Facilitating the continuation of critical operations and protecting taxpayers from costs
Resolution tools aim to ensure that a bank or other institution referred to in the Act on the Resolution of Credit Institutions and Investment Firms that is in serious financial difficulties can continue those of its operations that are important to society. At the same time, the resolution tools protect taxpayers from the costs of a potential crisis.
The objective of resolution is that a failing institution can be resolved in a controlled manner without serious disruption to the financial system. The powers assigned to the authorities ensure that the losses of failing institutions are first borne by the shareholders and creditors of the institution instead of taxpayers. The resolution authority must also ensure that resolution does not make creditors worse off than under normal insolvency proceedings.
When an institution is in crisis, the Financial Stability Authority assesses whether the institution has any critical functions that must remain operational in spite of the crisis. The FFSA subsequently renders a decision on placing the institution under resolution. If the decision is made not to place the institution under resolution, the FFSA must either make a decision on placing the institution under liquidation or petition a court to declare the institution bankrupt. If the institution is placed under resolution, the Financial Stability Authority can use resolution tools to restore the institution’s viability to a level that enables it to continue its critical functions.
There are four resolution tools that can be used in combination or separately
The four resolution tools available to the Financial Stability Authority are defined in the Act on the Resolution of Credit Institutions and Investment Firms:
- Write-down and conversion of liabilities (bail-in): the nominal value of liabilities is written down entirely or in part and converted into regulatory capital instruments, which means that the institution’s creditors and, before them, the shareholders bear the costs of the institution’s crisis instead of the general public.
- Sale of business: the institution’s shares or assets and liabilities are transferred entirely or in part to another institution or third party.
- Bridge institution: the institution’s assets and liabilities are transferred to a bridge institution that is established by the resolution authority and under the authority’s control.
- Asset management vehicle: part of the institution’s assets and liabilities are transferred to a separate asset management vehicle in connection with the use of one of the previously mentioned tools.
The Financial Stability Authority can only apply resolution tools after an independent valuation of the assets and liabilities of the institution under resolution has been carried out and the bail-in of shareholders has been effected. Bail-in can be effected, for example, through the write-down, conversion or cancellation of shares. Multiple tools can be used simultaneously for the restructuring of operations.
The Financial Stability Authority can decide on the use of resolution tools without the consent of the chief executive, board of directors or other senior management of the institution under resolution. The Financial Stability Authority’s competence supersedes what is provided for elsewhere in legislation on the competence of an institution’s administrative bodies when decisions on the use of resolution tools are made. However, the ordinary administrative bodies have their own tasks and powers insofar as these do not fall within the remit of the Financial Stability Authority by virtue of the law or the Authority’s decision.