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Prevention of bank crises

To help prevent banking crises, entities falling within the scope of the resolution regime are obliged to prepare a recovery plan, and then update it and submit it to the competent authority on an annual basis. The resolution authority in turn drafts and maintains its own action plan for each entity, in the form of a resolution plan.

Role of the supervisory authority

A recovery plan sets out the measures the company in question would need to take following a deterioration in its financial position. In some cases, entities may be subject to simplified requirements.

 

As part of the crisis prevention framework, the competent authorities may also intervene at an early stage when an entity falling within the scope of the SRM has infringed, or is liable in the near future to infringe its prudential requirements. They can oblige the entity to take any of the following actions:

  • implement its recovery plan or an action plan,
  • modify its commercial strategy,
  • negotiate a restructuring of its debts with its creditors,
  • remove or replace one or more of its managers,
  • call a general meeting of shareholders to vote on an agenda established by the competent authority.

 

If these measures are insufficient to halt the deterioration in the entity's finances, if the situation worsens, or if further infringements or irregularities are noted, the competent authority may demand the removal of the senior management or management body. The appointment of new senior managers or a new management body is subject to approval or consent by the authority. If the replacement of the senior management or management body is deemed insufficient to remedy the situation, the competent authority can appoint a temporary administrator either to replace the management body or to work with it temporarily.

Role of the resolution authority

The resolution authority implements measures to prevent crises. It drafts its own resolution plans for those entities required to submit a recovery plan. These plans set out the measures the authority will take to deal with the failure of the entity in question, while ensuring, where possible, the continuity of its so-called "critical functions", i.e. those functions necessary to continue operations, and the disruption of which could have an adverse impact on the economy and financial stability.

 

The resolution authority is also responsible for assessing whether entities are resolvable, i.e. whether it is actually possible to implement resolution measures. If it finds that there are substantive impediments to the application of resolution tools, it can demand that the entity take steps to address or remove these obstacles. If the steps are deemed insufficient, the resolution authority can go so far as to demand that the entity restructure or cease activities considered too risky.

Updated on: 03/19/2019 15:40