As the resolution authority, the CNB is required to draw up resolution plans on how to deal with situations which might lead to financial stress of institutions within CNB´s remit or their failure. During the planning process the CNB defines the most suitable resolution strategy for the institutions / groups, identifies and assesses potential obstacles to their resolvability, may require the institutions to take appropriate measures to ensure that they can be resolved with the available tools in a way that does not threaten financial stability and does not involve costs to taxpayers and specifies the minimum requirement for own funds and eligible liabilities (MREL) of those institutions. Resolution plans need to be distinguished from recovery plans which are prepared by institutions themselves as part of their internal control.
As many institutions operating in the Czech Republic are members of cross-border banking groups, the CNB cooperates with foreign resolution authorities within resolution colleges. CNB´s most important partner is the Single Resolution Board (SRB) located in Brussels, which is the resolution authority for most significant and cross border banking groups established within participating Member States of the Banking union.
The winding up of an institution through normal insolvency proceedings should always be considered before application of any resolution tools. Hence, should an institution within scope of the resolution regime fail (or be likely to fail) with no reasonable prospects that any alternative private sector measure or supervisory action would prevent the failure, such failing institution should in principle be liquidated pursuant to Act No. 89/2012 Coll., the Civil Code, or CNB initiates the insolvency proceedings pursuant to Act No. 182/2006 Coll., on Insolvency and Methods of Resolution. A resolution action using resolution tools and powers should be generally triggered only where necessary in the public interest (e.g. ensuring continuity of critical functions, protecting financial stability, minimising public support and protecting covered deposits) and liquidation or insolvency proceedings would not meet the resolution objectives and public interest to the same extent.
CNB has issued an explanatory memorandum (pdf, 91 kB).
If the public interest test is met, the CNB may use one or more resolution tools, the purpose of which is to meet the resolution objectives by achieving continuity of the critical economic functions provided by the institution and maintaining parts of the institution that have a ready market value.
Resolution tools are
- sale of business (transfer of all or part of an institution’s business to a willing and appropriately-authorised private sector purchaser),
- bridge bank (transfer of all or part of an institution’s business to a state-owned bank that would meet the necessary conditions for authorisation, pending a future sale or share issuance),
- bail-in (bail-in is used to absorb losses of a failed institution and recapitalise that institution (or its successor) using its own resources. The claims of shareholders and unsecured creditors are written down and/or converted into equity to restore solvency. In order to enhance the transparency and predictability of bail-in tool implementation, the CNB has published this simplified process).
For those parts of the institution that do not need to be maintained permanently but may need to be wound down in an orderly way, the CNB may use the asset separation tool allowing (parts of) assets, rights and liabilities of the failing institution to be transferred to and managed by a separate asset management vehicle, with a view to maximising their value through an eventual sale or subsequent wind-down.
For a bail-in to be viable the institution must have enough own funds and eligible liabilities (MREL) which the CNB will write down or convert at the point of no viability. A sufficient MREL coupled with the application of an appropriate combination of resolution tools and powers makes the resolution of the failing institution without the use of public funds feasible.
Nevertheless, by application of resolution tools, no creditor shall incur greater losses than would have been incurred if the institution had been wound up under liquidation or normal insolvency proceedings. Any difference is compensated by the resolution financing arrangement (the Resolution Fund).