via adoption of the Act on Solving of Crisis Situations on the Financial Market. The priority of the Act is to implement the effective crisis management system created by the BRRD.
According to the Act, the Resolution Council was established on January 1 2015 as the national resolution authority in the Slovak Republic. The Resolution Council is part of the Single Resolution Mechanism (SRM), which comprises (i) the Single Resolution Board, based in Brussels; (ii) the national resolution authorities of the euro area countries; (iii) the national resolution authorities of those other EU member states that have opted to participate in the SRM.
The main objective of the Resolution Council is to prevent the failure of institutions and groups in the financial sector and to ensure their effective resolution (if failure cannot be avoided), through the protec-tion of financial stability and client assets. In this respect, the main tasks of the Resolution Council are: to draw up resolution plans for institutions incorporated in the Slovak Republic and to contribute to the drafting of resolution plans for groups that have a subsidiary incorporated in the Slovak Republic; to comment on recovery plans of those institutions or groups; to assess the resolvability of institutions; to set minimum requirements for own funds and eligible liabilities for individual institutions incorporated in the Slovak Republic; to set the amount of financial contributions to the national resolution fund paid by individual institutions incorporated in the Slovak Republic; to issue decisions under specific regulations in relation to institutions incorporated in the Slovak Republic; and, to perform other activities relating to its participation in the SRM.
If NBS informs the Resolution Council that a particular institution is failing or is likely to fail in the near future, the Resolution Council will assess whether the conditions for resolution proceedings are met.
Resolution proceedings will then take place in the public interest, to the necessary extent and in a rea-sonable scope, if the objectives of the Act cannot be attained through insolvency or similar proceedings. The most weighty measure in resolution proceedings is the Resolution Council´s power to intervene in the rights of shareholders and creditors. As a rule, the shareholders of the failing institution should bear losses first, and no creditor should incur greater losses in resolution proceedings than it would have incurred under insolvency proceedings according to the Bankruptcy Act. In practical terms, the exercise of some of the Resolution Council's powers may result in a relatively invasive disturbance of the rights of private parties, which in Slovak law may raise a host of issues regarding application.
Germany is member state of the so-called Single Resolution Mechanism (SRM), which means that banks have to contribute to the EU Single Resolution Fund. In case of financial difficulties of a bank, the national resolution authorities, ie BaFin in Germany, have a wide-ranging spectrum of measures they can apply which range from bailing in shareholders and creditors to the sale of the bank in part or in whole and the transfer of certain or all assets to a bridge institution. Currently BaFin is consulting the draft of a catalogue of minimum requirements for bail-in. Thus, it can be expected that more detailed guidance from BaFin on bail-in measures will be published in due course.
Unlike other jurisdictions, the Israeli financial sector was less vulnerable to the 2008's global financial crisis and therefore the Israeli government was not required to bail-in any of the banks.
In terms of resolution of a bank the Banking Ordinance and the Bank of Israel Law provide the BoI with various powers and tools. For example in case the BoI believes that a bank has acted in a manner that might impair its ability to fulfill its obligations or its proper conduct, it may send order to take certain measures, instruct the bank to avoid any type of activity, ban distribution of a dividend and limit the authority of a board member or an officer or remove him from office. In case a bank is not able to fulfill any of its obligations or return any assets that were deposited with it, the BoI may in certain circumstances, appoint an authorized manager for the bank or to supervise its management.
In considering the stability of a bank the BoI may provide it with funds by discounting bills of exchange, promissory note or by collateralized loans. Moreover, the BoI may, with the approval of the Government of Israel, announce that the BoI or another bank shall guarantee another bank's deposits (up to the full amount or up to a certain amount). Such guarantee may cover also other liabilities if it is for the benefit of the public.
MAS has several options to deal with the situation where a bank runs into financial or operational difficulty.
Firstly, in certain defined circumstances, MAS has the power under section 49 of the BA to:
(a) direct a bank to take or refrain from certain action in relation to its business;
(b) appoint a statutory adviser to advise the bank on the management of its business; and
(c) assume control of the business of the bank itself.
Secondly, under Part IVB of the Monetary Authority of Singapore Act (which grants MAS the power to take over certain types of financial institutions, including banks), MAS is able, in certain defined circumstances, to:
(a) compulsorily transfer all or any business of a bank to another party;
(b) compulsorily transfer all or any shares of a bank to another party;
(c) compulsorily restructure the share capital of a bank; and
(d) bail-in certain defined eligible instruments and unsecured liabilities of a bank (presently being equity instruments, unsecured debt instruments that are subordinated to the claims of unsecured creditors, and any other instruments that provide for a write-down, conversion or modification when specified events occur) by cancelling, converting or modifying such eligible instrument or liabilities.
To ensure the effectiveness of any resolution option, MAS is also able to apply to the High Court for a moratorium (of up to 6 months) against the passing of any resolution or the making of any court order for the winding up of a bank. MAS is also able to temporarily stay the termination rights of counterparties in financial and non-financial contracts entered into with a bank over which MAS has exercised resolution powers.
If a bank’s liabilities exceed its assets, or a bank has suspended, or is likely to suspend, the repayment of deposits, the Prime Minister may appoint DICJ as a Financial Reorganization Administrator and order the bank to be under the control of DICJ pursuant to the Deposit Insurance Act. The Financial Reorganization Administrator will take control of the assets of the bank, dispose of the assets and search for another institution that is willing to take over the bank’s business.
In addition, to cope with the risk of harming national or regional financial systems, the Prime Minister may authorise DICJ to:
(i) subscribe for shares or subordinated bonds to enhance the bank’s regulatory capital;
(ii) provide financial aid in excess of the expected pay-off cost (in case the bank has suspended, or is likely to suspend, the repayment of deposits, or its liabilities exceed its assets) (“2-go sochi”); or
(iii) acquire all of the bank’s shares (in case the bank has suspended, or is likely to suspend, the repayment of deposits, and its liabilities exceed its assets) (“3-go sochi”).
Further, to cope with the risk of causing a significant disruption to the financial market or system in Japan, the Prime Minister may authorise DICJ to:
(i) supervise the bank, and provide loans or guarantees, or subscribe for shares or subordinated loans to the bank (in case the bank’s assets exceed its liabilities); or
(ii) supervise the bank and provide financial aid necessary to facilitate a merger, business transfer, corporate split or other reorganisation (in case the bank’s liabilities exceed, or are likely to exceed, its assets, or it has suspended, or is likely to suspend, payments on its obligations) (“Tokutei 2-go sochi”).
There is no specific resolution regime in Oman for banks, although the Banking Law, the CCL and the Commercial Law (RD 55/1990) contain the legal regime to remain applicable to banks in case of their insolvency, liquidation, dissolution or discontinuation of their activities.
According to the Organic Law of Georgia on National Bank, the National Bank is entitled to establish the rules relating to temporary administration of the bank (Article 49.1).
The Rules on the Adoption of the Temporary Administration Regime in the Commercial Banks approved by the Decree N 173/04 of the President of the National Bank introduces detailed rules on the temporary administration of the commercial banks which have or may be have significant financial problems or which are insolvent or which may threaten the stability of the bank or the banking sector, the interests of the depositors and creditors of the bank due to the weak risk management model and unhealthy practices.
During the Temporary Administration Regime, the authorities of all governing bodies of the bank shall be transferred to the temporary administrator. The temporary administrator is entitled to take all necessary measures required for the improvement of the financial condition of the commercial banks, including to sell or close the branches, representative offices and divisions of the bank, removing the staff from the held positions, making payments or suspension of payments. The temporary administrator is also enti-tled to merge the bank with another bank, to renew the capital or to sell the assets and liabilities of the bank to another bank. The temporary administrator is also entitled to block any amounts of individuals or legal entities in the banks for the period of temporary administration provided that it will take the neces-sary measures to maintain the stability thereof, unless it contradicts the requirements of Law of Georgian on Payment System and Payment Services.
Liechtenstein has transposed the Bank Recovery and Resolution Directive 2014/59/EU (BRRD) into national law.
The resolution regime for banks in Luxembourg reflects the provisions of the BRRD, as implemented by the law of 18 December 2015 on the resolution, reorganisation and winding up measures of credit institutions and certain investment firms and on deposit guarantee and investor compensation schemes (the "Resolution and Deposit Guarantee Law").
The BRRD requires an establishment of a resolution authority vested with wide-ranging powers, including the possibility to replace the Financial Institution's management and implement resolution tools. In Luxembourg, the resolution authority is going to take the form of a dedicated compartment of the CSSF called the resolution council (conseil de résolution). The resolution council will be separated from the supervisor with a "Chinese wall", having dedicated resources and an independent director.
Resolution and Deposit Guarantee Law creates the Luxembourg Resolution Fund (Fonds de résolution Luxembourg, the "FRL"). The fund finances the restructuring of the failing institutions not covered by the Single Resolution Mechanism (please see below) and is funded from the contributions from the financial sector. The daily management of the FRL is entrusted to the CSSF.
The Resolution Council and the Luxembourg Resolution Fund correspond to the bodies at the EU level - the Single Resolution Board and the Single Resolution Fund. They fall under the Single Resolution Mechanism covering systemically important banks supervised directly by the European Central Bank.
Resolution planning (Articles 7 to 25 of the Resolution and Deposit Guarantee Law) deals with resolution plans, i.e. the roadmaps to resolve a financial institution in an orderly way, minimising the negative impact on the economy. The planning is directed by the resolution authority, which is exceptional as other-wise it steps in only during the "gone concern" period. While the wording of the Resolution and Deposit Guarantee Law follows closely the BRRD, the two acts differ in terms of structure. Unlike the BRRD, the Resolution and Deposit Guarantee Law has three distinctive parts on resolution planning for individual financial institutions and groups, where either a parent company or a significant branch/subsidiary is based in Luxembourg. Since there is an important number of branches and subsidiaries of foreign financial institutions in Luxembourg, the legislator wished to add transparency to the rules on how resolution authorities from different countries cooperate on resolution planning.
In parallel to resolution planning, the resolution council has the power to carry out the Resolvability analysis. The purpose is to identify obstacles to resolution and, if needed, remove them e.g. by changing the organisational structure of a financial institution.
The section on Objectives, Conditions and General Principles of Resolution follows closely the BRRD and applies to both individual institutions and groups. Accordingly, the objectives of resolution are micro and macro-economic, i.e. to protect both individual depositors and overall financial stability in order to prevent taxpayer bail-outs and runs on banks. The conditions triggering resolution are related to the state of the balance sheet of the financial institution as well as the need for exceptional public aid. Lastly, the general principles of resolution govern the order of loss-bearing (shareholders first, followed by creditors), the power of the resolution council to replace the institution's management and the "no creditor worse off" principle, affirming the protection of guaranteed depositors at the level equal, if not high-er, to standard insolvency proceedings.
Resolution instruments represent the core of the resolution provisions of the BRRD and are closely transposed in the Articles 38 to 56 of the Resolution and Deposit Guarantee Law. The resolution council has the power to use all the following tools without shareholder approval:
- Private sector sale of the failing financial institution;
- Bridge bank, whereby core functions of a financial institution are transferred onto a temporary structure, while the remaining part of the bank is wound down;
- Good bank/bad bank structure, separating healthy and toxic assets in order to wind down the "bad bank" in accordance with a normal insolvency procedure. It is always implemented together with another resolution tool;
- Bail-in tool, where the institution's capital base is strengthened by wiping out debt and/or converting it to equity. This tool is expected to become the key resolution tool in the future. The rationale is that it should be the creditors and shareholders, not the taxpayer, who bear the cost of resolution.
Under national law, a resolution action may occur where Banco de Portugal has indicated that a credit institution is failing or likely to fail and there is no reasonable prospect that the failure can be prevented within a reasonable time frame through recourse to measures carried out by the credit institution itself or, for instance, the application of corrective measures. Before taking resolution action, Banco de Portugal shall appoint an independent entity, at the expense of the credit institution under resolution, in order to ensure that a fair, prudent and realistic valuation of the assets and liabilities and off-balance-sheet items of the institution in question is carried out.
Where the requirements are met, Banco de Portugal may apply up to four resolution actions:
a) partial or total sale of the business;
b) partial or total transfer of the business to bridge institutions;
c) separation and partial or total transfer of the business to asset management vehicles;
As a general rule, the members of the management and supervisory bodies of the credit institution under resolution and the respective statutory auditor shall cease functions and they shall be substituted by members appointed by Banco de Portugal.
The national legal framework of resolution measures follows these objectives:
a) to ensure the continuity of critical financial services for the economy;
b) to avoid adverse effects on financial stability, in particular by preventing contagion, including to market infrastructures, and by maintaining market discipline;
c) to safeguard the interests of taxpayers and protect public funds, minimising reliance on extraordinary public financial support;
d) to protect depositors and investors;
e) to protect the client funds and client assets held by credit institutions in their name and on their behalf and the provision of related investment services.
The costs incurred from the application of resolution actions and the required financial support shall be proportionate and appropriate to the objectives of these measures:
a) the shareholders of the credit institution under resolution bear first losses;
b) the creditors of the credit institution under resolution bear losses after the shareholders in an equitable manner, in accordance with the order of priority of their claims;
c) no shareholder or creditor of the credit institution under resolution shall incur greater losses than would have been incurred if the institution had been wound up;
d) depositors shall not bear losses from deposits guaranteed by the Deposit Guarantee Fund in accordance.
The resolution regime for banks is governed by the BRRD, which has been transposed locally by means of the Recovery and Resolution Regulations(Subsidiary Legislation 330.09 of the Laws of Malta), in accordance with the Single Supervisory Mechanism (“SSM”) and the Single Resolution Mechanism (“SRM”). These Regulations empower inter alia, require credit institutions to draw up recovery and resolution plans and set out the resolution tools available to the Resolution Committee (established by these regulations) which are to be triggered where the conditions established by these Regulations arise. To this effect, the Resolution Committee is empowered to utilise a range of resolution tools (i.e. sale of business tool, bridge institution tool, asset separation tool, and bail-in tool) depending on the circumstances.
As part of their obligations under these Regulations, banks are required to draw up and recovery and resolution plans covering the matters set forth in the Regulations, and keep these updated.
Over the years, there has been this dogma that a bank is “too big to fail” and this was one of the factors which resulted in many being surprised by the financial crisis that occurred, the Ministry of Finance (representing the Government of the State of Qatar) and the Qatar Central Bank have powers at their disposal to support financial situations which are failing to ensure to ensure the fluidity of financial institutions in the State of Qatar and to uphold the confidence of people in the financial system.
According to EU level regulatory requirements, the resolution plans are prepared by resolution authority which can ask banks to take appropriate measures to address obstacles to resolvability, including changes to corporate and legal structures.
The resolution tools that can be applied are the following: (i) Sale or merger of the business with another bank; (ii) Set up temporary bridge bank to operate critical functions; (iii) Separation of assets between “good bank” and “bad bank”; (iv) Bailing-in creditors of the bank: imposing losses to shareholders + bondholders + other creditors + depositors (> €100K deposit guarantee).
The resolution regime for banks is regulated in detail by law. The National Bank of Serbia prepares the resolution plan for each bank. The resolution instruments include: 1) sales of shares, or assets and obligations, 2) transfer of shares, or assets and liabilities to a special purpose bank, 3) assets carve-out, 4) distribution of loss to shareholders and creditors. Prior to the initiation of the bank resolution proceeding the National Bank of Serbia may write off relevant elements of the bank’s capital or its conversion to shares or other equity instruments of that bank, and after the initiation of this proceeding the write off or equity conversion shall be performed prior to the application of appropriate resolution instrument.
The current resolution regime is set out in the UK's Banking Act 2009 which provides for resolution and recovery measures and has been amended to reflect the requirements of BRRD. The PRA rules require banks to maintain recovery plans and resolution packs to enable institutions and the PRA better to plan effectively for recovery or resolution in the future. The Banking Act 2009 introduced a special resolution regime with new insolvency procedures of bank insolvency, bank administration and also empowers the institutions to transfer the bank to a third party or to take it into temporary public ownership. As part of the new powers granted to the Bank of England under the Banking Act 2009, the Bank of England has bail-in powers to write down and covert capital into full equity.
The process for resolving failing depository institutions is different than the process applicable to other businesses. Depository institutions are not subject to general federal bankruptcy laws. Instead, a failing depository institution is subject to receivership (or conservatorship, in very rare cases), and the FDIC will serve as receiver in an administrative proceeding under the provisions of the FDIA. Generally, the FDIC as receiver is expected to maximize the return on the assets of the failed institution and minimize losses to the FDIC’s Deposit Insurance Fund that may result from the failure. The FDIC’s primary goals are to provide depositors with access to their insured deposits quickly and to handle the resolution in the least costly manner. The two basic methods for resolving failing institutions are (1) a purchase and assumption transaction between the FDIC, in its capacity as receiver, and a healthy financial institution in which the healthy financial institution purchases some or all of the assets and assumes some of the liabilities of the failed institution (including insured deposits) or (2) a deposit payoff where the FDIC, as insurer, pays all of the insured depositors of the failed financial institution up to applicable deposit insurance limits.
Holding companies of depository institutions are usually subject to the general federal bankruptcy laws, with the exception of those designated as SIFIs. These situations are often complicated because the subsidiary depository institution is typically the cause of the holding company’s insolvency, and the holding company and depository institution are subject to different resolution regimes.
The US supplemented its existing banking organization insolvency regime to address the insolvency of failing SIFIs under the Orderly Liquidation Authority (OLA) provisions of Title II of the Dodd-Frank Act. The OLA provides an alternative to bankruptcy or other applicable liquidation proceeding, in which the FDIC acts as receiver to carry out the resolution of the various entities within a SIFI organization on a consolidated basis, including non-bank entities, such as insurance companies and broker-dealers (with some special procedures applicable to the latter).
Italy implemented the Bank Recovery Resolution Directive 2014/59/UE (BRRD) by means of the Legislative Decree no. 180 and no. 181 of 16 November 2015, which set out the BRRD regime and updated the Italian Banking Act and the Italian Financial Act.
Notwithstanding the BRRD regime, Italian banks are subject to the existing national legislation which provides for two different proceedings, the special administration and the compulsory administrative liquidation, on the basis of the nature of the crisis affecting the bank. The special administration consists of a short-term and temporary measure, undertaken with the aim of checking the possibility of restoring adequate capital, organization and business conditions. It can be activated when the losses and the breaches in bank’s management are considerable but not irrevocable. The compulsory administrative liquidation is activated when the crisis is irreversible and there are not the conditions for the resolution. The outcome of the compulsory administrative liquidation is the closure of the bank.
The FIB Act provides that in the event that the condition or operation of a financial institution may cause damage to the public interest, the BoT shall have various powers, including, but not limited, to (i) order the financial institution to rectify the condition or operation; (ii) order the financial institution to reduce its capital, increase its capital, or both, within the time specified, which shall not be more than 90 days from the date the financial institution received the order. If the financial institution fails to act or is unable to comply within the specified period, the order shall be deemed to be a resolution of the shareholders meeting as from the expiry date of such order, except that where there is an urgent need to maintain the condition and operation of the financial institution, the BoT may order the financial institution to reduce its capital, increase its capital, or both, immediately. Such an order shall be deemed a resolution of the shareholders meeting; (iii) order the financial institution to suspend its business operations entirely or in part for a temporary period within the time prescribed; (iv) order the financial institution to immediately remove any or all of its directors, managers or persons with power of management and appoint other persons to replace the persons so removed as deemed appropriate. Such an order shall be deemed a resolution of the shareholders meeting; and (v) order the control or closure of business of the financial institution.
The BoT is required to report the steps taken above to the Minister for information without delay. If the BoT issues an order closing a business as mentioned above, it shall propose to the Minister the revocation of the license of the financial institution.
Slovenia adopted The Resolution and Compulsory Dissolution of Credit Institutions Act, with which it transposed the Directive No. 2014/59/EU (the “BRRD”) and implemented the Regulation (EU) No. 806/2014. Slovenia also participates in SRM and a Single Resolution Fund.
In carrying out the resolution actions, the shareholders of the bank have to be the first to cover the bank losses, followed by the other holders of capital instruments of this bank and followed by the other creditors. No creditor of the bank shall bear greater loss than they would have borne if the bank was wound up in accordance with normal insolvency proceedings. Covered deposits are fully protected.