## 1finea2023004 ## Source details **Canonical URL:** [1finea2023004](https://www.imf.org/-/media/files/publications/cr/2023/english/1finea2023004.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2023/english/1finea2023004.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2023/english/1finea2023004.pdf.json) --- ### Background and recent developments - Finland’s financial safety net and crisis management arrangements rest on sound statutory foundations and are integrated with the Euro Area framework. - Major structural changes since the last FSAP: - Nordea’s re-domiciliation in 2018 increased banking sector assets as a percentage of GDP from 250 to 350 percent. - Cross-border exposures to Denmark, Norway, and Sweden are now 80 percent of total cross-border exposures. - Among Finnish banks, Nordea holds 74 percent of its assets in these three countries. - Legislative change in July 2022: Act on certain arrangements for the security of supply in the financial sector expanded FFSA and BoF crisis responsibilities. ### Progress and remaining challenges - Improvements: - Resolvability of Significant (SIs) and Less Significant (LSIs) institutions improved through compliance with MREL under EU arrangements. - Enhanced internal and inter-authority crisis preparedness; updated 2018 Nordic–Baltic MoU for regional coordination. - Remaining operational gaps: - LSI resolvability needs further work. - Operational readiness to implement resolution actions at speed requires strengthening, particularly for FFSA and BoF. - Central bank crisis liquidity support arrangements and interagency crisis preparedness need enhancement. ### Crisis management coordination and institutional roles - Institutional roles and interactions: - ECB (SSM) supervises SIs directly; FIN-FSA supervises LSIs under ECB oversight. - SRB has primary responsibility for resolution decisions for larger and cross-border institutions; FFSA implements resolution measures domestically. - BoF is responsible for Emergency Liquidity Assistance (ELA) but must act within the ECB framework and ELA Agreement constraints. - Coordination recommendation: - Increase centralization of crisis-preparation and crisis-management coordination within the Crisis Management Cooperation Group to: - coordinate formalization of internal crisis management practices across authorities; - monitor that resources dedicated to crisis management are commensurate with statutory functions. ### Preparations for future bank failure and resolvability - Timelines and expectations: - SIs and LSIs are expected to have removed remaining barriers to resolvability, including valuation and funding-in-resolution reporting capabilities, by 1 January 2024. - FFSA requires firms to self-assess compliance and applies the SRB heatmap methodology to assess LSI resolvability. - Key findings on resolution planning: - Resolution plans exist for all SIs and LSIs; some plans are updated only twice a year. - Banks are developing valuation, liquidity and unencumbered collateral reporting, and management information capabilities. - Loss-absorbing capacity and MREL: - MREL to be met at the latest by January 1, 2024. - Banks under FFSA are subject to a Loss Absorbing Amount (LAA) equal to Pillar 1, Pillar 2 and the combined capital buffer. - The Recapitalization amount (RCA) is defined as P1 and P2 plus an optional market-confidence charge (calculated as the combined buffer minus the CCyB). - The most systemic banks are required to hold a minimum amount of subordinated liabilities ranging between 13.5 percent plus total additional capital buffers and 12 percent plus a min. amount of additional capital buffers, which may also be met with own funds depending on the size of the firm. - Recommendation: - FFSA should develop and publish a resolvability scoring framework for Finnish LSIs (or implement an SRB framework) ahead of the 2024 compliance deadline to capture good and bad practices and to prioritize verification and maintenance. ### Managing failed banks and resolution mechanics (bail-in and transfer) - Operational credibility: - Statutory resolution tools must be usable “at speed” and with confidence to impose losses on failed bank creditors. - Findings on bail-in and transfers: - FFSA has not yet established its preferred mechanic for implementing the bail-in or transfer tools. - Public disclosure of bail-in mechanics is essential for credibility and stakeholder coordination (e.g., FMIs, CSDs). - Cross-border operations (e.g., Nordea’s 74 percent asset concentration) increase the importance of consistent bail-in mechanics. - Recommended content for published resolution mechanics: - By 2024, FFSA should publish its approach to deploying the bail-in resolution tool. - Published resolution mechanics should: - clearly define operational procedures for imposing losses on MREL holders; - specify detailed procedures in FFSA operational playbooks. - FFSA should set out the sequential steps in a bail-in mechanic, including: - identification of eligible securities; - suspension of trading of relevant securities; - suspension of, or change in, shareholder rights; - write down and/or cancellation of equity and/or debt; - issuance and trading of interim instruments if part of mechanic; - redemption of interim instruments if used; - issuance of new equity if planned; and - lifting the suspension of trading and shareholder rights. - FFSA should consider feasibility of an “open bank” bail-in mechanic relying on suspension of liabilities and use of interim instruments. ### Liquidity in resolution and lender-of-last-resort preparedness (BoF) - Findings: - Banks in resolution must have sufficient liquidity; initially expected to use private resources. - Where private resources are insufficient, access to central bank temporary crisis liquidity against a wide range of eligible collateral is needed. - BoF is responsible for ELA and has internal policies and capabilities to manage collateral, but has no published policy or framework for funding-in-resolution. - Key operational recommendations for BoF (with FFSA collaboration): - Ensure ELA and funding-in-resolution lending capabilities are fully operational by: - defining internal collateral outside normal monetary operations that could be accepted for ELA purposes; - defining haircuts that would be applied; - defining assumed pricing for temporary crisis liquidity support. - Conduct formal and regular reviews of BoF counterparty ELA liquidity capacity based on normal and non-conventional collateral. - Establish testing arrangements for ELA and funding-in-resolution lending capabilities with counterparties (e.g., on an annual basis). - Formalize a non-firm-specific approach with FFSA to assess liquidity needs and available unencumbered collateral for banks in resolution, including liquidity forecasting, collateral reporting, and regular testing of operational procedures. - Publish a policy framework clarifying BoF’s role as lender of last resort for funding in resolution purposes; identify and address national legislative barriers with MoF if needed. - Consider seeking a government indemnity when providing crisis liquidity assistance if there are concerns regarding counterparty quality, collateral quality, size or length of support, or ability to refinance. ### Deposit Guarantee Arrangements and funding (DGF / DGS) - Key statistics: - Deposits protected up to EUR 100,000. - Target level of the DGF: 0.8 percent of covered deposits of Finnish banks, which is around 1.2 billion euros and is to be reached by July 2024. - As of June 2022, the fund contains around 0.8 million euros. - When combined with the pre-existing privately managed fund, the available financial means of the Finnish DGS amount to around 1.3 billion euros. - In 2020 the Finnish DGS was given power, subject to Government permission, to borrow a maximum of EUR 2 billion from commercial banks to fund payout of protected depositors. - Findings and risks: - Reliance on commercial borrowing or increased levies in a crisis may exacerbate financial system risks. - DGS contributions to resolution must comply with the ‘least cost’ principle and Article 109 constraints. - A narrow interpretation of the least-cost criteria or strict Article 109 interpretation could leave DGS unable to fund resolutions. - Recommendations: - FFSA DGS should ensure it has sufficient funds under direct control to ensure financial autonomy and minimize dependency on borrowing from banks. - FFSA should take a prudent approach and ensure prefunded DGF and policy advice on target levels are sufficient for scenarios such as payout of several LSIs simultaneously. - Clarify publicly that DGS funds can be used to contribute to the cost of resolution once MREL resources are exhausted, subject to the ‘least cost’ principle. - FFSA should outline how the counterfactual insolvency valuation analysis would be undertaken to assess DGF contribution and publish how it would use DGS funds to support resolution action. ### Financial crisis preparedness, cross-border integration, and cooperation - Cross-border exposure and implications: - Nordea has 74 percent of its assets in Denmark, Norway, and Sweden. - Finland’s cross-border exposures to Denmark, Norway, and Sweden make up 80 percent of total cross-border exposures. - These concentrations heighten valuation and foreign funding withdrawal risks, especially for banks operating under a foreign branch model. - International and regional cooperation: - Participation in the Nordic-Baltic Stability Group (NBSG) and updated Nordic-Baltic MoU support cross-border coordination. - FFSA participates in SRB internal resolution teams and resolution colleges for major groups. - Recommendations: - Focus developing crisis management capacity with relevant home and host authorities (particularly Sweden, Denmark, and Norway) through sustained multi-year engagement. - Develop shared analytical methodologies for assessing FI viability and systemic impact for consistent, rapid assessments. ### Operationalization, crisis simulation, and legal protections - Operational readiness priorities: - Develop operationally tested, published bail-in mechanics. - Ensure BoF ELA and funding-in-resolution processes and operational procedures are tested internally and with counterparties. - FFSA and BoF to jointly establish non-firm-specific plans for liquidity needs in resolution and monitor unencumbered collateral. - FFSA to ensure DGF financial autonomy and robust backstop arrangements. - Centralize cross-authority coordination and formalize crisis simulation strategies and operational manuals. - Crisis Simulation Exercises (CSEs): - Distinguish learning-focused and testing-focused CSEs; match CSE type to maturity of crisis framework. - Avoid cross-border CSEs involving external parties before domestic framework is fully operationalized; if done earlier, use learning-focused design. - Recommended: develop a cross-authority CSE strategy and an operational manual; Crisis Management Cooperation Group to coordinate. - Legal protections: - Current framework lacks specific legal protections for FFSA and FIN-FSA staff acting in good faith. - Recommendation: strengthen legal protection consistent with international standards, provide statutory clarity so cases against crisis staff succeed only on grounds of criminal activity or bad faith, and provide indemnity/coverage for legal defense costs. ### Key recommendations and selected timing - Framework for Bank Failure: - Define criteria for when to use the new backup system to secure daily payments instead of resolution action (MoF, BoF, FFSA). Timing: I - Develop procedures for orderly entry/operation/exit from the backup system (MoF, BoF, FFSA). Timing: NT - Provide backstop Government stabilization tools, including temporary public ownership as last resort where legally possible (MoF). Timing: NT - Preparing for Future Bank Failure: - Government to review FIN-FSA levy request in 2024 and ensure FIN-FSA and FFSA have necessary resources (MoF). Timing: I - Publish policy framework on factors informing public interest assessment for LSI resolution strategies (FFSA). Timing: NT - Develop/publish framework for scoring or assessing LSI resolvability self-assessment reports ahead of 2024 compliance deadline (FFSA). Timing: I - Managing Failed Banks: - Publish policy on bail-in and transfer mechanics addressing valuation, issuance of new instruments, treatment of resolved bank shares, change in control (FFSA). Timing: NT - Ensure ELA processes and operational capabilities are sufficient and tested annually (BoF, FFSA). Timing: NT - Ensure DGS funds can be used for resolution contributions and that DGS has sufficient funds under direct control (FFSA, MoF). Timing: NT - Financial Crisis Preparedness & Coordination: - Centralize cross-authority crisis cooperation in Crisis Management Cooperation Group and broaden its responsibilities (MoF, FIN-FSA, FFSA, BoF). Timing: NT - Formalize crisis management practices and agree cross-authority crisis simulation exercise strategy and operational manual (FFSA, FIN-FSA, BoF, MoF). Timing: NT - Expand procurement frameworks for rapid appointment of external advisory support for crisis management (FFSA). Timing: NT - Develop shared analytical methodologies for assessing FI viability and systemic impact (BoF, FIN-FSA, FFSA). Timing: NT ### Resourcing and capacity facts - FFSA resourcing: - FFSA increased resources from 12.5 FTE in 2016 to 19.6 FTE in 2021. - FFSA resources planned to expand to 26 FTE by end 2022, with an additional 6 FTEs for backup payment systems mandate. - Sector concentration: - The six largest banks account for 90 percent of the banking sector. _Italic: International Monetary Fund—EXECUTIVE SUMMARY (1finea2023004)._ ### EXECUTIVE SUMMARY _____________________________________________________________________________ 4 ### EXECUTIVE SUMMARY ### Background and recent developments - Finland’s financial safety net and crisis management arrangements rest on sound statutory foundations and are integrated with the Euro Area framework. - Major structural changes since the last FSAP: - Nordea’s re-domiciliation in 2018 increased banking sector assets as a percentage of GDP from 250 to 350 percent. - Cross-border exposures to Denmark, Norway, and Sweden are now 80 percent of total cross-border exposures. - Among Finnish banks, Nordea holds 74 percent of its assets in these three countries. - Authorities managed the impacts of the COVID crisis and the war in Ukraine in quick succession; the Government passed an Act on certain arrangements for the security of supply in the financial sector in July 2022 to expand FFSA and BoF crisis responsibilities. ### Progress and remaining challenges - Resolvability of Significant (SIs) and Less Significant (LSIs) institutions has improved through compliance with MREL (Minimum Requirement for Own Funds and Eligible Liabilities) under EU arrangements. - National improvements: enhanced internal and inter-authority crisis preparedness and an updated 2018 Nordic–Baltic MoU for regional coordination. - Remaining operational gaps: - LSI resolvability needs further work. - Operational readiness to implement resolution actions at speed requires strengthening, particularly for FFSA and BoF. - Central bank crisis liquidity support arrangements and interagency crisis preparedness need enhancement. ### Crisis management coordination and institutional roles - Authorities should increase centralization of crisis-preparation and crisis-management coordination within the Crisis Management Cooperation Group to: - Coordinate formalization of internal crisis management practices across authorities. - Monitor that resources dedicated to crisis management are commensurate with statutory functions. - ECB/SSM and SRB responsibilities: - ECB (SSM) supervises SIs directly; FIN-FSA supervises LSIs under ECB oversight. - SRB has primary responsibility for resolution decisions for larger and cross-border institutions; FFSA resolves other smaller banks under SRB oversight. - Bank of Finland (BoF) is responsible for Emergency Liquidity Assistance (ELA) but must act within ECB framework. ### Preparations for future bank failure and resolvability - SIs and LSIs are expected to have removed remaining barriers to resolvability, including valuation and funding-in-resolution reporting capabilities, by 1 January 2024. - FFSA actions and expectations: - FFSA has defined expectations based on SRB and EBA resolvability policy and requires firms to self-assess compliance. - FFSA applies the SRB heatmap methodology to assess LSI resolvability. - Recommendation: FFSA should develop a resolvability scoring framework for Finnish LSIs (or implement an SRB framework) ahead of the 2024 compliance deadline to capture good and bad practices and to prioritize verification and maintenance. - FFSA should ensure resolution plans for SIs and LSIs with an amalgamation structure can be implemented at speed and with certainty over the resolution weekend, tailoring SRM resolvability expectations to Finland’s legal entity structures. ### Managing failed banks and resolution mechanics - Statutory resolution tools must be usable “at speed” and with confidence to impose losses on failed bank creditors. - Recommendation: FFSA should develop and publish its resolution mechanics, prioritizing bail-in, including policy choices on: - valuation timelines, - treatment of resolved bank shares, - issuance of new shares or interim instruments, - ensuring compliance with change in control and other regulatory requirements under the European prospectus directive. ### Liquidity in resolution and lender-of-last-resort preparedness - BoF should ensure its Emergency Liquidity Assistance (ELA) and funding-in-resolution lending capabilities are fully operational. - Actions for BoF (together with FFSA): - Further develop internal preparedness to support lending to failed banks restored through resolution tools and a credible restructuring plan. - Define internal collateral haircuts and pricing assumptions for crisis lending. - Regularly test ELA lending arrangements with counterparties. - Formalize a non-firm-specific approach to assessing liquidity needs for banks in resolution, including liquidity forecasting and collateral reporting. - Publish a policy framework clarifying the BoF’s role as lender of last resort for funding in resolution and specifying general conditions for accessing ELA if private sources are unavailable. - Resolution planning should not assume ELA is available, but banks should identify and be able to mobilize assets (including lower quality, less liquid assets) as collateral under stress, anticipating legal, regulatory, and operational obstacles. ### Deposit guarantee arrangements and funding - FFSA Deposit Guarantee Fund (DGF) should ensure it has sufficient funds under direct control to ensure financial autonomy and strengthen backstop funding arrangements. - DGF role: - Support rapid payout of covered deposits if required. - Contribute to resolution costs where banks cannot issue MREL or lack MREL resources. - Recommendation: FFSA should outline how the counterfactual insolvency valuation analysis would be undertaken to assess the DGF contribution. - FFSA should take a prudent approach to ensure the prefunded DGF and policy advice on target levels are sufficient for scenarios such as the payout of several LSIs simultaneously, and ensure backstop funding is not solely reliant on market borrowing. - Recommendation: Clarify publicly that DGS funds can be used to contribute to the cost of resolution once MREL resources are exhausted, subject to the ‘least cost’ principle. ### Key recommendations and timing (selection from Table 1) - Framework for Bank Failure: - Define criteria for when to use the new backup system to secure daily payments instead of resolution action (MoF, BoF, FFSA). Timing: I - Develop procedures for orderly entry/operation/exit from the backup system (MoF, BoF, FFSA). Timing: NT - Provide backstop Government stabilization tools, including temporary public ownership as last resort where legally possible (MoF). Timing: NT - Preparing for Future Bank Failure: - Government to review FIN-FSA levy request in 2024 and ensure FIN-FSA and FFSA have necessary resources (MoF). Timing: I - Publish policy framework on factors informing public interest assessment for LSI resolution strategies (FFSA). Timing: NT - Develop/publish framework for scoring or assessing LSI resolvability self-assessment reports ahead of 2024 compliance deadline (FFSA). Timing: I - Managing Failed Banks: - Publish policy on bail-in and transfer mechanics addressing valuation, issuance of new instruments, treatment of resolved bank shares, change in control (FFSA). Timing: NT - Ensure ELA processes and operational capabilities are sufficient and tested annually (BoF, FFSA). Timing: NT - Ensure DGS funds can be used for resolution contributions and that DGS has sufficient funds under direct control (FFSA, MoF). Timing: NT - Financial Crisis Preparedness & Coordination: - Centralize cross-authority crisis cooperation in Crisis Management Cooperation Group and broaden its responsibilities (MoF, FIN-FSA, FFSA, BoF). Timing: NT - Formalize crisis management practices and agree cross-authority crisis simulation exercise strategy and operational manual (FFSA, FIN-FSA, BoF, MoF). Timing: NT - Expand procurement frameworks for rapid appointment of external advisory support for crisis management (FFSA). Timing: NT - Develop shared analytical methodologies for assessing FI viability and systemic impact to ensure consistent, rapid assessments (BoF, FIN-FSA, FFSA). Timing: NT - Strengthen legal and operational framework for legal protection of officials, staff, and agents of financial oversight agencies (MoF/FFSA/FSA/BoF). Timing: MT ### Operationalization and readiness priorities - Authorities have made progress in developing crisis management capabilities and procedures and have practical experience from recent events, but need to fully operationalize the crisis management framework. - Priority actions include: - Developing operationally tested, published bail-in mechanics. - Ensuring BoF ELA and funding-in-resolution processes and operational procedures are tested internally and with counterparties. - FFSA and BoF jointly establish common understanding and non-firm-specific plans for liquidity needs in resolution. - FFSA ensure DGF financial autonomy and robust backstop arrangements. - Centralize cross-authority coordination and formalize crisis simulation strategies and manuals. _Italic: International Monetary Fund—EXECUTIVE SUMMARY (1finea2023004)_. ### Box 1. Finland: Main Findings of the 2018 Euro Area FSAP on Crisis Management ### Box 1. Finland: Main Findings of the 2018 Euro Area FSAP on Crisis Management ### Main findings (July 2018 Euro Area FSAP) - "The IMF concluded its first Euro Area FSAP, praising the Euro Area authorities for establishing a considerably strengthened bank resolution framework at the EU level while highlighting room for further improvement." - Key shortcomings identified: - "The banking union needs a more effective deposit insurance system (DIS). Many national DISs are underfunded and lack effective backup funding. A common deposit insurance system for the Euro Area is needed." - "A financial stability exemption is needed to help mitigate critical constraints in the framework. The Single Resolution Mechanism Regulation (SRMR) requires bailing in a minimum of 8 percent of total liabilities and own funds prior to access to the Single Resolution Fund or national public funds for loss absorption." - "Despite the establishment of the SSM and the SRM, fragmentation along national lines persists. In the EU, resolution requires an assessment against potential outcomes under significantly heterogeneous national insolvency regimes." ### Purpose and scope of the Note - The Note: - "does not reflect a formal or granular assessment of compliance with any specific standard assessment framework but rather is based on a comparison against established international policies and best practices." - Examples of standards referenced: "i) the Key Attributes for Effective Resolution Regimes; ii) the Basel Core Principles for Effective Banking Supervision (BCP); and iii) the Core Principles for Effective Deposit Insurance." - Aims to "help strengthen the Finnish financial safety net and crisis management framework by identifying gaps and recommending steps to improve it, considering the specific Finnish context." - Focuses on: "1) matters that are specific to Finland’s framework for bank failure, 2) progress to date in preparing for bank failure, 3) Finnish preparedness to manage crisis involving failing banks given their statutory responsibilities for resolution implementation, and 4) cross-authority crisis preparedness." ### Financial oversight architecture (domestic and European roles) - Domestic agencies: - "Financial Supervisory Authority (FIN-FSA, Finanssivalvonta)" - "Bank of Finland (BoF, Suomen Pankki)" - "Financial Stability Authority (FFSA, Rahoitusvakausvirasto)" - "Ministry of Finance (MoF)" - Roles summarized: - FIN-FSA: "prudential authority for the Finnish financial sector"; tasks include "supervision, regulation, and monitoring of financial markets" and "preparing, jointly with the MoF, BoF and FFSA, macroprudential measures." - FFSA: "the Finnish resolution and deposit insurance authority"; tasks include "resolving distressed credit institutions and investment firms," "prepare for the payout of covered deposits," and managing "the Financial Stability Fund (FSF), comprising the national resolution fund and the Deposit Guarantee Fund (DGF)." - BoF: "the monetary authority of Finland" with primary objective "to maintain price stability"; also "main provider of systemic risk analysis and monitoring" and "statutory responsibility for the provision of ELA." - European authorities with jurisdiction: "European System of Central Banks (ESCB), the European Central Bank (ECB), the European Commission (EC), the Single Resolution Board (SRB), the European Systemic Risk Board (ESRB), and the European Stability Mechanism (ESM)." - Operational interactions: - FIN-FSA "provides the majority of staff to support the ECB’s joint supervisory teams’ (JSTs) work" for Finnish SIs and leads supervision for Finnish LSIs. - FFSA "leads on resolution planning for Finnish LSIs and contributes to resolution planning for Finnish SIs as part of the SRM Internal Resolution Teams (IRTs)" and "has sole responsibility for executing resolution measures for all Finnish banks if they fail." - SRB "is making the resolution decision but must order the FFSA to implement the measures outlined in the decision via national statutory powers." - Cross-authority coordination: - "Domestic cross-authority crisis coordination on BRRD related crisis management options is facilitated through the FFSA Advisory Board." - Advisory Board membership: "appointed by the MoF for three years and include representatives from FFSA, MoF, BoF, and the FIN-FSA." - Complemented by "regular bilateral working groups between MoF, FFSA, BoF and FIN-FSA experts" and a "virtual platform designed to facilitate the secure sharing of firm-specific supervisory data and resolution reporting information." ### Progress since the 2016 FSAP - Resolvability and MREL: - "A preferred resolution strategy has been set for all Finnish SIs, and LSIs judged by the FFSA to enter resolution on failure." - "These banks are subject to the FFSA’s MREL requirements higher than the capital requirements." - "Finnish LSIs will have a compliance transition period until 1 January 2024, with the first binding intermediate target level in place since the beginning of 2022." - FFSA expectation: banks to "comply with the European Banking Authority's guidelines for institutions on improving resolvability." - International cooperation: - Participation in "the Nordic-Baltic Stability Group (NBSG)" and participation in "the NBSG crisis simulation exercise in 2019." - Cross-authority coordination: - "The Finnish authorities (MoF, the Ministry of Social Affairs, FIN-FSA, BoF, FFSA) signed a crisis management Memorandum of Understanding (MoU) in December 2021." - MoU establishes: "1) a Management Team for crisis management cooperation; and 2) a Cooperation Team for crisis management." - "A bilateral MoU was also signed by the BoF and FFSA in 2021 for information sharing in the crisis preparatory phase." - Authority preparedness and capabilities: - "Resourcing has increased since the last FSAP, and the authorities have developed their respective internal crisis preparedness (e.g., developing internal crisis manuals)." - Conducted "a series of crisis simulation exercises" and "a virtual tabletop exercise on selected resolution processes." - FFSA developed "a virtual platform to identify operational steps related to resolution action, link these steps to template documents, tools for the assessments to be made and governance requirements to support rapid action in a crisis." ### Framework for bank failure and statutory alignment - Legal framework: - "The Finnish statutory bank resolution regime aligns with global and European good practices for institutions that could be systemic in failure." - "The BRRD has been implemented in Finland and sets out FFSA’s powers, tools, and objectives as the Finnish national resolution authority (NRA)." - "The SRM Regulation sets out the powers of the SRB and the framework for coordination between the SRB and NRAs in resolving banks in the Banking Union." - MoF role: - "The MoF's role in the Finnish crisis management regime is primarily related to negotiating and implementing EU rules. It has no role in providing backstop solvency or liquidity support in an extreme system-wide financial crisis where the use of resolution tools has been unsuccessful in stabilizing the situation." - "The Government is also the sole gateway to the European Commission regarding all state aid cases." ### FFSA resolution tools (Box 2) - The four resolution tools available to the FFSA are: 1. "Bail-in: write-down and conversion of liabilities: the nominal value of liabilities is written down entirely or in part and converted into regulatory capital instruments." 2. "Sale of business: the institution’s shares or assets and liabilities are transferred entirely or in part to another institution or third party." 3. "Bridge institution: the institution’s assets and liabilities are transferred to a bridge institution that is established by the resolution authority and under the authority’s control." 4. "Asset management vehicle: part of the institution’s assets and liabilities are transferred to a separate asset management vehicle in connection with the use of one of the previously mentioned tools." - "Multiple tools can be used simultaneously for the restructuring of operations." - "The FFSA can only apply resolution tools after a valuation of the assets and liabilities of the institution under resolution has been carried out." ### Security of supply, backup systems, and operational implications - Legislative change: - "In July 2022, the Finnish Government passed the Act on certain arrangements for security of supply in the financial sector, which resulted in an expansion of the crisis management responsibilities of the FFSA and BoF." - New responsibilities: - FFSA: "responsible for the setup and operation of a security of supply account system, consisting of backup account services and backup services designed to secure debit-card payments." - BoF: "responsibility for securing interbank payments via the establishment of a Backup Interbank Clearing System." - Government: "responsible for deciding to activate the backup account system when a serious disruption of society or emergency conditions prevents the normal use of payment systems." - Implementation and coordination recommendations: - "FFSA should be able to explain to its external stakeholders how the existing crisis management and resolution framework interacts with the new tools so that it is clear to home and host authorities when different tools will be used and in what sequence." - "The Finnish Government should work with FFSA and BoF to design a set of criteria to inform the judgement when to use the new backup system to secure daily payments instead of a resolution action." - "The FFSA should develop the procedural and operational steps necessary to ensure orderly entry, operation, and exit from the backup system." - "The FFSA should establish clear arrangements with the BoF to ensure roles and responsibilities related to addressing any temporary liquidity needs related to the operation of the backup system are clearly understood and documented." ### Backstop public support, risks, and recommendations - Current stance: - "The MoF has decided to exercise its national discretion when implementing the BRRD into Finnish law by not including the government stabilization tool in the Finnish statutory regime." - Pre-existing statutory powers for MoF "for government liquidity, guarantees and capital support" were "abolished in 2015 upon the enactment of the national legislation implementing the BRRD." - "The decision not to include the government stabilization tool in the regime is consistent with the approach of many banking union countries." - Risk identified: - "Under the Finnish framework, no national-level public backstop arrangements are available to the authorities should a bank fail, and existing resolution tools fail to stabilize the firm." - "If in a future crisis, it was judged that banks with a liquidation strategy, in fact, needed to enter the resolution regime to preserve financial stability, the use of resolution tools may be ineffective, and the 8 percent rule requirement may mean there is no access to backstop public funds via the SRM." - "In this scenario, the absence of national-level public backstop arrangements could undermine Finnish financial stability." - Recommendation: - "The Government should exercise its flexibility under the BRRD to provide the MoF with government stabilization tools, including temporary public ownership as a last resort option if legally possible." - Implementation caveats: - "These additional tools should be available in exceptional circumstances only." - "Their use should be subject a determination that other resolution tools would not maintain financial stability and protect the public interest, e.g., bail-in of a failing bank’s MREL is insufficient to restore it to solvency and viability." - "In line with the Key Attributes, any losses incurred by the Government as a result of using such tools should be recovered from the industry, e.g., through ex post levies." *Source: Box 1. Finland: Main Findings of the 2018 Euro Area FSAP on Crisis Management (as provided).* ### 18. In expanding the powers of the MoF in extreme fallback situations, the mandatory 8 ### 18. In expanding the powers of the MoF in extreme fallback situations, the mandatory 8 percent requirement related to the government stabilization tools may also limit its flexibility in responding to certain banking crises. The IMF 2018 Euro Area FSAP recommended a financial stability exemption from the 8 percent bail-in requirements is needed to help mitigate this constraint in the framework in the event that the bail-in of all MREL liabilities failed to stabilize the failing firm or there was a system-wide crisis. An exception to the 8 percent rule should be designed to be used only in times of a system-wide crisis. Such an exception would need to be subject to strict conditions and appropriate governance arrangements. For example, the FFSA’s resolution strategy for managing the failing firm would need to show public funds being directly at risk. Making such a change would bring additional flexibility to managing a wide range of crises. ### Preparing for future bank failure — A. Plans for Restoring Banks at Risk of Failure - Findings on supervisory classification and oversight: - The SSM classifies financial institutions either as an SI or LSI. - The ECB directly supervises four Finnish SIs, including Nordea Bank, OP Group, Danske Bank A/S, Finland Branch and Kuntarahoitus. - The remaining nine banks in Finland are LSIs that are directly supervised by the FIN-FSA, subject to ECB oversight. - The intensity of ECB oversight of FIN-FSA LSI supervision depends on the LSI’s impact and risk on the domestic financial system as determined by the ECB. - The ECB has developed an early warning system (EWS) for SIs, and the SSM’s “Single Rulebook” provides for a comprehensive early intervention framework (EIF). - The FIN-FSA also uses the EWS and EIF for LSIs. - Resource and operational arrangements: - The SSM regulation creates a legal obligation for the FIN-FSA to provide resources to the ECB JSTs for Finnish SIs; in practice the FIN-FSA provides a significant proportion of supervisory resources to support the ECB’s supervisory work with respect to Finnish SIs. - The FIN-FSA has developed a bank crisis management plan for LSIs designed to support early intervention measures, including recovery plans, and to facilitate coordination with other national authorities. - The plan relies on the EBA’s guidelines on early intervention triggers and specifies conduct of a failing or like to fail (FOLTF) assessment and necessary information as a bank’s proximity to failure increases. - Gaps and preparedness: - Since establishment of the FFSA in 2015, Finnish authorities engaged in crisis simulation exercises, but there has been limited focus on training or testing the internal FIN-FSA crisis management plan through internal or cross-authority simulation exercises, partly due to resource pressures related to managing the COVID and Ukrainian crises. - It is important to update internal crisis management plans/manuals to capture good practices from recent events and ensure relevant FIN-FSA staff and senior management understand the FIN-FSA’s approach to crisis management of SIs and LSIs. - Financing and resourcing risks: - The FIN-FSA’s SI and LSI supervisory activities are financed by supervision fees and processing fees. - From 2024 there is a risk that supervision fees may not cover the FIN-FSA supervisory operating expenses if key financial figures of supervised entities do not increase in coming years. - Potential responses: the ECB could reimburse National Competent Authorities (NCA) for costs associated with resourcing JST; alternatively, the Finnish MoF could revise the FIN-FSA fee cap to allow the FIN-FSA to raise necessary funding. - The FIN-FSA is in discussions with the MoF on how its statutory levy arrangements could be changed. - Institutional capability recommendations: - The FFSA needs to ensure advance preparation for contingency planning, including internal frameworks to identify emerging risks, operational contingency plans for managing crises, and crisis governance arrangements. - The Finnish Government should ensure financial authorities' resources are commensurate with responsibilities; the MoF should review the FIN-FSA levy proposals in 2024 once the next Parliament is in session. - The MoF should ensure the FIN-FSA and FFSA have the resources they deem necessary to discharge their functions, including increasing the budget envelope to recruit and retain experienced staff or external advisors across supervisory and resolution topics, including operational and cyber risk. - The FFSA should consider whether it is possible to achieve synergies between its resolution and deposit insurance authority responsibilities. - Given a highly concentrated banking sector where the six largest banks account for 90 percent of the banking sectors, it may be possible to deploy resources to achieve high-priority objectives. ### Preparing for future bank failure — B. Resolution Planning and Resolvability Requirement - Progress and practices in resolution planning: - Resolution planning has progressed for SIs and LSIs in Finland since the last FSAP; a resolution plan has been set for all SIs and LSI. - For some banks, the resolution plan is updated only twice a year. - Finnish banks are developing consistent resolvability capabilities: resolution valuation capabilities, liquidity and unencumbered collateral reporting capabilities, and wider management information capabilities to support rapid decision-making in a resolution scenario. - FFSA MREL policy and guidance: - The FFSA has applied the SRB MREL policy to Finnish LSIs and published an updated memorandum in 2021 describing national legislation basis for the MREL requirement, the procedure for setting MREL and the factors determining its level. - The FFSA has determined that a significant proportion of its LSI population will enter resolution rather than liquidation in the event of failure, conducted in line with SRB guidance. - FFSA has developed analytical methodologies to assess LSI customers’ reliance on a single bank for deposit services and wider financial system impact; approaches align with SRB guidance on assessment of critical functions and public interest. - Publication and transparency recommendation: - The FFSA should publish its approach to assessing the impact on depositors and the financial system of LSI liquidation, given its importance for assessing the public interest test and setting resolution strategies for LSIs. - The FFSA has shared its approach with the SRM and other banking union NRAs; the FFSA should consider publishing information on its assessment methodology. - Loss Absorbing Capacity Requirements — key elements (from FFSA approach to MREL): - The banks under FFSA are subject to a Loss Absorbing Amount (LAA) equal to Pillar 1, Pillar 2 and the combined capital buffer. - The Recapitalization amount (RCA) is defined as P1 and P2 plus an optional market-confidence charge. This charge is calculated as the combined buffer minus the CCyB. - MREL will need to be met at the latest by January 1, 2024, with the FFSA setting an interim MREL target other than the final MREL in case the bank does not meet the latter requirement as the MREL decision is made. - The most systemic banks (G -SII, top tier and “fished” banks) are required to hold a minimum amount of subordinated liabilities ranging between 13.5 percent plus total additional capital buffers and 12 percent plus a min. amount of additional capital buffers, which may also be met with own funds depending on the size of the firm. - FFSA does not publish institution specific MREL requirements and does not require institutions to disclose their level of MREL resources relative to known benchmarks. - MREL is not applied to most Member Credit Institutions (MCIs), but their assets and liabilities are factors when calculating consolidated MREL for the amalgamation. - Notes from table: - 1 The LAA is the amount of MREL-eligible instruments needed by an institution to absorb losses; it is typically set in line with the regulatory capital requirements applied to the bank. - 2 The RCA reflects the capital needed to meet ongoing prudential requirements after resolution. - 3 The maximum of the CCyB and 31.25 is deducted from the combined buffer requirement during the final year of the transitional period 2022. - 4 The FFSA has not opted to fish any of the banks in its remit. - 5 The mortgage companies are excluded from the waiver. - Assessment of implementation and coordination: - The FFSA has a comprehensive MREL policy and has made good progress in ensuring implementation by SI and LSIs; first MREL requirements were set in 2017. Both SIs and LSIs comply with interim targets set, and most already comply with the final MREL targets. - FFSA has some flexibility to set subordination requirements for LSIs but currently does not do so. - The FFSA can impose a prohibition of distributions by banks if MREL requirements are breached. - The FFSA has chosen not to automatically set a market confidence buffer for entities subject to internal MREL; FFSA does not set any national-level MREL disclosure requirements on Finnish banks. - MREL requirements are set for SIs and LSIs on an annual cycle. The FFSA coordinates formally with FIN-FSA on draft MREL decisions for LSIs, engages quarterly with the FIN-FSA on MREL forecasts and processes, and the FIN-FSA provides FFSA with firm-specific prudential capital setting information, including Pillar II requirements. - The FFSA informs the BoF about LSI MREL decisions. - Interaction with macroprudential policy: - There is potential interaction between FIN-FSA, FFSA, and BoF regarding absorbency requirements; exercising discretion elements in MREL policy (e.g., subordination requirements or market confidence buffers) would impact a firm’s residual capital resources available for macroprudential policy-making purposes. - Macroprudential policymaking that does not include assessment of impact on resources available to comply with MREL may inadvertently constrain FFSA MREL policy discretion. - In 2021, Finnish Parliament altered the Act on Credit institutions (610/2014) Chapter 10, Section 4 to include the FFSA in preparing macroprudential policy decisions; the FFSA provides advice on suggested macroprudential policy decisions in quarterly preparatory meetings in light of implications on MREL requirements (including MDA restrictions) and resources. - Recommendation: The FFSA should continue to play an active role in macroprudential policymaking in Finland. - Other resolvability requirements and barriers: - A bank under resolution must demonstrate stabilization potential, continuity of operations, and coordination and communication during the process. - The Financial Stability Board has identified eight barriers to resolvability: 1) insufficient loss-absorbing capacity, 2) resolution valuations, 3) funding in resolution, 4) continuity in financial contracts in resolution, 5) operational continuity in resolution, 6) continuity of access to financial market infrastructure, 7) restructuring in resolution, and 8) management, governance, and communications. - International standards (EBA, SRB) have been implemented in many jurisdictions; while MREL addresses financial resources, it does not address valuation assessments or liquidity in resolution. - Resolvability expectations and deadlines: - The EBA sets expectations that SIs and LSIs remove remaining non-MREL related barriers to resolvability, including valuation and funding in resolution reporting capabilities, by 1 January 2024. - In defining resolvability expectations for Finnish LSIs, the FFSA relies on SRB and EBA resolvability expectations and applies the SRB’s heatmap methodology assessing LSI resolvability. - The FFSA’s current assessment is that Finnish LSIs require no further national legal policy guidance to meet these resolvability expectations and has no plans to publish additional domestic resolvability policies or guidance. - The FFSA has communicated an expectation to Finnish firms that they will need to provide a self-assessment report on their level of compliance with these resolvability expectations. - Implementation challenges and resource needs: - Firms will need significant work to comply with resolvability expectations by end 2023; SRB and EBA expectations were finalized relatively recently (2020 and 2022), and firms may find it difficult to develop required capabilities in advance of the compliance deadline. - Many resolvability requirements will be novel to banks; firms may need additional input or guidance from the FFSA on how to design firm-specific resolvability capabilities. - The FFSA will need resources and expertise to respond to firm implementation questions and provide clarity on good/bad practices with respect to national implementation actions by firms. - As firms submit self-assessment reports, the FFSA will face the challenge of assessing whether diverse, detailed firm-specific approaches or system capabilities suffice to comply with often high-level policy expectations. - Recommendation on scoring framework: - The FFSA should develop and publish a resolvability scoring framework to use when reviewing Finnish LSIs' self-assessment reports. - Benefits: support consistent feedback to LSIs, help ensure LSIs deliver a comparable level of resolvability ahead of the 2024 compliance deadline, support prioritization of FFSA verification of firm-specific capabilities and their ongoing maintenance. - The requirement to publish a resolvability scoring framework may also be addressed by publication of a Banking Union framework; the FFSA would follow the approach chosen by the SRB for LSIs under its remit. - The FFSA should work to ensure that banks comply with its resolvability expectations by 2024. _Italic: IMF staff extract from 1finea2023004 - PDF chapter content provided._ ### 39. For bank resolution plans to be credible, statutory resolution tools need to be usable, ### 1finea2023004 - 39. For bank resolution plans to be credible, statutory resolution tools need to be usable, ### A. Bail-in and transfer tools — findings and operational considerations - Findings: - Bail-in imposes losses on creditors holding loss-absorbing instruments (e.g., equity, debt capital and senior unsecured debt) by cancelling or reducing the value of their claims, thereby recapitalizing the bank to meet conditions of authorization. - Transfer tools strand creditors by holding loss-absorbing instruments in an administration while transferring good assets and other liabilities (e.g., deposits) to a bridge bank or a private sector purchaser. - Public disclosure of an authority’s bail-in mechanic is essential to ensure credibility and predictability of resolution actions and to allow stakeholders (e.g., Financial Market Infrastructure (FMI), Central Securities Depositor (CSDs)) to coordinate required actions. - Progress has been made in defining bail-in mechanics in the United Kingdom, Germany, and the Netherlands; the EBA launched a public consultation in June 2022 requiring national resolution authorities to publish their approach to implementing the bail-in tool. - The FFSA has developed an internal crisis preparedness program and a virtual platform to project-manage resolution execution, identify decision points, and coordinate inputs from other authorities. - The FFSA has sole responsibility for executing resolution measures for all Finnish banks if they fail, regardless of classification as SIs or LSIs. - The FFSA has not yet established its preferred mechanic for implementing the bail-in or transfer tools; defining detailed mechanics is necessary to enable orderly resolution action and to guide other market actors (including CSDs). - Finnish banks have significant cross-border operations (example: Nordea has 74 percent of its assets in Denmark, Norway, and Sweden), making consistent cross-border bail-in mechanics important. - Key design differences and cross-border challenges: - Important variations exist between jurisdictions' bail-in mechanics; these differences stem largely from national legislative frameworks and must be managed carefully in cross-border resolution contexts. - Ensuring a common approach to bail-in mechanics is important for coordinated home and host cooperation in resolving cross-border banks. - Policy recommendations (bail-in mechanic publication and content): - By 2024, the FFSA should publish its approach to deploying the bail-in resolution tool. - The published resolution mechanics should: - i) clearly define operational procedures in place for imposing losses on MREL holders; and - ii) specify the detailed procedures in FFSA operational playbooks. - The procedure for imposing losses needs to be transparent to the market. - In designing bail-in mechanics, the FFSA should set out how it will navigate the key sequential steps in a bail-in mechanic, including: - 1) identification of the eligible securities within the scope of the bail-in, - 2) suspension of trading of relevant securities, - 3) suspension of, or change in, shareholder rights, - 4) write down and/or cancellation of equity and/or debt, - 5) issuance and trading of interim instruments if part of mechanic, - 6) redemption of interim instruments if used, - 7) issuance of new equity if planned, and - 8) lifting the suspension of trading and shareholder rights. - The FFSA should, in the first instance, consider the feasibility in a Finnish context of an “open bank” bail-in mechanic that relies on the suspension of liabilities and the use of interim instruments. - Note: Interim instruments, such as warrants or certificates of entitlement, may be issued pending completion of a valuation after the resolution weekend; these can then be exchanged for equity (or other securities and potentially even cash) once a valuation exercise has been completed. ### B. Liquidity in resolution — findings and operational recommendations - Findings: - Banks in resolution must have sufficient liquidity to meet obligations; initially they are expected to meet liquidity needs from private resources. - Where private resources are insufficient or markets are inaccessible, banks in resolution need access to central bank temporary crisis liquidity support against a wide range of eligible collateral. - Central banks have become more transparent about crisis lending facilities (examples cited by year: Dodd-Frank Act provisions in 2010; Bank of Canada published a standing liquidity facility framework in 2016; Bank of England frameworks in 2017; HKMA revamped liquidity facility framework in 2019; Swiss Government announced 2022 plans to enable SNB support for a systemically important bank in resolution). - As a member of the euro area, the BoF implements ECB monetary policy, manages settlement operations, collateral management, payment traffic, and supplies TARGET payment system services; the BoF has capabilities to manage credit risk related to collateral eligible under the Eurosystem monetary policy collateral framework. - Under domestic legislation, the BoF is responsible for safeguarding financial stability as lender of last resort and for the provision of ELA; temporary ELA can only be provided in exceptional circumstances to a solvent institution and always needs to be collateralized, though other collateral eligibility criteria can be used from normal central bank funding. - The BoF has no published policy or framework for funding in resolution, consistent with absence of similar frameworks under the Eurosystem and Banking Union; there is an ongoing policy discussion at European institutions on a common Banking Union solution for liquidity support in resolution. - Lending against a wider range of collateral requires central banks to develop credit assessment capabilities, pricing frameworks, and haircuts in advance of a crisis. - The BoF has some capability to accept and credit assess a wide range of collateral, including covered bond securities and credit claims (i.e., loans), and to manage valuation challenges associated with loan collateral for ELA or funding in resolution. - The BoF has well-developed and documented internal policies, procedures and governance arrangements related to its role as ELA provider; it monitors counterparties' collateral positions using monetary policy data, securities holding statistics and AnaCredit data. - The BoF does not conduct regular counterparty analysis for ELA role but has in the past sent questionnaires and conducted interviews with banks regarding contingencies and continuity management. - Key statistics and references: - AnaCredit was established by the ECB in 2018 and contains detailed information on individual bank loans to corporations and other legal entities in the euro area. - Policy recommendations (BoF operational readiness and collaboration with FFSA): - The BoF should ensure that its ELA and funding in resolution lending capabilities are fully operational. Required actions include: - defining internal collateral outside normal monetary operations that could be accepted for ELA purposes, - defining the haircuts that would be applied, and - defining the assumed pricing for such temporary crisis liquidity support. - The BoF should conduct a more formal and regular review of BoF counterparty ELA liquidity capacity based on normal and non-conventional collateral; this review should form part of BoF internal ELA governance arrangements and support more rapid crisis response. - The BoF should establish testing arrangements for its ELA and funding in resolution lending capabilities with counterparties (e.g., on an annual basis) to ensure BoF operational procedures are robust and firms can provide necessary information; testing will facilitate firms developing internal operational procedures to meet BoF collateral pledge requirements for non-standard collateral. - The BoF should formalize an approach with the FFSA to assess liquidity needs and available unencumbered collateral for Finnish banks in resolution: - Distinguish between BoF committing to provide liquidity as part of a resolution plan (which it cannot do) and having operational readiness for scenarios involving bank failure. - Formalize a non-firm-specific approach to assessing and addressing liquidity needs so reporting and operational issues to rapid deployment of liquidity can be identified pre-crisis. - Include liquidity forecasting and collateral reporting requirements on firms, jointly assess liquidity capacity by monitoring unencumbered collateral, and regularly test operational procedures for pledging collateral and deploying liquidity. - Ensure banks identify and mobilize assets (especially lower quality and less liquid assets) that could be used as collateral in resolution, anticipating legal, regulatory, and operational obstacles under stressed conditions. - The BoF should publish a policy framework that clarifies its role as a lender of last resort for funding in resolution purposes: - The framework should describe the BoF’s general conditions firms need to meet to access temporary collateralized liquidity support if private sources are unavailable. - If national legislative barriers exist to such publication, they should be identified and addressed with the MoF. - When providing crisis liquidity assistance, the BoF should consider seeking a government indemnity when it has concerns about: - 1) quality of the counterparty (e.g., unclear solvency judgement or post-stabilization restructuring plan questions), - 2) collateral quality presented by the institution, - 3) size or length of support, or - 4) ability to refinance. - In establishing such arrangements, the BoF must consider interaction with the Eurosystem ELA Agreement, which specifies ELA is provided to solvent banks only (a bank is deemed solvent when there is a credible prospect of recapitalization; par. 4.1.b of the ELA Agreement). ### C. Deposit Guarantee Arrangements — findings and recommendations - Findings: - All Finnish deposit banks are within the scope of the Finnish deposit guarantee scheme; deposits are protected up to EUR 100,000. - The statutory deposit guarantee scheme is maintained in Finland by the FFSA; the FFSA has automated its payout processes. - Payout process: FFSA requests depositors' account numbers (electronically via suomi.fi service or by paper form); electronically submitted account numbers reach the FFSA quickly and securely, enabling payment without delay; the pay-out process is to be completed within seven working days. - The target level of the DGF is 0.8 percent of covered deposits of Finnish banks, which is around 1.2 billion euros and is to be reached by July 2024. - As of June 2022, the fund contains around 0.8 million euros. - When combined with the pre-existing privately managed fund, the available financial means of the Finnish DGS amount to around 1.3 billion euros. The funds are held in an account at the State Treasury. - The 0.8 percent of covered deposits is the minimum target level of pre-funding under the European DGSD. - If assets previously raised by the DGF are insufficient for payment, the FFSA may obligate deposit banks to pay ex-post contributions or lend assets to the DGF; ex-post contributions may not exceed 0.5percent of a deposit bank’s covered deposits. - Additional annual contributions are collected from the banks to refund the DGF. - In 2020, the Finnish DGS was given the power, subject to Government permission, to borrow a maximum of EUR 2 billion from commercial banks to fund payout of protected depositors; terms of loans stipulated in a decree issued by the MoF in February 2020. The Government decides on all loans and their terms regardless of creditor (Act of Resolution Authority 1195/2014, Chapter 3, paragraph 8). Ministerial Decree (75/2020) includes basic terms of loans between the DGS and banks. - The IADI Core Principles do not consider a backstop solely comprised of market borrowing as sufficient; Core Principle 9.4 calls for emergency funding arrangements to be explicitly set out (or permitted) in law or regulation and operationalized in advance. A funding agreement with the government would provide a suitable alternative to market borrowing. - Policy observations and recommendations: - It is critical that DGFs are well-funded and backstopped. - Reliance on commercial borrowing or increased levies on banks during a crisis may exacerbate financial system risks and constrain the DGS’s ability to rely on these sources. - The FFSA should account for possible financial stability implications of a pay-out when determining whether normal insolvency or resolution is the most appropriate approach in the public interest assessment. *Source: IMF staff chapter text (1finea2023004).* ### 59. The FFSA DGS should ensure that it has sufficient funds on an ongoing basis under its ### 59. The FFSA DGS should ensure that it has sufficient funds on an ongoing basis under its ### DGS funding sufficiency and targets - Recommendation: The FFSA DGS should ensure that it has sufficient funds on an ongoing basis under its direct control and investment to ensure its financial autonomy and minimize its dependency on borrowing from banks to support a payout. - The FFSA should take a prudent approach and ensure that its prefunded DGF, and its policy advice on the appropriate target levels, are sufficient for a range of crisis scenarios. - Context: Recent European Banking Authority (EBA) advice suggested assessing the sufficiency of the 0.8 percent target level for DGS funds. - Action: The FFSA DGS should review whether its independent capacity is sufficient to enable the payout for concurrent bank failures and use this review to inform its policy advice to Government and at an EU level. - The FFSA DGS levy arrangements should enable the DGS to reach the appropriate target level within a reasonable time. - Ongoing maintenance: Such a level of DGS funds should be maintained on an ongoing basis. ### Use of DGS funds in resolution and legal constraints - Legal constraints: - As per the BRRD, the FFSA DGS funds shall not be liable for an amount greater than 50 percent of the target level under DGSD. - FFSA DGS contributions to the cost of a bank resolution cannot leave the DGS worse off than it would have been under normal insolvency procedures (the ‘least cost’ principle). - Note: Article 109.5 allows member states to set a maximum DGS contribution higher than the 50% of the target level specified. - Importance: Ensuring the DGS can deploy its funds to support resolution costs is particularly important when banks cannot issue MREL due to prolonged loss of access to wholesale markets or for firms that do not have sufficient MREL resources. - Additional circumstance: If all available bail-inable liabilities have been written down for a bank in resolution, the DGS fund should be available to support orderly resolution if needed. - Levy power: The DGS fund has the power to levy industry for any losses incurred related to contributions to the cost of a bank resolution. - Risk: A narrow interpretation of the least-cost criteria or a strict interpretation of Article 109 of the BRRD could leave the DGS unable to fund resolutions; covered deposits’ preference over other creditors may highly constrain the DGS’s ability to support resolution powers. ### Recommendation on DGS contribution to resolution - It is recommended that if the estimated cost to the DGS, net of recoveries, is consistent with the “least cost” principle and less than liquidation costs, the DGS should be able to contribute resources to support resolution actions. - Permitted uses to include: - Inject cash to back a deposit transfer as part of a partial property transfer. - Provide additional solvency support in combination with the bail-in of liabilities. - Transparency: The FFSA should outline publicly that the counterfactual insolvency valuation analysis would be the basis for assessing the amount of DGF funds it could contribute to resolution costs and explain how it would be done. - Public guidance: The FFSA should set out publicly how it would use DGS funds to support resolution action to reduce market uncertainty and support rapid authority action by minimizing the need for interpreting statutory or policy flexibility in a crisis. ### Financial crisis preparedness and cross-border integration - Integration facts: - In 2018 Nordea’s re-domiciliation to Finland increased Finnish banks’ cross-border operations; Nordea has 74 percent of its assets in Denmark, Norway, and Sweden, often in the form of branches. - Finland’s cross-border exposures to Denmark, Norway, and Sweden make up 80 percent of total cross-border exposures. - Implication: Considerable risk for Finnish headquartered banks through valuations of foreign assets and derivatives, and potential withdrawals of foreign funding; risks heightened for banks operating under a foreign branch model in Finland. ### International and regional cooperation - Nordic-Baltic Stability Group (NBSG): - Provides a forum for cross-border cooperation and crisis coordination. - In 2018, an updated MoU on Cooperation and Coordination on cross-border financial stability was signed among Denmark, Estonia, Finland, Iceland, Latvia, Lithuania, Norway, and Sweden. - FFSA participation: - FFSA staff participate in the SRB internal resolution teams (IRT) of Nordea, OP and Municipality Finland. - FFSA participates in the resolution college for Nordea Group (SRB-led college since 2018), Danske Bank Group (led by Denmark), SEB Group (led by Sweden), and DNB Group (led by Norway). - FIN-FSA and BoF also participate in many resolution colleges as observers. - Svenska Handelsbanken Group no longer has a resolution college; FFSA coordinates bilaterally with the Swedish National Debt Office. - FIN-FSA has signed an MoU focused on recovery and resolution with the Bank of England and the Financial Conduct Authority. ### Resource and capacity implications for cross-border cooperation - Establishing cross-border cooperation requires significant and sustained investment and is resource intensive to develop shared understanding, coordination mechanisms, and analytical methodologies. - Status: Discussions are at an early stage; sustained effort over a multi-year engagement strategy is necessary before home and host authorities can take coordinated action in a crisis with acceptable execution risk. - Recommendation: Focus on developing crisis management capacity with relevant home and host authorities (particularly Sweden, Denmark, and Norway) by building links with regional resolution authorities participating in NBSG and resolution college arrangements. ### Inter-authority crisis coordination and operational arrangements - Need: Resolution decision-making requires very close coordination between the FIN-FSA, FFSA, and BoF to ensure consistent assessment of systemic impact, solvency, and viability. - Risk: Absence of shared assessment frameworks can lead to unproductive discussions and delayed decisions in a crisis. - International guidance: The Financial Stability Board (FSB) Principles for cross-border cooperation on crisis management recommend developing common support tools, including a shared systemic impact assessment framework. - Operational detail required: Arrangements should define operational details of each authority’s role, notification points, agreed procedures, and decision-making frameworks to support coordination with domestic and relevant foreign authorities. - Existing improvements: - FFSA advisory board and updated crisis management MoU have improved crisis collaboration. - Under the MoU, Crisis Management Cooperation Group responds to live crisis situations in a coordinated manner. ### Centralization and coordination within Crisis Management Cooperation Group - Recommendation: Increase centralization of cooperation and coordination of authorities’ preparation for and management of future crises in the Crisis Management Cooperation Group. - Role: Coordinate authorities’ independent work (e.g., FIN-FSA recovery planning and early intervention actions; BoF preparation for and deployment of ELA or funding in resolution; FFSA resolution planning and implementation) to formalize internal crisis practices and support coordinated independent action. ### Authority crisis management capabilities and preparedness - Components of crisis capabilities: internal frameworks to identify emerging risks, operational contingency plans, crisis governance arrangements, and testing or crisis simulation arrangements. - Requirement: Authorities need to formalize internal crisis management practices and ensure resources dedicated to crisis management are commensurate with statutory functions. - Progress since last FSAP: - FIN-FSA developed a crisis management manual (for the LSIs) including internal policies, procedures for action, and coordination. - BoF developed internal policies, processes, and procedures to support deployment of ELA. - FFSA increased resources: 19.6 FTEs in 2021 (compared to 12.5 in 2016). - FFSA resources to be expanded to 26 FTE by end 2022, with an additional 6 FTEs enabling onboarding of the new mandate related to the backup payment systems required under the Emergency Powers Act. - FFSA resources will be split between three units: Resolution Unit, Deposit Guarantee and Emergency Supply Unit, and Administrative Services and Financial Stability Fund Unit. - FFSA will start to work along four key processes: EU influencing, Crisis management, Crisis resolution planning, and Data collection and management. - In 2020 FFSA launched an internal three-year development program to enhance operational capability in an FFSA-led resolution process, including a virtual platform for managing resolution decisions and processes. ### Operational detail, methodologies, and resourcing recommendations - Gap: Crisis management framework needs more operational detail; authorities must develop internal arrangements that are fully operational for crisis purposes (e.g., FFSA defining resolution mechanics and identifying key information needs to execute a bail-in or transfer resolution). - Recommendation: Prioritize development of shared methodologies for consistent systemic impact, solvency, and viability assessments, specifying sources of information and valuation methodologies. - Note: Use of shared frameworks does not preclude authorities arriving at different conclusions or change the independent nature of assessments. - Benefit: Agreed methodologies minimize time-consuming differences and allow cross-authority discussions to focus on substantive issues. - Resourcing: - FFSA’s resources need to be commensurate with its standing crisis functions. - International best practices indicate perennial work is needed to ensure bank resolvability and implement crisis management actions. - The MoF should keep under review the FFSA’s resourcing model given the expansion of FFSA statutory responsibilities and increased reporting requirements. - Resources should support regular engagements with banks to monitor implementation progress, ensure resolvability capabilities are maintained, and provide policy clarification. - FFSA should seek resource synergies between its resolution and deposit insurance authority functions. - In a highly concentrated banking sector where the six largest banks account for 90 percent of the banking sector, it may be possible to temporarily deploy DGS resources to achieve high-priority resolution objectives. ### External advisory capacity and procurement - Recommendation: FFSA should expand procurement frameworks to support rapid appointments across the full range of external advisory support required. - Rationale: External advisors provide market expertise that may be cost-effective to acquire rather than develop or retain in-house. - Planning: Ensure capacity in resource planning for both peacetime resolution planning and crisis management implementation, realistic about availability and cost of advisory support. - Mitigation: Establish procurement frameworks with multiple external advisors in each lot and leverage their advice in peacetime and crisis. ### Crisis simulation exercises - The text emphasizes the role of crisis simulation and testing arrangements as part of crisis capability development (section heading indicates D. Crisis Simulation Exercises), supporting preparedness though specific exercises are not detailed in the supplied excerpt. *Source: FINLAND — International Monetary Fund, excerpts from chapter on Financial Crisis Preparedness and Coordination and related recommendations.* ### 80. Financial sector crisis simulation exercises (CSEs) are essential tools for authorities to ### 1finea2023004 - 80. Financial sector crisis simulation exercises (CSEs) are essential tools for authorities to ### CSE purpose and design principles - CSEs are essential tools for authorities to practice decision-making in the face of a financial crisis; they are not tests or exams to pass or fail. - Primary objectives: - Learning-focused CSEs: raise awareness, improve knowledge of crisis organization, plans, procedures, protocols; targeted at discussion and gaming of crisis-management aspects. - Testing-focused CSEs: probe individuals, teams, and organizational preparedness; involve elements of surprise and are used to identify strengths and vulnerabilities. - Design parameters shared by both types: players involved, level of realism, openness of scenario, player role, timing. - Guidance on sequencing and complexity: - Testing-based CSEs require crisis processes, protocols, and capabilities to be largely complete and functioning. - Learning-based CSEs are appropriate where crisis-management frameworks remain under development. - Authorities should generally avoid cross-border CSEs involving external parties before their domestic crisis management framework is fully operationalized and understood by staff; if undertaken earlier, design a learning-focused cross-border simulation targeting elements well understood by both parties. ### Finland — recent CSE activities and experience - Since the last FSAP, the FFSA, FIN-FSA and BoF have developed or participated in a range of CSEs. - 2018: two domestic CSEs: - First focused on developing national authority cooperation, communication and testing decision-making in a crisis. - Second focused on determination of failing or likely to fail. - Note: limited focus on training or testing the internal FIN-FSA crisis management plan through internal or cross-authority simulations. - January 2019: large Nordic-Baltic crisis management exercise with FFSA, FIN-FSA, and BoF as active participants; designed to practice exchange of information and decision-making in a cross-border CSE involving a bank failure. - Post-2019 follow-up: - FFSA chairs the Communication and Collaboration Tools working group. - FFSA preparing for an internal bail-in simulation to be organized in autumn 2022. - FFSA will support design and organization of the next NBSG simulation planned for 2024. ### Findings and risks from CSE practice - If CSE design is not tailored to the state of development of crisis management regimes, players may derive misleading meanings that influence real-crisis actions inconsistent with authorities' preferred strategy. - Example risk: foreign authority players might conclude internal home authority resolution processes/procedures are inadequate if tested while incomplete or poorly understood, undermining host confidence and risking preemptive, uncoordinated actions by hosts. ### Recommendations — cross-authority CSE strategy and CSE manual - Finnish authorities should formalize existing crisis management practices and priorities by: - Developing a cross-authority CSE strategy. - Supporting the strategy with an operational manual on CSE design and implementation. - Expected benefits: - Increase authorities’ operational readiness. - Ensure adequate resourcing for crises. - Capture lessons learned from CSEs via regular updates to the manual. - Ensure CSEs reflect the increasing complexity of cross-border crisis management. - Prioritize aspects of the regime most in need of cross-authority simulations. - Suggested governance and roles: - The Crisis Management Cooperation Management Group could support development of the cross-authority strategy, capture lessons learned, ensure lessons are addressed by each authority’s independent actions, and codify best practices in a CSE manual. - CSE manual content priorities: - Make clear different purposes of CSEs for different levels of completeness in the Finnish crisis management regime (teaching versus testing). - Capture best practices from Finnish authorities’ experience. - Minimize risk of unintended outcomes that could undermine cross-authority or cross-border cooperation. - Tailor CSE design to avoid testing incomplete or poorly understood internal processes that could be misinterpreted by external players. ### Legal protections for crisis management staff — findings and recommendations - Legal risks in crisis management include: - (i) supervisory authority failing to act despite knowledge of serious problems; - (ii) measures being inadequate in response to problems; - (iii) shareholder challenges to appointment of a provisional administrator; - (iv) resolution action interfering with private property in the public interest. - Current Finland framework: - There are no specific legal protections for FFSA and FIN-FSA staff carrying out their work in good faith. - The State is liable for damages caused by an employee through error or negligence at work. - A public official may be liable for damages caused by an error or omission in carrying out official duties and may be subject to legal action for unlawful acts regardless of good faith. - No arrangements exist for protecting staff against costs of defending their actions as part of their work. - Recommendation: - Strengthen legal protection of financial agencies’ officials, staff, and agents to be consistent with pertinent international standards. - Provide statutory clarity that a case against crisis management staff decisions would have no chance of success unless based on criminal activity (as per the Criminal Code) or actions/omissions made in bad faith. - Coverage should include agencies, current and former officials, staff, and agents. - If employees face personal action and must defend proceedings, they should have access to resources for defending the proceedings, including a full indemnity for legal costs. ### Related FSAP status and timelines (selected items from Appendix II) - FFSA human resources: - During 2021 the FFSA’s human resources were 19.6 FTEs (compared to 12.5 in 2016). - Status summaries: - Increase FIN-FSA and FFSA financial and human resources: Partially implemented. - Expand Nordic cooperation, coordinated inspections, stress tests, macroprudential collaboration, CPCM cooperation, and regular crisis simulations: Partially implemented. - Strengthen legal protection for staff of all financial oversight agencies: Not implemented. - Formalize inter-agency cooperation on crisis preparedness and management at national level (possible FFSA Advisory Council expansion): Partially implemented. - Ensure agency-specific and national financial crisis planning under FFSA Advisory Council oversight: Partially implemented. - Expedite resolution planning for systemic financial institutions: Partially implemented. - Define strategies for liquidity assistance in resolution and introduce indemnification for ELA losses incurred by BoF: Not implemented. ### International good practice guidance (Appendix III) — operational takeaways - Two broad purposes for CSEs: learning and testing; choose approach consistent with maturity of crisis framework. - Testing-based simulations require completed, functioning crisis infrastructure (valuation approaches, systemic impact assessment, operational liquidity facilities). - Learning-based simulations can develop specific team/organization capabilities through discussion while other crisis-management aspects remain under development. - Cross-border simulations should be undertaken only when domestic crisis frameworks are sufficiently operationalized and understood; otherwise, use a learning-focused cross-border approach concentrating on well-understood elements. ### Bail-in mechanics considerations (Appendix IV) — policy design choices for bail-in mechanics - Key design variations authorities must decide on when designing an open bank bail-in mechanic: - Valuation timelines: assume final valuations conclude in days versus lengthier processes (e.g., 3+ months). - Treatment of resolved bank shares: cancellation and issuance of new shares versus suspension of existing shares until final bail-in terms. - Issuance of new shares: whether Common Securities Depositary and stock exchange listing processes are initiated on resolution order and whether the bank in resolution must create a global note. - Issuance of interim securities: use of interim securities (e.g., Certificates of Entitlement (CEs) or claim rights) that can be traded between resolution and final valuation terms; example: UK CEs can be distributed immediately without complying with Listing Authority or EU Prospectus Directive prospectus requirements. - Compliance with change in control and other regulatory requirements: how the mechanic ensures new owners are fit and proper given challenges of identifying holders of interim securities or new shares. - National legislative frameworks largely determine approach; common approach across jurisdictions aids coordinated home-host cooperation in cross-border resolutions. - Recommendation for FFSA: - Consider developing an “open bank” bail-in mechanic that relies on the suspension of liabilities and the use of interim instruments. *Source: IMF staff report content from the provided PDF excerpt.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1finea2023004.pdf_