## 1norea2020003

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### Executive overview and institutional changes
- Norway strengthened its framework for financial crisis management and bank safety nets since the 2015 FSAP.
- BRRD transposed into Norwegian legal framework primarily via amendments to the Financial Institutions and Financial Groups Act (FIA), effective as of January 1, 2019.
- Finanstilsynet (the Financial Supervisory Authority of Norway, FSA) is designated as Norway’s resolution authority.
- Resolution financing options broadened by establishing a resolution fund; the Deposit Guarantee Scheme Directive (DGSD) has been transposed into Norwegian law even though it has yet to be brought into the EEA agreement.
- The legal and regulatory framework now provides a broadened and detailed set of instruments for dealing with weak banks, but remains largely untested in practice.

### Governance, roles, and operational independence
- Distribution of responsibilities:
  - Crisis management, bank resolution, and financial sector safety nets are distributed among four bodies: the FSA; the Ministry of Finance (MoF); Norges Bank; and the Norwegian Banks’ Guarantee Fund (BGF).
  - FSA is the designated resolution authority, but MoF retains significant say over resolution decisions and final powers for decisions of significance for financial stability (including licensing, approving group structures and resolution plans for larger institutions).
- MoF powers and process:
  - Decides whether to resolve or wind up an institution after receiving a “failing or likely to fail” notification from FSA (Financial Institutions Act, Section 20-13).
  - Appeals: Banks can appeal to the MoF concerning any decision taken by the FSA as resolution authority after an act relating to procedure in cases concerning public administration in general.
- FSA structure and scope:
  - Independent governmental agency established under the Financial Supervision Act and designated as a resolution authority in the FIA.
  - Resolution and supervision responsibilities are operationally separated (FIA, Section 20-3).
  - Of the 17 staff positions, eight are allocated to the FSA's role as resolution authority, including three with legal background.
- Norges Bank role:
  - Lender of last resort with broad powers to “grant credit on special terms,” extend credit to banks and other financial sector undertakings, and require adequate collateral.
  - Financial Stability Department responsible for macroprudential oversight.
- BGF status:
  - Mixed public-private legal entity; Board members appointed by MoF.
  - BGF has legal obligation to assist FSA in exercising its tasks as resolution authority (FIA, Section 20-3 (3)).
  - Post-2015 reforms removed requirement for five active bankers on the Board; current Board still includes one active banker.
  - No FSA representative on the BGF Board; institutional set-up for the resolution fund governance is still under discussion.

### Crisis preparedness, cooperation, and exercises
- Consultation and meeting frequencies:
  - Semi-annual tripartite meetings on financial stability among MoF, FSA, and Norges Bank.
  - Norges Bank and the FSA hold 8−9 bilateral meetings per year.
  - Regular bilateral meetings: MoF and FSA (usually quarterly); NB and FSA (usually quarterly); FSA and BGF (biannual).
- Memoranda of Understanding (MoUs):
  - No formal MoU between the three authorities for crisis management; no MoUs between the BGF and any public authorities. Bilateral MoUs exist between Norges Bank and the FSA for payments and securities settlement and clearing systems. MoU between the FSA and the BGF is under preparation.
- Simulation exercises:
  - Three tripartite exercises since 2012 (2012, 2013, 2016); an exercise planned for early-2021 to test new resolution tools. BGF expected to be included in 2021.
- Recommendation summary:
  - Establish an overarching system-wide crisis management framework to bring together relevant agencies for contingency planning, coordination, and information sharing.
  - Consider a high-level coordinating body (not necessarily decision-making) for system-wide contingency planning and coordination.
  - Conduct periodic broad crisis simulations (e.g., biennial) and more frequent targeted simulations; include the BGF once independence and roles are clarified.

### Early intervention, recovery, and resolvability
- Recovery planning requirements:
  - Recovery plans must: (i) contemplate various situations involving serious macroeconomic and financial disruptions; (ii) include several models for application of tools to restore financial position and ensure timely implementation; (iv) include an analysis of how and when the institution may avail itself of central bank facilities and identify qualifying collateral; (v) not assume any access to or receipt of public financial support; and (vi) be updated annually, or more frequently if required by the FSA.
  - All banks operating in Norway, including subsidiaries of foreign banks, are required to have in place a recovery plan.
  - FSA published guidelines on bank recovery planning in 2019 (Circular 10/2019).
- Recovery-plan assessments and testing:
  - In 2019 the FSA assessed nine of the largest banking group recovery plans and provided written feedback; DNB subject to annual in-depth assessment and dry-run exercises.
  - FSA requires multiple recovery scenarios including at least one near-default scenario and reverse stress scenarios; testing through simulation exercises will be required regularly.
- Resolvability and resolution planning:
  - FSA has developed resolution plans for eight of the country's largest banks and is developing plans for seven more; resolvability assessments will be included in each plan.
  - Resolution planning responsibilities lie with the FSA’s Licensing and Crisis Management Section.
  - FSA considers single-point-of-entry resolution strategies more optimal in the Norwegian context but has yet to finalize strategy choices for all banks.

### MREL build-up, timelines, and market implications
- MREL status and timelines:
  - MREL targets are included in banks’ resolution plans.
  - Nine of the largest banking groups have received advanced notice for their MREL requirements; six groups will receive their targets in 2020.
  - Plans for complying with MREL requirements should be submitted by the first group of institutions by 1Q 2020.
  - Most banks that have received their MREL target fulfil the total MREL requirement.
  - The MREL full subordination requirements must be reached by end-2022 (with an option to extend the deadline).
    - Footnote: In light of the Corona virus pandemic, the deadline for fulfilling the subordination requirement has been postponed to 1 January 2024; this will be reflected in individual decisions when updated by year end 2020.
  - So far, no such instruments have been issued by the Norwegian banks.
- Quantitative market note:
  - According to Moody’s, Norway's largest savings banks will need to issue approximately NOK 200 billion of nonpreferred senior debt over the next five years to cover their minimum requirements of MREL. The amount equates to about two-thirds of the banking system's debt, which will mature by end-December 2022.
- Operational readiness issues:
  - Practical execution of bail-in requires more work given that a large majority of MREL (subordinated) instruments are likely to be held by foreign investors.
  - The option to extend the deadline for subordination purposes should be used sparingly.

### Resolution tools, valuation, and legal safeguards
- Statutory tools available (as transposed from BRRD):
  - Complete or partially transfer the business to another institution.
  - Complete or partially transfer the business to a bridge institution.
  - Transfer assets and liabilities to an asset management vehicle.
  - Bail-in (write-down/convert own funds).
- Public-interest test and NCWO:
  - The FSA must assess whether winding up under public administration or resolution is in the public interest when notifying MoF.
  - Safeguard: No creditor shall be worse off as a result of resolution than in liquidation (NCWO); FSA shall not write-down/convert own funds or apply bail-in if shareholders and creditors would incur greater loss than in winding up (FIA, Section 20-37).
- Judicial review and enforceability:
  - Decision to take crisis prevention or crisis management measure does not require ex ante judicial review.
  - Decisions are immediately enforceable; enforcement may be suspended narrowly if not against public interest or weakening effect (FIA, Section 20-44).
- Recommendations on operationalization:
  - Clarify division of responsibilities between MoF, FSA, and BGF (including who determines “failing or likely to fail” and valuation procedures).
  - Operationalize resolution tools: develop resolution manuals, specify mechanics of bridge banks and asset separation tools, and prepare financing modalities.
  - Develop detailed current data on banks’ assets to enable swift asset valuations.

### Deposit Guarantee Scheme (BGF) and resolution fund specifics
- Coverage and funding:
  - BGF guarantees deposits up to NOK 2 million per depositor per bank.
  - As of January 2019, 55 percent of the BGF funds were transferred to the newly created resolution fund.
  - Current (post-transfer) BGF size is about NOK 17.2 billion as of end-2019 and covers about 1.25 percent of insured deposits.
  - According to latest audited annual accounts, the balance of the DGF was approximately NOK 35.5 billion at end-2018 (pre-transfer context).
  - 98,4 percent of household’s’ and companies’ deposits are fully covered.
- Permitted uses:
  - BGF’s main objective is to pay out covered deposits and provide funding for resolution activities (FIA, Section 20-54).
  - BGF may use resources for deposit payouts, transfer of assets/liabilities to secure covered depositors' continued access, and “alternative (preventive) measures” if costs are expected not to exceed costs of repaying covered deposits (FIA, Section 19-13 (2) d).
  - BGF should not provide open bank assistance (recommended).
- Back-up funding and resolution fund:
  - Resolution fund established in 2019 (FIA, Chapter 20, Section X) with initial transfer of 55 percent of existing BGF funds.
  - Target size of the resolution fund: at least 1 percent of aggregate covered deposits (based on BRRD).
  - No decision has been taken to operationalize the resolution fund; in practice it is so far just a separate portfolio of DGF-managed funds (with lower liquidity requirements than funds held for the deposit guarantee scheme).
  - If DGF assets are insufficient, members expected to pay extraordinary contributions (capped yearly by 0.5 percent of member's covered deposits). If DGF is smaller than minimum requirement (0.8 percent of covered deposits), shortfall shall be covered by guarantee from members.
- Operational readiness:
  - BGF conducts pay-out testing; staff active in assessing banks’ depositor information and single customer view files; law requires stress-tests of administrative systems at least every three years.
- Recommendations on funding backstops:
  - Consider a dedicated backstop (funding line) from the government to the BGF and resolution fund to be activated in systemic crisis situations when BGF funds are insufficient to pay out covered deposits.
  - Backstop should be repaid over time by exposing ex-post levies on the banking system.
  - Clarify modalities for BGF activation and interplay with FSA and MoF.

### Cross-border cooperation and regional arrangements
- MoUs and regional groups:
  - Norwegian authorities signed a revised MoU on cooperation and coordination on cross-border financial stability with Denmark, Estonia, Finland, Iceland, Latvia, Lithuania and Sweden (2010 MoU revised on January 31, 2018).
  - Nordic-Baltic Stability Group (NBSG) meets regularly and can invite relevant EU authorities as guests.
  - A 2016 MoU among central banks established procedures for cooperation in granting ELA to a cross-border group.
- Resolution colleges and participation:
  - DNB is the only domestic Norwegian bank with a resolution college; the college agreed on a joint decision on the group resolution plan and resolvability assessment. DNB resolution plan was approved by the MoF in December 2019.
  - FSA participates in six resolution colleges in other EEA Member States and the Banking Union: Swedbank, SEB, Handelsbanken, Danske Bank, Nordea, and Santander Consumer Bank.
  - Regret noted that Norwegian authorities were restricted from formally joining resolution Boards run by the SRB since the BRRD was not incorporated into the EEA framework.
- Recommendations for cross-border arrangements:
  - Enhance cross-border crisis management arrangements within the Nordic-Baltic region and expand focus to scenarios with “truly” systemic elements.
  - Provide transparent and expedited mechanisms to give effect in Norway to foreign resolution measures and address provisions for host–home authority consultation (KA 7.2-consistent provisions).

### Key statistics and structural features (selected exact figures)
- Financial sector assets (excluding the globally invested government pension fund, GPF-G): 290 percent of GDP.
- At end-2018, the Norwegian banking sector consisted of 135 banks of which 95 represented about 4 percent of total banking sector assets.
- Branches of foreign banks operating in Norway: 14.
- Market share of branches of foreign banks: 20 percent (retail) and 35 percent (domestic corporate).
- FSA Resolution Section staffing: Of the 17 staff positions, eight are allocated to the FSA's role as resolution authority, including three with legal background.
- Initial transfer to resolution fund: 55 percent of the existing BGF funds (as of January 1, 2019).
- Target resolution fund size: at least 1 percent of aggregate covered deposits.
- Bilateral meeting frequency: Norges Bank and the FSA hold 8−9 bilateral meetings per year.
- Regular meeting frequencies: usually quarterly (MoF–FSA; NB–FSA), biannual (FSA–BGF).
- Tripartite exercises since 2012: three exercises (2012, 2013, 2016); exercise planned for early-2021; BGF expected to be included in 2021.
- BGF post-transfer size: about NOK 17.2 billion as of end-2019; pre-transfer DGF balance: approximately NOK 35.5 billion at end-2018.
- BGF coverage limit: NOK 2 million per depositor per bank.
- BGF covers about 1.25 percent of insured deposits (post-transfer).
- 98,4 percent of household’s’ and companies’ deposits are fully covered.
- MREL issuance need (Moody’s): approximately NOK 200 billion of nonpreferred senior debt over the next five years for Norway's largest savings banks.

### Selected policy recommendations (Table 1: Norway: Key Recommendations — exact phrasing and priorities)
- 1 Include clearly defined statutory resolution objectives and accountabilities for the FSA in the law (MoF, FSA). ¶18 — ST
- 2 Bolster the FSA’s legal and operational independence and establish a clear division of roles and responsibilities between the FSA and MoF (MoF, FSA). ¶21 — ST
- 3 Exclude active bankers the BGF Board, with no exceptions (BGF). ¶22 — I
- 4 Strengthen the BGF’s integration into the broader resolution framework, including by assigning the resolution authority a seat at the BGF Board (BGF, FSA). ¶23 — ST
- 5 The BGF should not provide open bank assistance (MoF, BGF). ¶86 — ST
- 6 Operationalize the resolution fund (MoF). ¶93 — ST
- 7 Establish a dedicated backstop (funding line) from the government to the BGF and the resolution fund (MoF, BGF). ¶83, 93 — I
- 8 Formalize the early intervention framework, with clear escalation procedures (FSA). ¶56 — I
- 9 Make the new resolution tools operational by establishing the mechanics of the bridge bank and asset separation tools as well as preparing modalities to finance the relevant resolution operations (FSA). ¶73 — I
- 10 Establish an overarching system-wide crisis management framework bringing together relevant agencies to effectively cooperate in formulating feasible responses (FSA). ¶28-30 — ST
- 11 Carry out crisis management exercises between the domestic safety-net institutions, including the BGF (FSA, BGF). ¶31 — ST
- 12 Introduce powers to recognize non-EEA resolution actions (FSA, MoF). ¶100 — MT

- Timeframe legend: I Immediate (within 1 year); ST Short term (1−3 years); MT Medium Term (3−5 years).

*Source: 1norea2020003.*

### EXECUTIVE SUMMARY ____________________________________________________________________________ 4

### 1norea2020003 - EXECUTIVE SUMMARY

### Executive overview
- Norway has made substantial progress in strengthening its framework for financial crisis management and bank safety nets since the 2015 FSAP.
- The Bank Recovery and Resolution Directive (BRRD) has been transposed into the Norwegian legal framework primarily via amendments to the Financial Institutions and Financial Groups Act (FIA), effective as of January 1, 2019.
- Finanstilsynet (the Financial Supervisory Authority of Norway, FSA) has been designated as Norway’s resolution authority.
- Resolution financing options were broadened by establishing a resolution fund; the Deposit Guarantee Scheme Directive (DGSD) has been transposed into Norwegian law even though it has yet to be brought into the EEA agreement.
- The Norwegian legal and regulatory framework now provides a broadened and detailed set of instruments for dealing with weak banks, but remains largely untested in practice.

### Key findings on institutional design and gaps
- Legal framework and implementation
  - The FIA consolidates the previous Savings Bank Act, the Commercial Bank Act, the Financial Services Act, and Guarantee Schemes Act (plus large parts of the Insurance Services Act).
  - Chapter 20 of the FIA applies to (a) banks and mortgage credit institutions, and investment firms that are subject to the minimum requirement for initial capital in the Securities Trading Act, (b) holding companies or other parent company in a financial group of which an institution as referred to in (a) forms part and, finance companies that form part of a financial group as referred to in (b).
  - Chapter 21 applies to insurance undertakings, pension undertakings and holding companies that are not covered by section 20-1 subsection (1)(b). Chapter 21 on public administration sets the framework for winding up institutions.
  - As an EEA member, Norway must transpose EU directives and regulations governing the financial sector into national law; EU regulation (word-by-word) and EBA RTS and guidance apply where relevant.
  - Because Norway is not a member of the EU Banking Union, the Single Resolution Mechanism does not apply to Norwegian banks.
- Governance and operational independence
  - Stronger operational independence of the resolution authority (FSA) is desirable: the Ministry of Finance (MoF) retains significant powers under the new legislation.
  - The legal framework would be enhanced by clearly defined statutory resolution objectives and accountabilities for the FSA and by enabling the FSA to execute its mandate autonomously without interference from the government or the industry.
  - Responsibilities, accountabilities, procedures and information sharing arrangements among relevant bodies need clarification.
- Banks’ Guarantee Fund (BGF) and conflicts of interest
  - A number of reforms reduced active bankers’ presence on the BGF Board, but further improvements are needed.
  - The BGF should exclude any active bankers from its Board and strengthen cooperation with the FSA by having an FSA representative on the BGF Board.
  - Given the broad powers assigned to the BGF, it is important to ensure swift integration into the new recovery and resolution framework.
- Funding backstops and systemic liquidity considerations
  - Authorities should consider a dedicated backstop (funding line) from the government to the BGF and resolution fund to be activated in systemic crisis situations when BGF funds are insufficient to pay out covered deposits.
  - The current arrangements relying on top-up from BGF members could add to liquidity pressures; a government backstop, if activated, should be repaid over time by exposing ex-post levies on the banking system.
- Crisis management and cross-border cooperation
  - An overarching system-wide crisis management framework would help bring together relevant agencies for contingency planning, coordination, and information sharing.
  - Cooperation between Nordic-Baltic supervisors on resolution and crisis management is commendable and should be further intensified; resolution colleges are important but not a substitute for high-level official crisis management preparedness.
- Early intervention, recovery, and resolution planning
  - The early intervention framework would benefit from further formalization with clearer escalation procedures; current prompt corrective action tools are relatively broad but insufficiently sequenced.
  - The FSA’s corrective action and sanctioning powers are limited in some respects.
  - FSA has extended recovery planning requirements from large to medium-sized and smaller banks and provided guidance (including reverse stress-tests); there is room to better integrate recovery planning within risk management and operational testing.
  - FSA’s work on resolution planning, particularly for large and medium-sized banks, needs significant enhancement.
- Resolution tools and operational readiness
  - New resolution tools under the amended FIA (e.g., appointment of an administrator, MREL, bail-in criteria, recovery and resolution planning modalities) should be operationalized without delay.
  - Specific operational steps include establishing mechanics of the bridge bank and asset separation tools, and preparing modalities to finance relevant operations.
  - The resolution fund should be made operational as soon as possible.
  - The build-up of MREL, including the subordinated component, is a high priority; practical execution of bail-in requires more work given that a large majority of MREL (subordinated) instruments are likely to be held by foreign investors.
  - Consideration should be given to a policy decision that the public interest test is met by default for most banks to minimize adverse effects on financial stability; introducing a financial stability exemption for the mandatory minimum bail-in rule could also be contemplated.
  - Existing administrative winding up and liquidation procedures should be integrated into the resolution framework.
- Testing and exercises
  - Because resolution tools are untested in Norway, maintain efforts to conduct intra- and cross-institutional crisis simulation tests.
  - Carry out crisis management exercises between domestic safety-net institutions, including the BGF.

### Key statistics and structural features (selected)
- Financial sector assets (excluding the globally invested government pension fund, GPF-G): 290 percent of GDP.
- At end-2018, the Norwegian banking sector consisted of 135 banks of which 95 represented about 4 percent of total banking sector assets.
- Branches of foreign banks operating in Norway: 14.
- Market share of branches of foreign banks: 20 percent (retail) and 35 percent (domestic corporate).
- Relevant international standards and dates referenced:
  - BRRD (2014/59/EU)
  - Commission Delegated Regulation (EU) 2016/1075
  - Key Attributes (KA) of the Financial Stability Board (FSB), updated in October 2014
  - Core Principles for Effective Deposit Insurance (IADI Principles), updated in November 2014
  - Basel Core Principles for Effective Banking Supervision (BCP), updated in September 2012

### Policy recommendations (Table 1: Norway: Key Recommendations)
- 1 Include clearly defined statutory resolution objectives and accountabilities for the FSA in the law (MoF, FSA). ¶18 — ST
- 2 Bolster the FSA’s legal and operational independence and establish a clear division of roles and responsibilities between the FSA and MoF (MoF, FSA). ¶21 — ST
- 3 Exclude active bankers the BGF Board, with no exceptions (BGF). ¶22 — I
- 4 Strengthen the BGF’s integration into the broader resolution framework, including by assigning the resolution authority a seat at the BGF Board (BGF, FSA). ¶23 — ST
- 5 The BGF should not provide open bank assistance (MoF, BGF). ¶86 — ST
- 6 Operationalize the resolution fund (MoF). ¶93 — ST
- 7 Establish a dedicated backstop (funding line) from the government to the BGF and the resolution fund (MoF, BGF). ¶83, 93 — I
- 8 Formalize the early intervention framework, with clear escalation procedures (FSA). ¶56 — I
- 9 Make the new resolution tools operational by establishing the mechanics of the bridge bank and asset separation tools as well as preparing modalities to finance the relevant resolution operations (FSA). ¶73 — I
- 10 Establish an overarching system-wide crisis management framework bringing together relevant agencies to effectively cooperate in formulating feasible responses (FSA). ¶28-30 — ST
- 11 Carry out crisis management exercises between the domestic safety-net institutions, including the BGF (FSA, BGF). ¶31 — ST
- 12 Introduce powers to recognize non-EEA resolution actions (FSA, MoF). ¶100 — MT

- Timeframe legend: I Immediate (within 1 year); ST Short term (1−3 years); MT Medium Term (3−5 years).

*Source: EXECUTIVE SUMMARY, 1norea2020003.*

### 10.      Responsibilities for crisis management, bank resolution, and financial sector safety

### 10.      Responsibilities for crisis management, bank resolution, and financial sector safety

### Overview
- Crisis management, bank resolution, and financial sector safety nets are distributed among four bodies: the FSA; the Ministry of Finance (MoF); Norges Bank; and the Norwegian Banks’ Guarantee Fund (BGF).
- The FSA is the designated resolution authority, but the MoF retains significant say over resolution decisions.
- The BGF is a legal entity in its own right, operating under a new law. The legal structure of the recently instituted resolution fund is still under discussion.

### Ministry of Finance (MoF)
- The MoF is politically responsible for Norway’s financial sector policies and is the designated responsible ministry for crises management, in accordance with the BRRD (Art. 3 nr. 5).
- Roles and powers:
  - Gives strategic direction to financial oversight agencies under its jurisdiction (FSA and BGF).
  - Retained final powers for decisions of significance for financial stability, including on licensing, approving group structures and resolution plans for larger institutions, and on some early intervention decisions (FIA Section 20-3 (2)).
  - Decides whether to resolve or wind up an institution after receiving a “failing or likely to fail” notification from FSA (Financial Institutions Act, Section 20-13).
  - Receives information from the FSA on other decisions made and other exercises of competence as resolution authority.
- Appeals:
  - Banks can appeal to the MoF concerning any decision taken by the FSA as resolution authority after an act relating to procedure in cases concerning public administration in general.

### Financial Supervisory Authority (FSA) — regulator and resolution authority
- Status and objectives:
  - Independent governmental agency established under the Financial Supervision Act and designated as a resolution authority in the FIA.
  - Relevant resolution decisions are taken by the FSA Board of Directors.
  - Overall objective: supervise financial institutions and promote financial stability and well-functioning financial markets.
  - Intermediate objectives: promote financially sound and liquid institutions and robust infrastructure; ensure satisfactory payments, trade and settlement; enhance investor and consumer protection; facilitate efficient crisis management.
- Scope:
  - Supervises insurance and pension funds, securities firms and markets, debt collection, accounting and auditing activities, and real estate brokerage.
  - Contributes to regulatory framework development; MoF has authority to make regulations but routinely delegates proposal tasks to FSA.
  - Member of the European Supervisory Authorities (without voting rights), as stipulated in the EEA Agreement.
- Internal separation and staffing:
  - Resolution and supervision responsibilities are operationally separated (FIA, Section 20-3).
  - Banking Supervision section: evaluates institutions' recovery plans.
  - Licensing and Crisis Management section: responsible for resolution work, preparing resolution plans, participating in resolution colleges, and resolution work for insurance companies.
  - Of the 17 staff positions, eight are allocated to the FSA's role as resolution authority, including three with legal background.
  - Both sections (and the Capital Adequacy and Solvency Regulation section) report directly to the same Deputy Director General.

### Norges Bank
- Role:
  - Monetary authority and lender of last resort; tasks and responsibilities set out in the Norges Bank Act (NBA).
  - Tasked to maintain monetary stability and to promote the stability of the financial system and an efficient and secure payment system.
  - Advises the MoF “when measures need to be taken by any other party than the Bank to fulfil the purpose of the central banking activities.”
  - Serves as lender of last resort and has broad powers to “grant credit on special terms,” extend credit to banks and other financial sector undertakings, and require adequate collateral.
  - Shall inform the MoF of any matters of importance; in practice exchanges information with the FSA before a decision on credit on special terms.
- Macroprudential oversight:
  - The Financial Stability Department within Norges Bank has responsibility for macroprudential oversight.

### Norwegian Banks’ Guarantee Fund (BGF) and resolution financing arrangement
- BGF status and governance:
  - Mixed public-private legal entity; highest authority is the Board of Directors, with all members appointed by the MoF.
  - All banks with head offices in Norway shall be members of the deposit guarantee scheme.
  - Foreign credit institutions operating through Norwegian branches may be members if home state coverage is not equal.
  - MoF may specify terms for BGF membership and coverage.
  - BGF has a legal obligation to assist the FSA in exercising its tasks as a resolution authority (FIA, Section 20-3 (3)).
- Corporate governance changes:
  - Post-2015 FSAP recommendations led to removal of the requirement to have five active bankers on the Board; current Board still includes one active banker to provide market expertise.
  - No FSA representative on the BGF Board, reflecting FSA concerns about conflicts of interest between supervisory responsibilities and the BGF’s role in bank resolution.
- Resolution financing arrangement (resolution fund):
  - Established in 2019 by the Financial Institutions Act (FIA, Chapter 20, Section X).
  - Initial funding: transferring 55 percent of existing BGF funds to the resolution fund (as of January 1, 2019).
  - Ongoing contributions provided by banks and managed by the BGF.
  - Target size of the resolution fund: at least 1 percent of aggregate covered deposits (based on BRRD).
  - While the BGF carries out administrative tasks related to handling the resolution fund, the institutional set-up (governance, responsibilities, etc.) is still under discussion.

### Crisis preparedness and inter-agency cooperation
- Consultation and meetings:
  - Semi-annual tripartite meetings on financial stability among MoF, FSA, and Norges Bank, chaired by the Permanent Secretary of the MoF.
  - Norges Bank and the FSA hold 8−9 bilateral meetings per year and exchange information on liquidity and funding of Norwegian financial institutions.
  - Regular bilateral meetings: MoF and FSA (usually quarterly); NB and FSA (usually quarterly).
  - Regular biannual higher-level meetings between the FSA and the BGF, mostly to discuss Early Warning System indicators, plus ad hoc meetings and routine data exchange.
- Memoranda of Understanding (MoUs):
  - No formal MoU between the three authorities for crisis management or otherwise.
  - No MoUs between the BGF and any public authorities.
  - Bilateral MoUs between Norges Bank and the FSA exist for payments and securities settlement and clearing systems.
  - MoU between the FSA and the BGF is under preparation but slowed due to confidentiality concerns related to banking sector representation at the BGF Board.
- Simulation exercises:
  - Three tripartite exercises involving MoF, Norges Bank, and FSA since 2012 (also in 2013 and 2016).
    - 2012: solvency problems in a medium-sized bank evolving into a systemic crisis.
    - 2013: focus on ensuring continued operation of the payment system.
    - 2016: severe liquidity stress scenario stemming from an oil shock.
  - Exercise planned for early-2021 will test the new resolution tools provided by the Financial Institutions Act.
  - BGF has not been part of past exercises but is expected to be included in 2021.
- System-wide crisis management:
  - Authorities should consider how a system-wide crisis would be managed, requiring an appropriate governance framework supported by the new resolution framework to bring pertinent agencies together.
  - Authorities expressed concerns that formal inter-agency committee structures may undermine clarity in lines of authority and accountability; noted that largely ad hoc cooperation during the last global financial crisis led to satisfactory outcomes.

### Key statistics and exact figures
- FSA Resolution Section staffing: Of the 17 staff positions, eight are allocated to the FSA's role as resolution authority, including three with legal background.
- Initial transfer to resolution fund: 55 percent of the existing BGF funds (as of January 1, 2019).
- Target resolution fund size: at least 1 percent of aggregate covered deposits.
- Bilateral meeting frequency: Norges Bank and the FSA hold 8−9 bilateral meetings per year.
- Regular meeting frequencies: usually quarterly (MoF–FSA; NB–FSA), biannual (FSA–BGF).
- Tripartite exercises since 2012: three exercises (2012, 2013, 2016); exercise planned for early-2021; BGF expected to be included in 2021.

### Recommendations (selected)
- Define statutory resolution objectives and accountabilities explicitly in law, aligning with FSB KA 2.3. The four objectives to be made explicit: financial stability and continuity of important financial services; protection of depositors; avoiding unnecessary destruction of value and minimizing costs of resolution; considering impact of resolution actions on other jurisdictions.
- Strengthen FSA autonomy:
  - Limit MoF’s role in resolution-related decisions to cases involving public funds, or with systemic implications as outlined by the BRRD, to enhance FSA independence consistent with FSB KA 2.
  - Clarify roles where law currently lacks definition (e.g., determination of “failing or likely to fail”).
- Increase FSA Resolution Section resources:
  - Increase number of staff positions to ensure full operational capacity for resolution preparedness and implementation, particularly for large and complex firms and systemic crises (reference to FSB KA 2.5).
- Re-examine managerial reporting lines:
  - Consider decoupling reporting lines so Licensing and Crisis Management Section reports to one Deputy Director General and the Banking and Insurance Supervision and Capital Adequacy and Solvency Regulation Sections report to a different Deputy Director General to strengthen operational independence.
- BGF governance changes:
  - Exclude any active bankers from the BGF’s Board to avoid conflicts of interest and improve compliance with relevant IADI Core Principles (CP 4, CP 5, CP 6).
  - Utilize active bankers’ expertise via a separate advisory committee if needed.
- FSA representation on BGF Board:
  - Consider appointing an FSA representative to the BGF Board, either by assigning a separate Deputy Director General with resolution responsibilities the Board seat or nominating an independent Board member by the FSA to avoid conflicts with fiduciary duties.
- Legal protection and indemnification:
  - Strengthen legal protection for FSA staff against lawsuits for actions taken in good faith in resolution duties; provide specific statutory provision for indemnification of employees for the costs of any lawsuits, in line with FSB KA 2.6.
  - Current general protection under "Skadeerstatningsloven" exists, but the complexity of new resolution tools warrants higher-threshold protection and explicit indemnification arrangements.

*Source: 10.      Responsibilities for crisis management, bank resolution, and financial sector safety (1norea2020003).*

### 29.      The authorities should establish an overarching system-wide crisis management

### 1norea2020003 - 29.      The authorities should establish an overarching system-wide crisis management

### System-wide crisis management framework
- Establish an overarching system-wide crisis management framework to bring together pertinent agencies to effectively cooperate in formulating feasible responses during times of heightened financial sector stress.
- Framework elements:
  - Escalation protocols with communication modalities between and within agencies.
  - A forum to coordinate responses within an earlier agreed modality to potential threats to financial stability.
  - Coordination of all individual contingency plans to the extent of cross-dependencies and linkages between different agencies, both bilaterally and multilaterally, under the framework provided by the high-level crisis preparedness and management committee.
  - Objectives, principles, and processes dealing with stresses in the Norwegian financial system could be set out in a special MoU between the relevant authorities.

### High-level coordinating body and inter-agency arrangements
- Consider establishing a high-level coordinating body with a mandate for system-wide contingency planning to facilitate coordination and information sharing on crisis prevention and management.
  - The body need not be a decision-making entity; it could provide a setting for discussions on the government role and specific crisis-management policies (e.g., provision of fiscal resources for solvency support of systemic banks and government guarantees).
- Inter-agency working groups:
  - Undertake detailed policy development (e.g., crisis-resolution strategies, policy and operational guidance, pre-drafted documentation).
  - Conduct crisis-simulation exercises.
  - May occasionally involve other agencies if warranted.
  - Particular focus recommended on crisis communication.

### Crisis-simulation exercises
- Conduct broad, severe crisis simulations, along with desktop exercises, on a periodic basis (e.g., biennial), and targeted simulations more frequently.
  - Importance stressed because recent legislative and policy developments in the Norwegian crisis management framework have not been tested.
- Ensure agency-specific and more regular single- and multi-agency financial crisis-simulation exercises.
- The BGF, with strengthened independence from the industry and relatively broad powers, should be invited to participate in crisis-simulation exercises.

### Early intervention arrangements — Recovery planning
- Recovery plans identify options to restore financial strength and viability when a firm comes under severe stress; credible options should cover idiosyncratic and market-wide stress scenarios, capital shortfalls, liquidity pressures, and timely implementation processes.
- Essential elements of recovery plans:
  - Define clear backstops and escalation procedures with quantitative and qualitative triggers for implementation to prevent undue delays.
- Legal and regulatory requirements (post-amendment of the Financial Institutions Act):
  - Recovery plans must: (i) contemplate various situations involving serious macroeconomic and financial disruptions; (ii) include several models for application of tools to restore financial position and ensure timely implementation; (iv) include an analysis of how and when the institution may avail itself of central bank facilities and identify qualifying collateral; (v) not assume any access to or receipt of public financial support; and (vi) be updated annually, or more frequently if required by the FSA.
- Coverage:
  - All banks operating in Norway, including subsidiaries of foreign banks, are required to have in place a recovery plan.
  - Recovery plans are mandatory for banks, credit institutions (including mortgage companies), financial holding companies, parent companies of financial groups, and financial service companies that are part of a financial group. Some investment firms (with certain licenses) are obliged to have recovery plans.
  - Institutions must also have other contingency plans (liquidity, IT, payments, settlements).
  - Responsibility for evaluating institutions' recovery plans lies with the FSA’s Banking Supervision Section.

### Recovery planning implementation and oversight
- Insignificant subsidiaries: individual recovery plan may not be required if sufficiently covered by the group recovery plan, in line with the EBA recommendation on coverage of entities in group recovery plans.
  - Currently only two subsidiaries of foreign banks operate in Norway; the FSA has not assessed whether they have critical functions and has not required individual plans but will consider annually.
  - FSA participates in supervisory colleges of these firms and in assessment of group recovery plans and joint decision processes.
- Branches: FSA participates in all supervisory colleges of foreign banks’ branches operating in Norway. Branches, not being stand-alone corporate entities, are not required to have individual recovery plans; coverage is ensured through group recovery plan assessment via supervisory colleges.
- FSA actions:
  - Developed internal assessment criteria for assessing group recovery plans' coverage of activities in Norway.
  - Actively requested re-classification of certain functions of foreign branches in Norway as critical in a number of cases.
  - Prepared standardized modules for recovery plans for small and large domestic institutions, and for significant foreign branches.
- Guidelines and proportionality:
  - FSA published guidelines on bank recovery planning in 2019 (Circular 10/2019), specifying content, scope, and expectations in light of proportionality; requirements take into account EBA guidelines and RTS.
  - According to EBA RTS, FSA has imposed simplified obligations on recovery planning for small and non-complex institutions.

### Recovery-plan assessments and testing
- In 2019 the FSA assessed nine of the largest banking group recovery plans (in addition to recovery plans of foreign branches and subsidiaries), providing written feedback in several cases.
- For DNB (largest systemically important institution), the FSA has performed annual in-depth assessment of the group recovery plan since 2013 and has required the group to perform dry-run exercises to test the group recovery plan for the last two years.
- Requirements for recovery plans:
  - All available recovery plans must use multiple recovery scenarios, including at least one near-default scenario.
  - FSA requires institutions to apply a reverse stress scenario when estimating overall recovery capacity as part of guidelines for generating near-default scenarios; not all banks have carried this out yet.
- Testing practices:
  - Some banks have begun embedding operational testing into risk management and testing recovery plans.
  - FSA recently required all institutions to test recovery plans through simulation exercises on a regular basis before updating the recovery plan; yearly tests should focus on different aspects (communication, etc.).
  - FSA will receive the report on simulation exercises along with the recovery plan. So far only a few recovery plans have been tested using simulation exercises because Circular 10/2019 was issued only last year.

### Resolvability and supervisory powers
- Recent changes give FSA powers to pre-position supervised institutions to improve resolvability.
  - Resolvability assessment is made at the same time as and for purposes of drawing up and updating the resolution plan.
  - If substantive impediments to resolvability are found, the institution should propose measures to address or remove impediments.
  - FSA assesses “actual and potential obstacles” for implementing recovery options; institutions must assess internal and external interconnectedness and financial, legal, and operational impediments and propose mitigation measures.
- FSA may require institutions to address shortcomings and may direct banks to:
  - (i) examine need to establish or revise intragroup financing agreements or draw up service agreements to cover critical functions;
  - (ii) limit maximum individual and aggregate exposures;
  - (iii) divest specific assets;
  - (iv) limit or cease specific existing or planned activities;
  - (v) restrict or refrain from development of new or existing business lines or sale of products;
  - (vi) simplify institution or group structure to ensure critical functions can be legally and operationally separated through application of resolution tools;
  - (vii) where part of a mixed group, set up a separate holding company for the institution if necessary to facilitate resolution without adverse effects on the nonfinancial part of the group; and other measures as outlined in Financial Institutions Act (Section 20-6 (3)).

### Resolution planning
- Purpose:
  - A resolution plan determines an institution's critical functions, identifies impediments to resolvability, prepares for possible resolution, describes preferred resolution strategy and tools, and concludes with a resolvability assessment and MREL determination.
  - MREL: “minimum requirement for own funds and eligible liabilities” to ensure sufficient loss-absorbing capacity.
- FSA activity:
  - Developed resolution plans for eight of the country's largest banks and is currently developing plans for seven more; a resolvability assessment will be included in each bank's plan.
  - Responsibility for drawing up resolution plans lies with the FSA’s Licensing and Crisis Management Section.
  - Resolution planning is based inter alia on EU regulation (EU) 2018/1624 and focuses on preferred resolution strategy, MREL requirements, assessment of IT systems, critical financial market infrastructures, internal and external interconnectedness, and other factors.
  - FSA is also working on communication plans for each individual resolution strategy.
  - Resolution plans must be updated annually and after any change that necessitates a change to the resolution plan.
  - FSA is considering delegating preparation of resolution plans for smaller banks to the BGF.
- Strategy:
  - Resolution plan for banking groups should be based either on resolution action at parent-company (group as single entity) level or at level of individual legal entities.
  - FSA considers single-point-of-entry resolution strategies more optimal in the Norwegian context; has yet to determine this for foreign subsidiaries.

### MREL and implementation timelines
- MREL targets are included in banks’ resolution plans.
  - Norway has adopted MREL rules as part of the wider BRRD.
  - Nine of the largest banking groups have received advanced notice for their MREL requirements; six groups will receive their targets in 2020.
  - Plans for complying with MREL requirements should be submitted by the first group of institutions by 1Q 2020.
  - Most banks that have received their MREL target fulfil the total MREL requirement.
  - The MREL full subordination requirements—the replacement of senior unsecured bonds and certificates with senior nonpreferred senior debt—have to be reached by end-2022 (with an option to extend the deadline).
    - Footnote: In light of the Corona virus pandemic, the deadline for fulfilling the subordination requirement has been postponed to 1 January 2024; this will be reflected in individual decisions when updated by year end 2020.
  - So far, no such instruments have been issued by the Norwegian banks.
  - Retail client exposure to existing senior bank bonds has not been considered a substantial risk in Norway.
  - BRRD2 includes provisions to severely limit issuance of bail-in-able instruments toward retail clients; legal limitations will come into force at a later stage.
- Quantitative note:
  - According to Moody’s, Norway's largest savings banks will need to issue approximately NOK 200 billion of nonpreferred senior debt over the next five years to cover their minimum requirements of MREL. The amount equates to about two-thirds of the banking system's debt, which will mature by end-December 2022.

### Cross-border colleges and specific cases
- DNB:
  - DNB is the only domestic Norwegian bank with a resolution college.
  - The resolution college for DNB has agreed on a joint decision on the group resolution plan and resolvability assessment.
  - DNB resolution plan was approved by the MoF in December 2019.
  - FSA communicated MREL requirements for DNB in line with the joint decision of the college.
- Cross-border coordination:
  - For cross-border banks domiciled in Norway, FSA’s assessment and follow-up of the group resolution plan shall be undertaken in consultation with the resolution authority of another EEA member state when the group has a subsidiary in that state.
  - If the group has a branch with significant activities in another EEA member state, the FSA shall consult that state's resolution authority.
  - FSA participates in six resolution colleges in other EEA Member States and the Banking Union: Swedbank, SEB, Handelsbanken, Danske Bank, Nordea, and Santander Consumer Bank.
  - Regret noted that Norwegian authorities were restricted from formally joining resolution Boards run by the SRB since the BRRD was not incorporated into the EEA framework; FSA expects the issue to be resolved going forward.

### Recommendations
- Accelerate work on resolution planning, particularly for large- and medium-sized banks.
- Ensure cooperation between units responsible for recovery planning and resolution planning; recovery and resolution planning should form part of an iterative process where resolvability assessments inform resolution plans and test feasibility.
- Consider introducing templates for crucial first-hand resolution data to be delivered by banks under a short period (preferably within a day), with subsequent testing requirements.
- Simulation exercises must be evaluated, documented, and approved by the Board of Directors.

*Source: 1norea2020003 - 29.      The authorities should establish an overarching system-wide crisis management framework.*

### 48.      The build-up of MREL is of high priority.  More conceptual and legal work is also needed

### 48.      The build-up of MREL is of high priority.  More conceptual and legal work is also needed

### Build-up of MREL and operational readiness
- The build-up of MREL is of high priority. More conceptual and legal work is needed for the practical execution of the bail-in tool, given that the large majority of MREL (subordinated) instruments could be held by foreign investors.27
- With regard to systemic firms, further efforts are needed to ensure the operational readiness to rapidly execute recovery and resolution measures; some of which the authorities are already working on.
- The option to extend the deadline for subordination purposes should be used sparingly.
- Footnote: While there is no data available for Norway, the non-residents hold more the 90 percent of MREL in Denmark.27

### Early Intervention and Prompt Corrective Action — framework and powers
- Early identification of problem institutions and prompt remedial action is essential to reduce moral hazard and prevent the application of more intrusive resolution measures.
- An overall legal framework would benefit from a logical progression of increasingly stringent and intrusive powers (from relatively minor issues to near-insolvency, insolvency, and liquidation).
- Supervisory interventions occur under regular supervisory frameworks or formal intervention regimes; formal intervention regimes specify triggers and a set of measures and generally permit more intrusive actions (for example, removal/replacement of senior managers and/or Board members).28
- The FSA strengthens monitoring when a bank’s situation deteriorates and requires enhanced reporting.29 Examples:
  - Introduced daily reporting on liquidity and daily management calls.
  - Enhanced communication with executive management and Board of Directors.
  - Strengthened onsite and offsite activities.
  - Institutions must report breaches of recovery indicators (benchmarks).
  - FSA has ensured recovery indicators are calibrated to allow timely action before early intervention measures are applied; most institutions adopt a conservative calibration.
- The prudential framework provides the FSA with a range of discretionary powers, including powers in the Financial Supervision Act and the Financial Institutions Act (FIA), Section 14-6 (3). These include powers to:
  - require changes in internal controls;
  - require maintenance of a higher capital ratio than the minimum requirement;
  - require reduction of credit risk to particular customers;
  - rectify failures in institutions’ bodies discharging their duties;
  - correct inappropriate bank investments or activities.
- More intrusive supervisory early intervention powers are listed in FIA Chapter 20 (20-11 to 20-14) and include powers to:
  - change organization and management;
  - curtail or change business and reduce risks;
  - change remuneration policies;
  - limit dividend payouts for breaching solvency (see Section 14-6 (3)).30
- Before issuing an order under Chapter 20, the FSA must inform the group's supervisory college or resolution college, the MoF, Norges Bank and the BGF. As a last resort, after MoF approval, the FSA may adopt a decision to write down or convert own funds; if insufficient, the MoF may adopt resolution or winding up proceedings.31,32

### Early Intervention — specific tools and use of temporary administrators
- Under significant deterioration or serious infringements, the FSA may order changes to Board/senior management composition and, if insufficient, may appoint a temporary administrator for up to one year to replace or work with the Board.33
- The FSA can issue directions to subsidiaries of authorized non-operating holding companies (NOHC) and subsidiaries of regulated entities, including:
  - a ‘catch-all’ power to instruct on matters not contemplated elsewhere in the FIA;
  - directions to facilitate resolution in normal times or during crisis;
  - extend recapitalization directions to a regulated entity’s NOHC.

### Recommendations on early intervention (paragraphs 56–60)
- The early intervention framework would benefit from further formalization:
  - Current corrective tools are broad, not sufficiently sequenced, and lack a clear escalation framework (progressive gradation of sanctions).
  - Framework could use more transparency, less discretion, and greater predictability of FSA actions to reduce delays in deteriorating economic environments.
  - FSA is introducing a more comprehensive early warning system based on selected indicators of capital, assets, earnings, and liquidity.
- Procedures should provide more specific guidance on when early intervention is needed and operational aspects of transitioning to more intrusive actions and to resolution:
  - Clarify triggers and mechanisms for moving from early intervention to resolution, and from resolution to compulsory liquidation.
  - Establish explicit triggers for entry into resolution (when restoring viability with corrective actions is impossible).
  - Provide indicative actions the FSA could take at each stage.
  - Align broad-based early intervention powers in the Financial Supervision Act with similar powers in the FIA and bridge them with powers in Chapter 20.
- The FSA has developed and continuously tests an early warning framework and established a task force to further develop the early intervention framework and procedures; the FSA intends to comply with the EBA guidelines on early intervention triggers (EBA/GL/2015/03).
- Limitations of FSA corrective and sanctioning powers:
  - The FSA does not have power to revoke bank licenses, except where delegated by the MoF.
  - All supervisory decisions and corrective measures can be appealed to the MoF.
  - The FSA has very limited sanctioning powers; laws do not generally permit fines except in money laundering cases.
  - A daily fine can be applied by the MoF (power currently delegated to the FSA) during breaches, but the fine amount is limited and cannot be applied once a bank has rectified its situation.34,35
- Need to operationalize temporary administration measures:
  - Specify administrator tasks and powers in advance.
  - Define qualifications for special administrators and maintain a regularly updated list of preapproved potential administrators.
  - Amend legislation to clarify that the cost of special administration is borne by the institution under administration.

### Emergency Liquidity Assistance (ELA) — legal basis and procedures
- The Norges Bank Act provides the central bank with a sound legal basis to perform its lender-of-last-resort (LOLR) function.36
- Norges Bank can provide liquidity support in domestic and foreign currency to eligible institutions including banks and nonbank financial institutions.
- Norges Bank has published guidelines for applying for ELA (“credit on special terms”) specifying required information, including:
  - profit and loss and capital adequacy calculations;
  - forecasts on income and capital adequacy;
  - plan for recapitalization;
  - liquidity reports and liquidity buffers;
  - information on funding, mark-to-market values of securities portfolios and off-balance sheet portfolios; and
  - impairment of loans and other claims.
- Norges Bank provides ELA only to domestic financial institutions and subsidiaries of foreign institutions; a foreign bank branch will not be considered eligible for ELA.
- A Nordic-Baltic MoU specifies that an ELA request should be submitted to the home central bank; the branch's host-country central bank “will strive to assist.”37
- In the 2019 Nordic-Baltic crisis-simulation exercise, Norges Bank simulated a swap arrangement to provide Norwegian kroner for a regional peer central bank to provide ELA in Norwegian kroner to a large foreign bank with a branch in Norway that was systemically important.

### Recommendations on ELA (paragraphs 64–65)
- Enhance information exchange between Norges Bank and the FSA prior to and after activating ELA:
  - Use a pre-arranged template for banks’ data (e.g., collateral, provisioning, forward-looking solvency assessments) to support informed solvency decisions.
  - Involve the FSA (including its Resolution Unit) closely in assessing banks’ plans to restore liquidity and monitoring progress.
  - Run a simulation test with FSA and MoF, including processes for obtaining legal clarity on non-standard collateral under the Financial Collateral Act and providing a government indemnity if necessary, to ensure timely ELA provision.
- Norges Bank should continue to refine modalities to provide liquidity support in foreign currencies quickly in severe crises:
  - For significant stress scenarios where the home central bank cannot provide ELA (e.g., Kaupthing Bank in 2008), authorities should be ready—operationally and legally—to provide liquidity to foreign bank branches considered systemically important for Norway, immediately before or after resolution decisions regarding the branch.

### Bank resolution — statutory tools and processes
- Norway has transposed BRRD principal resolution tools and optional government financial stabilization tools into law, complemented by powers such as appointing a special administrator and imposing stays on rights to terminate contracts or execute collateral.
- The BRRD allows national insolvency regimes to remain applicable as an alternative or alongside resolution and requires resolution authorities to have the ability to pre-empt insolvency proceedings. Broadly, the resolution framework introduced by the BRRD is consistent with the FSB KA. However, MoF consent is required if the FSA initiates resolution.
- The Financial Institutions Act provides several resolution options:
  - complete or partially transfer the business to another institution;
  - complete or partially transfer the business to a bridge institution;
  - transfer assets and liabilities to an asset management vehicle;
  - bail-in.
- Under the Norwegian resolution strategy, failed institution losses would be absorbed through write-down of relevant capital instruments and, if necessary, a bail-in. The resolution decision should be adopted by the MoF after receiving a notification from the FSA, along with a valuation of the failing institution's assets and liabilities.
- If a bank is failing or likely to fail, the institution shall notify the FSA.38 The FSA shall notify the MoF if it considers there is no reasonable prospect of rectification through private-sector action or early intervention; the notification must assess whether winding up under public administration or resolution is in the public interest.39
- The FSA must immediately ensure a valuation of the institution’s assets and liabilities is carried out. With MoF consent, the FSA may adopt a decision to write down or convert own funds in accordance with rules governing priority under competition law.
- If public interest does not call for resolution, the MoF will wind up the institution under public administration:
  - Former bodies (Board and general meetings) become inoperative and the administration Board assumes their authority.
  - Settlement and winding up follow the Debt Settlement Proceedings and Bankruptcy Act “insofar as appropriate.”
  - The FSA makes decisions required pursuant to the Debt Settlement Proceedings and Bankruptcy Act, except determining claims (court of first instance).
  - Resolution options are not available under wind up (e.g., transfer of IT or payment system services), but depositor preference is ensured (FIA, Section 20-32).40

*Source: Excerpt from the Norway FSAP chapter (provided content).*

### 70.      Norway has exercised its option under the BRRD, in which a decision to take a crisis

### 1norea2020003 - 70. Norway resolution framework and deposit guarantee scheme

### Judicial review, enforceability, and remedies for resolution decisions
- Norway exercised its option under the BRRD whereby a decision to take a crisis prevention or crisis management measure does not require ex ante judicial review.
- Courts' right to judicial review of administrative agencies' discretion is limited to cases where agencies exercise their powers arbitrarily, abusively, or based on irrelevant facts or reasons.
- A decision to resolve or to wind up an institution shall be immediately enforceable; “enforcement may nonetheless be suspended provided this would not be against the public interest and would not weaken the effect of the decision or the exercise of authority.” (FIA, Section 20-44 implementing Article 85, No. 4 (b) BRRD)
- Authorities view the exception to immediate enforcement as to be construed narrowly because Norwegian courts, not specialized and facing short review periods, would be restrained in re-examining the resolution authority's discretion without weakening the decision's effect.
- The FIA does not explicitly state that the only remedy for a complainant, if a challenge succeeds, is compensation; the FSA finds it challenging to see any other remedy in the current legal framework except rare cases where courts suspend enforcement.

### Creditor ranking, depositor preference, and safeguards
- Recent changes clarified the ranking of unsecured debt instruments in insolvency.
- Depositors are awarded a higher claim against the bank’s assets than other unsecured creditors: covered deposits and the deposit guarantee scheme’s right to recourse rank first.
- Eligible deposits that exceed the amount for BGF coverage have a lower priority than covered deposits but are higher than ordinary unsecured, non-preferred liabilities.
- Certain claims—such as unpaid salary, taxes and duties—rank prior to the aforementioned liabilities.
- Work on implementing Directive (EU) 2017/2399 (amending BRRD as regards ranking of unsecured debt instruments in insolvency hierarchy) is ongoing; the directive does not change current depositor preference and establishes a framework for nonpreferred senior debt (for MREL purposes). Proposed changes in Norwegian regulation were on public hearing until September 2019.
- The flexibility to depart from the general principle of equal (pari passu) treatment of creditors of the same class, with transparency about reasons to contain systemic impact or maximize value for all creditors (as per FSB KA 5.1), remains yet to be introduced.
- Safeguards: requirement that no creditor be worse off as a result of resolution than in liquidation (NCWO). Resolution tools should not be applied so that partial transfers leave uncovered creditors/shareholders receiving less than in liquidation. The FSA shall not write-down/convert own funds or apply bail-in if shareholders and creditors would incur greater loss than in winding up. (FIA, Section 20-37)

### Recommendations — resolution framework governance and operationalization
- Clarify division of responsibilities in the Financial Institutions Act between the MoF, the FSA, and the BGF: which institution makes final determination on “failing or is likely to fail,” whether MoF conducts separate assessment or relies on FSA, and procedures if MoF does not consent to FSA valuation for failing bank’s assets and liabilities (Sections 20-15 and 20-16).
- Provide a more nuanced decision tree between MoF, FSA, and BGF for BGF activation.
- Operationalize resolution tools: invest resources in preparing resolution manuals for all tools and for temporary administration during early intervention. Use temporary administrator powers with caution due to risks of deposit runs and contagion; make appointment available but not mandatory and not typically considered a resolution tool in its own right.
- Discuss mechanics of bridge bank and asset separation tools within FSA (preferably among all relevant institutions), document use, and work out financing either through DGS or resolution fund.
- Develop detailed current data on banks’ assets to enable swift asset valuations for solvency and viability assessments in resolution.
- Consider applying multiple resolution options given limited bail-in experience; while authorities prefer bail-in, deposit and asset transfers funded by DGF on a least-cost basis with continuity of critical functions, harmonized creditor hierarchy (for NCWO), and access to funding should be considered. “Sale of business” operations and bridge banks are time-tested and potentially cost-effective, especially in systemic crisis.
- Consider policy decision that the public interest test is met by default for most banks and introduce a financial stability exemption for the mandatory minimum bail-in rule, to be used only in systemic crisis and subject to strict conditions and governance arrangements.
- Integrate existing administrative winding-up and liquidation procedure into the resolution framework; include liquidation in the resolution toolkit and make purchase and assumption (P&A) powers available in this regime. These liquidation tools could be exercisable by the FSA. Insolvency procedure would continue to be subject to ex-post judicial review and monetary compensation requirements.

### Deposit Guarantee Scheme (BGF) — coverage, funding, powers, and operations
- Coverage and cross-border arrangements:
  - BGF guarantees deposits up to NOK 2 million per depositor per bank (more than twice EUR 100,000 applicable in EU member states).
  - During deposit payouts to foreign branches, distributed amount is reduced by amount covered by any foreign DGS.
  - Agreements exist to ensure rapid transfer of funds from foreign (home-country) DGS to comply with a seven-day legally mandated payout deadline.
  - All banks headquartered in Norway are required to maintain membership in the NBGF. Branches of non-Norwegian banks have the right, but are not required, to seek membership.
  - FIA, Chapter 19 covers most aspects of the DGSD; Norway has transposed the DGSD into Norwegian law.
- Funding and size:
  - BGF is funded on an ex-ante basis by participating banks using a risk-based contribution model.
  - As of January 2019, 55 percent of the BGF funds were transferred to the newly created resolution fund.
  - Current (post-transfer) BGF size is about NOK 17.2 billion as of end-2019 and covers about 1.25 percent of insured deposits.
  - 98,4 percent of household’s’ and companies’ deposits are fully covered.
  - The fund can cover deposits of the 20 smallest banks (there are about 6 banks in Norway with assets below NOK 1 billion and 84 banks with total assets below NOK 10 billion).
  - According to latest audited annual accounts, the balance of the DGF was approximately NOK 35.5 billion at end-2018 (pre-transfer context).
- Permitted uses and powers:
  - BGF’s main objective is to pay out covered deposits and provide funding for resolution activities (FIA, Section 20-54).
  - BGF may be used to secure covered depositors' continued access where resolution triggers: (i) bail-in applied by amount by which covered deposits would have been written down had covered deposits not been excluded; (ii) transfer of certain assets/liabilities where BGF covers amount of losses covered depositors would have borne had creditors' losses been apportioned by least-cost method. BGF contribution to be determined by FSA in consultation with BGF. FIA, Section 20-54 (2): “The amount shall not exceed the loss the guarantee scheme would have had to bear had the institution been wound up under section 20-29.”
  - BGF may use scheme resources to finance measures securing covered depositors' continued access, including transfer of assets and liabilities and deposit book transfers in winding up.
  - BGF has the right to utilize guarantee scheme resources for “alternative (preventive) measures” to prevent a member institution from being resolved (e.g., granting loans, issuing guarantees, acquiring equity certificates), preconditioned on expectation that the measure's costs will not exceed costs of repaying covered deposits. (FIA, Section 19-13 (2) d) transposed from DGSD Article 11).
  - In the 2008 crisis, BGF provided liquidity to Glitnir’s Norwegian subsidiary (liquidity provided by Norges Bank to BGF).
  - Alternative measures have not been used by the BGF since then.
- Back-up funding and governance:
  - FIA requires DGF to have back-up funding facilities but does not provide modalities. If DGF assets are insufficient, BGF members expected to pay extraordinary contributions (capped yearly by 0.5 percent of member's covered deposits). If DGF is smaller than minimum requirement (0.8 percent of covered deposits), shortfall shall be covered by guarantee from members.
  - BGF is considering options to establish funding lines with international and domestic banks and has approached MoF.
  - Legal framework gives FSA rights to confer tasks to BGF; delegating resolution planning for smaller banks to BGF has been under consideration. FSA approves BGF risk-based model and is appellate instance to BGF decisions in certain instances.
- Operational preparedness:
  - BGF staff active in assessing banks’ preparedness for depositor information lists required for payouts. Under new framework, BGF expects broader role in assessing single customer view files (FIA, Section 19-14).
  - BGF has a relatively large staff (currently 17) and meets semi-annually with FSA to discuss vulnerabilities (early warning system indicators). It joins FSA for on-site inspections and maintains its own list of problem banks; conducts onsite visits in coordination with FSA.
  - Pay-out elements are regularly tested with banks; law requires “stress-tests of the administrative systems shall be performed regularly and at least every three years.”

### Recommendations — BGF operational and funding arrangements
- Clarify modalities for BGF activation under various scenarios, including interplay with FSA and MoF, in regulations and procedures.
- Continue regular testing of relevant systems of all banks to ensure swift deposit-payout; continue establishing clear and tested procedures to ensure swift payout by home-country DGS to foreign branches to meet seven-day payout period.
- Establish a dedicated government backstop in addition to top-up levies on banks: ex-post levies in case of government funding not fully recovered.
  - Note: introducing additional levies on banks during financial stress may lead to adverse consequences; credit-line backstops from banks or syndicates may be counterproductive/expensive.
- BGF should not provide open bank assistance; preventive measures outside resolution should be used only in exceptional cases with strong prospects for rehabilitation and restoring long-term viability. Allocating deposit insurance funds to insolvency/solvency support that exposes scheme to significant uncertainty and risk should be phased out.
- Given recent steps to broaden pool of ELA-eligible collateral, BGF should refrain from granting liquidity assistance.

### Resolution funding, government stabilization tools, and recapitalization
- Government stabilization tool ensures continuation of critical functions and avoids contagion; objectives include protection of deposits, client funds, and client assets.
- As required by BRRD, there must be contribution by shareholders and creditors to loss absorption and recapitalization equal to not less than 8 percent of total assets through write-down and conversion before using government stabilization tools and resolution financing arrangements (resolution funds). (FIA, Section 20-15 (3))
- In serious disruptions, MoF may use government stabilization tools after a bank has been placed under resolution and may recapitalize by injection of CET1, AT1, and AT2 capital, or “acquire ownership of the institution or its business and transfer the ownership to a public authority or a state-owned enterprise.” (FIA, Section 20-28 (2))
- Foundations for a new resolution fund are in FIA (Sections 20-50 to 20-57): the resolution fund will be ex ante funded by banks using risk-based contributions (initially by splitting resources accumulated in BGF). Minimum size set at 1 percent of aggregate covered deposits. If resources fall below minimum, shortfall covered by guarantee from participating institutions.
- No decision has been taken to operationalize the resolution fund; in practice it is so far just a separate portfolio of DGF-managed funds (with lower liquidity requirements than funds held for the deposit guarantee scheme).

*Source: Extract from IMF chapter on Norway resolution framework and deposit guarantee scheme (content unit 1norea2020003 - 70).*

### 92.      The resolution fund may be used to support the use of resolution tools. In particular, it

### Resolution fund may be used to support the use of resolution tools

### Use of the resolution fund (paragraph 92)
- The resolution fund may be activated for the following purposes:
  - (a) to guarantee the assets or the liabilities of an institution under resolution, its subsidiaries, a bridge institution or an asset management vehicle;
  - (b) to make loans to institutions referred to in (a);
  - (c) purchase the assets of an institution under resolution;
  - (d) to make contributions to a bridge institution or to an asset management vehicle;
  - (e) to pay compensation for losses to shareholders, creditors, and the deposit guarantee scheme; and
  - (f) to contribute to bail-in operations.

### Emergency Liquidity Assistance (ELA) and Norges Bank (paragraph 93)
- Norges Bank communication clarified that banks in resolution may also be considered eligible for ELA.
- Norges Bank emphasized:
  - the time-criticality of a resolution process;
  - the legal requirement to grant liquidity only to solvent banks.
- Norges Bank will consider bank solvency at the moment a decision is made to recapitalize it by the FSA.
- Norges Bank indicated the need for recapitalization decisions to remove all doubt about legality of FSA write-down and conversion decisions.
- It remains to be clarified whether the FSA decision has to be approved by the MoF for Norges Bank to grant liquidity support in resolution.

### Recommendations on resolution financing (paragraphs 94–95)
- Define clear strategies for government stabilization tools, including liquidity assistance, for institutions in resolution.
- Central bank liquidity provision:
  - The central bank should be able to provide liquidity subject to safeguards, including possibly in the form of a government guarantee, to an institution whose current solvency may be in doubt, but which is considered systemic and viable in the context of a realistic time-bound resolution plan.
- Ensure the resolution fund can secure needed amounts:
  - The authorities will have to make sure that the resolution fund would be able to secure the needed amounts within a short period of time and on a continuous basis.
- Operationalize the resolution fund as soon as possible.
  - Clarify roles and responsibilities of the FSA and the MoF in triggering resolution financing.
  - The resolution fund should have a backstop with the government, as with the DGF.
  - Consider establishing broad principles as to how the government will recover the costs of funding a resolution through the resolution fund to enhance protection for taxpayers.

### Cross-border cooperation (paragraphs 96–99)
- Memoranda of Understanding and regional cooperation:
  - Norwegian authorities signed a new MoU on cooperation and coordination on cross-border financial stability with counterparts in Denmark, Estonia, Finland, Iceland, Latvia, Lithuania and Sweden (2010 MoU revised on January 31, 2018).
  - Objective: facilitate cooperation and coordination to promote financial stability in the region, focusing on functioning of the financial system and counteracting the rise and potential spread or escalation of a financial crisis.
  - The parties recognize their common interest regarding financial stability from potential system inter-linkages between their countries.
- Nordic-Baltic Stability Group (NBSG):
  - Meets regularly, at least annually, can meet more often under extraordinary circumstances; relevant EU authorities (ECB and SRB, for example) can be invited as guests.
  - A separate 2016 MOU among central banks established procedures for cooperation in granting ELA to a cross-border group.
- EU/EEA law adaptation and NBSG role:
  - Norway's implementation of BRRD and DGSD should not weaken the role of the NBSG.
  - Establishment of resolution colleges means institution-specific cooperation happens within colleges with the EBA coordinating; the NBSG’s MOU shifted toward general government-level cooperation and coordination to promote financial stability.
- NBSG simulation exercise (2019):
  - Involved 31 authorities from the region, the SRB, and the EU Commission (ECB as observer).
  - Lessons included need for stronger coordination in communication (e.g., issuing press releases), importance of written materials in advance of conference calls, clear conclusions and next steps after tele-conferences.
  - Need clearer communications regarding which creditors would incur losses, clearer understanding of when the resolution college should be involved/informed, and addressing insufficient involvement of central banks in resolution college information exchange or meetings.
  - Improve clarity of operational procedures vis-à-vis the DGFs.

### Legal framework for cross-border resolution (paragraphs 99–101)
- Financial Institution Act (FIA) provisions:
  - Provides framework for resolving a Norwegian institution that is part of a financial group headquartered in another EEA member state.
  - If conditions are met, the FSA shall notify the group-level resolution authority and the members of the resolution college for the group.
  - If the group-level resolution authority considers that the resolution actions would not make it likely that the conditions for resolution would be met in relation to group entities established in the EEA member state, the resolution actions may be implemented. (FIA, Section 20-47 (2).)
  - The MoF has powers to resolve or wind up under public administration a branch of an institution established outside the EEA if this is in the public interest. (FIA, Section 20-49 (3).)
- Recommendations to strengthen cross-border crisis management and resolution framework:
  - Enhance cross-border crisis management arrangements within the Nordic-Baltic region; resolution colleges are important but not a substitute for high-level official crisis management preparedness.
  - Expand focus within regional cross-border crisis management groups to cover scenarios with “truly” systemic elements (e.g., multiple systemic banks failing); consider reverse stress-testing analogies.
  - Authorities encouraged to be active in pushing NBSG boundaries to strengthen regional crisis readiness.
  - Strengthen cross-border bank resolution framework:
    - Ensure the revised legal framework adequately addresses cross-border resolution aspects.
    - Provide transparent and expedited mechanisms to give effect in Norway to foreign resolution measures, either by mutual recognition or by taking measures that support and are consistent with foreign resolution authorities’ measures.
    - Address KA 7.2-consistent provisions: where a host authority takes discretionary national action, it should give prior notification and consult the foreign home authority—a provision that seems missing for branches and subsidiaries that are part of non-EEA banking groups.

*Source: Extracted paragraphs 92–101 from the provided IMF content unit.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1norea2020003.pdf_