Resolution
is the orderly restructuring in an entity when the entity is no longer viable or it is foreseeable that it will be in the near future, there are no reasonable prospects that measures from the private sector can correct this situation, and for reasons of public interest and financial stability it is necessary to avoid its filing for bankruptcy. This procedure minimizes the cost to taxpayers and the effect that the non-viable entity could have on the economy or on financial stability.
As a result of the financial crisis (2008) it became clear that the authorities did not have the necessary tools to manage the non-viability of entities in an orderly manner. As a consequence, the management of said non-viability became a priority issue at the international level and triggered the development of various regulations in the field of resolution.
The resolution authorities are those authorities designated by the Member States which are in charge of planning and eventually implementing the resolution tools.
Planning is an essential component for an effective resolution. It is developed in a precautionary manner for all credit institutions. To accomplish this, the authorities must have all the necessary information to determine which are the critical functions that must be ensured, propose appropriate resolution strategies and tools, and limit the effects on the real economy, minimizing the impact of non-viability of entities on the financial stability and the cost for taxpayers. This information will be included in the resolution plans, the content of which must be proportional to the entity’s level of systemic importance.
The regulations make various tools and procedures available to the competent authorities to implement the resolution of an entity (i.e. sale of business, bridge institution, asset separation vehicle and bail-in).
Banco de España, within the scope of its powers, actively participates in the various international organizations (SRB, EBA, FSB) that address the topic of resolution.
The regulation requires that entities have a sufficient amount of capital and debt instruments that can absorb losses and recapitalize the entities in the event of having to implement a resolution tool.
