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
- transfer tools
- 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),
- and 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.
In order to resolve a failed institution credibly by implementing any of the above resolution tools in accordance with the set strategy and without the need to use public funds, it is crucial that the relevant entity (i.e. the institution or its parent) or its group be resolvable.
Resolvability of institutions/groups is a state of affairs in which institutions or other group members can be feasibly and credibly resolved through liquidation or using the procedures set out in the Insolvency Act or the Recovery and Resolution Act while avoiding significant adverse effects on the financial system of the Czech Republic, another Member State or the European Union as a whole – including cases where an institution fails in a situation in which financial stability has already been disrupted and previous events have had a systemic impact – and while ensuring continuity of the institution’s critical functions.
One of the principal pillars for achieving resolvability is a sufficient amount of MREL eligible instruments, i.e. instruments that meet the conditions set out in Article 129 et seq. of the Recovery and Resolution Act and that can, if necessary, be used to absorb the losses of, and subsequently recapitalise, a failing institution. The CNB has published a General approach to setting MREL and a thematic article “Minimum requirement for own funds and eligible liabilities (MREL): General approach of the Czech National Bank”.
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).