In the intricate domain of banking and finance, the Resolution Phase marks a crucial juncture in the core bail-in processes. This phase is activated when a bank is officially declared “failing or likely to fail” (FOLTF) by the authorities, triggering the application of resolution tools designed to stabilize the institution and protect the financial system.
What is the Resolution Phase?
The Resolution Phase is a critical period that spans several days, during which the authorities declare the bank’s FOLTF status and implement resolution tools to address the financial crisis. The primary tool often employed is the bail-in mechanism, which involves restructuring the bank’s liabilities to restore its viability.
Key Components of the Resolution Phase
1. Governance of the Resolution Phase
Effective governance is paramount during the Resolution Phase. This involves establishing governance arrangements tailored to the bank’s FOLTF status and the application of the bail-in tool. Key aspects include:
- Authority Coordination: Clear lines of communication and decision-making protocols between the bank’s management, board, and resolution authorities.
- Crisis Management Team: A dedicated team to oversee the resolution process, ensuring all actions are coordinated and executed efficiently.
2. Workflow for the Resolution Phase
A detailed workflow guides the operational sequences necessary to execute the bail-in tool during the Resolution Phase. This workflow encompasses several critical areas:
- Traded Instruments:
- Operational Process: A comprehensive plan to apply the bail-in to traded instruments, covering internal processes (accounting, tax, and operational actions) and external communications/actions (engagement with FMIs and relevant authorities).
- Internal and External Execution: Steps include trading suspension, external write-down/off and conversion, and internal write-down/off and conversion processes.
- Deposits:
- Freezing and Conversion: Procedures to freeze deposits and, if applicable, convert them to non-preferential deposits, ensuring stability and maintaining depositor confidence.
- Derivatives:
- Stay Powers and Conversion: Theoretical descriptions of internal and external processes to apply stay powers and, if applicable, convert derivatives to manage counterparty risk effectively.
- Other Instruments:
- Bail-In Application: Considerations for applying the bail-in tool to other instruments not covered in the previous categories, ensuring comprehensive coverage of all liabilities.
- Contact Points:
- Key Contacts: Identification of main persons to be contacted during the Resolution Phase, ensuring clear and efficient communication throughout the process.
Importance of the Resolution Phase
The Resolution Phase is critical for maintaining financial stability and protecting the broader economy during times of severe financial distress. By executing well-defined governance arrangements and operational workflows, banks can manage the crisis effectively, minimizing disruptions and restoring confidence in the financial system.
In conclusion, the Resolution Phase is a pivotal part of the core bail-in processes. It involves meticulous planning, stringent governance, and robust operational workflows. By understanding and effectively managing this phase, banks can navigate financial crises more efficiently, ensuring stability and continuity for themselves and the broader economy.
