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Recovery and Resolution

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Directive 2014/59/EU (“BRRD”) and Council Regulation (EU) No. 806/2014 (“SRM”) form a common regime for the recovery and resolution of banks – the so-called “second pillar” of the European Banking Union, which compliments the rules of the Single Supervisory Mechanism (“SSM”), the “first pillar” of the European Banking Union. The provisions of the BRRD bring together material regulations ensuring a minimum level of harmonisation for the recovery and resolution of banks in EU member states. Furthermore, the SRM has been created as a separate resolution authority on a European level for the purpose of resolution (and resolution planning) for banks which are subject to direct ECB supervision. The SRM will be operated by the respective national resolution authorities for the execution of resolution actions, but the most important decisions will, however, be taken by the European resolution authority (in part jointly in conjunction with the EU Council and the European Commission).

Legal Basis in Austria

In Austria, the BRRD is transposed by the Federal Act on the Recovery and Resolution of Banks (“BaSAG”). BaSAG entered force on 01.01.2015. The Austrian Financial Market Authority (“FMA”) fulfils the role of the national resolution authority. In order to ensure the operational independence of its resolution activities, and in order to prevent the emergence of conflicts of interest between resolution-related functions and other supervisory functions within the FMA, necessary organisational provisions have been taken. The Oesterreichische Nationalbank will cooperate closely with the FMA in the FMA’s function as the resolution authority.

Resolution tools

The FMA has far-reaching powers conveyed upon its activities as the resolution authority, in order to be able to execute an orderly resolution in the event of the failure or threat of failure of an institution, and to ensure that financial market stability is maintained. An orderly resolution should ensure that the continuity of critical functions is maintained, that considerable negative effects on financial market stability are avoided, and that public funds and secured customer deposits are protected, in the event that these objectives could not be fulfilled to the same effect by bankruptcy proceedings. The guiding principle here is to ensure that creditors do not suffer a greater loss through resolution than they would in the event of insolvency. The following resolution tools are at the FMA’s disposal:

  • The sale of business tool
  • The tool to establish a bridge institution (bridge bank)
  • The asset separation tool
  • The tool for bailing-in of creditors (bail-in)

The bail-in tool forms the core element of the BRRD. It permits the resolution authority to write down the eligible liabilities in a cascading contribution to loss absorption of an institution, or to convert them into equity capital. The most important examples for exceptions to the scope of application of the bail-in tool are secured deposits, liabilities held against employees, secured liabilities and interbank liabilities with an original maturity of less than seven days. Furthermore, the FMA may also take measures for ensuring the continuity of services and avoiding adverse effects on financial stability by separating performing assets from impaired or under-performing assets. For this purpose the FMA may transfer shares or all or part of the assets of an institution to a private purchaser or a bridge institution without the consent of the shareholders. 

International cooperation and financing

Effective resolution of internationally active institutions and groups requires cooperation between the Union, Member States and third-country resolution authorities. For this purpose resolution colleges are be formed – under the leadership of the resolution authority of the parent institution, and which are responsible for the resolution.

The resolution process is primarily funded by the participation of the owners and creditors (“bail-in”). In the event that the costs of the resolution cannot be borne adequately by means of a bail-in, a resolution fund exists that is to be funded by the banks in accordance with their liabilities and their risk profile.