In the case of the resolution of an institution (primarily a credit institution, although also possible for investment firms) other than in the case of a liquidation or insolvency, a methodical restructuring takes place on the basis of resolution actions ordered by the FMA. The consequence may be, although not necessarily, the continued existence of the institution. The purpose of methodical restructuring is to ensure the preservation of certain material elements of an institution in the public interest, which for example may also be achieved by transferring parts of the institution to another institution that then continues its functions. Since such actions are far-reaching, resolution may only be conducted if:
- an institution is failing or likely to fail,
- its failure is unable to be averted by measures by the private sector, and
- resolution actions are in the public interest.
A resolution may be justified as being in the public interest, where doing so guarantees the continuity of critical functions, where significant negative effects on financial market stability are thereby averted or where doing so is necessary to safeguard public funds, depositors or investors, or customer assets or deposits.
Where it is apparent that resolution is necessary, then the resolution authority is required to observe certain principles in conducting the resolution. These principles in particular include the following:
- Losses are primarily to be borne by shareholders (primarily the owners of the institution);
- bear the losses in the order of priority of their claims;
- of the same exposure class are treated in the same way;
- are not required to bear larger losses than in the case of insolvency proceedings (the “no creditor worse off” principle (NCWO));
- Covered deposits are secured (see information about deposit protection);
- natural and legal persons are made liable, subject to national law, under civil or criminal law, for their responsibility for the institution’s failure.
Comparable resolution principles apply for the resolution of central counterparties (CCPs). Therefore a CCP may only be placed in resolution in the case of the CCP failing or likely to fail, where the failure is unable to be averted by measures by the private sector, and where resolution actions are required in the public interest. The “no creditor worse off” principle (NCWO) also applies for CCPs. It should be noted that in certain details – in particular due to CCPs’ different structure – differences exist compared to the applicable rules under resolution law for institutions.