Recovery and resolution
Published: 8 November 2022
Last updated: 16 May 2023
The EU’s ‘Bank Recovery and Resolution Directive’ (BRRD) entered into force in the EU in January 2016. The provisions of the Directive have been implemented in Chapter 20 of the Financial Institutions Act relating to capital inadequacy and insolvency of banks, mortgage companies and financial groups.
The BRRD provides for the resolution or winding up of banks, mortgage companies and certain investment firms without jeopardising financial stability. Important considerations are that critical functions can be continued and that losses are borne by shareholders and creditors, while deposits, client funds and public funds are protected. The Directive also provides for emergency preparedness and preventive measures.
The BRRD was implemented in Norwegian law as of 1 January 2019 in chapter 20 of the Financial Institutions Act relating to capital inadequacy and insolvency of banks, mortgage companies and financial groups. Supplementary rules can be found in chapter 20 of the Financial Institutions Regulations. Section 20-2 of the Financial Institutions Regulations implements the regulations relating to the BRRD that have been incorporated into the EEA Agreement.
Resolution of banks, mortgage companies and financial groups
Not all banks, mortgage companies or financial groups are to be subject to resolution in the event of capital inadequacy or insolvency. The alternative is for the financial institution to be wound up under public administration pursuant to the provisions of chapter 20 IV of the Financial Institutions Act. Resolution tools should only be applied in cases where such action is considered to protect the ‘public interest’.
The Ministry of Finance makes the final decision on whether a financial institution should be resolved or wound up under public administration. If a decision is made to resolve the institution, Finanstilsynet may decide to apply the following resolution tools:
– Transfer of all or part of the business to another institution
– Transfer of all or part of the business to a bridge institution
– Transfer of assets and liabilities to a management company
– Internal recapitalisation (bail-in)
The BRRD has been amended several times, most recently through Directive (EU) 2019/879 (BRRD2). The Storting (Norwegian parliament) has adopted legislative amendments implementing the amending directive, but these have not entered into force.
Minimum Requirements for Own Funds and Eligible Liabilities (MREL)
A key element in the BRRD is internal recapitalisation as a resolution tool, where capital instruments and liabilities are written down and/or converted to equity (bail-in). Finanstilsynet shall draw up resolution plans to facilitate the possible resolution of an institution. MREL shall be set concurrently with the drawing up of the resolution plan for the relevant institution.
The resolution authority may need funds to ensure the effectiveness of its resolution tools, which may include providing guarantees and loans, purchasing assets and contributing to finding other effective solutions. The BRRD therefore requires that a resolution fund be established. If the authorities are to make a contribution in the form of funds from the resolution fund, there are specific minimum requirements for losses and contributions to recapitalisation that must already have been met by the institution’s holders of shares, equity certificates, other capital instruments and convertible debt.
On 1 January 2019, the Norwegian Banks' Guarantee Fund was split into a resolution fund and a deposit guarantee fund. Requirements relating to, among other things, the capitalisation of the deposit guarantee fund follow from the Deposit Guarantee Schemes Directive (DGSD). Institutions are required to pay annual contributions to both funds, based on the principle that contributions shall be proportional to the institution’s' risk profile.
For more details about the resolution fund, see the regulations on supplementary rules to chapter 20, Part 2 of the Financial Institutions Regulations (available in Norwegian only). See also section 4.12 of Finanstilsynet's consultation document, proposing supplementary provisions of secondary legislation to the new legislation relating to the BRRD, including a description of the model (in Norwegian only).
Deposit guarantee scheme
Directive (EU) 2014/49 replaced the EU's previous deposit guarantee directives. The directive has been implemented in Norwegian law in chapter 19 of the Financial Institutions Act on the deposit guarantee scheme for banks. The Norwegian deposit guarantee scheme is administered by the Norwegian Banks' Guarantee Fund.
More information about the deposit guarantee scheme: