Application of resolution measures and assessment of resolvability

It follows from the Resolution Act, the purpose of the Act, and the conditions for resolution action that resolution measures will not be taken in connection with the activities of all financial institutions in Iceland. Elsewhere in the European Economic Area (EEA), for instance, resolution is only applied in some cases. The Resolution Authority prepares resolution plans for financial institutions if the above conditions are satisfied. In general, it can be said that more influential and systemically important financial institutions are more likely to be subject to resolution, while less influential companies would be subjected to conventional winding-up proceedings. Resolution plans will not be made available to the financial institutions concerned, but they will be prepared on the basis of information the Resolution Authority has obtained from the institutions themselves and the Central Bank of Iceland, including the institutions’ recovery plans.

The preparation of resolution plans involves several steps that ultimately determine minimum requirements for own funds and eligible liabilities (MREL). The steps are as follows: 1) A strategic business analysis; 2) The preferred resolution strategy; and 3) A resolvability assessment. The fourth and last step in the preparation of resolution plans is the determination of specific MREL for each institution.

A strategic business analysis entails, among other things, an overview of core business lines and critical functions at institutional and group levels. Based on the business analysis, which includes consideration of the institution’s recovery plan, the Resolution Authority determines the preferred resolution strategy. The preferred resolution strategy entails the measures the Resolution Authority will take in the event that the conditions for resolution apply to a given institution. This involves, among other things, selecting the optimum resolution action for the financial institution concerned; i.e., the measures best suited to that institution’s activities. All available resolution measures are considered: 1) bail-in; 2) establishment of a new bridge institution to take over critical functions; 3) sale of business – i.e., the divestment of assets or operational units of the institution in an open sale; 4) asset separation – i.e., the transfer of assets or operations to an asset management company. The Resolution Authority may tap the so-called Resolution Fund to cover the cost of resolution and fund the measures it has decided to apply. 

The preparation of a resolution plan also includes an assessment of the institution’s resolvability. This entails ascertaining that there are no impediments to resolution; i.e., that it will be possible to take decisions on the application of resolution measures quickly and effectively. If impediments do exist, however, and the institution in question cannot remove them, the Resolution Authority is obliged to demand that the institution take the following actions, including: 

• The institution shall review agreements providing for intra-group support according to the Act on Financial Undertakings or determine whether such agreements should be made; 
• The institution shall prepare service agreements with intra-group or third parties in order to guarantee continuity of critical functions; 
• The institution shall limit its individual and aggregate exposures; 
• The institution shall provide, more frequently or on a regular basis, additional information relevant to the resolution process; 
• The institution shall divest specific assets; 
• The institution shall limit or cease specific existing or proposed activities.