KEY ATTRIBUTES OF EFFECTIVE RESOLUTION REGIMES

Following the Global Financial Crisis, the mandates of deposit protection schemes were expanded in most jurisdictions to include, among other roles, involvement in problem bank resolution. According to the International Association of Deposit Insurers (IADI), resolution refers to a disposition plan and process for a non-viable bank including liquidation and depositor reimbursement; transfer and/or sale of assets and liabilities; establishment of a temporary bridge institution; and write-down or conversion of debt to equity. It may also include the application of procedures under Insolvency law to parts of an entity in resolution, in conjunction with the exercise of Resolution Powers.

In 2011, the Financial Stability Board (FSB) put in place “The

Key Attributes of Effective Resolution Regimes for Financial Institutions (the ‘ Key Attributes’)”. These were later updated in 2014. The key attributes set out the responsibilities, instruments, and powers that regulatory authorities should have for an effective and orderly resolution of financial institutions, while protecting vital economic functions through mechanisms which make it possible for shareholders, unsecured and uninsured creditors to absorb losses in a manner that respects the hierarchy of claims in liquidation, without taxpayer exposure to loss from solvency support. The key attributes relate to scope, resolution powers, set off, netting, funding of firms in resolution, recovery, and resolution planning among others. It is imperative to note that these key attributes are not homogenous in all sectors and circumstances due to different national legal systems and market environments and sector-specific considerations.

Scope

The resolution regime should be comprehensive enough to cover any financial institution that is viewed as systematically significant or critical if it fails. In other words, the resolution regime should cover institutions such as banking institutions, non-bank financial institutions, holding companies of a firm, subsidiaries that are significant to the operations of the business, and financial market infrastructures.

Resolution Powers

These refer to powers available to Resolution Authorities under legal frameworks for the purposes of resolution, and exercisable without the consent of shareholders, creditors, debtors or the entity in resolution (IADI). A Resolution Authority is a public authority that, either alone or together with other authorities, is responsible for the resolution of financial institutions established in its jurisdiction (including resolution planning functions). In Zimbabwe, this responsibility is shared by the Reserve Bank of Zimbabwe and the Deposit Protection Corporation.

Generally, the resolution powers must be explicit, and may include the power to replace senior management and directors of an institution and manage all the affairs of the institution including collecting outstanding loans or advances. The insurer may have powers to override shareholders of the institution in the best interest to resuscitate the firm through capitalization or restructuring the company’s assets or liabilities or effect the closure and orderly wind-down of the whole or part of a failing firm with a timely payout or transfer of insured deposits and prompt access to transaction accounts and to segregated client funds. The choice of resolution powers should be guided by the need to minimize resolution costs and maintain the stability and continuity of critical banking functions.