Resolution tools
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.
The Financial Stability Authority has the right to write down the nominal value of liabilities and convert liabilities into regulatory capital instruments. This applies to all liabilities except the following:
- repayable deposits covered by deposit insurance
- secured liabilities
- liabilities based on employment relationships, except for variable remuneration
- accounts payable relating to goods and services
- liabilities with original maturities of less than seven days vis-à-vis other institutions
- liabilities arising from payments and securities settlement.
In certain situations, the Financial Stability Authority may also exclude other liabilities from bail-in. Liabilities that are exceptionally excluded from bail-in can be offset by lowering the value of other eligible liabilities. However, in doing so, the Authority must take into account the general principle of the Act, under which creditors must not be worse off than under normal insolvency proceedings.
Pursuant to the Act, the institution is obliged to submit a proposal for restructuring its activities subsequent to the write-downs of liabilities and their conversions into regulatory capital instruments.
Further reading: A description of the write down and conversion of capital instruments and eligible liabilities in resolution (pdf)
Sale of business as a resolution tool covers, in addition to partial transfer of assets and liabilities to another undertaking, also mergers through combination or absorption and de-mergers, as well as forced sale and further disposal of an institution’s shares or participations. Transferable assets and liabilities must be publicly offered to purchasers unless it jeopardises the resolution objectives.
In the event of applying the bridge institution tool, an institution’s assets and liabilities may be transferred to an existing institution.
The Financial Stability Authority is to exercise control in that institution, but such a bridge institution may also have other public or private owners. The purpose of a bridge institution’s activity is always to enable the continuity of critical business operations of an institution placed under resolution and the further disposal of the assets and liabilities transferred to the bridge institution. In cooperation with other authorities, the FFSA ensures that a bridge institution is, among other things, duly authorised and registered and has the necessary resources for business continuity. Upon application by the FFSA, the Financial Supervisory Authority may grant a bridge institution a fixed-term derogation from capital and liquidity requirements.
The Financial Stability Authority must decide on a bridge institution’s merger, de-merger, sale of its shares or other dissolution as soon as possible and no later than in two years of receipt of transferred operations. A three-year time frame can be applied in exceptional cases. In terminating the operation of a bridge institution, the FFSA must make a public purchase offer for the bridge institution’s shares, participations or assets. The FFSA is to opt for the most favourable offer that does not jeopardise the resolution objectives and the smooth functioning of the financial markets.
In applying the above resolution tools, the Financial Stability Authority may set up one or more limited liability companies and decide on the transfer, in one or more instalments, of the assets and liabilities of an institution under resolution or of a bridge institution to an asset management vehicle. However, this tool can only be applied in connection with some other resolution tool.
The articles of incorporation of an asset management vehicle must indicate that it is an asset management vehicle as referred to in the Act on the Resolution of Credit Institutions and Investment Firms. The Authority may decide on the transfer of the assets and liabilities of an institution under resolution or of a bridge institution to an asset management vehicle if they cannot be sold without incurring losses or causing disruptions to the functioning of the financial markets. This can also be done if ensuring the appropriate operation of an institution under resolution or of a bridge institution so requires. The Authority must determine the consideration against which assets or liabilities are transferred to an asset management vehicle. This must be done in accordance with the provisions of the Act on the Resolution of Credit Institutions and Investment Firms pertaining to the valuation of assets.
The Financial Stability Authority is required to subscribe for at least such proportion of the shares of an asset management vehicle as constitutes more than half of the total number of votes carried by all the vehicle’s shares. The Authority must sell the asset management vehicle’s shares, decide on the merger or de-merger of the asset management vehicle or dissolve the asset management vehicle as soon as this is feasible. This must be accomplished without such termination of the operations causing significant losses or significant disruptions to the financial markets or jeopardising the achievement of the resolution objectives.