Bank resolution protects the public interest
Banks provide important services to citizens, companies and the economy. They also play a crucial intermediary role between the economies of different countries. Consequently, financial difficulties experienced by banks must be resolved quickly, effectively and in a controlled manner. The legal bank resolution framework ensures the continuation of banks’ critical functions, helps maintain their financial stability and aims to minimise costs to taxpayers.
Bank resolution means the restructuring of a credit institution or other institution referred to in the Act on the Resolution of Credit Institutions and Investment Firms (hereinafter referred to as “the institution”) when the institution is in financial difficulties or in the event of a broader financial crisis, for example. Decisions on bank resolution and the use of resolution tools are made by the resolution authority. The authorities may use resolution tools intended to safeguard the public interest.
In Finland, the management of a resolution event and resolution planning are among the main tasks of the Financial Stability Authority. The aim of the Authority is to prepare for crises faced by Finnish institutions with care so as to reduce the probability of default for banks and simultaneously minimise the adverse effects of the crises and their resolution for society as a whole.
The Financial Stability Authority works closely together with the Single Resolution Board (SRB) of the European Banking Union.
Resolution measures available to the authorities
In resolution situations, the authorities have the option of covering an institution’s losses through write-downs and converting the institution’s liabilities into regulatory capital instruments. This is referred to as bail-in.
The opposite of the use of bail-in instruments is bail-out, which refers to covering costs by public funds. The use of bail-out measures was required previously during the financial crisis that began in 2008, for example, as there were no effective uniform regulations on resolution at the time.
Other resolution tools include the sale of the institution or part of its business, establishing a bridge institution to continue the institution’s operations and establishing an asset management vehicle. The authorities can use several different tools to stabilise the situation in the context of bank resolution.
Bankruptcy or resolution?
Institutions experiencing serious financial difficulties can be dissolved by winding down their operations through a bankruptcy or liquidation procedure.
However, some institutions are so significant to the system or interconnected to such a degree that winding them down by means of bankruptcy proceedings does not adequately protect the rest of the financial system or the real economy from serious disruptions. Such institutions are placed under resolution to ensure that the objectives of resolution are achieved.
Legislation lays down the following objectives for resolution
- Continuation of the institution’s critical operations
- Preventing significant disruptions to financial stability and maintaining market discipline
- Safeguarding public funds and minimising the use of exceptional public financial support
- Safeguarding the guaranteed assets of depositors and investors
- Protecting client funds held by the institution
A decision on placing an institution under resolution can be made when, in the estimate of the authorities, the institution is likely to fail and no other supervisory measure or measure taken by the public sector is sufficient to restore the institution’s operating capacity in the short term, or if allowing the institution to go bankrupt would create such instability in the financial system that would go against the public interest.
The SRB acts as the banking union’s resolution authority and is responsible for the resolution of large banks.
The Single Resolution Board is the centralised resolution authority of the countries that belong to the banking union. Its basic task is to ensure the systematic restructuring of failing institutions so as to minimise the impacts on the real economy and the financial system as well as the public economies of the Member States participating in the banking union.
The SRB is responsible for the resolution of Significant Institutions (SI) in the euro area as well as cross-border banking groups located in the banking union. It is responsible for the resolution plans drafted for institutions in this category as well as decision-making in resolution situations. The resolution of Less Significant Institutions is the responsibility of the national resolution authorities, such as the Financial Stability Authority in Finland.
The Single Resolution Mechanism harmonises resolution in the banking union
The SRB and the national resolution authorities in the countries belonging to the banking union together form the Single Resolution Mechanism (SRM). The purpose of the Single Resolution Mechanism is to establish a coherent decision-making system for resolution in the banking union.
The SRB is responsible for the effective and consistent functioning of the Single Resolution Mechanism. The SRB may issue general guidelines and warnings to the national resolution authorities if they do not comply with the SRM Regulation or the instructions issued by the SRB. The SRB may also exercise the previously mentioned authority with regard to Less Significant Institutions.
The SRB and the national authorities work closely together on drafting resolution plans for Significant Institutions. The plans are updated annually and an MREL requirement is issued for the institutions in connection with the approval of the plans. MREL refers to the minimum requirement for own funds and eligible liabilities for institutions to enable the use of the bail-in tool. The planning efforts are led by the SRB and they take place in Internal Resolution Teams (IRT). The Financial Stability Authority is also represented in the teams.
The national resolution authorities play an important role in the management of the Single Resolution Mechanism. They participate in the administration and operations of the Single Resolution Mechanism in the SRB’s Plenary Sessions and various working groups.
A national authority also participates in issuing resolution decisions in the SRB’s Executive Sessions when the decisions concern an institution under their remit. If an institution under the SRB’s remit meets the conditions for being placed under resolution, the resolution order must be approved by an SRB Executive Session in which the SRB and the relevant national resolution authority are represented. The national resolution authority in question then executes the decision by means of a national enforcement decision and, where necessary, other supplementary decisions.
The Single Resolution Fund
The SRB administers the Single Resolution Fund (SRF) of the countries that belong to the banking union. The assets of the SRF can be used in resolution situations to cover losses and safeguard the solvency of the restructured institution. All of the approximately 3,000 Significant Institutions and Less Significant Institutions located in the banking union participate in financing the SRF through annual stability contributions.
If a national resolution authority demands the use of SRF assets for resolution purposes, the SRB will make the resolution decision even if the credit institution in question is otherwise under the direct remit of the national authority.