The framework for the recovery and resolution of credit institutions and investment firms, as set out in the BRRD Directive, provides the competent authorities with a harmonised set of tools for resolving an institution that is failing or likely to fail, in order to achive the resolution objectives.
The national resolution authorities (NRAs) are responsible for relevant decisions. In order for the resolution process to be triggered, all of the following conditions must be met:
a) The credit institution must be considered to be failing or likely to fail.
b) There are no alternative private sector measures or supervisory actions that would prevent the credit institution’s failure within a reasonable timeframe.
c) The resolution action is deemed necessary to protect the public interest.
The national resolution authorities (NRAs) choose among the resolution tools they are equipped with on a case-by-case basis, in an aim to achieve the resolution objectives as effectively as possible.
Tools of the national resolution authorities
The sale of business tool
This tool refers to the transfer of shares or other instruments of ownership issued by an institution under resolution, or all or any of the assets, rights or liabilities of an institution under resolution to a purchaser that is not a bridge institution. The acquirer of a credit institution shall have the appropriate authorisation to carry out the business it acquires by virtue of the sale of business order.
The bridge institution tool
Once a bridge institution has been established, the resolution authority transfers to it all or any of the assets, rights or liabilities, shares or other instruments of ownership issued by the institution under resolution. The bridge institution must be a legal person with the appropriate authorisation to carry out the business or provide the services transferred to it as a result of the resolution proceedings and complies with the applicable supervisory requirements. The lifespan of a bridge institution cannot exceed two years, but can be extended under certain conditions.
The asset separation tool
The asset separation tool refers to the mechanism for effecting a transfer of assets, rights and liabilities of an institution under resolution or of a bridge institution to one or more asset management vehicles, pursuant to a respective decision of the resolution authority. It should be noted that an asset management vehicle is a legal person which is wholly or partially owned by one or more authorities, among which is the Resolution Fund or the resolution authority. In addition, it is controlled by the resolution authority and is set up for the specific purpose of acquiring all or any of the assets, rights and liabilities of an institution under resolution or a bridge institution.
Asset management vehicles manage the assets transferred to them with a view to maximising their value until their sale or orderly liquidation.
The bail-in tool
The bail-in tool consists in writing down or converting the liabilities of an institution into equity, following a respective decision of the resolution authority. This particular resolution tool can be used to recapitalise an institution . This restores the ability of the institution to comply with the conditions of its authorisation and allows for its critical functions to continue uninterrupted, thus securing its long-term viability.
Furthermore, the resolution authority can use this tool in combination with any of the other three tools (1 to 3). The aim is to convert liabilities into equity, or reduce the principal amount of the debt instruments of the institution under resolution that are to be transferred to a bridge institution or under the sale of business tool or asset separation tool.