SRB published an overview of the resolution tools available in the Banking Union and their impact on a bank’s ability to maintain continuity of access to financial market infrastructure services in resolution. The overview also covers the resolution framework and the relevant legal provisions supporting continued access to financial market infrastructure services in resolution. The Single Resolution Mechanism Regulation (SRMR) and Bank Recovery and Resolution Directive (BRRD) grant SRB and the national resolution authorities with specific powers and resolution tools to ensure that the entities under their remit are resolvable. The overview explains that resolution authorities in the Banking Union have four resolution tools at their disposal—namely, bail-in, sale of business, bridge institution, and asset separation.
The following are the key highlights of the resolution tools and their potential impact on financial market infrastructures:
- Bail-in Tool—This tool allows resolution authorities to cancel, reduce, and/or convert capital and eligible liabilities, with a view to absorbing losses and recapitalizing the institution. An indirect effect on financial market infrastructures, unrelated to the membership/participation of the bank in resolution, may result from the write-down or conversion of securities issued by the bank that other counterparties post as collateral to the financial market infrastructure. Similar effects can be expected in case of bilateral exposures between banks secured by securities issued by the bank in resolution and bailed-in. This may impact the activity of any triparty or securities financing transactions offered by financial market infrastructures.
- Sale of Business tool—This tool allows resolution authorities to sell all or parts of a failing entity to one or more purchasers without the consent of the failing entity’s shareholders or any third party. In the scenario where the purchaser would buy assets only, and not take over any of the activities of the bank, the remainder of the bank including the contractual relationships with the financial market infrastructure may be subject to another resolution tool or wound down under normal insolvency proceedings. The fact that the financial market infrastructure's member has been purchased and belongs to a new group is likely to have consequences on the external rating provided by rating agencies and/or the internal rating established by the financial market infrastructure for the entity. This is not expected to have an impact on participation or membership. In case the financial market infrastructure takes credit or liquidity risks on its participants or members a rating change may impact the level of exposures that the financial market infrastructure would be willing to bear, or the collateral that they may accept.
- Bridge Institution tool—This tool allows resolution authorities to transfer instruments of ownership or assets, rights, or liabilities of a failing entity to a bridge institution without the consent of the failing entity’s shareholders or any other third party. The fact that the financial market infrastructure member has been transferred to a bridge bank may have consequences on the external rating provided by rating agencies and/or the internal rating established by the financial market infrastructure for the entity. In case financial market infrastructures take credit or liquidity risks on their participants or members, a rating change may have an impact on the level of exposures that the financial market infrastructures would be willing to bear, or on the collateral that they may accept. For the remainder of the bank in resolution, which may be wound down under normal insolvency proceedings, there is the possibility that certain financial market infrastructure participations or memberships would be suspended or terminated following the liquidation of part of the bank’s activities.
- Asset Separation Tool—This tool allows resolution authorities to transfer assets, rights, or liabilities from a failing entity or a bridge institution to an asset management vehicle without the consent of the failing entity’s shareholders or any other counterparty. Typically, this tool would be used to isolate non-performing loans of the failing entity by moving them into a vehicle where they can be managed as efficiently as possible. A priori, the asset management vehicle is not designed to hold a banking license and is not expected to need access to an financial market infrastructures (though it may need indirect access through a Clearing Member to manage its outstanding positions).
During resolution planning, resolution authorities identify, for each bank, a preferred resolution strategy and, where necessary, one or more variant strategies. The resolution strategy comprises the resolution approach (multiple points of entry or single point of entry) as well as a preliminary view on the set of tools that resolution authorities expect to use in case of resolution. Resolution authorities may select different tools at the time of resolution, depending on the circumstances.
Keywords: Europe, EU, Banking, Banking Union, Resolution Framework, Bail-In, Financial Market Infrastructure, SRMR, BRRD, Resolution Planning, FMI, SRB
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