When are resolution measures commenced and how are they implemented?
The resolution of a bank or other institution referred to in the Act on the Resolution of Credit Institutions and Investment Firms commences when the competent authorities find that the three conditions for resolution are met. The conditions are as follows:
- The institution is failing or likely to fail.
- There are no supervisory or private sector measures that can restore the institution to viability within a reasonable timeframe.
- Resolution is necessary in the public interest, i.e. the resolution objectives would not be met to the same extent if the bank were wound up under normal insolvency proceedings.
For significant institutions in the banking union, the European Central Bank (ECB) as the supervisory authority decides whether an institution is failing or likely to fail. The ECB consults the Single Resolution Board (SRB) before making the decision. In certain circumstances, the decision on failing can also be rendered by the SRB. At the national level, with regard to less significant institutions, the Financial Supervisory Authority and Financial Stability Authority in Finland are responsible for carrying out the assessment. If the situation concerns a significant institution that is under the direct remit of the Single Resolution Board, the SRB renders the decision on placing the institution under resolution. In this case, the national resolution authority – in Finland, the FFSA – carries out the resolution measures in accordance with the SRB’s decision.
How are the conditions for resolution assessed and what is the assessment procedure?
If an institution is in crisis and it deems itself to be failing, its board of directors is required to notify the Financial Supervisory Authority without delay. The incapability to continue operations is the first of the conditions for being placed under resolution stipulated by the Act on the Resolution of Credit Institutions and Investment Firms.
When the Financial Supervisory Authority has received a notification from an institution, it is required, in turn, to notify the Financial Stability Authority without delay. The Financial Supervisory Authority may also assess, on its own initiative, whether the institution is failing or likely to fail. When the Financial Stability Authority receives the notification from the Financial Supervisory Authority, it assesses whether the institution is failing and whether the first condition for being placed under resolution is satisfied.
If the Financial Stability Authority or the Financial Supervisory Authority deems that the institution satisfies the aforementioned condition, they must submit a notification of their assessment to each other and certain other authorities as defined in the Act.
The Financial Supervisory Authority or the Financial Stability Authority reaching a conclusion on whether an institution is failing or likely to fail does not yet mean that the institution is placed under resolution. The FFSA must additionally assess whether two other conditions are met:
- Considering the circumstances, can it be assumed that the continuation of the institution’s operations cannot be safeguarded within a reasonable time frame by other measures and without jeopardising the objectives referred to in the Act on the Resolution of Credit Institutions and Investment Firms?
- Is placing the institution under resolution necessary in the public interest?
If all three conditions are met, the Financial Stability Authority issues a decision to place the institution under resolution. Even if the institution is not placed under resolution, the FFSA may decide on the institution’s loss coverage and annulment of its shares and participations if the initiation of such measures is necessary for safeguarding the continuity of the institution’s activities or the institution is in need of extraordinary public financial support.
The objectives of resolution and the public interest
One of the three conditions for the commencement of resolution proceedings is that resolution is necessary in the public interest. Resolution is in the public interest if the objectives of resolution are otherwise impossible to achieve. The resolution authority is responsible for the assessment of the public interest.
The objectives of resolution are as follows:
- Continuation of an institution’s critical functions
- Preventing significant disruptions to financial stability and maintaining market discipline
- Safeguarding public funds and minimising the need to use extraordinary public financial support
- Safeguarding the guaranteed assets of depositors and investors
- Safeguarding client assets held by the institution
When the resolution authority assesses whether to undertake resolution procedures, the authority must take into account the objectives of resolution and choose the tools that best achieve the objectives. The assessment must be based on quantitative data to the greatest extent possible. Activity-specific information is collected from institutions – in connection with resolution planning, for example – on customer volumes, the euro-denominated amounts of deposits, transactions and loans as well as the institution’s market shares for the purpose of assessing the criticality of their operations. To assess contagion effects, the resolution authority uses market information as well as the information reported to the supervisory authorities by the institutions. A preliminary assessment of the public interest is carried out as part of resolution planning. The preliminary assessment is updated at the time of resolution and it takes into account the status of the institution as well as the broader prevailing conditions of the banking sector, the financial market and the real economy.
Issuance and adoption of a resolution scheme
When the Single Resolution Board finds that an institution under its direct remit meets the conditions for resolution, it issues a resolution scheme. The national resolution authorities are closely involved in the drafting and approval of the resolution scheme. The resolution scheme defines what resolution tool – or tools – will be applied to resolve the institution’s situation. When a Finnish institution is placed under resolution by a decision of the SRB or the Financial Stability Authority, the Financial Stability Authority can subsequently decide on measures pertaining to the institution’s operations, assets and liabilities in accordance with the Act on the Resolution of Credit Institutions and Investment Firms.
Although the SRB renders a decision on placing an institution directly under its remit under resolution, the Financial Stability Authority is responsible for implementing the measures specified in the decision in Finland. The SRB also monitors the implementation at the national level of resolution schemes by the national resolution authorities. The resolution powers available to the resolution authorities are defined in the Resolution Directive.
An institution that is under the remit of the Single Resolution Board may appeal the SRB’s decisions to the Court of Justice of the European Union. Before taking that step, an institution can file an appeal to the SRB’s Appeal Panel. With certain exceptions, the decisions of the Financial Stability Authority can be appealed to the Helsinki Administrative Court.
Chart: Implementation of the SRB's resolution decision