The lessons learnt from the economic-financial crisis started in 2008 necessitated worldwide the introduction of regulation which entitled resolution authorities with powers in order to manage the crisis of failing financial institutions without any recourse to public money. The European Commission (Commission) approved enormous State aid for bailing out the financial sector between 2008 and 2010 therefore the public debt highly increased in most of the countries. Since then, it has been obvious that a financial crisis cannot be managed with the same tools. A common thinking was started to elaborate prudential requirements and a resolution framework which on one hand facilitates the resilience of financial institutions and on the other hand manages their crisis and restores their long-term viability by minimising the usage of public money.
The current study scrutinizes the place of the bank resolution framework compared to other branches of law in the legal system, its definition, objectives and the evolution of the present regulation and its roots in the individual legal systems of certain countries.
In order to understand better the evolution of the resolution regulation, it is important to set out procedures we actually consider as resolution. Although the Directive 2014/59/EU establishing a framework for the recovery and resolution of credit institutions and investment firms (BRRD) does not contain any definition for resolution, the Hungarian Act XXXVII of 2014 on the further development of the system of institutions strengthening the security of the individual players of the financial mediating system (Hungarian Resolution Act) sets out the definition of resolution as a restructuring procedure aiming to restructure an institution or a group which objectives are to secure the continuity of the institution's basic functions, the preservation of the stability of the financial intermediary system and the partly or full restoration of the viability of the institution or the group[1].
If we carefully examine the elements of the definition, it is to be pointed out that restructuring under resolution is purpose limited: securing the continuity of the basic functions, preservation of the stability of the financial inter-
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mediary system and partly or full restoration of the viability. The Hungarian Resolution Act does not define the definition of basic function, however, it should be assumed that its meaning corresponds to critical functions: activities, services or operations the discontinuance or limited substitution of which is likely in Hungary or in other Member States, to lead to the disruption of services that are essential to the real economy or to disrupt financial stability due to the size, market share, external and internal interconnectedness, complexity or cross-border activities of an institution or group, with particular regard to the substitutability of those activities, services or operations.[2] Securing the continuance of basic/critical functions is linked closely to the preservation of financial stability since their absence would hamper the latter. It is to be highlighted that the preservation of critical functions does not pertain to partly or fully restore the viability of the institution or the group since it can be feasible that the critical functions of the institution under resolution are transferred to a third party and the institution under resolution is liquidated under normal insolvency procedure, therefore - in our view - the definition of resolution is not identical with 'bank rescue' since its main aim is the preservation of critical functions instead of the restoration of the viability of institution under resolution. Although the resolution strategy can be evolved in a way that resolution preserves the remanence of the institution after resolution (for example an open bail-in strategy).
According to the definition elaborated by the Single Resolution Board (SRB), resolution authority of the significant institutions and groups within the banking union, resolution is the restructuring of the bank via applying resolution tools in favour of protecting the public interest, including the maintenance of critical functions and minimizing the recourse to taxpayer's money[3] which also underpins our view that restoring viability of the institution under resolution as a whole is not a necessary objective of resolution. The Bank of England considers resolution as a procedure managing a bank crisis by securing the maintenance of critical functions and the protection of public funds and financial stability in an orderly manner[4]. This definition does neither refer to the restoration of viability and at the same time we would like to highlight the element of orderly manner. In our opinion, this means that the individual crisis management should not have negative impacts on financial stability.
Beyond the abstract definition of resolution elaborated by the different resolution authorities, BRRD and the relevant national transposing acts provide exhaustive list of resolution objectives[5]:
- to ensure the continuity of critical functions;
- to avoid a significant adverse effect on the financial system, in particular by preventing contagion, including to market infra-
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structures, and by maintaining market discipline;
- to protect public funds by minimising reliance on extraordinary public financial support;
- to protect covered depositors and investors;
- to protect client funds and client assets.
Regarding the relation of resolution objectives to each other and whether all resolution objectives shall be achieved during a resolution process, the following consequences can be drawn in accordance with BRRD and the Hungarian Resolution Act.
According to BRRD 'when applying the resolution tools and exercising the resolution powers, resolution authorities shall have regard to the resolution objectives, and choose the tools and powers that best achieve the objectives that are relevant in the circumstances of the case'[6]. Beside that 'the resolution objectives are of equal significance, and resolution authorities shall balance them as appropriate to the nature and circumstances of each case'[7]. Based on the Hungarian Resolution Act - similar to BRRD - those measures and powers shall be chosen which serve best the resolution objectives regarding the circumstances of the concrete case[8], but at the same time the Central Bank of Hungary (MNB) acting in its capacity as resolution authority shall enforce all resolution objectives taken into account the circumstances of the concrete case[9]. In our view, although the Hungarian Resolution Act prescribes that all resolution objectives shall be enforced, but by inserting the clause in the sentence that the circumstances of the concrete case shall be taken into account, which in our interpretation means that enforcing all resolution objectives is rather an effort since there can be circumstances under which there are objective impediments to achieve a certain resolution objective. For example, when an institution does not dispose of any deposits, therefore the resolution objective of protecting covered deposits cannot be achieved.
In Hungarian, in the course of the ordinary conversation we understand under the definition of failing (fizetésképtelenség) when on the one hand the debtor is not able to pay its liability due and on the other hand when the value of its assets is less than its outstanding debt[10]. The Hungarian Resolution Act - in line with BRRD - applies the definition of failing in broader context than the Act XLIX of 1991 on bankruptcy procedure and insolvency procedure (Hungarian Bankruptcy Act). Opposite to the Hungarian Bankruptcy Act which mentions as the reasons of failing the debtor's failure to settle or contest his previously uncontested and acknowledged contractual debts within twenty days of the due date, if the enforcement procedure against the
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debtor was unsuccessful, or the debtor's liabilities exceeds its assets[11], the Hungarian Resolution Act considers every reason which establishes the revocation of authorization, including when extraordinary public financial support is required.
The definition of failing is important since an institution can only be placed under resolution when it is failing or likely to fail, no alternative measures, including the recovery and early intervention measures ordered by the supervisory authority and the resolution is in the public interest[12].
As mentioned above resolution is a special crisis management procedure for failing institutions. To that end it is important to map its relation to other branches of law which also deal with the failing of institutions such as insolvency law. In general, the legal literature pulls under the scope of insolvency procedures bankruptcy and liquidation procedure, moreover the debt management procedure of local municipalities. The Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings [13] considers as insolvency procedure - when further conditions are met and among others - the debtor is rescued, the debt is arranged, a debtor is totally or partially divested of its assets for the purpose of reorganization or liquidation and insolvency practitioner is appointed etc.[14]. This regulation determines which type of procedure shall be deemed as insolvency procedure: in Hungary only the bankruptcy and liquidation procedures. It is to be noted that institutions are out of the scope of the regulation since special regulations refer to the relevant procedures of these entities and national authorities have wide range of powers to intervene[15]. Based on the above, in our view, resolution procedures do not belong to insolvency procedures.
Since we approach to these procedures from the perspective of credit institutions and investment firms it is to be pointed out first that credit institutions cannot be placed under bankruptcy procedures in Hungary[16]. Moreover, only credit institutions and investment firms are under the scope of the Hungarian Resolution Act, most of the provisions of the regulation dealing with the recovery and resolution of the central counterparties are entering into force in 2022, the proposal of the Commission of the recovery and resolution framework for the (re)insurance sector was published in September 2021[17]. Taken into consideration the different aims of the procedures, it is important during a bankruptcy procedure that the institution and the debtors are able to reach an agreement, in liquidation the most important principal is the enforcement of the creditor's interests. Opposite to liquidation the main objective of resolution is to preserve financial stability even against the interests of creditors, moreover the burdens of
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resolution after the shareholders shall be borne by creditors.
From the aspects of procedural law, the bankruptcy and insolvency proceedings are civil non-contentious proceedings, by contrast resolution proceedings are administrative procedures, moreover in certain Member States are bound by court approval. In Hungary, MNB has the power to decide whether to place an institution under resolution, but the court is responsible to put an institution under liquidation procedure.
In the process of searching the way out from the great economic crisis lasted between 1929 and 1933 the primary aspect was to restore the confidence against the financial intermediary system. Based on the Banking Act of 1933 the Federal Deposit Insurance Corporation (FDIC) was founded which mission has been unchanged ever since: insurance of deposits and mitigation of the economic disturbances caused by insolvency of banks.
At the beginning, between 1933 and 1935 the only available method for dealing with individual crisis was to transfer covered deposits (purchase and assumptions - P&A) from the failing banks. In case FDIC was not able to carry out the transfer within a sufficient timeframe, it founded a Deposit Insurance Bank (DINB), which was responsible for providing continuous access to covered deposits and their reimbursement[18].
From the beginning it had been conspicuous that the reimbursement of the depositors was very costly, therefore it was encouraged that failing institutions were to merge with other viable institutions or their deposit stock, or other valuable assets were transferred. In favour of that, FDIC was entitled to grant loan for the difference between the value of assets and liabilities, to purchase assets, provide guarantee for the merge. As an offset for the funding, it could receive reimbursement from the assets not affected by the transfer. It is important to point out that instead of FDIC, the supervisory authority (Comptroller of the Currency) was responsible for deciding on the termination of the institution under normal insolvency proceeding. After a transfer managed by FDIC, the residual part of the institution was placed under liquidation procedure and FDIC notified its creditor claim together with the uninsured depositors against the institution under liquidation. Taking into consideration that the liquidation of institutions needed special expertise, in course of time FDIC was appointed for the management of the assets under liquidation (receivership). Since 1951, based on the pressure of the Senate, a cost test was applied to decide the transfer of assets or the pay out of deposits seem to be better option to manage the crisis situation[19].
As of the 1960's it is to be noted that before the transfer an advantageous
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method was to close the bank and a receivership had been created. An approval of the stockholders was not necessary prior to the transfer[20].
Managing a crisis of a large banks had not been taken place till the 1970's when P&A transactions were carried out regarding the Franklin National Bank (Franklin) the twentieth largest bank of the US and the United States National Bank (USNB). One of the main cornerstones of the future resolution framework is that distinctions cannot be made among creditors of the same class. In the case of USNB certain creditor's claims were not transferred against deposits of the same class therefore the creditors after a three years lawsuit received compensation since it was an unjustifiable discrimination.
In the Franklin-case - since it was a large bank - finding an appropriate purchaser needed longer time (five months) compared to the smaller P&A transactions. During this period of time, a significant deposit outflow was observed. The shortfall was funded by the Federal Reserve Bank of New York. Later FDIC had also important role regarding the institutions which remained open during their crisis management procedure (Open-Bank Assistance). The rationale was behind that it was doubtful whether the relevant federal central bank is able to provide temporary funding for an insolvent institution. The first such case was happened with American Bank & Trust in 1971 when it received temporary funding from FDIC because the maintenance of its certain functions was essential for the community[21]. The bank sold shortly after receiving the temporary funding.
Based on certain views, on the eve of the economic crisis of 2008 the US regulation was capable to manage individual crisis of institutions, but it was unable to resolve holding companies in a coordinated manner [22], although a significant part of the banks of the US financial intermediary system was owned by bank holding companies. In order to remove that shortfall, the Dodd-Frank Act has founded the resolution authority for systemic relevant entities Orderly Liquidation Authority, OLA), which was also responsible for the resolution of bank and non-bank holding companies[23].
It is important to point out that as a rule, the unviable holding companies shall be liquidated also in the future as well except when it would have harmful effect on the financial stability in the US and based on the measures provided by the Dodd Frank Act cannot be overridden or minimalised. It is to be noted that the resolution powers of OLA have not been applied in practice yet[24].
To facilitate the funding in resolution, the Dodd Frank Act founded the Orderly Liquidation Fund (OLF). Instead of ex-ante contributions institutions shall make ex-post contributions only in cases where the incomes from the management of the assets of the institution under resolution does not cover the funding provided by OLF. The claims of OLF precede every other claim in the creditor hierarchy. OLF is also entitled to receive loan from the US Treasury[25].
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As of 2012[26] the bank holding companies with at least 50 million dollars asset stock shall draw up resolution plans every year in which it is demonstrated how they planned to resolve from the crisis situation in the course of resolution. Beside that the institutions are also obliged to publish summary about their resolution plans on the website of FDIC.
The US framework has contributed lot to the development of resolution strategies which method is applied across the world. The concept of the single point of entry (SPE) strategy was elaborated[27]. Under that resolution strategy the banking group is resolved through placing only the institution under resolution which controls the entire banking group irrespective of the fact in which group member the causes of the failure emerged. Except the institution typically at the top of the banking group, the other group members operation remains untouched.
In theory, the SPE strategy secures the continuous access to critical functions and preserves the value of the group[28]. SPE strategy is effective especially for the resolution of globally systemic relevant institutions[29].
FDIC intervenes at the level of the holding company and the capital and liabilities at the level of the holding company provides the remanence of the subsidiaries. In practice, FDIC establishes a bridge institution in the frame of the receivership which takes over the assets of the holding company, including its shares in the subsidiaries. In order to capitalize the bridge institution, the claims of the shareholders and creditors of the holding company are converted to the equity of the bridge institution and as a next step the bridge institution is sold on the market with respect to the market economic principle. Although FDIC seeks to rely on market resources in the course of implementing the SPE strategy, but it has the possibility to have access to shortterm liquidity of the OLF and can provide guarantee for the creditors of the bridge institution[30]. Regarding that the main difference between the US and the EU resolution framework is that beside indirect bail-in explained above (capitalization of the bridge institution through bail-in) the direct bail-in is allowed in the EU which means that the losses of the institution under resolution is absorbed and it is directly recapitalised by applying the bail-in tool[31].
It is to be highlighted that there are doubts whether Total Loss Absorbing Capacity (TLAC) eligible investors will be able to absorb losses without triggering any contagion effects. TLAC is introduced by the Basel seated international organization, the Financial Stability Board (FSB) in 2015. It is a requirement for G-SIBs to hold a minimum requirement of capital and TLAC-eligible liabilities which can absorb losses or converted into equity in case of resolution[32].
Critics have also been made regarding the wide range of powers allocated to FDIC as resolution commissioner. There is also a need to amend the Bankruptcy Code because of the limited accountability of FDIC[33].
In summary, the evolution of the US resolution framework in the last
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almost 80 decades had and still has a great impact on the international and national developments in the field of deposit protection and resolution. The main principles (protection of covered deposits, no creditor worse-off, etc) and the conditions for their practical achievement serve as an alignment point for other countries. In further section of the current study, we will see how other legal regimes relied on the US system.
Beside the US experience, linked to the economic crisis of 2008 and taking into account the practices, some countries had already introduced some kind of resolution framework, before the EU introduced harmonised rules.
As a result of the changes in the economic policy of the United Kingdom (UK) in the early 1980s such as deregulation in the financial sector developed an attractive environment to turn into one of the financial centres of the world. Although the economic world crisis of 2008 threatened the UK's banking system seriously therefore the legislator under a significant time pressure adopted an emergency bill for the financial sector (the Banking Special Provisions Act 2008) and the after that the so called Banking Act 2009 which contained the provisions concerning resolution as well. The Banking Act influenced BRRD to a great extent and despite Brexit the policy papers of the Bank of England as resolution authority in the field of resolution have been treated as best practices for legislation both at European union and national levels as well[34].
The UK regulation differentiate among three phases of resolution and reorganization attached to. The first is the phase of stabilisation which main aim is to preserve the continuity of critical functions through immediate measures. These measures can be transfer to third persons or bail-in. In the professional terminology bail-in refers to the resolution tool which is to be applied after own funds absorbed losses and contributed to the recapitalisation to the maximum extent. In the frame of bail-in, bail-in eligible liabilities are written down or converted to Common Equity Tier 1 (CET1). In order to avoid any bank runs, the measures are implemented as fast as possible, typically during a weekend (resolution weekend). The second phase is the restructuring phase where in order to eliminate the reasons causing the failing of the institution, significant reorganization measures shall be implemented both regarding the affected institution and its business model. As Andrew Gracie stated in 2014 already, the bail-in tool itself cannot override the difficulties of the institution but it let us time to reorganize the institution[35]. The third phase refers to the termination of resolution when the resolution authority does not exercise the ownership rights over the institution under resolution anymore[36].
In 2013 the two largest banks of Cyprus, Bank of Cyprus (BoC) and Cyprus Popular Bank (Laiki Bank) were
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failing, because they suffered significant losses on the Greek state bonds. Based on the valuation of the International Monetary Fund (IMF), the bailout of the banks was not feasible since it would have consumed 65 per cent of the gross domestic product[37]. Only resolution provided a reasonable solution, therefore the Cypriot Parliament adopted the resolution act in March of 2013. By applying the provisions of the law, Laiki Bank was resolved via bailin of the liabilities against shareholders, bondholders and not covered depositors. Certain assets and the emergency liquidity loan provided by the Cypriot central bank to Laiki Bank were transferred to BoC, the not covered deposits were converted to shares[38]. The Cypriot case was the first where creditors, including not covered depositors had to contribute to the burdens of the reorganization. The Cypriot resolution act relied on the first versions of the proposals for BRRD. However, some provisions of the final BRRD have taken into account the lessons learnt from the Cypriot case[39].
The initial phase of the economic crisis of 2008 - because of the limited exposures to the US mortgage bond market - affected less the Greek banks, although they were hit by the sovereign debt crisis of 2009. The individual credit institutions received mostly EU and IMF funding, mainly through state recapitalisation.
As a consequence of the crisis, the banking system became more concentrated, the four large banks (Alpha Bank, Eurobank, National Bank of Greece, Piraeus Bank) took over viable assets of several smaller institutions. As of 2011, the Bank of Greece received resolution powers. Before transposing BRRD, 13 resolution procedures were carried out. Out of the 13 procedures the sale of business tool was applied in 11 and the bridge institution tool in 2 procedures. Shortly after BRRD had been implemented in 2015, the Cooperative Bank of Peloponnese was placed under resolution.
The Hellenic Financial Stability Fund (HFSF) provided funding for the resolutions. The objective of HFSF was to contribute to the stability of the Greek banking system in favour of the public interest[40].
The capital of HFSF was provided partly from the EU, the IMF and the Greek State[41]. The law regulating HFSF declared that the fund does not belong to the public sector in broader context, it has operational and economic independence and can operate exclusively based on the rules of the market economy[42]. In our view this provision is inserted not to treat the funding provided by HFSF as State aid. The main responsibilities of HFSF are: providing funding in the form of capital to credit institutions taken into account the EU State aid rules, monitoring whether the received aid was used properly and to ensure that the relevant credit institutions operate properly. Beside that the HFSF exercises the ownership rights over credit institutions to which it provided capital support, grants loan to the Hellenic Deposit and Investment
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Guarantee Fund (HDIGF) and ensures the management of the non-performing loans of the credit institutions[43].
HFSF played a role in the precautionary recapitalisation of Eurobank, National Bank of Greece and Piraues Bank in 2014 and 2015.
The Portugal Resolution Act[44] entered into force in 2012 which was amended because of the resolution of the large banking group Banco Espirito Santo (BES)[45]. The resolution act has already taken into account the international debates regarding the proposals for the resolution framework and contained the principles and objectives of resolution, the possibility for the application of the sale of business and bridge institution tools, but not the bail-in[46]. Therefore, in the case of BES, the bridge institution tool was applied, however a later stage of the operation of the bridge bank, the bail-in tool had to be applied[47].
The economic crisis of 2008 affected mainly the cooperative banks (Cajas). The solely state-owned Fund for Orderly Bank Restructuring (FROB) was established in 2009 and its task was to carry out the restructuring procedures and to forward State aids towards the banks. Apart from its state-owned nature, the credit institutions had representatives in the governance body. Beside FROB, the deposit guarantee fund was also entitled to provide aid to institutions. Spain received 100 billion euro from the European Stability Mechanism to recapitalize the banking sector. In 2012, FROB received resolution powers as well. After amending the relevant law, the representation of credit institutions in the governance body was terminated, only the representatives of the Bank of Spain and the Ministry of Economy and Competitiveness remain members of it. The restructuring was applied to credit institutions which needed State aid to the restoration of their viability and it was likely that they could pay it back or their resolution was not feasible since it was a serious threat on the financial stability[48]. In the Spanish law the conditions for resolution were included same as in the latter BRRD: in favour of the public interest and maintaining financial stability when the credit institution was not viable or became unviable probable in the near future and its winding up in liquidation was to be avoided.
A further important element of the crisis management framework was the independent asset management company (SAREB) which was owned by the FROB, the deposit guarantee fund and private investors. It took over the real estate portfolio of the banks received State aid. As an offset these institutions received State guaranteed junior bonds issued by SAREB.
Similar to Portugal the regulation took into account the BRRD under development. Therefore, FROB received power to oblige in the frame of compulsory burden-sharing shareholders, owners of hybrid capital instruments and subordinated debt instruments
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to loss absorption to the maximum possible extent and with a view of the 'no creditor worse-off' principle[49]. As a consequence of the concrete procedures, the owners lost entirely their shares and preferential shareholders and subordinated creditors also bore losses in a way that CET1 was written down and the subordinated creditors could choose between receiving own funds instruments or junior bonds. In several cases, the preferential shareholders were natural persons. In case of institutions which were not introduced in the stock market the deposit guarantee fund could purchase the shares of the former retail owners of hybrid instruments[50]. As a result, several lawsuits could be avoided. The exercise of the resolution powers was divided between the Bank of Spain and FROB. The Bank of Spain decided whether the conditions for resolution were met, FROB made proposal for the resolution action plan which was approved by the Bank of Spain and implemented by FROB[51]. There was the possibility of remedy against the decisions of FROB and the early intervention, restructuring and resolution decisions had to be approved by the Bank of Spain therefore the central bank could also be suable.
The remedies against the measures of the FROB regarding hybrid capital and subordinated debt instruments were limited[52]. The remedy could not cover cases when the FROB breaches the conditions for issuance[53].
The Spanish experience shows that there should be a learning period between bail-out and bail-in to minimise the risk of litigation[54].
Five banking packages were adopted in Denmark to handle the economic crisis. The aim of the 1st package (October 2008) was to avoid bank panic. In favour of that the state guaranteed every deposit and ordinary unsecured claims. The most important measure was from the later resolution point of view the foundation of the Financial Stability Company (Finansiel Stabilitet) which is exclusively state-owned and was responsible for the winding-up of institutions in an ordinary controlled manner so the clients of the affected institutions could carry out their banking transactions uninterruptedly[55]. Finansiel Stabilitet took over the control of these institutions and searched for other institutions in stabile position which can acquire the viable parts, business lines of the failing institutions and the residual part of the institution went into liquidation.
The threshold for the coverage of deposits was raised to 750 thousand Danegeld after the maturity of the general state guarantee and the Danish government granted hybrid loan up to 100 thousand Danegeld in order to strengthen the capital position of the institutions during the implementation of the 2nd banking (credit) package (October 2009).
The 3rd exit package (October 2010) cancelled the general state guarantee and opened the possibility for the loss absorption of senior uninsured credi-
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tors, deposits above the 100 thousand euro threshold in order to restart the market mechanism and reprice the risks[56].
The 4th consolidation package (August 2011) provided incentives for viable institutions to take over the liabilities of failing institutions. The consolidated procedure included the compensation of the state and the guarantee fund, state guarantee in case of a merger and an insurance system which was uploaded by annual contributions. Beside that the domestic systemic relevant institutions were identified.
The 5th package ensured (March 2012) that the enterprises had access to sufficient funding sources.
BRRD was adopted in Denmark in March 2015 and entered into force on 1 June 2015. The resolution powers are divided between the Danish Financial Supervisory Authority (DFSA) and the Finansial Stabilitet. The DFSA is responsible for the tasks till the determination of the conditions for resolution. The DFSA draws up resolution plans in cooperation with the Finansiel Stabilitet. The DFSA is responsible for the wording of the decisions on addressing impediments to resolvability and prescribing the minimum requirement of own funds and eligible liabilities (MREL). Among the conditions for resolution, the failing or likely to fail and the 'no alternative measure' conditions are determined by the DFSA. The Finansiel Stabilitet decides about the public interest condition and also responsible for the application of resolution powers and tools[57].
FSB published its policy paper on the 'Key Attributes of Effective Resolution Regimes for Financial Institutions' (Key Attributes)[58] in 2011 which was revised in 2014. This policy paper aims to establish a resolution mechanism for failing systemically important financial institutions. The resolution shall be carried out in an orderly manner and shall be funded by the shareholders and junior creditors. The policy paper relied in large extent on the regulation practices of certain countries. The policy paper emphasizes the importance of resolution regarding cross-border groups and it intended to extend the resolution framework on financial infrastructures since they play a key role in the financial intermediary system, in the maintenance of the critical functions. The Key Attributes considers important at least to draw up recovery and resolution plans regarding domestic systemically relevant institutions and regular resolvability assessments and the development of institution specific co-operations[59].
In the meantime, several other resolution related policy papers were published by FSB including Temporary Stays on Early Termination Rights (October 2011), Information sharing for Resolution Purposes (November 2014), Guidance on Cooperation and Information Sharing with Host Authorities
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of Jurisdictions where a G-SIFI has a Systemic Presence that are Not Represented on its CMG (November 2015), Institution-specific Cross-border Cooperation Agreements (2011)
The greatest impact of the standards published by FSB are in connection with the loss absorption capacity of G-SIBs: Principles on Loss-absorbing and Recapitalisation Capacity of G-SIBs in Resolution Total Loss-absorbing Capacity (TLAC) Term Sheet (2015) (TLAC Term Sheet), Guiding Principles on the Internal Total Loss-absorbing Capacity of G-SIBs ('Internal TLAC'). The first principle of the TLAC Term Sheet summarizes its essence: 'There must be sufficient loss-absorbing and recapitalisation capacity available in resolution to implement an orderly resolution that minimises any impact on financial stability, ensures the continuity of critical functions, and avoids exposing taxpayers (that is, public funds) to loss with a high degree of confidence'. The TLAC standards were implemented in several jurisdiction, in particular in the EU as well by supplementing the rules of the MREL requirement.
State aid provided to enterprises is prohibited as a rule in the EU. Although there are exceptional cases where State aid is allowed in order to remedy serious disturbance in the economy[60]. According to the Communication from the Commission on the application, from 1 August 2013, of State aid rules to support measures in favour of banks in the context of the financial crisis (Banking Communication), 'the evolution of the crisis has required the adaptation of some provisions of the State aid framework dealing with the rescue and restructuring of firms in difficulty while not ruling out the possibility of accessing, exceptionally, significant public support'[61].
The Banking Communication pointed out the regulatory developments regarding the establishment of the banking union[62] and the future regime for the recovery and resolution of credit institutions and that the adaptation of the crisis communications to the new framework could 'ensure more decisive restructuring and stronger burden-sharing for all banks in receipt of State aid in the entire single market'[63].
From a resolution point of view, restructuring aid and impaired asset measures are important to mention. In that regard the State aid regime prescribed adequate burden-sharing measures: bank, its shareholders and creditors (hybrid capital and subordinated debt holders)[64]. The framework does not require the contribution from senior debt holders, including depositors[65]. Furthermore, in order to eliminate the reasons why the institution run into difficulty, to maintain long-term viability and to mitigate the advantages of aid on the beneficiary behavioural and structural commitments have to be undertaken[66].
BRRD built on the crisis communications. It set out that when interventions involve State aid, including the intervention of the deposit guarantee schemes and resolution funds - which
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are also within the scope of the State aid framework and in particular the Banking Communication - these should be assessed in accordance with the relevant State aid provisions[67]. It is to be noted that BRRD introduced a stricter burden-sharing mechanism which can even reach beyond shareholders, hybrid capital and subordinated debt-holders depositors as well, except for covered deposits.
In 2009, the European Council set sights[68] on the creation of the Single Rulebook which would incorporate the single regulatory framework regarding the EU financial sector for the completion of the internal market in the sector of the financial services[69]. The Single Rulebook envisaged single prudential requirements, more enhanced depositor protection and the establishment of the crisis management rules for the banks.
The Commission outlined its intention for the drawing up of BRRD in its communication in October 2009 encouraged by the relevant amendment of the Banking Act in the UK[70]. The
Commission revealed its view on the necessity of establishing national resolution funds in 2010[71] and its proposal on the resolution powers and tools[72].
Building on the piles fixed by FSB, the Commission published its first proposal on the harmonised resolution framework in 2012. The final version of BRRD was adopted in June 2014 and entered into force on 2 July 2014 and had to be transposed by the Member States till 31 December 2014. The transposed provisions of the directive had to be enter into force as of 1 January 2015 with the exception of the bail-in tool which had to be implemented in the national resolution toolbox till 1 January 2016 at the latest. Currently, the resolution toolbox contains the sale of business, the bridge institution, the asset separation and the bail-in tool. It is allowed for the Member States to apply other tools as well provided that 'they do not pose obstacles to effective group resolution'[73] and 'they are consistent with the resolution objectives and general principles[74]'.
BRRD mandated the Commission in the field of resolution to adopt delegated acts based on the preparation work of EBA of regulatory technical standards (RTS) and implementing technical standards which were adopted and entered into force till the end of 2018.
In favour of implementing the TLAC-standards in the EU 'the Commission committed itself to bringing forward a legislative proposal by the end of 2016 that would enable the TLAC standard to be implemented in Union law by the internationally agreed deadline of 2019'[75]. The amended version of BRRD entered into force on 27 June 2019. The TLAC-standards introduced minimum thresholds for own funds and TLAC-eligible liabilities /16 per cent of the risk-weighted assets (RWA) of the resolution group and 6 per cent of the of the Basel III leverage ratio denominator (LRE) as
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from 1 January 2019 and 18 per cent of the resolution group's RWA and 6.75 per cent of LRE). The minimum thresholds, the qualitative requirements towards the TLAC-requirement were transposed in the Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and amending Regulation (EU) No 648/2012 (CRR) while the institution specific add-on for G-SIIs and the institution-specific requirement for non-G-SIIs, were implemented by modifying the relevant provisions of BRRD[76].
Based on BRRD the Member States shall designate public administrative authority or authorities entrusted with public administrative powers in order to carry out resolution related tasks and obligations[77]. Although BRRD does not prescribe which authorities in the Member States shall be responsible for the resolution function, but at the same time expressively set out that central banks, ministries, authorities responsible for the prudential supervision can also be designated. If the authority is entrusted with other functions beyond resolution, operational independence shall be ensured between the resolution function and supervisory or other functions to avoid conflicts of interest.
The staff participating in exercising the resolution function shall be structurally separated from the staff involved in other functions of the relevant authorities and shall be under separate reporting lines obligation[78].
Regarding the designation of resolution authorities, different solutions were chosen in the EU. In 21 Member States[79] a single authority is responsible for the resolution function, in 7 Member States[80] it is divided among more authorities, mostly separating the resolution planning and execution tasks. In 16 Member States[81] the central banks have resolution functions, under which in 11[82] - including Hungary - every resolution task is carried out by the central bank.
In parallel of the preparation of BRRD, the Single Rulebook set sights on the implementation of the banking union which consists of three pillars: the Single Supervisory Mechanism (SSM), the Single Resolution Mechanism (SRM) and the European Deposit Insurance System (EDIS). The operation of the SRM is regulated by Regulation (EU) No 806/2014 of the European Parliament and of the Council of 15 July 2014 establishing uniform rules and a uniform procedure for the resolution of credit institutions and certain investment firms in the framework of a Single Resolution Mechanism and a Single Resolution Fund and amending Regulation (EU) No 1093/2010 (SRM-regulation).
The SRM-regulation established the Single Resolution Board (SRB) which is the resolution authority for certain institutions within the banking union. The tasks divided between the SRB
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and the national resolution authorities. Under the remit of SRB belong entities that are not part of a group and for groups which are considered to be significant in accordance with Article 6(4) of Regulation (EU) No 1024/2013 or in relation to which the ECB has decided to exercise directly all of the relevant powers and cross-border groups[83]. The SRB is responsible for drawing up resolution plans and to adopt the decisions regarding resolution. Beside that a participating Member State in the banking union is entitled to decide to transfer the resolution powers entirely to the SRB[84].
It is important to note that although the decisions about applying resolution tools are made by SRB, their implementation is the responsibility of the national resolution authorities in line with the instructions of SRB.
The modern Hungarian crisis management framework - similar to the US developments, but 50 years later - goes back to the foundation of the Hungarian Deposit Insurance Fund (HDIF) in 1993. The law establishing HDIF differentiated between the tasks of HDIF such as pay outs of depositors, preventing pay outs, and crisis management tasks similar to resolution[85].
The Act CXII of 1996 on Credit Institutions and Financial Institutions set up an absolute and relative limit for the intervention of HDIF Based on the Act it was qualified as a relative cost limit that 'The Fund shall choose a solution in order to avoid the freezing of deposits which causes the least long-term loss for the depositors, credit institutions and for the central state budget'. Absolute cost limit meant that the aggregate sum of the conditional and unconditional commitments should not exceed the expected sum of the reimbursements of insured deposits and any costs of the Fund arose relating to their pay out.
The first preventive usage of the financial assets of HDIF was in case of the recapitalisation of Agrobank in 1995 when HDIF contributed in amount of HUF 500 million to the raising of the share capital. As an example for taking into account the relative cost limit was in the case of Iparbankház where its orderly winding up in cooperation with the then supervisory authority (State Supervisory Authority for Banks) prevent the HDIF from a HUF 3 billion pay out. The supervisory authority obliged the bank to elaborate an action plan aiming to downsize the bank and as a final goal, the rendering of its authorization within a stated deadline. The crisis management of Iparbankház showed the aim of the crisis management is the avoidance of the freezing of deposits instead of rescuing the bank[86].
In the course of the crisis management of Realbank HIDF became the majority owner of the bank with a capital injection of HUF 3 billion. HDIF'
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motivation was to avoid a large reimbursement obligation. Based on the concept, HDIF would have searched for a private investor in favour of the sale of the bank, in the temporary period of time the bank would have operated as a 'bridge institution[87]. After acquiring the majority ownership HDIF assessed the position of the bank and further losses, negative capital were determined which were beyond the cost bearing capacity of HDIF enabled by the law. Therefore, HDIF could not achieve the restoration of the normal bank operation and the preparation of the bank for the sale with searching for purchaser. Finally, the authorization of the bank had to be revoked and depositors reimbursed which was the largest reimbursement case of HDIF at that time[88].
In Hungary, the central bank has been the designated resolution authority since 1 October 2013[89] the operational independence is ensured by the Act CXXXIX of 2013 on the Central Bank of Hungary pointing out that the function can only be expressed under the subordination and control of the governor of MNB or directly any vice-governor[90].
Beside that in the name of MNB the Financial Stability Council (FSC) makes decisions within the frames determined by the Monetary Council concerning decisions on placing an entity under resolution, applying resolution measures[91]. Based on decree issued by the governor of MNB certain powers are delegated to executives[92].
Hungary was among the first Member States in the EU which transposed BRRD, the transposition procedure carried out parallel to the EU legislation, so the Hungarian Parliament adopted the Hungarian Resolution Act. Certain provisions (for example the setting up of the Resolution Fund) entered in to force still in that month, but most of the provisions - such as the resolution toolbox, including the bail-in tool - became effective 60 days later. The law has been amended in the meantime. The law tailored to the review of the BRRD of 2019 based on its last two amendments which entered into force on 26 December 2020 and on 2 August 2021.
Based on the mandate provided by the Hungarian Resolution Act the detailed rules of the eligible costs regarding the application of resolution tools and exercise of resolution powers concerning MNB acting in its capacity as resolution authority and the Resolution Fund[93], the detailed rules of the selection of independent valuers and the system of the tender, the conditions for admitting to the register[94], moreover the detailed rules of the business reorganisation plan after bail-in[95] are regulated in government decrees. The governor of MNB has determined in governor decree the quantified criteria of breaching the requirements to be examined regarding the resolution condition failing or likely to fail[96].
The detailed rules of the burden-sharing of the Resolution Fund in case of bail-in can be regulated in government decree, although it has
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not been elaborated yet. It is to be noted that both the Hungarian Resolution Act and the level 1 union legislation contain detailed rules in that regard. Beside that the governor of MNB can regulate the data collection obligation regarding the information necessary for resolution planning and execution and the limitation of investments regarding the MREL-eligible liabilities and the methodology of determining the public interest resolution condition. In our view, the regulation of the data collection obligation regarding the resolution planning is not necessary in an MNB decree since it is regulated in a European Union regulation which has direct effect in the Member States[97].
The economic crisis of 2008 revealed that bail-outs and relying on tax payer's money cannot be a sustainable solution for managing individual failing of institutions, therefore a need emerged to create a framework which requires sufficient burden-sharing requirements from shareholders and creditors. There was a wide consensus among the countries that the main goal of resolution shall be the preservation of critical functions and core business lines which have role in maintaining financial stability instead of rescuing an institution as a whole. The legislators both at international and EU-level did not need to find out fully new methods for resolving institutions, they could draw on practices of different countries.
In our view, the necessity of individual bank crisis called the resolution regulations into being at national level in the EU before the harmonisation of the resolution framework, especially in countries which banking systems were hit by not only the economic crisis of 2008 but the following euro crisis (for example Greece) of the early 2010s as well. A best practice example was the decades experience of FDIC. Sometimes the emergency situation of avoiding contagion effects triggered an immediate introduction of the resolution framework (for example in Cyprus in 2013). Mostly transfer tools were applied such as the sale of business, bridge institution (Portugal) and asset separation tool (Spain), the bail-in only under exceptional circumstances (Cyprus). Although, it is to be pointed out that the bail-in tool was construed for large, systemic relevant institutions, it has been only applied to small institutions yet. OLA has not exercised its relevant powers yet regarding these types of institutions. Regarding the resolution objectives the protection of covered depositors and the avoidance of the contagion effects in order to maintain financial stability were always to be achieved.
The direct root case of the single EU resolution framework was the lessons learnt from the management of the economic crisis of 2008. The main elements were based mostly on the FSB standards but drew on the FDIC experience as well with the exception that the bail-in tool especially its compulsory application has a more significant
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role in the EU system in line with the State aid framework.
As mentioned above, Hungary was among the first Member States which transposed BRRD.
Meanwhile, the loss absorption and recapitalization capacity of the institutions is strengthened with the completion of the provisions regarding the MREL-requirements by transposing the TLAC-standards. It can be measured after 1 January 2024 (end compliance date for fulfilling the MREL-requirement) in practice how the advanced regulatory requirements for maintaining sufficient loss-absorbing recapitalization capacity will contribute to the resilience of the institutions. It seems that the legislator is engaged to extend the legislation to other types of financial institutions since the recovery and resolution framework for CCPs has already been adopted and proposal for the directive of the recovery and resolution on the (re)insurance sector was published by the Commission in September 2021. ■
NOTES
[1] Hungarian Resolution Act Section 2 (1)
[2] Hungarian Resolution Act point 42 of Section 3
[3] SRB: What is resolution? https://srb.europa.eu/en/content/what-bank-resolution Downloaded: 2 May 2020.
[4] Bank of England: https://www.bankofengland.co.uk/financial-stabuity/resolution 2020 Downloaded: 2 May 2020
[5] BRRD Art 31
[6] BRRD Art 31 (1)
[7] BRRD Art 31 (3)
[8] Hungarian Resolution Act Section 16 (1)
[9] Hungarian Resolution Act Section 16 (3)
[10] Éless Tamás, Juhász Edit, Juhász Imre, Kapa Mátyás, Papp Zsuzsanna, Somlai Zsuzsanna, Szécsényi-Nagy Kristóf, Timár Kinga, Tóth Ádám, Török Judit, Varga István: A polgári nemperes eljárások joga, Eötvös Kiadó, 2014, page 297
[11] Hungarian Resolution Act Section 17 (2)
[12] Hungarian Resolution Act Section 17 (1)
[13] Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings
[14] Regulation (EU) 2015/848 Art (1)
[15] Regulation (EU) 2015/848 Recital 19 of preamble
[16] Banking Act Section 52 (1)
[17] Proposal for a directive of the European Parliament and of the Council establishing a framework for the recovery and resolution of insurance and reinsurance undertakings and amending Directives 2002/47/EC, 2004/25/EC, 2009/138/EC, (EU) 2017/1132 and Regulations (EU) No 1094/2010 and (EU) No 648/2012
[18] Gelpern Anna, Veron Nicolas: An Effective Regime for Non-viable Banks: US Experience and Considerations for EU Reform, European Parliament, 2019 pages 21-22
[19] Federal Deposit Insurance Corporation The First Fifty Years The History of FDIC 1933-1983,Washington D.C. 1984: 86
[20] Federal Deposit Insurance Corporation i.m. 88
[21] Federal Deposit Insurance Corporation i.m. 94
[22] Simon Gleeson, Randall Guynn: Bank Resolution and Crisis Management Oxford University Press, 2016 68
[23] Gelpern-Veron: i.m. 12
[24] Gelpern-Veron Nicolas: i.m.29
[25] Gelpern-Veron: i.m.31
[26] Dodd Frank Act 165(d)
[27] US Bankruptcy Code Chapter 14
[28] Gelpern-Veron: i.m.31
[29] Gleeson-Guynn: i.m. 70
[30] Gelpern-Veron: i.m. 31
[31] Gleeson-Guynn: i.m. 187
[32] Gelpern-Veron: i.m. 31
[33] Gelpern-Veron: i.m. 31-32
[34] Gleeson, Guynn: i.m. 221
[35] Andrew Gracie: Making resolution work in Europe and beyond - the case for gone concern loss absorbing capacity http://www.bis.org/review/r140725c.pdf, 2 Downloaded: 25 October 2021
[36] Gleeson, Guynn, 2016, 221-222
[37] World Bank Group: Bank Resolution and Bail-in in the EU: Selected Case Studies Pre and Post BRRD, 21, Financial Case Study Center, 2016: http://www.google.hu/url?sa=t&rct=-j&q=&esrc=s&source=web&cd=2&ved=2a-hUKEwjiiLjBrsPjAhVwxosKHaP4AZIQFjABegQ-IARAC&url=http%3A%2F%2Fpubdocs.worldbank.org%2Fen%2F120651482806846750%2F-FinSAC-BRRD-and-Bail-In-CaseStudies.pdf&usg=AOvVaw0ZD_kvYvT2_DW5E_l3ZWgj Downloaded: 20 July 2019
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[38] World Bank Group, 2016
[39] Panicos Demetriades: Failing banks, bail-ins, and central bank independence: Lessons from Cyprus, VOX CEPR Policy Portal, 21 February 2018.: https://voxeu.org/article/bank-bail-ins-lessons-cypriot-crisis Downloaded: 20 July 2019
[40] HFSF Law 2 (1)
[41] HFSF Law 3 (1)
[42] HFSF Law 1 (1)
[43] HFSF Law 2 (2)
[44] Decree-Law no. 31-A/2012, which was amended by Decree-Law 114-A/2014 and Decree-Law no. 114-B/2014.
[45] José Fazenda Martins "Closed bank resolution" under recent Portuguese law https://www.iflr1000.com/NewsAndAnalysis/Closed-bank-res-olution-under-recent-Portuguese-law/Index/1028 Downloaded: 20 July 2019
[46] World Bank Group 53, World Bank Group, Financial Case Study Center, 2016
[47] Bowman Louise: Novo Banco bail-in may breach BRRD transfer rules, Euromoney, 2016 Downloaded: 28 October 2021; https://www.euromoney.com/article/b12kp0jkw480cg/novo-banco-bail-in-may-breach-brrd-transfer-rules
[48] Royal Decree-Law 24/2012, of August 31, 2012, on the restructuring and resolution of credit institutions 9
[49] World Bank Group: i.m. 67
[50] World Bank Group: i.m. 71
[51] Royal Decree-Law 24/2012, of August 31, 2012, on the restructuring and resolution of credit institutions 9
[52] Royal Decree-Law 24/2012, of August 31, 2012, on the restructuring and resolution of credit institutions point 3.2, 17
[53] Royal Decree-Law 24/2012, of August 31, 2012, on the restructuring and resolution of credit institutions 24
[54] World Bank Group: i.m. 72
[55] World Bank Group: i.m. 25
[56] World Bank Group: i.m. 25,
[57] World Bank Group: i.m. 26,
[58] http://www.financialstabilityboard.org/wp-content/uploads/r_111104cc.pdf?page_moved=1
[59] Key Attributes 5
[60] Treaty on the Functioning of the European Union point b) of Article 107 (3)
[61] Recital 4 of the Banking Communication
[62] Recital 12 of the Banking Communication
[63] Recital 13 of the Banking Communication
[64] Recitals 15 and 41 of the Banking Communication
[65] Recital 42 of the Banking Communication
[66] Commission communication on the return to viability and the assessment of restructuring measures in the financial sector in the current crisis under the State aid rules (2009/C 195/04)
[67] Recital 47 of BRRD
[68] https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52012DC0510&-from=EN
[69] https://eba.europa.eu/regulation-and-policy/single-rulebook
[70] Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee, the European Court of Justice and the European Central Bank: An EU Framework for Cross-Border Crisis Management in the Banking Sector. Downloaded: 2 August 2019 https://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2009:0561:FIN:EN:PDF
[71] Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the European Central Bank - Bank Resolution Funds COM/2010/0254.: Downloaded: 25 October 2021
https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52010DC0254&from=EN
[72] Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee, the Committee of the Regions and the European Central Bank An EU Framework for Crisis Management in the Financial Sector COM(2010) 579 Downloaded: 2 August 2019: https://ec.europa.eu/transparency/regdoc/rep/1/2010/EN/1-2010-579-EN-F1-1.Pdf
[75] Directive (EU) 2019/879 of the European Parliament and of the Council of 20 May 2019 amending Directive 2014/59/EU as regards the loss-absorbing and recapitalisation capacity of credit institutions and investment firms and Directive 98/26/EC (BRRD2) Recital 1
[76] BRRD2 Recital 2
[77] BRRD Recital 15 of preamble
[78] BRRD Art 3 (3)
[79] Austria, Belgium, Cyprus, Czech Republic, Finland, France, Germany, Hungary, Ireland, Italy, Latvia, Lithuania, Luxemburg, Malta, The Netherlands, Poland, Slovakia, Slovenia, Sweden, UK
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[80] Bulgaria, Croatia, Denmark, Estonia, Greece, Romania, Spain
[81] Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Greece, Hungary, Ireland, Italy, Lithuania, The Netherlands, Portugal, Romania, Slovenia, Spain, UK
[82] Belgium, Cyprus, Czech Republic, Hungary, Ireland, Lithuania, The Netherlands, Portugal, Slovenia, UK
[83] SRM-regulation Article 7 (2)
[84] SRM-regulation Article 7 (5)
[85] Jánossy-Garbainé-Gulácsi-Máger-Molnár: Az első tíz év, OBA, 2003, 43
[86] Jánossy-Garbainé-Gulácsi-Máger-Molnár 50
[87] Jánossy-Garbainé-Gulácsi-Máger-Molnár 49
[88] Jánossy-Garbainé-Gulácsi-Máger-Molnár 51
[89] Act on the Hungarian Central Bank Section 4 (8)
[90] Act on the Hungarian Central Bank Section 4 (15)
[91] Act on the Hungarian Central Bank point l) of Section 13 (2) of the
[92] MNB Decree of 45/2019. (XII. 18.) on the exercise of powers regarding certain administrative decisions of the Central Bank of Hungary and the detailed rules of substitution of the person exercising power
[93] Government Decree 363/2014. (XII. 30.)
[94] Government Decree 205/2014. (VIII. 15.)
[95] Government Decree 217/2014. (VIII. 28.)
[96] MNB Decree 59/2014. (XII. 19.)
[97] Commission implementing regulation (EU) 2018/1624 of 23 October 2018 laying down implementing technical standards with regard to procedures and standard forms and templates for the provision of information for the purposes of resolution plans for credit institutions and investment firms pursuant to Directive 2014/59/EU of the European Parliament and of the Council, and repealing Commission Implementing Regulation (EU) 2016/1066
Lábjegyzetek:
[1] The Author is doctoral candidate, Doctoral School of the Law at the University of Pécs.
Visszaugrás
