Appendix I: Governance Structure of Finnish Financial Agencies
The FSA governance structure comprises three decision-making bodies:
The Parliamentary Supervisory Council (PSC) oversees the FSA’s overall expediency and efficiency; appoints and dismisses the FSA’s Board members, its director general, and their deputies; determines the principles underlying these officials’ terms of employment and oversees their compliance with disclosure requirements; and confirms the FSA’s rules of procedure. The PSC consists of nine members elected by parliament; the PSC elects a chairman and deputy chairman from among its members—all nine PSC members are parliamentarians.
The Board manages the FSA’s activities; in particular, it determines the FSA’s overall strategy, sets specific operational objectives and oversees compliance therewith, adopts prudential regulations and guidelines, and oversees cooperation between the safety net participants and with AML/CFT authorities. The Board comprises five members, each appointed to a three-year term. Three members and their deputies are appointed by the PSC on proposals—each one— from the Ministry of Finance, the Ministry of Social Affairs and Health, and the BOF; two other members are appointed directly by the PSC. The PSC designates the chair and vice chair.
The Director General (FSA-DG) is the FSA’s chief executive officer; in particular, the FSA-DG manages its activities, ensures efficient and expedient execution of its tasks, and appoints and dismisses FIN-FSA’s staff. When a matter could have significant effects on the stability of financial markets or cause significant disruptions to the functioning of the financial system, the Board may consider for decision such matters before the FSA-DG does so. This includes (de)licensing non-banks, restriction of business, and imposition of additional capital requirements. The FSA-DG is appointed for a five-year term and can be dismissed by the PSC pursuant to a Board proposal; the PSC designates a Deputy FSA-DG from among FSA staff.
The BoF’s governance structure comprises two bodies:
The PSC supervises the BoF’s administration and activities. For this purpose, it is tasked, among other things, with financial oversight over the BoF; appointment and dismissal of its Board members, deputy Board chair, and directors—the president appoints/dismisses the Board chair.
The Board is responsible for BoF’s administration and for executing BoF’s tasks that are not vested in the PSC. The Board comprises the chair/governor and a maximum of five other members appointed for seven- and five-year terms, respectively. The current Board has three members, including the governor.
The FFSA governance structure comprises four bodies—three decision-making and one advisory:
The Director General (FFSA-DG) is the FFSA’s chief executive officer and takes all FFSA decisions, unless stated otherwise in the FFSA Act; in particular, the FSA-DG is responsible for achieving the FFSA’s objectives, and for its operations and profitability. The FFSA-DG is proposed by the Minister of Finance and appointed for a maximum of two consecutive five-year terms by the government, which also can dismiss the FFSA-DG; the Deputy FFSA-DG is appointed by the minister.
The Board of Directors of the Financial Stability Fund (Fund Board) determines the FSF’s risk management framework and investment principles, and it prepares the FSF investment plan. The Fund Board comprises a chairperson, a vice-chair, and three to five members, all appointed by the Minister of Finance for three-year terms; at least two members are appointed on a proposal by the financial industry. Currently, the Fund Board has five members.
The parliament would decide on the use of extraordinary public financial support should such support be needed. Relatedly, if any resolution matter would require borrowing, the FFSA would propose so to the MoF; subject to the government’s approval, the Fund is authorized to borrow within the limits set by parliament.
The Advisory Council is tasked with ensuring cooperation and communication among its members—this task can be further defined, but such has not yet been accomplished. The Council comprises representatives from the FFSA, FSA, MoF, and BoF—all put forward by their respective institutions and appointed by the minister for three-year terms.
Appendix II: Early Intervention Powers
Resolution frameworks depend critically on the effectiveness of early intervention by the supervisor. Generally, the overall framework for dealing with problem banks should establish a logical progression of increasingly stringent powers to deal with everything from relatively minor issues of noncompliance to insolvency. This “ladder” of increasingly intrusive measures should not constitute an inflexible, mechanical requirement that less intrusive measures must be applied before more intrusive actions are taken. International principles prescribe an early intervention framework, including the following components:1 (1) clear triggers for the timely exercise of powers in a manner that helps reduce arbitrariness and promotes transparency; (2) broad range of effective powers available to the supervisor to help restore weak banks to sound financial conditions; and (3) a clear path to orderly resolution when the financial institution appears unlikely to return to viability.
The competent authority’s extensive array of early intervention powers includes the power to direct a bank to implement a recovery plan. The SSM draws powers from multiple national and EU-level legal sources. A broad and increasingly intrusive set of powers becomes available to the competent authority as different thresholds are crossed.2 The competent authority may, for example, direct an institution to change its business strategy or implement elements of its recovery plan where the institution no longer meets, or is likely to breach in the near future the prudential requirements set out in CRD IV or the CRR (for example, due to a deteriorating liquidity situation). Where these powers are insufficient to reverse the deterioration or remedy infringements, the competent authority may remove or replace one or more members of an institution’s senior management or management body. Finally, the competent authority may appoint a ‘temporary administrator’ to carry out all or part of the management functions of the institution, when, among other factors, removal or replacement of management would be insufficient to remedy the situation.
In addition to the early intervention powers available to the competent authority, the resolution authority may write down or convert capital instruments to prevent the failure of a bank or an entity in the banking group. A resolution authority may require the write-down of relevant capital instruments (that is, common equity Tier 1 [CET1), additional Tier 1 or Tier 2 instruments) independently of resolution measures when one or more of the following circumstances apply: (1) the competent authority has determined that unless the write-down or conversion power is exercised in relation to the relevant capital instruments, the bank, other entity, or the group will no longer be viable; or (2) extraordinary public financial support (other than support available to mitigate a systemic crisis) is required by the bank or other entity in the group. The write-down and conversion power may also be used in combination with a resolution action, where the remaining conditions for entry into resolution have been met.
Appendix III: Recovery and Resolution Planning in the Banking Union
Recovery and Resolution Plans (RRPs) have evolved as a key component for contingency planning and crisis management. In particular, the BRRD and the FSB’s Key Attributes of Effective Resolution Regimes for Financial Institutions (KA) establish a comprehensive framework for RRPs (or “living wills”) to guide the recovery of a distressed institution or to facilitate an orderly resolution while minimizing official financial support.1 A Recovery Plan would be developed by a financial institution to identify options for restoring its finances and viability when faced with distress. The resolution authority would prepare a Resolution Plan based on information provided by the institution. The plan would be intended to facilitate orderly resolution to protect systemically important functions without severe disruptions or losses for taxpayers. The KA allows the authorities to execute alternative strategies deviating from RRPs.
All banks in the Banking Union, no matter their size, are subject to recovery planning requirements. Recovery plans are prepared by the banks and assessed by the competent supervisory authority (for instance, the FSA for Finnish LSIs and the ECB for Finnish SIs). They are also shared with the relevant resolution authority, which may identify any actions in the recovery plan that could adversely affect the resolvability of the institution, and make recommendations to the supervisory authority accordingly. Ensuring resolvability falls within the competence of the relevant resolution authority, which is empowered to take actions against a bank to ensure its resolvability. For the four Finnish SIs, the JSTs, in cooperation with the ECB’s Crisis Management Division and the FSA, are responsible for assessing recovery plans and coordinating, where necessary, with supervisory colleges and the EBA. Within six months from their submission to the authorities, the JST must communicate directly to the bank any recommendations or changes that need to be made to address material deficiencies in the plan or material impediments to its implementation (a “material deficiency notice”). The institution then has two months, extendable by one month, to submit a revised plan addressing the deficiencies.
In the Banking Union, resolution planning needs to be in place for all banks, regardless of their size. Resolution planning entails formulating a Preferred Resolution Strategy (PRS) and conducting the Resolvability Assessment Process (RAP);2 this is documented in a resolution plan for each institution. While resolution authorities—the SRB or the NRA, as the case may be—may ask banks to help in drafting and updating the resolution plan, the ultimate responsibility for the plan rests with the authorities; the ECB and the NCAs are consulted during the preparation of the plans.
Appendix IV: Triggering Resolution in SRM/Finland
Triggering resolution of Finnish Banks under the SRB’s jurisdiction requires the following (chart below):
The ECB, after consultation with the SRB, determines that the bank is failing or is likely to fail, and informs the EC and the SRB. The SRB may make that determination if the ECB fails to act within three days of notice by the SRB of its intention to make such determination.
The SRB, in close cooperation with the ECB, determines that, with regard for timing and other relevant circumstances, there is no reasonable prospect that any private sector measure, or early intervention measure, would prevent the failure of the institution. The ECB may also inform the SRB that this second condition for resolution is met.
The SRB adopts a resolution scheme once it determines that a resolution measure is necessary and in the public interest, and, immediately after adoption, transmits it to the EC.
Within 24 hours after transmission, the EC either endorses the resolution scheme, or objects to it with regard to the discretionary aspects of the resolution scheme in the cases not covered below (i.e., European Council decisions).
Within 12 hours after transmission, the EC may propose to the Council to object to the resolution scheme on the grounds that it does not fulfill the public interest criterion necessary for resolution—the Council must do so within 12 hours. Alternatively, the EC can propose that the Council approve or submit within 12 hours a reasoned objection to a material modification of the amount of SRF monies provided for in the resolution scheme. If the Council objects to the resolution scheme on the grounds that it does not fulfill the requirement that resolution is in the public interest, the entity is orderly wound up in accordance with the applicable national insolvency law.
The EC must approve the use of the SRF or any other state aid.1
The resolution scheme may enter into force only if no objection has been expressed by the Council, or by the EC within 24 hours after transmission.
Within eight hours, the SRB modifies the resolution scheme in accordance with the reasons expressed by the EC, in its aforementioned objection, or by the Council, in its approval of the modification proposed by the EC.
The SRB instructs the FFSA on the resolution scheme.
Appendix V: Cross-Border Arrangements under the BRRD
Reaching cross-border agreement on resolution plans and enhancing resolvability are crucial objectives. The BRRD and the SRM Regulation establish a framework that facilitates coordination between Banking Union participants and other EU member states, such as Denmark and Sweden. Under the BRRD, the group level resolution authority (GLRA)1 is responsible for the creation of a “resolution college” for any bank that has a presence in more than one member state. The resolution college serves as a forum for members to consult each other and undertake joint decisions, as the case may be, on setting MREL requirements, conducting the RAP, and adopting resolution plans with respect to a particular bank, among other things.2 The BRRD dictates the membership of the resolution colleges, which include the GLRA and representatives of relevant national authorities.3 The EBA contributes to the functioning of resolution colleges, including through provision of guidelines for resolution colleges and mediating on disagreements; it has, however, no voting power concerning any decision made within a resolution college.4
The BRRD takes a less comprehensive approach to coordination between EU member states and third countries. Within the European Union itself, the BRRD focuses on coordinated resolution planning and implementation, including efforts through resolution colleges and the SRB. With respect to third countries, the focus of the EU framework is on recognition of third-country resolution measures and, where not possible, the ability to take unilateral action against, for example, a local branch of a third-country bank. While the BRRD provides for the establishment of “European resolution colleges” to coordinate resolution planning and implementation with respect to EU branches and subsidiaries of third-country banks, the purpose of the college is to facilitate intra-EU coordination. The resolution authorities from the relevant third country may request to be invited to participate as observer in the European resolution college. In theory, this means that members of a European resolution college could seek to agree on the resolution plan for an EU subsidiary of a third-country bank, without engaging with the third-country resolution authority and irrespective of resolution strategies or plans agreed at the group level (for example, through the CMG). A further complication is that the BRRD does not require member states to take into consideration the implications of their resolution measures on third countries.5
Appendix VI: Resolution Funding in the Banking Union
Minimum requirements for own funds and eligible liabilities
All banks in the European Union are required to have sufficient liabilities deemed eligible to absorb losses in a resolution. One of the main objectives of the BRRD is to ensure that banks are resolvable, with minimal recourse to public funds. The minimum requirement for own funds and eligible liabilities for bail-in (MREL) will be set on a case-by-case basis from January 2016, with a transition period that will be determined by the resolution authority.
An EBA draft RTS outlines the criteria that resolution authorities should apply when setting MREL.1 The RTS aims to achieve a degree of convergence, so that similar levels of MREL are set for banks with similar risk profiles and degrees of resolvability in different member states. The draft RTS outlines two elements of MREL: (1) loss absorption; and (2) recapitalization. Under the draft RTS, loss absorption is derived in the first instance from the bank’s minimum capital requirements (including pillar 2 and the combined buffer2). In contrast, recapitalization amounts may only be necessary for those institutions for which liquidation under normal insolvency processes is determined not to be feasible. The draft RTS allows NRAs to take account of the specific features of the bank (business model, risk profile, governance, and so on) using the outcome of the supervisory review and evaluation process (SREP) and to adjust the loss absorption or recapitalization amount accordingly. For example, the NRA may discount the counter-cyclical buffer, which depends upon the credit cycle, as it may be at zero at the point when resolution occurs, for example, during a downturn. The NRA has ultimate discretion, but must explain to the supervisor when it departs from the prudential requirement in setting MREL. For determining the recapitalization amount, the NRA would take into account the PRS.
Greater harmonization may be merited across the Banking Union to ensure more clarity and confidence in how the bail-in powers would be applied and to level the playing field for financial institutions. Significant divergences create challenges for resolution planning for banks operating in multiple Banking Union jurisdictions, as well as pricing and risk management risks (and possible arbitrage)3 for investors who are trying to determine with certainty where they stand in the loss-absorbency hierarchy of a failed banking group.
The Single Resolution Fund
The SRF will be paid for by contributions from Banking Union banks. The SRF is established by the SRM Regulation, and owned and administered by the SRB; it replaces the National Resolution Funds (NRFs) in the Banking Union mandated by the BRRD. The SRF may be used to ensure the effective application of the resolution tools:
To guarantee the assets or the liabilities of the institution under resolution;
To make loans to or to purchase assets from the institution under resolution;
To make contributions to a bridge institution and to an asset management vehicle;
To pay compensation to shareholders or creditors who suffered greater losses than they would have if the firm had been wound up under the applicable insolvency regime(s); and
To make contributions to the institutions under resolution, in lieu of the write-down or conversion of liabilities of certain creditors under exceptional circumstances.
The SRF is funded by regular ex-ante contributions. After a build-up period of 8 years, by end-2023, the SRF should stand at, at least, 1 percent of covered deposits in the Banking Union (approximately €55billion). During the build-up period, the contributions collected by NRF prior to the establishment of the SRF (in accordance with the BRRD), and the contributions collected up until the end of the build-up period (in accordance with the SRM Regulation), are transferred to the SRF (in accordance with an intergovernmental agreement [IGA]). The IGA stipulates that the SRF will first comprise national compartments, which will have to be used first in case of the resolution of a bank of the respective SRM participant. Over time, the national compartments will be increasingly mutualized; the mutualized compartment may then be used in a second step as soon as the national compartments are exhausted. At the end of the build-up period, national compartments will be fully mutualized and will cease to exist. Finland has ratified the IGA.4
SRM participants have agreed to transitional bridge funding arrangements for national compartments. The SRB will enter into Loan Facility Agreements (LFAs) with SRM participants agreeing to transitional credit lines of up to the estimated target level of €55 billion. These credit lines only back national compartments of the SRF in case of a funding shortfall. The framework for this arrangement, including the adoption of an LFA template, was agreed upon in December 2015.5 The funding made available under the LFAs will be used as a last resort to be repaid by contributions from the banking sector of the SRM participants where the resolution took place. The individual credit lines will only be available as a last resort after having exhausted all other financing sources, including the SRB’s external borrowing capacity. Finland signed the LFA.6
Constraints for SRF funding
SRF requirements may constrain the authorities when dealing with recapitalizations in a systemic scenario. The SRF can only be used to cover the costs for not bailing-in some creditors, if (1) shareholders and creditors have collectively absorbed losses and recapitalizations of at least 8 percent of total liabilities, including own funds, after a fair, prudent, and realistic valuation; and (2) SRF funding is limited to the lesser of 5 percent of the bank’s total liabilities, or the available SRF funds plus any amount that could be raised through ex post contributions in three years.7 State aid approval by the European Commission is also required. Moreover, as required by the SRM Regulation, the European Commission also has to apply the 8 percent rule to any SRF funding.8
The 8 percent bail-in requirement may create transition risks. The amounts and location of MREL needs, if any, to support the PRS of Finnish SIs has yet to be decided; so far, no Finnish banks have disclosed MREL figures. Introducing the 8 percent requirement in the absence of adequate loss absorbing capacity may create transition risks; the requirement may also have permanent risks in a systemic crisis.9 The EBA draft RTS contemplates that the MREL recapitalization amount may be zero for banks with liquidation as the PRS. If contagion risks would prevent liquidation, resolution tools and funding may be needed. However, these banks would not have previously been required to issue MREL to support resolution and to satisfy any BRRD or state aid requirements.
European Stability Mechanism
Subject to strict conditionality, the ESM can provide direct financial assistance to banks experiencing or threatened with severe financial distress. The ESM has a lending cap of €500 billion, paid-in shares of €80 billion and €620 billion of callable shares, and could finance itself from the market and from member countries. ESM assistance will only be granted when the recipient state proves that it lacks other options for recapitalizing a bank and when ESM assistance is indispensable to safeguard the financial stability of the euro area or its member states. Prior to December 2014, the ESM could only indirectly recapitalize banks by providing loans to a member state to on-lend to its undercapitalized bank(s).10 This approach, however, did not break the sovereign bank linkages, and a direct recapitalization instrument was adopted in December 2014, up to a maximum of €60 billion. The conditions for using this tool are highly constrained and can only be used to fund bank recapitalizations or resolutions when the 8 percent bail-in rule is met, when the SRF 5 percent contribution has been disbursed, and when all unsecured, nonpreferred liabilities (other than eligible deposits) have been written down or converted in full.
Appendix VII: BRRD Resolution Tools
The SRB resolution scheme may provide for the use of one or more resolution tools, the exercise of supporting powers and the partial liquidation of the bank. The BRRD has introduced four principal resolution tools—namely, the sale of business tool, the bridge institution tool, the asset separation tool and the bail-in tool. It also introduced optional government financial stabilization tools and supporting powers, such as the authority to appoint a special manager, and the imposition of stays on rights to terminate contracts or execute collateral. The BRRD also allows member states to introduce additional resolution tools; Finland has not made use of this option. The BRRD acknowledges that existing national insolvency regimes would remain applicable as an alternative to resolution and/or alongside resolution (for example, where residual parts of a firm will be wound down) and requires that resolution authorities have the ability to preempt insolvency proceedings.1 Broadly speaking, the resolution framework introduced by the BRRD is consistent with the Key Attributes.
In addition to the power to write down or convert capital instruments (which is available during early intervention and in resolution), the BRRD includes a bail-in tool. The FFSA may write down and/or convert into equity the bank’s liabilities. This tool is most likely to be relevant to the resolution of systemic banks, in the context of an SPE resolution strategy (which would aim to recapitalize the bank and maintain it as an ongoing entity). However, the bail-in tool could also be used to support the other resolution tools—for example, to convert to equity or write down the principal amount of claims or debt instruments that are transferred to a bridge institution under a multiple point of entry (MPE) strategy.
Flexibility to exclude liabilities from the scope of the bail-in tool for financial stability or operational reasons is constrained. The BRRD allows for liabilities to be excluded from the bail-in powers by allowing for departure from strict pari passu treatment of creditors in a bail-in under certain limited circumstances, for instance, for operational reasons or to prevent contagion. Consistent with good practice, the BRRD prescribes that no creditor should be worse off as a result of resolution, than if the bank had entered insolvency proceedings at the time the decision to commence resolution was taken (the “No Creditor Worse Off” or “NCWO” principle). The BRRD establishes that in the event that the NCWO principle is breached, compensation should be paid to the relevant creditor(s) from the special resolution fund (SRF). However, the BRRD also specifies that the SRF can only be used to exclude some creditors from bail-in under exceptional circumstances, and if the shareholders and creditors have collectively first absorbed losses of at least 8 percent of total liabilities, which could reduce flexibility to deal with systemic cases, at least until adequate loss absorbency is in place.
Sale of business, and bridge institution
The sale of business tool and the bridge institution tool allow for the transfer of a failed firm or its activities to a private or public sector purchaser, respectively. Under the sale of business tool, the FFSA may sell the shares of the failing bank or its assets, rights, and liabilities to a private sector purchaser. As with all of the resolution tools prescribed by the BRRD, the consent of shareholders or third parties is not required to execute the transfer. The FFSA may also transfer the shares of the failing institution, or some portion of its assets (together with liabilities less than or equal in value to the assets transferred), to a special-purpose temporary bridge institution. A bridge institution would be established by the FFSA under the Companies Act and would be wholly or partially owned by public authorities (which could include the FFSA). It would be authorized to conduct banking activities pending its sale to a third party or until such time when it is wound down.
The BRRD also provides for the asset separation tool. The FFSA may transfer assets, rights, and liabilities from the failing bank to a separate asset management vehicle under the authorities’ ownership and direction. Such a separation may help the authorities realize greater value from the assets. The relevant asset management vehicle may be the subject of directions from the FFSA and must manage the assets with a view to maximizing their value by selling them or winding them down. The asset separation tool may only be used in combination with other resolution tools.
Government stabilization tools
The Finnish authorities have elected not to implement through Finnish legislation the BRRD’s optional government stabilization tools. The BRRD provides for two types of government stabilization tools that may be used as a last resort, where use of the other resolution tools would not suffice to avoid significant adverse effects on the financial system or otherwise protect the public interest.2 The public equity support tool allows a member state to participate in the recapitalization of a bank subject to resolution by temporarily providing capital in exchange for CETI instruments, Additional Tier 1 instruments or Tier 2 instruments. The temporary public ownership tool allows member states to temporarily acquire a bank’s shares, subject to resolution. The use of either tool is subject to the state aid rules and the mandatory 8 percent contribution to loss absorption by the bank’s shareholders and creditors. The Finnish authorities’ decision to not incorporate these tools into national legislation is understandable. However, the absence of these tools places an even higher reliance on resolution planning and improving resolvability, including putting in place adequate loss absorbency in Finnish banks and ensuring operational capacity (including at banks) to rapidly deploy recovery and resolution tools.
Prepared by Atilla Arda (MCM).
The CRD IV (Directive 2013/36/EU) and the BRRD (Directive 2014/59/EU) are not directly applicable in member states and must be implemented through national legislation. EU regulations, such as the CRR (Regulation (EU) 575/2013) and EBA binding RTS, are directly applicable in EU member states. This combination of legislative instruments aims to balance national discretion and uniformity.
To a large extent, the Finnish CPCM framework is based on European Union arrangements, in particular the Banking Union, including the Single Supervisory Mechanism and the Single Resolution Mechanism. Therefore, the note’s assessment and recommendations go beyond national responsibilities and legislation.
The author would like to thank Marc Dobler, Dinah Knight, Hans Weenink, and David Scott for their work on these FSAPs.
This note focuses on banks and does not discuss the resolution of nonbank financial institutions.
See the Technical Note on the Macroprudential Policy Framework that recommends strengthening the FSA’s macroprudential mandate (relative to its microprudential mandate).
Any exercise of power by the ECB against a private party, whether under EU or national legislation, requires approval from the ECB’s Governing Council.
As a consequence of item (3), the ECB has different powers in each of the member jurisdictions.
See list of SI/LSIs: https://www.bankingsupervision.europa.eu/banking/list/who/html/index.en.html
The Single Rulebook aims to provide a single set of harmonized prudential rules throughout the EU.
CPCM plans would exist in conjunction with business continuity plans that have been implemented and successfully tested within the MoF, FSA, and BoF. The FFSA is in the process of preparing its own business continuity plan. The MoF’s plan was tested during a national government preparedness test; the next test is scheduled for 2016.
Building blocks from effective crisis communications include: (1) high-level objectives, including clarification of the authorities’ mandate; (2) key policy objectives, including assessment of the crisis and focus on stability; (3) target groups, including the general public, depositors, market-participants, and financial press; and (4) tools, including conventional media, social media, and news releases.
The FSA has chosen to be stricter than the ECB recommendation on the topic and it applies simplified recovery planning to only one bank; the FSA has also decided that one investment firm, which together with an insurance company constitutes a financial conglomerate, should have a full-fledged recovery plan.
In 2015, the Finnish DGS was changed from a private “VTS Fund” to a combined public–private system. The VTS Fund holds roughly €1 billion. Over a decade, annual installments of €60 million will be transferred from the VTS Fund to a public DGF administered by the FFSA. The DGS will have continued access to the VTS Fund to supplement its own fund when needed for payouts. The DGF target level is 0.8 percent of covered deposits. Together, the DGF and VTS Fund stand at 1.4 percent of covered deposits. After the Nordea branchification, deposit guarantee responsibilities for Finnish Nordea depositors will shift to Sweden and the coverage ratio will rise to 1.9 percent.
The NCBs’ shares in the ECB capital are calculated by using a key that reflects the respective country’s share in the total population and gross domestic product of the European Union. These two determinants have equal weighting.
Regardless of balance sheet protection, the BoF should continue to appropriately value collateral and assess the ELA recipient’s solvency. For a more elaborate discussion on the topic, see “The Lender of Last Resort Function after the Global Financial Crisis”
See for example the
As an example of a statutory ELA loss indemnification arrangement see Article 9 of the Organic Law of the National Bank of Belgium, which was welcomed by the ECB (see
The SRM Regulation sets out criteria for when a bank is considered failing or likely to fail. The EBA has issued guidelines regarding the interpretation of the different circumstances when an institution shall be considered to be failing or likely to fail.
With respect to an LSI, the FFSA is responsible for determining whether these three conditions have been satisfied.
Which states that “in all cases the liability of the deposit guarantee shall not be greater than the amount of losses that it would have had to bear had the institution been wound up under normal insolvency proceedings.”
Communication from the Commission on the application, from August 1, 2013, of State aid rules to support measures in favor of banks in the context of the financial crisis (“Banking Communication”): http://eur-lex.europa.eu/legal-content/EN/ALL/?uri=OJ%3AC%3A2013%3A216%3ATOC
A recommendation of the Five Presidents’ Report: https://ec.europa.eu/priorities/sites/beta-political/files/5-presidents-report_en.pdf. The SRF is part of a broader framework for resolution funding (Appendix VI).
While Eurosystem rules do not require NCBs to publish monthly balance sheets, ECB Guideline ECB/2010/20 recommends that NCBs apply the same accounting and reporting rules to national operations “to the extent possible” for consistency and comparability reasons.
In 2012, an accounting reclassification took place “in order to harmonize the disclosure of ELA provided by Eurosystem central banks to domestic credit institutions” under “Other Claims on Euro Area Credit Institutions in Euro” in the Eurosystem weekly consolidated statement: https://www.ecb.europa.eu/press/pr/wfs/2012/html/fs120424.en.html
For example, the Bank of England reported its ELA to HBOS and RBS on a delayed basis: http://www.bankofengland.co.uk/publications/Documents/other/treasurycommittee/financialstability/ela091124.pdf
Automatic recognition of “reorganization measures” under the Winding-Up Directive has worked well; it was a key instrument during the Irish banking crisis for achieving cross-border enforceability of a subordinated liabilities order (i.e., a bail-in order) issued with respect to the subordinated debt of AIB. More recently, however, courts in two cases have refused to grant recognition where the action taken by the NRA did not precisely match the terms of the BRRD: Goldman Sachs International v Novo Banco and Bayerische Landesbank v Heta Asset Resolution.
These include the Basel Core Principles for Effective Banking Supervision; Basel/International Association of Deposit Insurance Core Principles; and International Association of Insurance Supervisors.
Title III, BRRD.
Key Attribute 11 and Appendix I, Annex 4. The October 2014 version of the KA also covers financial market infrastructures (FMIs), FMI participants, insurers, and the protection of client assets.
The European Commission’s state aid rules on support measures in favor of banks in the context are set out in the Banking Communication of July 30, 2013, 2013/C 216/01.
Under the BRRD, GLRA means the resolution authority in the member state where the consolidating supervisor is located.
Article 88(1), BRRD.
Article 88(2), BRRD.
Final draft RTS on resolution colleges (EBA/RTS/2015/03).
In contrast, as between EU member states, the BRRD imposes significant consultation requirements—in addition to the resolution college requirements.
The combined buffer includes the capital conservation, countercyclical, systemic (either G-SIB or D-SIB and the systemic risk buffer).
For example, vulture funds seeking to test contractual subordination in debt contracts of banks in resolution.
By November 20, 2015, the IGA was ratified by a sufficient member states, ensuring that the regime took full effect on January 1, 2016. http://register.consilium.europa.eu/doc/srv?l=EN&f=ST%208457%202014%20INIT
Decisions to grant loans to the SRB under the Finnish LFA will require prior national approval within three working days, which is an option foreseen in the Master LFA. Decision to grant a loan will be taken by the Ministry of Finance, subsequent to endorsement by the government’s Cabinet Finance Committee. The EU Affairs Committee of the Finnish parliament will be informed as part of this process.
This is calculated on total liabilities, including own funds unlike regulatory capital, which is calculated on the basis of risk weighted assets.
“Any state aid notified to the Commission after January 1, 2016 that triggers resolution under the BRRD can only be approved subject to bail-in of at least 8 percent of the bank’s total liabilities, including own funds, which may require also converting senior debt and uncovered deposits.” http://europa.eu/rapid/press-release_MEMO-15-6394_en.htm
For example, a common shock to small deposit takers without MREL, but which, due to the risk of wider contagion, such as occurred in the savings and loans crisis in the United States in the 1980s and 90s, could no longer be liquidated as originally planned.
Article 1(2) Indirect Recapitalization Guideline, which was used to disburse 41bn Euros to the Spanish banking sector (originally via the ESFS and then the ESM when the latter came into effect in September 2012).
Article 86 of the BRRD provides that insolvency proceedings may only be commenced against an institution in resolution with the consent of the resolution authority, and against an institution eligible for, but not yet subject to, resolution, with notice to the resolution authority and an opportunity to commence resolution.
It should be noted that the SRM Regulation does not make these tools available to the SRB either.