Legal References
BRRD and BRRD2:
The Bank Recovery and Resolution Directive, Directive 2014/59/EU of the European Parliament and of the council of 15 May 2014 (BRRD), establishes a framework for the recovery and resolution of credit institutions and investment firms. It outlines uniform principles and tools for managing failing credit institutions. The BRRD is implemented in Danish law, including the Financial Business Act (FIL), the Act on the Restructuring and Resolution of Certain Financial Enterprises (RAL), and various executive orders. The BRRD has been amended by Directive (EU) 2019/879 of the European Parliament and of the Council of 20 May 2019 (BRRD2).
EBA:
The European Banking Authority (EBA) drafts guidelines across the European banking sector and monitors compliance with EU banking requirements. It also prepares draft delegated regulations, which are subsequently approved by the European Commission.
The Act on the Restructuring and Resolution of Certain Financial Enterprises (RAL):
Several executive orders have been issued under RAL, including Executive Order No. 822 of July 3, 2015, on resolution measures and Executive Order No. 823 of July 3, 2015, on the Resolution Fund.
The Financial Business Act (FIL):
Relevant executive orders issued under FIL include:
- Executive Order No. 47 of January 16, 2023, on recovery plans for credit institutions, mortgage credit institutions, a ship financing institute, and investment firms.
- Executive Order No. 973 of June 22, 2022, on outsourcing for credit institutions etc.
- Executive Order No. 2018 of October 26, 2021, on resolution planning and preparedness, which sets out frameworks for resolution planning and preparedness, including necessary summaries and information for resolution planning.
EBA Guidelines on Resolution Capabilities
The EBA has developed guidelines targeting both authorities and institutions to enhance institutions' resolution capabilities. Topics include structure and operational matters, financial resources, information systems, cross-border issues, and resolution execution.
The EBA has also outlined guidelines on process flows, including elements that should be included in an institution's self-assessment regarding resolution capabilities. These guidelines promote consistency across institutions and ensure they have considered relevant factors, enabling effective planning and resolution.
Terms and Definitions
Resolution Authorities:
In Denmark, the Danish Financial Supervisory Authority (DFSA) and the Danish Financial Stability Company (FSC) are designated as national resolution authorities, collectively referred to as the resolution authorities. When an institution is in a "going concern" state, the Danish Financial Supervisory Authority is the responsible resolution authority. The Danish Financial Stability Company assumes responsibility once the institution is deemed failing or likely to fail and can implement resolution measures when all resolution conditions are met.
FOLF (Failing or Likely to Fail):
This term refers to the assessment of whether an institution is failing or likely to fail. Originating from EBA guidelines, the assessment considers general conditions and capital and liquidity positions. The Danish Financial Supervisory Authority makes the final determination of FOLF, with the Danish Financial Stability Company serving as a consulting party, as per the Financial Business Act (FIL) section 224a.
Public Interest Assessment:
If an institution is deemed FOLF and other options for addressing its challenges are exhausted, the Danish Financial Stability Company evaluates whether resolution is in the public interest under the Act on the Restructuring and Resolution of Certain Financial Enterprises (RAL). Resolution is in the public interest if it serves one or more resolution objectives as outlined in RAL section 5. If resolution is not in the public interest, the institution will be handled through bankruptcy or liquidation under applicable rules.
Resolution:
Resolution refers to the Danish Financial Stability Company’s use of one or more resolution tools and measures under the Act on the Restructuring and Resolution of Certain Financial Enterprises (RAL). This includes cases aimed at a controlled wind-down of the institution or its restructuring.
Resolution Situation:
A situation in which the Danish Financial Stability Company takes control and initiates resolution measures when resolution conditions are met under the Act on the Restructuring and Resolution of Certain Financial Enterprises (RAL) section 4. This control continues until the restructuring is complete and the institution is returned to new shareholders or sold under RAL section 19.
Preferred Resolution Strategy:
The preferred resolution strategy outlines how resolution authorities plan to handle a failing institution and specifies the resolution tools expected to be used. The final choice of tools depends on the specific institution and situation.
Resolution Entity and Resolution Group:
Under the Financial Business Act (FIL) section 260(2), a group resolution plan must identify which entities within a group are designated as resolution entities. The plan also defines the resolution group’s scope. There can only be one resolution entity per resolution group.
Systemically Important Institutions (O-SII):
A systemically important financial institution (O-SII) is a bank or mortgage credit institution whose financial distress could have significant adverse effects on households, businesses, and the economy. In Denmark, O-SII institutions are designated annually by the Danish Financial Supervisory Authority based on objective criteria, as per the Financial Business Act (FIL) section 308.
Resolution Measures:
As a resolution authority, the Danish Financial Stability Company can write down and convert relevant capital instruments under the Act on the Restructuring and Resolution of Certain Financial Enterprises (RAL) sections 17 and 18. Resolution measures include tools and powers available to the Danish Financial Stability Company under RAL Chapter 4-8.
Resolution Tools:
Under the Act on the Restructuring and Resolution of Certain Financial Enterprises (RAL) sections 19-28, the Danish Financial Stability Company has several tools for resolving or restructuring an institution. These include:
- Sale of business
- Bridge institution
- Asset separation
- Bail-in
Resolution Objectives:
The choice of resolution tools depends on the specific situation and must align with the resolution objectives in the Act on the Restructuring and Resolution of Certain Financial Enterprises (RAL) section 5, such as ensuring continuity of critical functions and preventing systemic crises.
Minimum Requirement for Eligible Liabilities (MREL):
As part of resolution planning, the Danish Financial Supervisory Authority sets requirements for eligible liabilities to absorb losses and recapitalise a failing institution.
Bail-in:
Bail-in involves writing down and converting obligations to absorb losses and recapitalise. Rules regarding bail-in are outlined in the Act on the Restructuring and Resolution of Certain Financial Enterprises (RAL) sections 24-28. A restructuring plan must follow recapitalisation. When bail-in is used for recapitalisation, the institution must prepare and implement a restructuring plan, according to RAL section 28. A recapitalisation requires that it can reasonably be expected that the bail-in will lead to the restoration of the institution’s financial health and long-term viability. Bail-in is used after the write-down and conversion of relevant capital instruments in accordance with the Bankruptcy Act, according to sections 92-99 of the Bankruptcy Act, considering the special bankruptcy-related rules in RAL section 13. Certain liabilities, including covered deposits, are excluded from bail-in, according to section 25(3) of RAL. The Danish Financial Stability Company also has the option to exclude individual or categories of liabilities from bail-in in special cases, according to RAL section 25(4), if, for example, it is necessary to continue critical functions or avoid a contagion effect. The Danish Financial Stability Company notifies the European Commission when liabilities are excluded from bail-in.
Valuation:
Before applying resolution tools, the Danish Financial Stability Company conducts a valuation under the Act on the Restructuring and Resolution of Certain Financial Enterprises (RAL). A temporary valuation is performed initially, followed by an independent external valuation before resolution measures are finalised.
Critical Functions:
Defined in the BRRD as activities whose discontinuation could disrupt financial stability and impact the economy, e.g., payment services or mortgage bond issuance.
Core Business Lines:
BRRD defines these as business areas that generate significant revenue or value for an institution or group.
Critical Suppliers and Financial Market Infrastructures:
These are suppliers or infrastructures that institutions depend on to continue critical functions and core business areas.
Systemic Crisis:
A systemic crisis involves financial system disruptions with severe potential consequences for the internal market and real economy.
NCWO (No Creditor Worse Off):
This principle ensures creditors and shareholders are not worse off in resolution than they would have been in bankruptcy proceedings. If they are, they are entitled to compensation.
For further details: Bail-In Application (PDF)