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Management of banking crises

In order to put an entity into resolution and apply resolution tools, the resolution authority must determine whether the entity is failing or likely to fail.

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Start of resolution proceedings

An entity is deemed to be failing if there are objective factors indicating that it is likely to find itself in one of the following situations:

  • it is no longer compliant with the capital requirements for continuing authorisation;
  • it is unable to meet its payments;
  • the value of its assets is lower than that of its liabilities;
  • it is in need of extraordinary public financial support.

 

If the resolution authority concludes that the entity is failing or likely to fail, that no possible alternative private sector measures can be taken (such as a recapitalisation) and that resolution is in the public interest, then the entity in question can be placed under resolution. In this case, the resolution authority takes control of the entity, either directly or via a specially appointed administrator.

The four resolution tools

The resolution authority has four main resolution tools at its disposal, and can choose to apply them either together or individually, as required by the circumstances.

 

1. Sale of business

The authority can sell the entity's assets, rights, liabilities, shares and other ownership instruments to a private purchaser.

 

2. Asset separation

The authority can transfer poor quality assets, rights and liabilities to a specially created asset management vehicle with a view to their sale or liquidation. This structure is often referred to as a "bad bank".

 

3. Bridge institution

The authority can transfer the entity's assets, rights, liabilities, shares and other ownership instruments to a controlled temporary entity. This temporary entity is often referred to as a "good bank".

 

4. Bail-in

Under this mechanism, shareholders and creditors are required to shoulder some of the entity's losses or take part in its recapitalisation. It consists of two phases:

  • eligible liabilities are reduced as much as possible to absorb losses and bring the entity's net asset value down to zero;
  • eligible liabilities are converted in order to recapitalise the entity or contribute to the capital of the bridge institution.

     

These tools may be applied alone or in combination, with the exception of the asset separation mechanism.

Updated on: 03/19/2019 15:40