The work of the resolution authorities includes ensuring that an up-to-date resolution plan is ready in case an institution becomes failing. Each institution has an individual resolution plan, which serves as a contingency document outlining a pre-thought-out approach to handling a potential resolution. It is crucial that the resolution plan is operational to ensure that resolution authorities can effectively manage the resolution of a failing institution in practice.
Resolution planning is a critical component of effective resolution as it provides the Danish Financial Supervisory Authority and the Danish Financial Stability Company with more time to prepare for a resolution before the institution enters a crisis. These plans aim to enable the resolution of a company in the most effective way, minimising harm to the public and creditors while avoiding the need for public support.
The preferred resolution strategy determines how the resolution authorities will initially handle the failing institution. This strategy includes the most effective resolution tools for the specific institution. The ability of individual resolution tools to meet resolution objectives depends on the institution and the specific resolution scenario. As such, the final choice of tools is always made on a case-by-case basis. For Danish systemically important financial institutions (O-SIIs), the preferred resolution strategy typically involves recapitalising the institution. For credit institutions, this involves using the bail-in tool, which includes writing down and converting relevant capital instruments and other liabilities covered by bail-in.
For non-O-SII institutions, the preferred resolution strategy involves a controlled wind-down of activities. This may include partial restructuring to transfer viable parts of the institution to the market as quickly as possible through divestiture, while other parts are resolved under the Danish Financial Stability Company.
If the O-SII institution is part of a group, resolution powers may be applied to the parent company, with recapitalisation of subsidiaries occurring via capital downstreaming from the parent. This involves distinguishing between a Single-Point-Entry (SPE) and a Multiple-Point-Entry (MPE) strategy. Under an SPE strategy, the entire group remains intact, with resolution authorities focusing on ensuring sufficient capitalisation for all subsidiaries. Conversely, under an MPE strategy, individual group components or subsidiaries may follow separate resolution plans, such as sale or divestiture, with the group restructured and continuing to operate in the market.
The European Banking Authority (EBA), in collaboration with national resolution authorities and the Single Resolution Board (SRB) for the banking union, has developed guidelines on the conditions required to implement the preferred resolution strategy.
Resolution authorities work with institutions to address any significant barriers to executing the preferred resolution strategy. For example, institutions conduct self-assessments based on EBA guidelines for improving resolvability, and there is an ongoing dialogue between resolution authorities and institutions regarding these self-assessments. Resolution authorities also conduct tests of resolution preparedness, described in detail in the section on information systems.
The guidelines are available in English and Danish on the EBA's website.