Resolution is the orderly restructuring of a credit institution when it is failing or likely to fail in the near future, there is no reasonable prospect that any private sector measures can prevent its failure and, for reasons of public interest and financial stability, winding up the institution must be averted. This procedure minimises the impact that an institution’s failure could have on the overall economy or on financial stability.
The 2008 financial crisis highlighted the strong link between bank failures and public support, and the lack of appropriate tools available to the authorities for managing bank failures in an orderly fashion without resorting to public support. In the aftermath, authorities around the world made addressing how to handle these failures a top priority, triggering various legislative initiatives to create an institutional and regulatory framework for 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).
This assessment aims to determine whether these institutions can be resolved in a way that ensures financial stability. To achieve this, regulations set out the criteria and procedures for evaluating the resolvability of an institution or group.
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.
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.
At the European level, coordinated progress is being made in the resolution process and in planning future actions that will affect institutions.
