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IMF Country Report No. 15/253

NORWAY

FINANCIAL SECTOR ASSESSMENT PROGRAM

TECHNICAL NOTE—CRISIS MANAGEMENT, BANK RESOLUTION, AND FINANCIAL SECTOR SAFETY NETS

September 2015

This Technical Note on Crisis Management, Bank Resolution, and Financial Sector Safety Nets for Norway was prepared by a staff team of the International Monetary Fund. It is based on the information available at the time it was completed in August 2015.

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Front Matter Page

NORWAY

FINANCIAL SYSTEM STABILITY ASSESSMENT

August 18, 2015

TECHNICAL NOTE

CRISIS MANAGEMENT, BANK RESOLUTION, AND FINANCIAL SECTOR SAFETY NETS

Prepared By

Monetary and Capital Markets Department

This Technical Note was prepared by IMF staff in the context of the Financial Sector Assessment Program in Norway. It contains technical analysis and detailed information underpinning the FSAP’s findings and recommendations.

Contents

  • GLOSSARY

  • EXECUTIVE SUMMARY

  • INTRODUCTION

  • INSTITUTIONAL FRAMEWORK

  • A. Cross-Border Arrangements and Coordination

  • B. Key Recommendations

  • CRISIS PREPAREDNESS

  • A. Recovery Plans

  • B. Resolution Plans and Resolvability Assessments

  • C. Crisis Management Planning

  • D. Key Recommendations

  • EARLY INTERVENTION

  • A. Current Framework

  • B. Recommended Revisions

  • C. Key Recommendations

  • EXTRAORDINARY FINANCIAL ASSISTANCE

  • A. Emergency Liquidity Assistance (ELA)

  • B. Solvency Support

  • C. Key Recommendations

  • RESOLUTION REGIME

  • A. The Current Regime

  • B. Recommended Revisions

  • C. Key Recommendations

  • BANK LIQUIDATION AND INSOLVENCY

  • A. The Current Regime

  • B. Key Recommendations

  • DEPOSIT GUARANTEE SCHEME

  • A. Legal Basis

  • B. Scope and Coverage

  • C. Governance

  • D. Operations

  • E. Fund Characteristics

  • F. Deposit Insurance Premium

  • G. Reimbursement

  • H. Key Recommendations

  • IMPACT OF ASSET ENCUMBRANCE ON RESOLUTIONS

  • A. Summary

  • B. Key Recommendations:

  • TABLES

  • 1: Key Recommendations

  • 2: Assets Transferred to Mortgage Companies (In billions of NOK)

Glossary

ABS

Asset-backed Securities

AMCs

Asset Management Companies

BGF

Banks’ Guarantee Fund

BRRD

Bank Recovery and Resolution Directive

BCPs

Basel Core Principles

CMG

Crisis Management Group

DGS

Deposit Guarantee Scheme

ECB

European Central Bank

ELA

Emergency Liquidity Assistance

EU

European Union

FIA

Financial Institutions Act

FSAct

Financial Supervision Act

FSA

Finanstilsynet

FSB

Financial Stability Board

GSA

Guarantee Schemes Act

G-SIFI

Globally Systemically Important Financial Institutions

KAs

Key Attributes for Effective Resolution Regimes for Financial Institutions

KA

Key Attribute

MOF

Ministry of Finance

MOU

Memorandum of Understanding

NB

Norges Bank

NBSG

Nordic-Baltic Stability Group

NOK

Norwegian krone

Executive Summary1

1. Arrangements for crisis management, bank and group resolution, and the financial sector safety nets are well developed and tested. Roles, responsibilities, accountabilities and information sharing arrangements among the relevant bodies, the Ministry of Finance (MOF), the Finanstilsynet (FSA), Norges Bank (NB) and the Banks’ Guarantee Fund (BGF), the private sector led deposit guarantee scheme, are generally well defined and functioning. The MOF is, de facto, the lead resolution authority, and the FSA has resolution responsibilities as well. The MOF takes decisions based on the recommendations of the FSA, which are formulated routinely in consultation with NB and often with the BGF. The FSA executes MOF’s resolution decisions. Due to its private sector governance, there are impediments to integrating the BGF fully into the resolutions and crisis preparedness and management frameworks, and further steps should be considered to overcome obstacles in this regard.

2. The current legal framework provides substantial powers and flexibility to deal with failing or failed banks but needs to be strengthened in several respects. A public-private sector banking law commission is currently working to formulate new legislation to transpose the EU’s Bank Recovery and Resolution Directive (BRRD) in Norwegian law. The commission and government also should take into account the requirements of the Financial Stability Board’s Key Attributes for Effective Resolution Regimes for Financial Institutions, the internationally agreed standard, in drafting the new legislation. Key issues in this respect include ensuring the operational independence of the resolution authority as well as adequate legal protections, adopting the full resolution toolkit set out in the Key Attributes, and distinguishing between going and gone concern resolution.

3. The FSA has begun to implement a recovery plan requirement for the largest banks. However, the legal and regulatory framework for institution-specific resolution plans, and for the assessment of potential impediments to resolvability that help to underpin them, is not in place; further, substantive work toward developing resolution strategies and plans has not yet been undertaken. Resolution planning for the largest domestic banks should be initiated as soon as possible.

4. The authorities have not formally articulated their expectations regarding the Norway-specific elements of the recovery and resolution plans of foreign bank subsidiaries and branches. This is of significance to the second, third and fourth-largest banks in Norway by assets. While some policy in this regard in being formulated in the context of the work of supervisory colleges and the Nordea Crisis Management Group, and notwithstanding the roles and ultimate responsibilities of the home authorities, a comprehensive and consistent policy framework should be developed.

5. The authorities make good use of simulation exercises to enhance crisis preparedness. This includes domestic unilateral, bilateral, and tripartite exercises as well as regional exercises; although it has been several years since a significant regional exercise was undertaken, one is planned for 2017. The BGF is generally not a part of the domestic exercises, and means to better integrate it should be considered.

6. Both NB and the BGF can provide emergency liquidity assistance, and the BGF can provide solvency support. Relevant policies are in place at NB but not at the BGF. There are no standing arrangements for the provision of resolution funding under the control of the resolution authorities, and one should be considered as part of the new legislation.

7. The BGF offers a high level of deposit insurance coverage and is well funded. All banks must be members. It is governed by the banking industry (five of seven board members are current bank executives) and operated by the Bankers’ Association. Its private sector character impedes information flows from the FSA, and gives rise to potential conflicts of interest in decisions regarding support to members. The BGF should adopt a clear and comprehensive policy for recusal of board members in such matters. The BGF can borrow and should adopt policies regarding for what purpose and under what conditions it can borrow. At present the BGF does not have a committed back-up funding facility, and efforts to secure one should be pursued. Members must guarantee any deficiency in the size of the fund relative to a legally mandated minimum, but the current legal constraint on BGF’s ability to draw on the guarantee should be relaxed.

8. See Table 1 for a summary of key recommendations.

Table 1:

Key Recommendations

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For action within the next 12 months.

For action within the next 24 months.

Norway: Financial Sector Assessment Program-Technical Note-Crisis Management, Bank Resolution, and Financial Sector Safety Nets
Author: International Monetary Fund. Monetary and Capital Markets Department