What is the resolution regime for banks?
Banking & Finance
Unlike other jurisdictions, the Israeli financial sector was less vulnerable to the recent 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 was 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.
In July 2014, a specific insolvency procedure has been implemented in Hungary for troubled institutions on the basis of the Bank Recovery and Resolution Directive (the “BRRD”). The Hungarian legislation was aligned to the provisions of the BRRD. Accordingly, the objective of such procedure is to facilitate the restructuring of troubled institutions while ensuring the continuity of its critical functions and retaining the stability of the system of financial intermediaries. Such procedure provides for the prevention of spillover or other major adverse effects relating to troubled institutions.
Within the framework of the resolution procedure, the HNB was designated to act as national resolution authority and was empowered to exercise a wide range of rights including from the initiation of the resolution procedure to the adaptation of different measures.
The initiation of the resolution procedure is subject to the occurrence of certain conditions, i.e. the insolvency of the institution is not sufficient itself to trigger the resolution, but the existence of public interest also need to be justified.
Within the framework of the resolution procedure, the main instruments available to HNB are
- the sale of business,
- the bridge institution tool,
- the asset separation and
- the creditor bail-in (please see under Question No. 22).
Also, the measures available to HBN varies depending on the given phase of the resolution procedure available: for instance measures in the preparatory phase (e.g. obligatory removal of obstacles to resolvability) aims to pave the way for an effective resolution proceeding, while those that may be taken in an actual event of distress aims to handle the issues arisen due to insolvency is imminent (e.g. dismissal of executives, use of resolution tools such as asset transfers, write down or conversion of capital instruments, intervention in contractual relationships).
HNB is also entitled to impose different type of sanctions in case of the breach of applicable law or the hindering of the resolution procedure.
Directive 2014/59/EU of the European Parliament and of the Council of 15 May 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms and amending Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/36/EU, and Regulations (EU) No 1093/2010 and (EU) No 648/2012, of the European Parliament and of the Council (BRR Directive) establishes the resolution regime for banks and basically introduces four resolution tools:
- the sale of business tool;
- the bridge institution tool;
- the asset separation tool;
- the bail-in tool.
As of the moment of establishment of the Single Resolution Mechanism (SRM), the resolution authority is the FCMC in cooperation with the Single Resolution Board, the EU agency.
The Lithuanian resolution regime is based on EU regime, including SRM and BRRD.
Resolution tools available to the resolution authority include (i) sale of business, (ii) bridge institution, (iii) asset separation, and (iv) bail-in.
Bank resolution may be financed by the European Single Resolution Fund. In certain circumstances, the Deposit Insurance Fund may be required to contribute to the financing of bank resolution by an amount equal to the losses that covered depositors would have suffered had they not been protected and excluded from resolution. The national resolution fund and the Deposit Insurance Fund are administered separately by the same designated authority, the State Company “Deposit and Investment Insurance”, but decisions regarding their usage during resolution are made by the national resolution authority i.e. Bank of Lithuania.
In December 2015, the Bank of Lithuania was designated to become the resolution authority of the country (Bank Recovery and Resolution Directive No. 2014/59/EU). From 2016, when the Single Resolution Mechanism fully entered into force, the Bank of Lithuania shares its resolution responsibilities with the Single Resolution Board, as prescribed in the Single Resolution Mechanism Regulation (No. 806/2014). For financial institutions the failure of which would not pose risks to financial stability, the regular liquidation/insolvency procedure is available and depositors receive payouts from the Lithuanian Deposit Insurance Fund as required.
There is no special resolution regime for banks; the standard resolution regime for joint stock companies applies.
Starting with December 2015, the resolution regime in Romania is aligned with the EU Directive 2014/59/EU regarding the recovery and resolution of credit institutions, also known as the Bank Recovery and Resolution Directive (BRRD). Under the Romanian bank resolution law, the NBR has been designated as the Romanian resolution authority for credit institutions.
The Romanian bank resolution regime abides the bail-in principle under BRRD and provides that the shareholders will be the first to bear the losses, followed next by the creditors of the failing bank. Also, banks are under the obligation to contribute to the National Resolution Fund which may fund the resolution process. The amount of the contribution to the national resolution fund is determined by the NBR taking into account various factors such as the size and the risk of each bank.
In line with BRRD, the resolution instruments available to the NBR are the sale or merger of the business, the set-up of a temporary bridge institution to operate critical functions, the separation of good and bad assets and bail-in instruments.
As part of the prevention efforts, banks are required to prepare recovery plans and the NBR is equipped with early intervention tools such as dismissing the existing management and appointing a temporary administrator, requesting urgent reforms and plans to restructure the bank’s debt.
Insolvency laws in India are presently going through a period of transition. As a result, while the insolvency resolution regime for banks is still reliant on the BR Act and regulations thereunder, there is an uncertainty in relation to the availability of a competent forum that is empowered to take up such matters.
If the RBI is concerned about the financial health of a bank (including a government bank), it may make a recommendation to the central government in relation to its reconstruction and amalgamation with another bank (typically a government bank). The RBI has wide powers in this respect. In the past few decades, the RBI has been reconstructing or amalgamating weaker banks with stronger counterparts to avoid winding-up situations. Since 2002, the RBI also has a prompt corrective action (PCA) framework under which banks (including government banks) that breach certain triggers relating to capital, asset quality, etc. are subjected to certain mandatory corrective measures to restore financial health. The RBI closely engages with the management of such banks to ensure time-bound results.
The Insolvency and Bankruptcy Code, 2016 (IBC) which has been recently notified is a consolidated framework governing corporate insolvency and personal bankruptcy in India. However, the IBC does not currently apply to financial services companies (including banks).
Further, the Financial Resolution and Deposit Insurance Bill, 2017 (FRDI Bill) is pending in the Indian parliament. The FRDI Bill proposed to set up a comprehensive recovery and resolution regime for the financial sector companies including all banks and NBFCs. There is no visibility on the timeline for passing of the FRDI Bill and it being brought into force.
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”).
The resolution regime for banks is governed by the BRRD, which has been transposed locally by means of the Recovery and Resolution Regulations, in accordance with the Single Supervisory Mechanism (“SSM”) and the Single Resolution Mechanism (“SRM”). These Regulations empower the Resolution Committee 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.
Under the BOFIA, where a bank informs the CBN that-
a) it is likely to become unable to meet its obligations; or
b) it is about to suspend payment to any extent; or
c) it is insolvent; or
where, after an examination of the banks records, the CBN is satisfied that the bank is in a grave situation.
The resolution measures which may be taken by the CBN include:
a) prohibiting the bank from extending any further credit facility for a particular period;
b) requiring the bank to take any steps whatsoever, in relation to the bank or its business or its directors or officers which the CBN may consider necessary;
c) removing any manager or officer of the bank;
d) removing any director of the bank from office;
e) appointing any person or persons as directors of the bank, or
f) appointing any person to advise the bank in relation to the proper conduct of its business.
Where after taking any of the above steps/measures, the state of affairs of the bank concerned does not improve, the CBN may turn over the control and management of such bank to the NDIC on such terms and conditions as the CBN may stipulate.
Where after assumed control over a failing bank as set out above, and such bank is significantly under-capitalised to the extent that its risk weighted assets ratio is below 5% but above 2%, the NDIC may require the bank to submit a recapitalisation plan, prohibit the bank from extending any further credit and incurring any additional capital expenditure without its approval, require the bank to take any steps or action in relation to its business or its directors or officers, remove with the approval of CBN any director, manager, officer, or employee of the bank; or with CBN’s approval, appoint new directors for the bank.
The NDIC will then remain in control and continue to carry on the business of the bank in the name and on behalf of the bank until such a time as in the opinion of the CBN, it is no longer necessary.
Where the failing bank cannot be rehabilitated, the NDIC may recommend to the CBN other resolution measures which may include the revocation of the bank's license. Where the license of a bank has been revoked, the NDIC shall apply to the Federal High Court for the winding up of the bank.
Alternatively, the CBN in conjunction with the NDIC may set up a bridge bank, operated by the NDIC which will administer the deposits and liabilities of a failed bank for a period during which it will finding buyers for the bank as a going concern, or liquidate its portfolio of assets. Another option is the good bank – bad bank approach which involves the AMCON purchasing the toxic assets from the banks, leaving the banks with “clean” balance sheets. This allows for specialized management of the bad debts, thereby allowing the good banks to focus on its core business of lending.
Banks that fails to fulfil its obligations as they expire, or are not able to fulfil the current capital adequacy requirements or become insolvent cannot be subject to ordinary insolvency proceedings, however shall be subject to public administration. Decisions on the public administration of banks are passed by the MoF. When a bank is placed in public administration:
- The bank's name must be changed to include the wording "In Public Administration".
- The bank's board of directors is replaced by an Administration Board (administrasjonsstyre) appointed by the MoF.
- The bank is prohibited from both receiving new deposits and accepting new customers or extending existing customer relationships.
- The bank is also unable to make disbursements to depositors or other claimants without consent of the NFSA.
If the Administration Board finds that there is basis for the bank to continue its business, it may propose the release of the bank from administration proceedings. This solution can involve reducing the creditors' claims. However, if it appears that the bank is unlikely to be released from administration more than one year from the date on which the administration became effective, the bank must be liquidated. Its assets must then be divided among the creditors according to ordinary insolvency principles, a process which may involve write down of the share capital and reduction of the creditors' claims.
Norway is yet to implement rules corresponding to the Banking Resolution and Recovery Directive ("BRRD")(Directive 2014/59/EU). Rules corresponding to BRRD are expected to be implemented during 2018.
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.
Please refer to question 8 above.
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 proceedings, FINMA has a variety of tools, including bail-in and the transfer of assets, to try to successfully restructure the bank.
In addition to and parallel with the information provided under Question 19, 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:
- cease the Distressed Bank’s operations temporarily; and/or
- 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
- provide financial aid to the Distressed Bank by acquiring its shares and by purchasing damages corresponding to such acquired shares; or
- to acquire the remainder of the Distressed Bank’s shares by paying the share price to the Distressed Bank’s shareholders; or
- 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:
- 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
- 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
- to sell the Distressed Bank’s assets on a discounted or another basis to third parties and take all measures it deems necessary; and
- 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.
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.
There is a special Recovery and Resolution of Credit Institutions and Investment Firms Act (RRCIIFA), transposing Directive 2014/59/EC of the European Parliament and the Council of 15 May 2014 on establishing a framework on recovery and resolution of credit institutions and investment firms (Directive 2014/59/EC). The RRCIIFA provides the statutory national framework to recovery and resolution of banks licensed by BNB and banks licensed in a Member State but subject to consolidated supervision by BNB.
The Bulgarian competent authority for the purposes of banks’ resolution regime is BNB. A special Resolution of Banks Fund is created to assist banks’ resolution. The objective is that the funds there reach 2% of the total amount of secured deposits within 10 years, which exceeds the required minimum amount of 1% of the total amount of secured deposits by Directive 2014/59/EC.
The RRCIIFA outlines the following resolution objectives:
- ensuring sustainability of critical functions;
- avoiding material unfavourable consequences for financial stability;
- protection of public funds and minimising dependability on use of extraordinary public financial support;
- protection of covered depositors;
- protection of clients’ funds and assets.
The RRCIIFA arranges the governing principles of bank resolution following Article 34 of Directive 2014/59/EC, providing that a banks’ shareholders and creditors first bear the losses in resolution regime. In case shareholders and creditors bear higher losses that the ones they would have otherwise borne in case of the bank’s winding up, such shareholder or creditor has the right of compensation of the difference from the Restructuring of Banks Fund.
The RRCIIFA follows Directive 2014/59/EC by providing for four resolution tools applicable to banks in resolution regime, independently or in combination: (i) sale of business tool; (ii) bridge institution tool; (iii) asset separation tool; and (iv) bail-in tool. As an exception, (iii) above is applied only in combination with any of the other tools.
COMF establishes an intensive oversight regime applied to the financial entities identified as of high and critical risk profile, understanding such entities as those with poor (i) economic -financial conditions, (ii) quality of corporate or cooperative governance, or (iii) management of risks, among other conditions determined by the control body. The authority also evaluates which entities are considered inadequate to deficient for the size and complexity of its operations, which require significant improvements or that present clear prospects of breaching minimum solvency requirements or have failed to meet them. In such cases a specific supervision program is implemented by the Superintendence of Banks.
The intensive supervision program may be imposed on the entity by the Superintendence of Banks at any time; the program shall be prepared by the respective financial institution and presented to the control entity for approval, within the term established for that purpose. If the financial entity has not submitted the program within the deadline, the control entity will prepare it and impose its implementation. The intensive supervision program will contain the commitments, obligations and deadlines to carry out the activities envisaged therein, in no case may it have a term of more than two years and must detail in a timetable the actions and measures that the entity will take to resolve its situation. The program must be viable, with sustainable assumptions and must be approved by the Board of the oversight entity.
The regime for resolution of disputes between the banks and the public officers is based in the judicial branch, before public courts and judges. However, the regime for resolution of disputes between the banks and their clients can be based in arbitral procedures.
The BRRD Regulations provide the CBI with powers for dealing with failing banks with a view to minimising the ecenomic impact of a failing bank or in-scope investment firm.
In order for resolution of a bank to be deemed necessary the following conditions must be met:
(a) the determination of the CBI that that the institution is failing or is likely to fail;
(b) in the CBI’s opinion there is no reasonable prospect of alternative private sector measures;
(c) in the CBI’s opinion resolution action is necessary in the public interest. In this regard the CBI must be satisfied that a winding-up under normal circumstances would not achieve continuity of critical functions, avoid significant adverse effect on the financial system, achieve protection of public funds, depositors, client assets or client funds;
(d) the CBI is obliged to inform the Minister for Finance.
The CBI can apply to the High Court of Ireland for a capital instruments order to write-down or convert relevant capital instruments into shares or other instruments of ownership in respect of a failing bank.
To avail of the resolution tools ((i) sale of business tool, (ii) the bridge institution tool, (iii) the asset separation tool (iv) and the bail-in tool (utilised individually or on a combined basis)), the CBI must make a proposed resolution order and then make an ex parte application to the High Court for a resolution order. The subject bank, a shareholder, or the holder of a capital instrument or liability affected by a resolution order may apply to the High Court within 48 hours of publication of the order, for the order to be set aside. The resolution order may provide for, amongst other things: the transfer of shares, assets and liabilities; the reduction of principal/outstanding amount under capital instruments or eligible liabilites; the conversion of capital instruments or eligible liabilities into shares; the cancellation of debt instruments excluding secured liabilities; the termination of financial contracts; the removal and replacement of management by a special manager.
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).
The regime captured under the European directive 2014/59/EU (the Bank Recovery and Resolution Directive - BRRD). The directive requires banks to prepare recovery plans to overcome financial distress. It also grants national authorities powers to ensure an orderly resolution of failing banks with minimal costs for taxpayers.
Furthermore, the directive includes rules to set up a national resolution fund that must be established by each EU member state. All financial institutions have to contribute to these funds. Contributions are calculated on the basis of the institution's size and risk profile.
The EU's bank resolution rules ensure that the banks' shareholders and creditors pay their share of any potential costs through a ‘bail-in’ mechanism. If that is still not sufficient, the national resolution funds set up under the BRRD can provide the resources needed to ensure that a bank can continue its operations while being restructured.
The relevant articles of the directive were implemented in Book II, Titles IV, V, VI of the Banking Act.
The FSA prepares a resolution plan for each credit institution. The resolution plan shall provide for the options to apply the resolution tools or powers where the credit institution meets the conditions for the commencement of the resolution proceedings. Credit institutions need to prepare and submit to the FSA a recovery plan providing for measures to be taken by the credit institution to restore its financial position following a significant deterioration thereof.
The bank resolution framework in Greece is mainly determined by law 4335/2015, whose procedures transposed Directive 2014/50/EU (Bank Recovery and Resolution Directive) into Greek law.
Law 4335/2015 designates the BoG as the competent resolution authority in Greece and establishes, in line with EU legislation, a three-pillar scheme, comprising of the following phases:
- Early intervention, and
For a credit institution to qualify for the resolution phase, the following conditions must be cumulatively met:
- the BoG determines that it is failing or likely to fail;
- there is no reasonable prospect that alternative measures from the private sector or any other supervisory action, including early intervention measures, can prevent the institution from failing; and
- the resolution actions is necessary in the public interest.
To ensure an efficient resolution process, the BoG may make use of the following resolution tools:
- The sale of business tool;
- The bridge institution tool;
- The asset separation tool and
- The bail-in tool.
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.
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 maximise the return on the assets of the failed institution and minimise 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 organisation 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).
The resolution regime for banks in Colombia is mainly regulated in the Organic Statute of the Financial System and Decree 2555 of 2010. Initially, the Superintendence of Finance as a part of its main functions and other authorities, can impose measures to prevent resolution situations and protect clients and the financial system in general. Some of these measures include obligating the financial institution to adopt special surveillance, recapitalization, trusteeship, partial or total assignment of assets and liabilities, mergers and acquisitions and administrative takeover as the most aggressive type of intervention and others. Ultimately, it is the Superintendence of Finance who decides when a bank needs to be resolved.
The Guarantee Fund for Financial Institutions (Fondo de Garantías de Instituciones Financieras FOGAFIN) is the institution in charge of monitoring financial institutions in liquidation processes. If the bank fails to recover with the measures adopted by the Superintendence of Finance, then the FOGAFIN will proceed by assigning a liquidator.
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 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.
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.