Why has the Sejm adopted the Act of 10 June 2016 on the Bank Guarantee Fund, Deposit Guarantee Scheme and Resolution?
The Act implements the Bank Recovery and Resolution Directive (BRRD) and the Directive on Deposit Guarantee Schemes into the Polish law. Poland is obliged to implement these Directives due to the membership of the European Union.
Why has the BRRD been adopted?
The last financial crisis revealed that the Member States of the European Union did not have tools appropriate for liquidation of large financial institutions being under the bankruptcy threat which were not able to continue their business independently due to their weak financial situation. At the same time, the systemic risk occured. There were fears that uncontrolled bankruptcy of „too big to fail” financial institutions would pose a threat to their clients and to the economy as a whole. Having no appropriate tools at their disposal, the Member States granted aid to threatened entities from their national budgets. The European Commission came to the conclusion that taxpayers should not bear the costs of rescuing the „too big to fail” financial institutions. The decision was taken that the responsibility should be borne in the first place by owners and then by creditors of entities under the bankruptcy threat.
The provisions of the BRRD require the Member States to vest a designated institution with tools which enable the conduct of resolution. Owing to these tools the systemic risk can be controlled in a better way.
Which institution has been designated by the Sejm to conduct resolution?
The Bank Guarantee Fund has been entrusted with execution of these tasks.
When did the new Act enter into force?
The Act entered into force on 9 October 2016.
What entities can be subject to resolution?
The resolution procedure can cover commercial banks, cooperative banks, credit unions and certain brokerage houses.
Whenever the expression „a threatened entity” is used hereinafter, this wording may concern a bank, credit union or brokerage house.
What is resolution?
It is restructuring of the business of a threatened entity which is not able to continue its operation independently in the case when its bankruptcy could pose a serious threat to its clients and the economy as a whole.
Within resolution, existing owners loose their powers which are acquired by the BGF and have to bear losses generated in the entity. A part of its business which is „healthy” and important for the clients and for the economy is continued, whereas the remaining one is subject to liquidation.
The BGF initiates resolution if it is necessary in the public interest.
What does it mean that resolution can be conducted only in the public interest?
Resolution measures can be deemed by the BGF necessary in the public interest when they are essential to:
- maintain financial stability, e.g. trust in the financial sector,
- limit the use of public funds,
- continue critical functions,
- protect depositors and investors covered by the compensation scheme,
- protect funds entrusted to an entity by its clients,
and attainment of these objectives to the same extent is not possible within supervision of the Polish Financial Supervision Authority or via the bankruptcy procedure.
Where there is no significant threat to the public interest, the BGF shall not initiate the intervention. A financial institution will be liquidated or be subject to the bankruptcy procedure.
Who bears the costs of resolution?
Owners of a threatened entity incur costs of resolution in the first place, in a similar way as in the case of the bankruptcy procedure. They have the right and the duty to control actions of the management board, therefore they are liable for its errors. The owners of the entity are its shareholders, and in the case of cooperative banks and credit unions – their members. If the capital of the owners is not sufficient, also creditors of the threatened entity will be charged.
As an exception, the costs of resolution may be covered from a special fund created on the basis of contributions of financial institutions, provided that previously losses are borne by the creditors and owners. If, for instance, there are more threatened entities or these financial resources are insufficient, resolution may be supported with public funds as a last resort, provided that it can be justified by the public interest.
Can the costs of resolution of banks and credit unions be borne by individual clients who entrusted their money to these entities?
In the case of funds up to the amount of the PLN equivalent of 100 000 EUR – not. Funds of individual clients up to this amount are under the BGF guarantee and cannot be depleted by no means.
Whenever the amount of 100 000 EUR is referred to hereinafter, this expression means the PLN equivalent of 100 000 EUR.
What about deposits exceeding 100 000 EUR?
Deposits exceeding 100 000 EUR are generally not covered by the BGF guarantee. In some special cases coverage level is higher than 100 000 EUR.
The Act introduces favouring deposits exceeding 100 000 EUR owned by individual clients and small and medium-sized enterprises compared to other liabilities. It means that funds above 100 000 EUR owned by individual clients and small and medium-sized enterprises may cover the costs of resolution in the last place.
The privileged parties may be charged only when losses of the financial institution are so significant that funds of the owners and creditors (other than individual clients and small and medium-sized enterprises) are not sufficient to cover them. In such a situation, the funds above 100 000 EUR can be converted into shares of the said entity, which will continue its business. Such an operation is called conversion of liabilities. The funds above 100 000 EUR may not be returned in some part to the clients. In such a case, partial write down of liabilities takes place.
Granting the privilege for the funds above 100 000 EUR reduces the risk that individual clients or small and medium-sized enterprises will bear the costs of resolution of a bank or credit union within the scope of the excess over the limit of 100 000 EUR.
What should be done in order to avoid this risk?
It is advisable to divide large amounts in order not to deposit them in one financial institution. Savings are guaranteed up to 100 000 EUR independently in each bank and credit union.
It should be remembered that clients’ investments in bonds or other securities of financial institutions are not covered by the guarantee.
Clients should pay attention to the financial situation of their bank or credit union in the same way as they do so towards their contractors. Banks and credit unions are required to share information on their financial standing to each client.
In what way can the BGF conduct resolution?
Within resolution, the BGF will be authorised to:
- sell shares of a threatened entity,
- sell the business of a threatened entity or its part,
- establish a bridge institution – a special institution to which good assets and liabilities (deposits) of a threatened entity will be transferred,
- burden owners and certain creditors of a threatened entity with its losses, so as to rebuild its capital and enable it to continue its operation (bail-in) – burdening with the losses takes place via write down of shares of the owners and possibly via conversion or write down of liabilities of certain creditors,
- transfer low-quality assets to a special institution,
- file to a court for bankruptcy or liquidation of a residual entity remaining after a partial or total sale of its business,
- conduct liquidation of the discontinued business of the entity.
What assistance activities were performed by the Bank Guarantee Fund before the entry into force of the new Act?
If the insolvency threat occured, the BGF was entitled only to financially support an acquisition of a threatened entity by a stronger one. It was possible only if the support was deemed compliant with the principles of granting public aid. At present, the Fund is still entitled to financially support resolution.
What are the new tasks of the Bank Guarantee Fund connected with resolution?
Within one year from the entry into force of the new Act, the BGF will prepare a resolution plan for each entity which can be covered by this procedure. The Fund will assess feasibility of the plan at least once a year. If the BGF, during the assessment, determines that impediments occur which prevent execution of the plan, the Fund will be authorised to issue binding instructions for entities, obliging them to remove the obstacles.
The BGF will also determine the amount of own funds and liabilities which will cover losses of threatened entities in the first place, the so called MREL (minimum requirement for own funds and eligible liabilities).
The Fund will collect contributions for the resolution funds from financial institutions.
The BGF analyses information concerning financial institutions and cooperates with the Polish Financial Supervision Authority so that any recovery and supervisory measures could prevent threats to operation of monitored entities.
What will happen if a foreign bank which is an owner of a bank in Poland faces financial difficulties?
Conduct of cross-border resolution which concerns a bank in Poland is not possible without the knowledge, consent and active involvement of the BGF. The mode of its conduct is agreed (in the form of a group resolution plan) by all resolution authorities, including the BGF, of countries where the banking group operates.
In the case of initiation of a cross-border resolution process the BGF approves its method. The Fund also executes all resolution actions concerning a bank in Poland. The BGF may also undertake independent measures, if it deems propositions of the authority competent for the group to which a Polish bank belongs, to be inappropriate.
Direct effects of resolution of a foreign owner of a bank in Poland should not be sizeable for this bank. Banks in Poland have high levels of capital and in most cases many various sources of funding. Therefore, they are not highly dependent on the inflow of funds from their foreign owners. When difficulties occur a foreign entity may be forced to sell its bank in Poland to another Polish or foreign entity.
What change for the financial sector results from resolution?
Financial institutions which may be covered by resolution will be obliged to observe the additional requirements – so called MREL. They will be also required to pay contributions for the resolution funds.
Financial institutions will have to implement recommendations made by the BGF if the Fund identifies any material impediments to execution of the resolution plan on the part of a particular financial institution.
Will acquisitions of threatened entities by stronger ones lead to excessive concentration in the financial sector?
Each time, the BGF will assess whether initiation of resolution is necessary in the public interest and whether a liquidation of a threatened entity or a bankruptcy procedure towards it is feasible. Moreover, not all resolution tools lead to an increase in market concentration. In each case the Fund will consult the issue of maintenance of competition with the Office of Competition and Consumer Protection.