BCB notified that the supplementary draft law (PLP 281/2019) on banking resolution has been submitted to Congress. The bill is intended to implement international recommendations regarding more effective and modern solutions for resolving distressed financial institutions and to ensure financial stability by preserving the continuity of critical functions. The PLP 281/2019 provides for a legislation on banking resolution that is in line with the FSB Key Attributes of Effective Resolution Regimes for Financial Institutions. The PLP 281/2019 harmonizes the framework for resolution regimes by creating two regimes—the Stabilization Regime and the Compulsory Liquidation Regime.
In addition to defining the resolution authorities’ roles and competencies, the PLP 281/2019 establishes the mandatory use of equity or other instruments of firm ownership to absorb losses to ensure continuity of some critical activities for the Brazilian population and economy. The Stabilization Regime aims to mitigate the risk for a systemic crisis involving an institution or a relevant activity performed within the National Financial System, or SFN, and allows the institution or its critical functions to continue to be undertaken, provided that the shareholder rights are "overrided." The Compulsory Liquidation Regime, CLR, resolves, in an orderly manner, a non-systemic financial institution from the National Financial System. The Compulsory Liquidation Regime will be a faster process than the extra-judicial liquidation of financial institutions, which is currently provided for by Law No. 6,024/1974.
To protect the National Financial System, the PLP 281/2019 better defines the use of deposit guarantee funds and allows the creation of private resolution funds to be capitalized with resources from the National Financial System. Furthermore, the PLP 281/2019 allows the preservation of critical functions funded by private investments in the institution or the National Financial System itself. Only in cases of severe crises—and only after the use of all private resources from shareholders, subordinated creditors, and privately financed resolution funds—the PLP 281/2019 provides for the use of public funding as a last resort and the Treasury will be the first to be repaid after the recovery of the institution. In parallel, the BCB draft precludes the use of public resources to bail-out the insolvent institutions’ controllers.
Keywords: Americas, Brazil, Banking, Stabilizing Regime, Compulsory Liquidation Regime, Systemic Risk, Resolution Framework, BCB
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