Resolution authorities must work with entities while they operate under business as usual, planning the measures that would need to be implemented should they be no longer viable at some point or expected to become no longer viable in the near future.
The Single Resolution Board (SRB) and the Banco de España work together to plan such actions through the elaboration of the so-called ”resolution plans” at least annually.
The resolution plan includes three basic elements: the tools to be used to restructure the entity; the resolvability assessment of the entity, which identifies any impediments that may exist to implement these tools; and the MREL.
It shall be understood that an entity is resolvable when it holds sufficient resources to absorb any losses that may happen and continue to comply with its obligations, so that it can continue with its activities during and after the resolution. In the event that any factor that prevents an orderly resolution is identified, entities shall be required to carry out the necessary actions for its correction.
When is an entity resolved?
When it is determined that an entity is no longer viable or is expected to become no longer viable in the near future, the first option subject to assessment is liquidating said entity through a regular insolvency procedure, in which case covered deposits would be paid by the Deposit Guarantee Fund. If it is determined that the liquidation of the entity would have a detrimental impact in the financial system and the economy, the appropriate resolution tools would be applied for the sake of public interest to guarantee the provision of the essential services provided by the entity to individuals and companies, and to preserve financial stability. Otherwise, the liquidation of the entity through the national insolvency procedure would be the strategy suggested in the resolution plan.
The decision of when a significant institution is no longer viable or potentially bound to become no longer viable in the near future corresponds to the European Central Bank (ECB) after consultation with the Single Resolution Board (SRB). The SRB may also carry out this assessment, although it must previously notify its intentions to the ECB, which shall have three days to evaluate this decision. In the case of less significant institutions, the FROB or the competent supervising authority will determine that an entity is no longer viable or shall in all likelihood be no longer viable. Subsequently, the FROB shall assess whether all other circumstances required to initiate the resolution proceedings concur.
The SRB (and the FROB in the case of less significant institutions) are responsible for determining whether a resolution is necessary for the sake of public interest. If it is determined that this condition is not met, the entity will be liquidated through regular insolvency procedures.