Resolution of financial institutions
Together with the Single Resolution Board, we are responsible for the resolution of financial institutions operating in Lithuania, ensuring that their key functions are preserved and depositor and tax-payer funds are protected.
The need for an efficient resolution system manifested notably during the financial crisis, when, seeking to ensure financial stability, countries often had to turn to tax-payer money to save failing banks. To that end, the EU Bank Recovery and Resolution Directive, establishing a recovery and resolution framework for credit institutions and investment undertakings, was implemented. Under the new framework, major banks, instead of going bankrupt, are resolved in accordance with a pre-defined plan.
In the context of this framework, the Bank of Lithuania acts as a national resolution authority. In implementing this function, the Bank of Lithuania is able to apply:
- the sale of business tool – selling the bank or parts of its business to one or more purchasers without the consent of shareholders of the bank under resolution;
- the bridge institution tool – transferring the bank to a bridge institution in order to maintain its critical functions and uninterrupted access to deposits;
- the asset separation tool – creating a ‘good’ and ‘bad’ bank, thus respectively separating the assets of the bank under resolution;
- the bail-in tool – if the financial standing of the bank deteriorates to such an extent that the bank’s own funds or other tools do not suffice, this tool will ensure that all critical functions of the bank are maintained and resolution costs are covered by shareholders and creditors instead of tax payers. Usual insolvency procedures will be applied with regard to those business areas of the bank that are not systematically important to maintaining financial stability or domestic economy.
Having become the national resolution authority, we began participating in the Single Resolution Mechanism and the activities of the Single Resolution Board, an EU-level resolution authority. The Single Resolution Board is directly responsible for developing the resolution plans for important banks and banking groups operating in several countries within the banking union and for implementing resolution tools. In addition to the joint supervision of banks, performed in cooperation with the European Central Bank since 2015, this will be the second important step towards ensuring full participation in the EU banking union, strengthening the financial stability of the country.
In cooperation with the Single Resolution Board and the national resolution authorities of foreign banks operating in Lithuania, we, as a national resolution authority, prepare detailed resolution plans, which are followed where it is necessary to ensure business continuity of a commercial institution facing serious problems.
After the implementation of the Bank Recovery and Resolution Directive, a resolution fund was set up, financed by the contributions of euro area banks and significant investment undertakings. Hence the resolution of failing banks will be, first and foremost, financed with the funds of shareholders and creditors, and, if necessary, funds from the centralised euro area Single Resolution Fund.