What is bank resolution?
Resolution of a bank and/or a banking group implies the exercise of resolution powers and the use of resolution tools and measures, envisaged by the Law on Banks (RS Official Gazette, Nos 107/2005, 91/2010 and 14/2015), in respect of a bank and/or an ultimate parent company or a member of a banking group, in order to achieve the resolution objectives.
Why is resolution carried out?
Resolution is carried out with the aim of safeguarding the public interest. Resolution is considered to be in the public interest if it is applied to a systemically important bank and if it can adequately achieve one or more resolution objectives that could not be achieved to the same extent through a bankruptcy or liquidation procedure.
Resolution objectives are to:
- ensure the continuity of critical functions;
- avoid a significant adverse effect on the stability of the financial system;
- protect budgetary and other public funds;
- protect depositors and investors;
- protect client funds and other assets.
All the stated objectives are of equal significance and are to be balanced in the resolution procedure as appropriate to the circumstances of each individual case.
How is resolution carried out?
The NBS, as the resolution authority, was given a wide range of powers and a set of flexible measures and tools, allowing it to timely and efficiently respond to different stress situations in the banking sector, and to apply to a concrete case such resolution tool that most effectively meets the resolution objectives, bearing in mind the public interest. The Law on Banks envisages the following resolution tools:
- sale of business tool, i.e. sale of shares, and/or of all or any assets and liabilities;
- bridge bank tool, i.e. transfer of shares of one or more banks under resolution or transfer of all or any assets and/or liabilities of one or more banks under resolution to a bridge bank;
- asset separation tool, i.e. transfer of assets and liabilities of a bank under resolution or a bridge bank to the Deposit Insurance Agency or an asset management company;
- bail-in tool.
In order to achieve the resolution objectives, the Law provides for the implementation of resolution tools without shareholders’ and creditors’ consent. On the other hand, the Law also provides for measures and mechanisms for the protection of shareholders, creditors and third parties to which the NBS must adhere in the resolution procedure.
The NBS has the possibility to write down appropriate elements of a bank’s capital or convert them to shares or other equity instruments even before initiating the resolution process. The NBS carries out such write-down and conversion upon initiating the resolution procedure, before the application of an appropriate tool. The reason behind such option is to create preconditions, prior to initiating the resolution procedure, for restoring an adequate financial position of a bank failing or likely to fail, i.e. to preclude the resolution. If the resolution procedure has been launched, the purpose is to ensure that elements of the core and supplementary capital suffice to cover the bank’s losses, prior to applying any resolution tool.
When is resolution carried out?
The NBS initiates the resolution procedure when it determines that the following requirements are met:
- the bank is failing or likely to fail;
- it is unlikely that any other measure of the bank or private sector person, a measure taken in the supervision procedure in accordance with the Law or a measure of write-down and conversion of capital could remove obstacles to the continuation of the bank’s operations within a reasonable period, taking into account the circumstances of each individual case.
- bank resolution is in the public interest.
In order to determine whether the requirements for initiating the resolution procedure are met, as well as to select the appropriate resolution tools and measure (if it establishes that the requirements are met), the NBS is obliged to ensure an independent, fair and realistic valuation of assets and liabilities of the bank before initiating the resolution and to prepare a report on the least-cost test. By way of exception, if there is a need for urgent action in a specific case, the NBS will provide a provisional valuation of the bank’s assets and liabilities, which is temporary and used in resolution until the definitive valuation of the bank’s assets and liabilities is completed.
What are the main principles of resolution?
Reflecting the effort to protect budgetary and public funds as much as possible, resolution is designed in such a way that shareholders of the bank bear losses first, and after them creditors. However, the Law also prescribes appropriate safeguard mechanisms for shareholders and creditors – by ensuring equal treatment of creditors whose claims are of the same order of priority in the bankruptcy procedure when writing off and converting liabilities, as well as through the rule (principle) that the shareholders and creditors of the bank cannot incur greater losses than they would have incurred had the bank been placed under the bankruptcy procedure. The Law also envisages other safeguard measures to protect the bank’s shareholders and creditors, as well as third parties.
At the same time, the resolution procedure protects the bank’s depositors, by guaranteeing that insured deposits are fully protected up to the level of the insured amount laid down in the law governing deposit insurance.
Members of the bank’s management bodies and other persons who contributed to the bank’s failing or likelihood of failing are made liable, in accordance with law, for omissions in their work and the damage they have caused.
If a member of a banking group is under resolution, the negative effects of resolution on other members of the banking group and on the stability of the financial system as a whole are minimised.
What is the role of recovery and resolution plans?
Amendments to the Law on Banks have also improved the conditions for preventive action and adequate preparation of banks, the NBS and other competent institutions to respond to stress financial situations, failure or likelihood of bank failure.
Preventive action and preparedness of the banking sector is ensured by the prescribed obligation for banks to draft recovery plans. The recovery plan of each bank envisages measures that the bank will apply in case of deterioration of its financial condition, with a view to restoring its viable operation and appropriate financial position. These plans are subject to assessment by the NBS and must be updated at least once a year.
On the other hand, the NBS prepares resolution plans for all banks and banking groups under its jurisdiction. Resolution plans are updated at least once a year, and more often if necessary (in case of changes in the legal or organisational structure of the bank, changes in its operations or its financial position, when these changes are of material significance for the resolution plan implementation, as well as in case of other changes affecting the content of that plan and the possibility of its implementation). When drafting and updating the resolution plan, the NBS:
- determines whether there are functions in the operations of a bank and/or a banking group that could be considered critical, the continuity of which needs to be maintained under resolution;
- assesses the resolvability of a bank and/or a banking group and accordingly determines the appropriate manner of dealing with them in case the conditions for initiating resolution are met;
- determines the minimum requirement for own funds and eligible liabilities (MREL) for a bank and/or a banking group, which aims to provide sufficient capacity to cover losses and possible capital increase of a bank and/or a banking group after resolution;
- identifies potential impediments to bank resolution and undertakes appropriate activities to eliminate them.