There is an EU-wide directive on bank recovery and resolution designed to resolve issues with failing banks without the use of taxpayers’ money. This legislation applies to credit institutions established in Ireland, including subsidiaries of EU credit institutions.
Shareholders and bank creditors, except for protected depositors, may potentially lose part of their funds held by the bank. The Central Bank has authority in Ireland under this legislation.
These measures may arise when an institution is not insolvent but fails to meet basic solvency requirements. The legislation also applies to situations of prospective insolvency.
The Central Bank must consider the bank’s size, nature, shareholding structure, risk profile, interconnectedness with other financial institutions, and the financial system as a whole.
The Central Bank must create a resolution plan for each institution not subject to consolidated supervision to address financial crises, employing resolution tools mentioned earlier. Resolution may involve suspending trading in the bank’s shares and securities on the stock exchange and significant regulatory powers by the Central Bank.
The Central Bank determines if the institution can cover itself or if resolution steps are necessary. The legislation requires the Central Bank to take early steps, including removing management and appointing a temporary administrator if an institution faces difficulty.
Prospective resolution methods may involve actions like
- selling the business,
- creating a bridge bank for asset transfer,
- selling a clean entity or assets,
- implementing bail-ins, or sharing by non-depositor creditors
- creditors receive equity instead of debt.
Creditors should generally not be worse off than they would be in a liquidation scenario.
Regulated institutions must prepare a recovery plan, while the Central Bank develops a resolution plan. Recovery aims to enable the bank to trade out of difficulties, whereas resolution is implemented when an institution has failed.
Banks must maintain a recovery plan outlining measures to restore its financial position in case of significant deterioration. This plan must be reviewed annually, considering risk factors affecting the bank and outlining steps to address the situation. It is assumed that no public funds will be available, although Central Bank liquidity might be allowed based on eligible assets.
The recovery plan must be submitted to the Central Bank for review. The Bank consults with authorities in other member states if there’s a branch there. The Central Bank evaluates the plan based on the institution’s risk and role in the financial system. It may require plan amendments or a completely new submission.
The Central Bank may direct the institution to modify its risk profile, strategy, structure, and governance if the recovery plan seems insufficient. Any such direction may be appealed to the IFSAT and must be proportionate and reasoned.
Central Bank Intervention
The Central Bank can intervene in cases of regulatory capital requirement breaches or significant deterioration in a bank’s financial position, potentially mandating a recovery plan, or appointing a temporary administrator.
Procedures govern the removal of directors and management. The Central Bank may direct shareholder meetings for implementing changes.
A temporary administrator may be appointed if new management is insufficient. This remedy’s use must be proportionate and reasonable, with procedures in place before appointment, possibly expedited in emergencies. Confirmation of the temporary administrator occurs via High Court appointment through the Central Bank’s application.
The Central Bank may choose from various options or tools to meet objectives, ensuring critical function continuity, avoiding systematic risk, protecting taxpayers’ funds, depositors, and client assets.
Resolution may apply if the institution is failing or likely to fail without alternative supervisory private sector remedies, only in cases of significant loss of funds, assets listed as liabilities, or an inability to pay debts. Resolution involves preserving all or part of the bank’s business or orderly winding down if preservation isn’t feasible.
Shareholders bear the initial loss, while creditors must be treated fairly and not receive less than they would in a liquidation scenario. Senior management and officers are typically replaced unless necessary to meet specific objectives. Deposits are covered by the deposit guarantee scheme.
Confirmation by Court
The Central Bank issues a proposed resolution order and seeks confirmation from the High Court. The court confirms the order unless it deems it unreasonable or containing legal errors. The court order may encompass various matters related to the resolution, such as the transfer of shares, rights, liabilities, or changes in the capital structure.
Challenges against the order are limited. Judicial review is possible but highly restricted. Appeals are permitted only in cases of exceptional public importance and when it’s in the public interest.
The Central Bank may appoint a special manager to replace existing management and execute a resolution plan. The special manager reports to the Central Bank and follows its directions, wielding specific powers.
Manner of Resolution
A resolution order may mandate the transfer of shares, assets, rights, and liabilities to another entity, which must occur on commercial terms and comply with EU state aid provisions. Assets should be marketed openly, though financial stability concerns might alter this requirement.
Assets might be transferred to an institution functioning as a special purpose vehicle, acting on the Central Bank’s directives to facilitate the sale of assets without certain liabilities.
If feasible, the resolution order may involve bail-in for non-retail creditors, possibly converting their debt to equity or reducing what is owed to them.
Bail-in/write-down does not apply to EU deposit-protected scheme deposits, collateralized securities, or assets and liabilities lasting less than seven days. It may apply to loans, bonds, debt capital instruments, and various other claims.
The order may alter the terms and conditions of the bail-in. Similar to the original order, it may also adjust the institution’s capital structure, potentially canceling or eliminating existing shareholders.
If a resolution order transfers a portion of the rights, assets, and liabilities, creditors whose claims were not transferred should receive what they might have obtained in a liquidation at that time. Their loss should not exceed what would occur in winding up, and provisions exist for valuation purposes.