The 2008 financial crisis evidenced that the financial authorities did not have the necessary tools to orderly deal with entities going bankrupt. For this reason, developing and implementing specific capacities allowing public authorities to manage the bankruptcy and liquidation procedures of entities became a top priority in the G20 agenda, which adopted in October 2011, the Financial Stability Board’s (FSB) document "Key attributes of effective resolution regimes for financial institutions".
This document constitutes an international benchmark used by all FSB members to create a legal Resolution framework. In the European Union, this was implemented through the Bank Recovery and Resolution Directive (BRRD), which provides the corresponding authorities the powers and tools to intervene in those entities that have been identified as no longer viable or are expected to be no longer viable in the near future. Likewise, the Single Resolution Mechanism and the Single Resolution Board were created.
Entities subject to resolution regulations
The resolution framework applies to credit institutions and investment service companies.
- To ensure the continuity of critical functions.
- To avoid significant adverse effects on financial stability, in particular by preventing contagion, including to market infrastructures, and by maintaining market discipline.
- To protect public funds by minimising reliance on extraordinary public financial support.
- To protect depositors covered by the Deposit Guarantee Scheme Directive (DGSD) and investors covered by the Investor Compensation Scheme Directive (ICSD).
- To protect client funds and client assets. The SRB and, where relevant, NRAs will seek to minimise the cost of resolution and avoid destruction of value.