## FINANCIAL SECTOR ASSESSMENT PROGRAM UPDATE KINGDOM OF THE NETHERLANDS–NETHERLANDS CRISIS MANAGEMENT AND BANK RESOLUTION FRAMEWORKS TECHNICAL NOTE JUNE 2011 (_cr11207)

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### I. Introduction and context
- Purpose: Analyze the Dutch framework for crisis management and bank resolution and formulate recommendations to address observed weaknesses.
- Basis:
  - Detailed analysis of relevant legal and policy documents.
  - Intensive discussions with the Ministry of Finance (MoF), the Ministry of Justice, De Nederlandsche Bank (DNB) and the Authority for Financial Markets (AFM), as well as stakeholders (including banks, insolvency practitioners and academics).
  - Mission to the Netherlands: November 28 to December 14, 2010.
- Context and motivation:
  - Global financial crisis hit the Netherlands hard and interventions involved unprecedented levels of governmental financial support.
  - Dutch taxpayers contributed disproportionately in part due to lack of burden sharing arrangements (both ex ante and ex post) between countries and the lack of an effective international resolution framework.
  - Crisis exposed weaknesses in Dutch financial oversight and legal frameworks for crisis prevention and orderly resolution of globally active financial institutions.

### Key findings and high-level recommendations (summary)
- Institutional framework
  - Institutional set-up broadly appropriate.
  - Main areas requiring attention:
    - Shift decision-making power from the Judiciary to DNB in bank resolution to reflect DNB’s professional competence and role in maintaining financial stability.
    - Enhance willingness of the State, DNB and the AFM to support forceful actions by making them liable only in cases of gross negligence or willful misconduct.
    - Fine calibration of respective roles of the MoF and DNB in bank resolution.
- Official financial support
  - Overall framework appropriate but significant weakness: absence of a standing budgetary authorization for the Government to fund solvency support.
  - Any such authorization should be designed to avoid increasing moral hazard.
- Restructuring under official control
  - Establish a single regime for resolving banks under official control with adequate objectives (including financial stability), tasks and powers for official administrators.
- Orderly resolution in gone concern
  - Strengthen liquidation framework; introduce consultative/steering role for DNB and AFM in liquidation; introduce mechanisms for rapid transfer of deposits and essential functions (e.g., IT and payments), possibly combined with simultaneous asset transfers.
- Deposit Guarantee Scheme (DGS)
  - DGS should be ex ante funded and authorized to fund bank resolution operations (including financing transfer of deposit books and “purchase and assumption” transactions).
  - Introduce a well-designed depositor preference to support effectiveness and reduce resolution costs for back-up financiers.

### II. Institutional aspects — roles, coordination and liability
- Core requirements:
  - Strong and clear mandates; adequate allocation of labor; explicit coordination mechanisms including secure exchange of confidential information.
- Roles and responsibilities (as summarized)
  - MoF:
    - Financial stability is political responsibility of Government, represented by MoF.
    - Competent for any measure involving the public purse; involved when systemic stability is concerned or a measure requires direct public finance contribution.
  - DNB:
    - Lead authority for bank resolution measures that do not raise systemic concerns or require public solvency support (subject to caveats).
    - Competent for emergency liquidity assistance to illiquid but solvent banks and for imposing corrective measures; may limit powers of decision-making bodies via curatorship and can instigate restructuring or liquidation by seeking triggering of the “emergency mechanism.”
  - AFM:
    - No specific crisis management competences but contributes by balancing market transparency and conduct-of-business rules with discretion needed to ensure effectiveness of official financial support.
  - DGS:
    - Responsible for compensating insured depositors; has no separate legal personality and is managed and operated by DNB.
  - Judiciary:
    - Plays prominent role in resolution; courts control imposition of a trustee through “emergency mechanisms” and oversee trustees in restructuring or liquidation; “Vie d’Or” case law gives courts ultimate quality control.
- Inter-institutional cooperation and information sharing:
  - MoF and DNB roles codified in a Memorandum of Understanding (MoU).
  - Act on Financial Supervision (AFS) coordinates DNB and AFM when curator appointed, license withdrawn, or bank resolution measure triggered (Article 1:47).
  - Legal bases for DNB–MoF information sharing: Article 1:42, Article 1:89, and Article 37 of the DNB Law.
  - Exceptions to confidentiality (Article 1:89 AFS) include sharing with other supervisory authorities, curators and trustees, criminal prosecution services, and central banks.
- Practical crisis coordination:
  - DNB expanded a coordination group on financial stability (originally met 3-5 times a year; met weekly during the crisis).
  - Crisis management group “Pecunia” included MoF and AFM representatives and met daily.
- Inter-institutional allocation of labor — recommendations
  - Clarify allocation of responsibilities between DNB and MoF when measures require both solvency support and restructuring.
  - If technical resolution decisions generally allocated to DNB, legal framework should indicate how MoF involvement alters responsibility and which agency is ultimately responsible.
  - Accountability arrangements should mirror division of labor.
  - Fine-tune interaction between DNB and Judiciary: strengthen DNB decision-making and transform ex ante court involvement into crisp ex post review.
  - Enhance liability threshold so authorities are liable only in cases of gross negligence or willful misconduct.

### III. Prevention and supervisory early intervention
- Prevention — enhancing resilience
  - Supervisory framework enhancement recommended (detailed assessment outside this Note).
  - Initiatives to enhance bank resilience:
    - Higher bank equity requirements (in line with Basel III).
    - Contingent capital instruments with automatic debt-equity conversion mechanisms.
    - “Recovery and resolution plans”: policy choice whether plans are mainly informative or used to force organisational and legal changes to facilitate orderly resolution.
- Supervisory early intervention of problem banks
  - Authorities should have explicit and strong powers to require boards and management to act, and to replace directors and management rapidly and effectively.
- Corrective action powers under AFS
  - Directions (Article 1:75): impose a “direction” to obligate determined behavior within a reasonable time when breaches or signs of developments in solvency, equity or liquidity may endanger the institution.
  - Cease and Desist Orders (Article 1:79): DNB may impose; MoF may establish detailed rules but has not yet done so.
  - Special Measures (Article 3:111a): impose restrictive and other risk reduction measures (e.g., higher equity or specific provisioning policy).
- Strengthening use of powers
  - DNB should actively use powers and document administrative practice (without naming individual banks) to increase credibility and moral suasion.
  - MoF should develop detailed rules for DNB’s cease-and-desist orders to clarify enforceability of restructuring plans (including potential divestment of business lines and subsidiaries).
  - Consider legislative amendments to remove uncertainties and obstacles; enhanced liability threshold would help.
- Change of management
  - AFS authorizes removal of underperforming directors/managers through a “direction” (Article 1:47 jo. Article 1:75), but relies on bank to dismiss officials.
  - Consider granting DNB power to remove and, where necessary, replace directors and managers directly, coupled with stronger fit-and-proper rules.

### IV. Crisis management tools — ELA and solvency support
- Essential elements: arrangements for official (temporary) financial support; robust resolution powers for going concerns; orderly liquidation mechanism; well-designed DGS.
A. Emergency liquidity assistance (ELA)
- Principles:
  - State or official agency should provide rapid, legally robust ELA to illiquid but solvent banks; liquidity provider should manage credit risks and require collateral.
- Dutch framework:
  - Member states remain competent to establish ELA; ECB has no jurisdiction over ELA apart from coordination issues.
  - DNB’s legal framework considered to allow ELA (see March 2003 Minister of Finance letter asserting Article 8.1 of the DNB Law as legal basis).
  - Authorities developed a policy framework for assistance (Box 1) offering DNB considerable discretion.
- Box 1 — Policy Framework for ELA (summary)
  - DNB confirmed as lender of last resort and responsible for providing ELA.
  - DNB has discretion to decide when and if to provide ELA.
  - DNB may provide ELA to banks and banking parts of financial conglomerates.
  - Framework is silent on the interest DNB would charge for ELA operations.
  - DNB has discretion as to adequacy of collateral, with expectation that MoF and DNB will consult on collateral when amounts of ELA reach significant levels.
  - In principle, MoF does not provide a state guarantee to DNB for exposures from ELA.
- Legal constraints:
  - EU Treaty prohibits “monetary financing,” interpreted to prohibit national central banks from providing liquidity support to insolvent banks.
  - European Commission: “pure” ELA to illiquid but solvent banks does not fall under state aid rules; liquidity assistance to insolvent banks is governed by state aid rules.
B. Solvency support
- Framework goals:
  - Allow state (or agency) to enter rapidly and legally robustly into transactions that buttress solvency (recapitalization, guarantees, etc.) and execute them rapidly.
- Dutch practice and shortcoming:
  - Government has taken over banks and provided recapitalizations, guarantees, and balance sheet relief (e.g., “Illiquid Assets Back-Up Facility” for ING).
  - Public Accounts Law (“Comptabiliteitswet”) requires Parliament prior approval for State participations, impeding rapid discrete action.
  - Significant weakness: absence of a standing budgetary authorization for Government to fund solvency support.
- Recommendation:
  - Introduce a standing budgetary authorization for MoF to make disbursements for (temporary) solvency support via legislative amendment to provide legal underpinnings for stability contributions.
- Measures to minimize moral hazard when authorizing solvency support:
  - Predicate solvency support on close interaction between MoF and DNB:
    - MoF should consult DNB beforehand; DNB required to issue a written opinion on appropriateness of fiscal support.
    - Consider making solvency support conditional on DNB determination that (i) the Netherlands is experiencing a systemic crisis and (ii) DNB cannot address systemic pressure through ELA and bank resolution.
  - Resolution policies should attribute losses to pre-insolvency financial stakeholders, including unsecured creditors, and link solvency support to allocation of such losses (via Government statement, Parliament motion, or legislation).
  - Solvency support should be subject to robust ex post transparency requirements towards Parliament.

### V. Restructuring under official administration (going concern) — unified regime proposal
- Existing mechanisms:
  - Curatorship (Article 1:76): DNB may appoint a “curator” who controls decision-making bodies mainly via veto.
  - Emergency Mechanism (Article 3:160–162; Article 3:163): courts may impose a trustee who can transfer liabilities to a third party; EM sole objective is creditors’ interest and law imposes an almost total moratorium.
- Assessment:
  - Curatorship lacks explicit objectives and effective restructuring tools; curator does not replace decision-making bodies.
  - Emergency Mechanism grants effective control but trustee appointed by courts, limited restructuring options (liability transfers only), and creditor-interest-only objective.
- Proposal: single, strengthened regime for official administration
  - Triggers:
    - Available at a sufficiently early stage (before actual insolvency) on clear, proportionate triggers combining qualitative and quantitative measures.
    - Example quantitative triggers: CAR at 50 percent or 25 percent could set floors for intervention.
    - Qualitative triggers: adequacy of management, “loss of market confidence that endangers the survival of the bank.”
  - Appointment and status:
    - Administrator(s) appointed and dismissed by DNB, not by courts.
    - Administrators should act as agents of DNB, obligated to follow DNB instructions and accountable to DNB; as agents they would not incur own liability—DNB (or the Kingdom) would be liable.
  - Objectives:
    - Main objective: contribute to overall soundness of the banking system by providing orderly resolution; creditor interests second.
  - Basic tasks:
    - (i) assess real financial situation;
    - (ii) establish new balance sheet reflecting fair and true view;
    - (iii) write down capital and convert subordinated debt into capital as needed;
    - (iv) design and implement restructuring plan (after DNB approval);
    - (v) if restructuring not an option, prepare for orderly liquidation.
  - Control and powers:
    - Administrator should fully take over powers of management, supervisory board and general assembly (not implying automatic dismissal).
    - Restructuring tools needed: rapid recapitalization without pre-emptive rights, conversion of subordinated debt into equity, transfer/sale of assets and assumption of liabilities (“purchase and assumption”).
    - Consider selective stay on certain liabilities; introduce bank debt restructuring mechanism (Box 3).
  - Supporting legal framework:
    - Deposit liabilities should be transferable without depositor consent.
    - Consider explicit “bridge bank” regime.
    - Analyze competition rules’ effect on “purchase and assumption” with other domestic financial institutions.
  - Modalities:
    - Costs of official administrator borne by the bank; such costs should have first priority if bank is later declared insolvent.
    - Restructuring transactions need “safe harbor” protection against claw-back rules if transferor bank later liquidated.

### VI. Orderly liquidation (gone concern) — streamlining and enhancements
- Current liquidation mechanisms:
  - Liquidation under EM (Article 3:163).
  - Bankruptcy Law special chapter on banks (Articles 212g et seq.).
  - AFS specific provisions (Article 1:104) govern withdrawal of license under liquidation.
- Recommendation: single, robust and flexible mechanism for orderly liquidation
  - Useful features exist in both EM liquidation and bankruptcy; liquidators prefer bankruptcy for familiarity.
  - Streamline and fine-tune mechanisms to facilitate orderly liquidation.
- Key features to enhance rapid transfers and continuity:
  - Express legal power for “purchase and assumption” transactions to transfer assets, liabilities and combined portfolios.
  - Power to establish a “bridge bank” under government ownership to temporarily acquire assets, liabilities and essential functions if no private acquirer available.
  - Authority for liquidator to organize rapid transfers of assets (e.g., shares in single purpose vehicles charged with IT and payment services) or to transfer relevant assets, contracts and staff to solvent acquirer to ensure continuity.
  - Close interaction between liquidators and authorities required.
- Role of DNB and AFM in liquidation:
  - Currently DNB and AFM cease involvement once liquidation is opened.
  - Recommendation: DNB and AFM should be consulted on major disposals and have right to formulate recommendations to Courts and liquidators.
  - Stronger alternative: grant DNB and AFM powers to direct liquidators (recognizing potential coordination issues with Courts).

### Box 3 — Bank Debt Restructuring Framework (key features)
- Triggers: late stage when bank balance sheet insolvent or about to become insolvent; restructuring approved only if necessary and will return viability.
- Control of management: restructuring as part of “official administration” though some management may remain.
- Scope: only subordinated and senior debt restructured; exclude insured and inter-bank deposits, secured debt (covered bonds), trade finance, and repos.
- Waterfall: losses follow liquidation priority—first equity (including post-conversion of contingent capital), then subordinated debt, then senior creditors.
- New capital: provide sufficient new capital combined with dilution of pre-restructuring shareholders via conversion or issuance.
- Limits on walk-away clauses: prohibit automatic termination of transactions; include prohibition on “walk away” clauses.
- Stay/moratorium: possible stay on selected liabilities while allowing payment on non-stayed debt.
- Liquidity assistance and guarantees: restructuring must be coupled with adequate official liquidity assistance and official guarantees for some non-stayed debt.
- Creditor approval: quick action argues against requiring creditor approval.
- Decision-making: initiated by administrative decision of DNB; consider judicial approval in lieu of optional judicial review with speedy action and appropriate weight to DNB expertise.
- Cross-border effectiveness: framework must qualify as a “reorganization measure” under EU Winding Up Directive so haircuts are recognized in other EU jurisdictions.

### VII. Intra-group and cross-border coordination
- Resolution complexity increases with multi-jurisdictional groups and conglomerates.
- Current framework:
  - Legal entity-specific but includes limited intra-group coordination tools: AFS authorizes appointment of a curator with respect to “financial institutions” but curator powers limited to appointed entity.
  - DNB could appoint same curator(s) for affiliated components to ensure some coordination.
  - DNB empowered to determine the “interests” that should guide curators and might instruct curators to consider interconnectedness.
- Recommendation:
  - Avoid collapsing insolvency estates into single estate.
  - Include explicit legal mechanism for close coordination of resolution procedures of bank and its subsidiaries/affiliates by courts and DNB.
  - Allow coordination between Dutch authorities and foreign administrators or liquidators of foreign affiliates or subsidiaries.
- Cross-border cooperation recommendations:
  - Explicitly authorize official administrators to coordinate with foreign counterparts with jurisdiction over branches, subsidiaries and affiliates.
  - Institute mandate to take into account other countries’ financial stability concerns insofar as not detrimental to Netherlands’ interests.
  - Fine-tune AFS (Article 3:209–211) to make ring-fencing optional when EM opened against Dutch branch of foreign bank, allowing cooperation with home country liquidator if reconcilable with Dutch national interest.
  - DNB may request opening of insolvency procedures over Dutch branches of foreign banks (Article 3:206) with discretion to cooperate with foreign authorities.

### VIII. Deposit Guarantee Scheme (DGS) — reform priorities
- Rationale:
  - DGS should evolve from historical “pay-box” to an active crisis-management participant to minimize fiscal cost, depositor distress and maximize trust.
- Current practice and shortcomings:
  - When a bank becomes insolvent, DNB pays covered depositors and recuperates amounts from other banks.
  - DGS funds cannot currently be used to support bank resolution transactions, limiting toolkit.
  - Risk of regulatory arbitrage by banks not internalizing deposit safety costs relative to other EU states.
- Ex-ante funding:
  - Recommendation: DGS funded ex ante by contributions paid by banks in proportion to insured deposits.
  - Contribution design options: flat rate or risk-based basis (risk-based attractive but practically challenging).
  - Contributions should be invested with regard to liquidity so funds are readily available.
  - If funds insufficient:
    - Authorities should be explicitly authorized to close funding gap through loans or grants (Loans being the first best option).
    - Clarify whether official support for DGS shortfalls should be provided by MoF or DNB.
- Use of DGS funds in resolution:
  - DGS should be allowed to financially support certain restructuring transactions at request of DNB by financially supporting transfer of insured deposits to another bank.
  - Transfer mechanisms: auction of deposit book component or “purchase and assumption” transactions (insured deposits and corresponding assets transferred).
  - DGS may top up transaction up to amount of insured deposits; transferor bank must subsequently be liquidated to avoid open bank assistance benefiting pre-insolvency stakeholders.
  - DGS powers should be circumscribed and supportive of DNB’s resolution strategy; DGS should not replace DNB as resolution authority.
  - Authorizations should be complemented by regulatory obligations for availability of depositor information, operational manuals, contractual frameworks and due diligence tools; consider “bridge banks” if private acquirers unavailable.
- Depositor preference:
  - Recommendation: insured depositors and/or DGS (directly or via subrogation) should have high-ranking priority over failed bank’s estate.
  - Rationale: subrogation without priority leaves DGS as unsecured creditor and likely to suffer severe losses pari passu with other unsecured creditors.
  - Preferential right over unencumbered assets enables recovery ahead of ordinary unsecured creditors, protecting DGS, contributing banks and public purse; facilitates “purchase and assumption” transactions.

### IX. Liability, incentives and legal protection
- Closing the circle — liability and incentives for forceful action:
  - Recommendation: enhance liability threshold for State, DNB, AFM and official administrators so they are liable only in event of gross negligence or willful misconduct.
  - Purpose: support forceful official action by reducing litigation risk that could deter decisive measures; recognize imperfect information and urgency; encourage willingness to take difficult decisions.
  - Legal standard: liability triggered only by gross negligence or willful misconduct, with burden of proof lying firmly with plaintiffs.

*Source: IMF staff technical note prepared by Wouter Bossu (Legal Department) and Jianping Zhou (Monetary and Capital Markets Department), CR/11/207 (June 2011).*

### 2011. The views expressed in this document are those of the staff team and do not necessarily reflect

### FINANCIAL SECTOR ASSESSMENT PROGRAM UPDATE KINGDOM OF THE NETHERLANDS–NETHERLANDS CRISIS MANAGEMENT AND BANK RESOLUTION FRAMEWORKS TECHNICAL NOTE JUNE 2011

### I. Introduction
- Purpose: Analyze the Dutch framework for crisis management and bank resolution and formulate recommendations to address observed weaknesses.
- Basis of the Note:
  - Detailed analysis of relevant legal and policy documents.
  - Intensive discussions with the Ministry of Finance (MoF), the Ministry of Justice, De Nederlandsche Bank (DNB) and the Authority for Financial Markets (AFM), as well as stakeholders (including banks, insolvency practitioners and academics).
  - Mission to the Netherlands: November 28 to December 14, 2010.

- Context and motivation:
  - The global financial crisis hit the Netherlands financial sector hard; interventions contained the crisis but involved unprecedented levels of governmental financial support.
  - Dutch taxpayers contributed disproportionately in part due to lack of burden sharing arrangements (both ex ante and ex post) between countries and the lack of an effective international resolution framework.
  - Crisis exposed weaknesses in Dutch financial oversight and legal frameworks for crisis prevention and orderly resolution of globally active financial institutions.

### Key findings and recommendations (summary from Note)
- Institutional Framework for Crisis Management
  - Institutional set-up broadly appropriate.
  - Main areas requiring attention:
    - Shift decision-making power from the Judiciary to DNB in bank resolution to reflect DNB’s professional competence and role in maintaining financial stability.
    - Enhance willingness of the State, DNB and the AFM to support forceful actions by making them liable only in cases of gross negligence or willful misconduct.
    - Fine calibration of respective roles of the MoF and DNB in bank resolution.

- Official Financial Support
  - Overall framework for official financial support to stem systemic crisis is appropriate.
  - Significant weakness: absence of a standing budgetary authorization for the Government to fund solvency support. Any such authorization would need to be designed to avoid increasing moral hazard.

- Restructuring under Official Control
  - Current framework for resolving ailing banks in going concern could be significantly strengthened.
  - Recommendation: establish a single regime for resolving banks under official control, with adequate objectives (including financial stability), tasks and powers for official administrators.

- Orderly Resolution in Gone Concern
  - Liquidation framework could be strengthened and fine-tuned.
  - Introduce a consultative, if not steering, role for DNB and the AFM throughout liquidation to ensure financial stability concerns receive appropriate attention.
  - Introduce mechanisms supporting rapid transfer of deposits and essential functions (e.g., IT and payments), possibly combined with simultaneous asset transfers.

- Deposit Guarantee Scheme (DGS)
  - DGS has helpful characteristics but could be significantly enhanced.
  - To play a meaningful crisis-management role, DGS should be:
    - Ex ante funded.
    - Authorized to fund bank resolution operations (including financing transfer of deposit books and “purchase and assumption” transactions).
  - Introduce a well-designed depositor preference to support effectiveness of operations and reduce resolution costs for back-up financiers of the scheme (other banks and, ultimately, the State).

### II. Preliminary observations
- Cross-border resolution challenges:
  - National authorities face difficulty resolving large international financial groups whose operations, assets and risks spread beyond national borders.
  - Netherlands hosts several large international financial groups and participates in EU single capital and banking market, which has removed some national levers to prevent, contain and manage crises.
  - Present “home country” control and resolution system lacks strong incentives for effective cross-border supervision and resolution, in part because of absence of ex ante burden sharing arrangements.
  - Host states have limited powers over foreign EU bank branches but face political constraints to accept inadequate crisis management by home states (example noted: Icesave failure).

- Role of ex ante burden sharing:
  - Lack of ex ante burden sharing with relevant host countries is particularly unhelpful for the Netherlands.
  - Public funding may sometimes be needed temporarily to reduce systemic risks; ex ante agreements increase likelihood of successful resolution, set correct incentives, save crisis time, and avoid protracted negotiations.
  - Parameters and criteria for burden sharing could be included in an international enhanced coordination framework for bank resolution, although development of such a framework is uncertain.

- Policy implication:
  - In absence of imminent institutional reform at international and EU level, Dutch authorities should strengthen domestic crisis management and bank resolution frameworks soon and forcefully.

### III. Institutional aspects
- Core institutional requirements for sound crisis management:
  - Strong and clear mandates for relevant institutions.
  - Adequate allocation of labor across institutions.
  - Explicit coordination mechanisms, including secure exchange of confidential information in times of distress.

- Roles and responsibilities (as summarized in the Note):
  - MoF (Ministry of Finance):
    - Financial stability is a political responsibility of the Government, represented by the MoF.
    - MoF competent for any measure involving the public purse; involved when systemic stability is concerned or a measure requires a direct public finance contribution.
    - Example actions: led acquisition of Dutch part of Fortis and provision of solvency support to ING and other institutions.

  - DNB (De Nederlandsche Bank):
    - Lead authority for bank resolution measures that do not raise systemic concerns or require public solvency support (subject to caveats).
    - Competent for emergency liquidity assistance to illiquid but solvent banks and for imposing corrective measures.
    - May limit powers of decision-making bodies of ailing banks via curatorship and can instigate restructuring or liquidation by seeking triggering of the “emergency mechanism.”

  - AFM (Authority for Financial Markets):
    - No specific crisis management competences but contributes by balancing market transparency and conduct-of-business rules with discretion needed to ensure effectiveness of official financial support.
    - Supports discrete bank resolution measures while requiring transparency when necessary.

  - DGS (Deposit Guarantee Scheme):
    - Responsible for compensating insured depositors for losses caused by bank failures.
    - No separate legal personality; managed and operated by DNB.
    - Institutional set up appropriate; central bank management supports incorporation of financial stability considerations in pay-out strategies and avoids governance problems from close involvement of other commercial banks.

  - Judiciary:
    - Plays a prominent role in resolution of banks and licensed financial firms.
    - Courts—not DNB—control imposition of a trustee in bank resolution through the “emergency mechanisms” and oversee trustees in restructuring or liquidation.
    - “Vie d’Or” case law: courts act as ultimate quality control of financial institution resolution measures in the Netherlands.

- Inter-institutional cooperation and information sharing:
  - MoF and DNB roles codified in a well-designed Memorandum of Understanding (MoU) recognizing MoF’s role and DNB’s tasks.
  - Act on Financial Supervision (AFS) explicitly organizes coordination between DNB and AFM when a curator is appointed, a license withdrawn, or a bank resolution measure is triggered (Article 1:47).
  - Dutch laws permit information sharing during crisis management between DNB and AFM and between DNB and MoF.
  - Legal bases for DNB–MoF information sharing include Article 1:42 (accountability arrangement), Article 1:89 (allows DNB to share information if necessary for performing its tasks), and Article 37 of the DNB Law.
  - Exceptions to general confidentiality principle (Article 1:89 AFS) include sharing with other supervisory authorities, curators and trustees, criminal prosecution services, and central banks.

- Practical coordination during the crisis:
  - “Twin Peak” model and the MoU between DNB and AFM facilitated robust and rapid crisis response.
  - Combination of prudential supervisor and central bank under one roof aided policy response.
  - DNB established and expanded a coordination group on financial stability: originally met 3-5 times a year, but met weekly during the crisis.
  - Group expanded to include representatives from DNB’s financial market, payment, and legal divisions.
  - A crisis management group named “Pecunia” was set up including representatives from the MoF and the AFM, meeting daily.
  - Coordination between DNB and AFM proceeded smoothly based on AFS arrangements.

*Source: IMF staff technical note prepared by Wouter Bossu (Legal Department) and Jianping Zhou (Monetary and Capital Markets Department), CR/11/207 (June 2011).*

### 11.      Nevertheless, some improvements to the inter-institutional allocation of labor

### 11.      Nevertheless, some improvements to the inter-institutional allocation of labor

### Inter-institutional allocation of responsibilities
- Advocate reforms to clarify allocation of responsibilities between DNB and MoF when crisis management measures require both solvency support and restructuring of a bank’s balance sheet.
- Specific recommendations:
  - If the power to take technical resolution decisions is generally allocated to DNB, the legal framework should indicate how MoF involvement due to systemic and public purse concerns alters this responsibility (if at all) and clarify which agency is ultimately responsible for the resolution process.
  - Accountability arrangements should mirror the division of labor.
- DNB and Judiciary:
  - Fine-tune interaction between DNB and the Judiciary with respect to bank resolution measures to allow DNB to leverage its mandate and expertise.
  - Recommended: strengthen the decision-making and steering role of DNB while transforming current ex ante involvement of the courts into a crisp but adequate ex post review.
- Liability Threshold:
  - A well designed enhanced liability threshold providing the authorities with greater legal protection would complement the more prominent role that DNB would assume.

*See the Technical Note on the Twin Peaks Model (footnote reference in source).*

### IV. PREVENTION — enhancing resilience
- Supervisory framework enhancement would be important for crisis management though a detailed assessment is outside this Note (footnote reference).
- Initiatives that could enhance banks’ capacity to withstand distress:
  - Higher bank equity requirements (in line with Basel III).
  - Contingent capital instruments with automatic debt-equity conversion mechanisms.
  - “Recovery and resolution plans”: key policy choice for Dutch authorities is whether these plans are mainly informative or will be used to force substantial organizational and legal changes to facilitate orderly resolution.
    - Transfer of essential functions of insolvent banks would be facilitated if those functions are well organized within appropriate legal structures.

### V. SUPERVISORY EARLY INTERVENTION OF PROBLEM BANKS
- Authorities should have explicit and strong powers to require board and management of an ailing bank to undertake actions to strengthen the bank or refrain from weakening actions; powers to replace directors and management rapidly and effectively if unhelpful.

Corrective action
- DNB currently has powers beyond fines and license modification/withdrawal under the AFS to impose measures on non-compliant banks:
  - Directions (Article 1:75): impose a “direction” to obligate determined behavior within a reasonable time frame when in breach or when signs of developments in solvency, equity or liquidity may endanger the institution.
  - Cease and Desist Orders (Article 1:79): DNB may impose cease and desist orders; MoF may establish detailed rules but has not yet done so.
  - Special Measures (Article 3:111a): impose restrictive and other risk reduction measures, such as higher equity or specific provisioning policy.
- Strengthening DNB’s ability to use powers as early intervention:
  - DNB should start using those powers actively vis-à-vis weak banks and document and publish its administrative practice (but not actions vis-à-vis individually named banks) to increase credibility and moral suasion, and to strengthen DNB’s position if its powers are challenged in Court. (Footnote: Until now, these instruments used mainly vis-à-vis insurance firms and pension funds.)
  - MoF should develop detailed rules for DNB’s cease-and-desist orders, focusing on how DNB can use those tools to impose decisive action (e.g., clarify that DNB can enforce through a cease-and-desist order the implementation of a restructuring plan, which could include divestment of business lines and subsidiaries). (Footnote: Divestment measures are not currently included in Article 136 of the EU Banking Directive.)
  - Consider whether specific legislative amendments are needed to remove uncertainties and obstacles to use of these powers. (Enhancing the liability threshold as advocated would also be helpful.)

Change of management
- DNB’s powers to change directors and management could be made more explicit:
  - AFS currently authorizes removal of underperforming directors and managers through a “direction” (Article 1:47 jo. Article 1:75), meaning DNB still relies on the bank to dismiss those officials.
  - Consider granting DNB the power to remove, under certain circumstances, directors (including members of supervisory councils) and managers directly, and where necessary replace them.
  - Coupling such reform with broader enhancement of fit and proper rules (content and continuing application) is recommended.
  - Under some circumstances such powers could be used as an “ultimum remedium” before placing troubled banks under official control.

### VI. CRISIS MANAGEMENT TOOLS — overview
- Essential elements: arrangements for official (temporary) financial support; robust resolution powers for banks as going concerns; mechanism for orderly liquidation as gone concerns; well-designed deposit guarantee scheme that may participate in resolution to minimize negative impacts.

A. Official Financial Support
- Emergency liquidity assistance (ELA):
  - Framework should allow state or official agency (in particular a central bank) to provide rapidly and legally robust emergency liquidity to illiquid but solvent banks; liquidity provider should manage credit risks and require collateral.
  - The Netherlands has a robust framework for ELA:
    - Under Statutes of the European System of Central Banks, member states remain competent to establish ELA framework. ECB has no jurisdiction over ELA apart from coordination issues; ELA typically provided by national central banks at their risk.
    - DNB’s legal framework is considered to allow ELA operations with banks (see March 2003 Minister of Finance letter asserting Article 8.1 of the DNB Law as legal basis).
    - Authorities developed a policy framework for providing assistance (Box 1), offering considerable discretion to DNB on the “when” and “how” of ELA.
    - Ex post reviews raised questions on modalities (e.g., differences between DNB’s collateral framework and ECB’s monetary policy collateral). It may be judicious to clarify parameters guiding DNB in providing ELA while preserving necessary constructive ambiguity concerning interventions in specific cases.
  - Box 1 — Policy Framework for ELA (summary):
    - DNB confirmed as lender of last resort and responsible for providing ELA.
    - DNB has discretion to decide when and if to provide ELA.
    - DNB may provide ELA to banks and banking parts of financial conglomerates.
    - Framework is silent on the interest DNB would charge for ELA operations.
    - DNB has discretion as to adequacy of collateral, with expectation that MoF and DNB will consult on collateral when amounts of ELA reach significant levels.
    - In principle, MoF does not provide a state guarantee to DNB for exposures from ELA.
  - Notes on legal constraints:
    - EU Treaty prohibits “monetary financing,” held to prohibit national central banks from providing liquidity support to insolvent banks.
    - European Commission jurisdiction: “pure” ELA (liquidity assistance to illiquid but solvent) does not fall under state aid rules; liquidity assistance to insolvent banks is governed and constrained by state aid rules.

- Solvency support:
  - Framework should allow state (or agency) to (i) enter rapidly and legally robustly into transactions that buttress solvency (recapitalization, guarantees, etc.) and (ii) execute those transactions rapidly.
  - The Netherlands’ framework for official solvency support is broadly appropriate but with room for improvement:
    - Government has taken over a bank (the Dutch part of Fortis, including its share in ABN-Amro) and provided recapitalizations, guarantees, and balance sheet relief (e.g., “Illiquid Assets Back-Up Facility” for ING).
    - Operations structured as direct contractual agreements between the Kingdom (represented by Minister of Finance) and recipient banks/holding companies.
    - Public Accounts Law (“Comptabiliteitswet”) requires Parliament prior approval for all State participations in companies, which is unhelpful for rapid discrete action in crises.
    - Authorities have managed uncertainties in practice, but crisis management framework would be strengthened if availability of financial resources for solvency support could be explicitly ensured ex ante while avoiding moral hazard.
  - Recommendation:
    - Introduce a standing budgetary authorization for MoF to make disbursements for (temporary) solvency support — a legislative amendment could provide legal underpinnings for financial operations seeking to contribute to stability by providing financial assistance on firm-specific (if systemically relevant) or system-wide basis.
  - To minimize moral hazard, pair authorization with measures:
    - Predicate solvency support on close interaction between MoF and DNB:
      - MoF should consult beforehand with DNB on use of public funds; DNB required to issue a written opinion on appropriateness of fiscal support.
      - Consider making solvency support conditional on DNB determination that (i) the Netherlands is experiencing a systemic crisis and (ii) DNB cannot address systemic pressure through ELA and bank resolution.
    - Resolution policies/instruments should attribute losses to pre-insolvency financial stakeholders:
      - Proposed resolution framework would allow allocation of losses, including to unsecured creditors, during bank resolution. When strengthening budgetary framework, make explicit link between future (temporary) solvency support and allocation of such losses (via Government policy statement, motion of Parliament, or legislation).
    - Solvency support should be subject to robust ex post transparency requirements towards Parliament.

B. Orderly and Effective Resolution
- Box 2 — Restructuring Versus Liquidation (summary):
  - Failing banks can be resolved by restructuring (going concern) or liquidation (gone concern) as recognized by EU Winding Up Directives.
  - Restructuring: keep legal/licensed entity alive by sanitizing balance sheet (increase equity, reduce debt, shrink balance sheet).
  - Liquidation: sell businesses/assets and distribute proceeds to creditors, removing failed bank from market.
  - Boundary between approaches can blur:
    - Both may use transfers of assets/liabilities; in restructuring transfers shrink balance sheet, whereas in liquidation transfers may move viable parts out and cause creditor losses.
    - Loss of private control over non-financial firms is usually only triggered in liquidation; bank resolution laws typically allow going concern restructuring under official control (“official administration”) for financial stability reasons; differences remain (e.g., “claw back” and contract repudiation rules typically trigger only in bankruptcy, not official administration).
  - Primary concern: provide authorities a broad toolbox to choose best approach depending on idiosyncrasies of each failing bank.
- Restructuring under official control:
  - When a bank cannot be stabilized in private hands, transfer control to an official agent (“administrator”) before technical insolvency.
  - Administrator should have strong powers to restructure the bank as a going concern and these powers need adequate support mechanisms to make restructuring successful.

*Italic: Source: _cr11207 - 11.      Nevertheless, some improvements to the inter-institutional allocation of labor*

### 22.      The authorities currently have two mechanisms for restructuring troubled

### _cr11207 - 22.      The authorities currently have two mechanisms for restructuring troubled

### Existing mechanisms for restructuring banks in going concern
- Curatorship (Article 1:76)
  - DNB may appoint a “curator” over troubled banks.
  - Curator’s main task: control the existing decision-making bodies of the bank without totally removing them.
- Emergency Mechanism (Article 3:160–162; Article 3:163)
  - A trustee may be imposed by virtue of the “emergency mechanism.”
  - Trustee’s going-concern task: transfer all or part of the liabilities of the troubled bank to a third party.

### Assessment: strengths and weaknesses of each mechanism
- Curatorship
  - Strengths:
    - Curator is appointed and dismissed by DNB.
    - The AFS indicates DNB has some degree of control over the appointee.
    - Grounds for appointing the curator are broadly appropriate.
  - Weaknesses:
    - Curator exercises control mainly via veto power but does not replace decision-making bodies.
    - AFS is silent on objectives of curatorship and does not grant explicit and effective restructuring tools.
    - Questionable whether curator can be used as a “silent” form of restructuring, particularly for banks.
- Emergency Mechanism (EM)
  - Strengths:
    - Grounds for opening the EM seem broadly appropriate.
    - Trustee effectively takes over full control over the ailing bank.
  - Weaknesses:
    - Trustee is appointed by the Courts—DSB case illustrates risk of court appointment.
    - Law imposes an almost total moratorium, which is unhelpful from a financial stability perspective.
    - Restructuring option limited to transfer of liabilities only.
    - Sole objective of the EM is to serve the interest of creditors; no room for financial stability concerns.

### Proposal: single, strengthened regime for restructuring under official administration
- Triggers
  - Official administration should be available at a sufficiently early stage (i.e. before the bank is actually insolvent) on grounds of objective, clear, and proportionate triggers.
  - Ideal: combination of qualitative (similar to current triggers) and quantitative (e.g., related to capital adequacy, leverage and liquidity ratios) triggers.
  - Example quantitative triggers: CAR at 50 percent or 25 percent could effectively set a floor for intervention.
  - Qualitative triggers might include adequacy of management and a “loss of market confidence that endangers the survival of the bank.”
  - Opening official administration need not be limited to a public interest test, or to systemic institutions only.
- Appointment of Official Administrator
  - Administrator(s) should be appointed and dismissed by DNB, not by the courts.
  - DNB should have power to appoint one or more administrators who would jointly operate as a college depending on size and problems of the bank.
- Status of Official Administrator
  - Official administrators should be agents of DNB: obligated to follow DNB’s instructions and accountable to DNB.
  - Key decisions should be subject to prior approval of DNB.
  - As agents, they would not incur own liability; DNB (or the Kingdom) would be liable for their actions.
- Objectives
  - Main objective: contribute to overall soundness of the banking system by providing orderly resolution.
  - Pursuit of creditor interests ought to come only in second place.
  - Calibrated objectives would allow actions (e.g., bank debt restructuring: see Box 3) not directly in interest of all equally ranked creditors.
- Basic Tasks
  - (i) assess the real financial situation of the bank;
  - (ii) where necessary, establish a new balance sheet reflecting a fair and true view of that financial situation;
  - (iii) if appropriate, write down capital accordingly, and convert subordinated debt into capital as needed;
  - (iv) where possible, design and implement a restructuring plan for the bank (after DNB approval);
  - (v) if restructuring is not an option, prepare the bank for orderly liquidation.
- Control over Bank
  - Official administrator should fully take over powers of all decision-making bodies: management board, supervisory board and general assembly of shareholders.
  - This does not imply automatic dismissal of directors and senior managers.
  - Administrator effectively takes managerial control and can enter into any business transaction and take any decision that falls under the jurisdiction of the decision-making bodies.
- Restructuring Powers
  - Administrator needs the following tools:
    - (i) rapid recapitalization of the bank without pre-emptive rights of pre-existing shareholders;
    - (ii) conversion of subordinate debt into equity;
    - (iii) transfer (e.g. sale) of assets (including businesses and subsidiaries) with assumption of liabilities (“purchase and assumption” transactions).
  - To facilitate these in going concern, it might be useful to impose a selective stay on certain liabilities.
  - Consideration should be given to introducing a bank debt restructuring mechanism to restore the bank to viability (see Box 3).
- Supporting Legal Framework
  - Deposit liabilities should be transferable without consent of depositors.
  - Consider need for an explicit “bridge bank” regime.
  - Analyze whether “purchase and assumption” transactions with other domestic financial institutions might be disproportionately hindered by competition rules.
- Modalities
  - Costs of the official administrator should be borne by the bank; these costs should have first priority if the bank is subsequently declared insolvent.
  - Restructuring transactions need “safe harbor” protection against claw-back rules if the transferor bank is later liquidated because restructuring failed.

### Orderly liquidation: current framework and recommended improvements
- Current liquidation mechanisms
  - Liquidation under the EM (Article 3:163).
  - Bankruptcy Law special chapter on bankruptcy of banks (Articles 212g et seq.).
  - AFS specific provisions (Article 1:104) govern withdrawal of license of institutions under liquidation.
- Recommendation: single, robust and flexible mechanism for orderly liquidation
  - Useful features exist in both EM liquidation and bankruptcy (e.g., power to transfer entire businesses or parts rather than piecemeal asset sales).
  - Liquidators prefer bankruptcy over EM due to familiarity and procedural certainty.
  - Streamlining and fine-tuning the two mechanisms may facilitate orderly liquidation.
- Key features to enhance rapid transfers and continuity (recommended)
  - Express power in law to transfer to a third party the assets, liabilities, and combined portfolios of both (“purchase and assumption” transactions) in case of actual insolvency.
  - Power to establish a “bridge bank” under government ownership to temporarily acquire assets, liabilities and essential functions if no appropriate third party acquirer is available.
  - Authority for liquidator to organize rapid transfers of assets such as shares in single purpose vehicles charged with IT and payment services, or rapidly transfer relevant assets, contracts and staff to a solvent acquirer to ensure continuity of services.
  - Transfers will require close interaction between liquidators and authorities.
- Role of DNB and AFM in liquidation
  - Currently, once a liquidation is opened, DNB and AFM cease further involvement.
  - Recommendation: DNB and AFM should be consulted on all major disposals and have the right to formulate recommendations to the Courts and liquidators on how liquidation should proceed.
  - A stronger alternative: grant DNB and AFM powers to direct liquidators (but may pose coordination issues with Courts).
  - This allows DNB to feed financial stability concerns and AFM to share consumer protection concerns relevant to liquidation measures.

### Box 3. A Bank Debt Restructuring Framework (key features)
- Triggers
  - Trigger at a late stage when the bank is balance sheet insolvent, or about to become thus insolvent.
  - Restructuring approved only if necessary for, and will bring about, a return to viability.
- Control of Management
  - Recommend restructuring as part of “official administration,” though parts of management may stay if appropriate.
- Scope of Restructuring
  - Only subordinated and senior debt should be restructured.
  - Exclude insured and inter-bank deposits, secured debt (covered bonds), trade finance, and repos.
- Waterfall of Restructuring
  - Losses should follow liquidation priority: first pre-existing equity (including post-conversion of contingent capital) until fully written down; next subordinated debt; senior creditors take losses only after shareholders and junior creditors.
- New Capital
  - Provide sufficient new capital to make the bank viable, combined with dilution of pre-restructuring shareholders via conversion of haircutted debt into equity or issuance of new equity from third parties.
- Limits on Walk Away Clauses
  - Restructuring should not automatically trigger termination of bank’s transactions and agreements; include prohibition on “walk away” clauses in legislation.
- Stay and Moratorium on Selected Liabilities
  - Possible to stay creditor action and impose moratorium on selected liabilities (in particular debt under restructuring) while allowing bank to remain current on non-stayed debt.
- Liquidity Assistance and Official Guarantees
  - Restructuring must be coupled with adequate official liquidity assistance and official guarantees for some non-stayed debt to stem outflows.
- Creditor Approval
  - Need for quick action in interest of financial stability argues against requiring creditor approval.
- Decision-Making Process
  - Restructuring decision should be initiated by administrative decision of DNB.
  - Consideration could be given to requiring judicial approval in lieu of optional judicial review; any judicial involvement should ensure speedy action and appropriate weight to DNB expertise.
- Cross-Border Effectiveness
  - Framework must qualify as a “reorganization measure” under the EU Winding Up Directive so haircuts are recognized in EU jurisdictions whose law might apply to the restructured debt.

### Intra-group and cross-border coordination
- Complexity of resolution increases with groups having multiple branches and subsidiaries across jurisdictions and with conglomerates including non-bank financial firms.
- Current framework: legal entity-specific but includes limited intra-group coordination tools
  - AFS authorizes appointment of a curator with respect to “financial institutions,” but curator has powers only over the specific institution appointed, not subsidiaries or affiliates.
  - Term “financial institution” is defined widely to include banks, insurance firms, and clearing institutions; DNB could in theory appoint same curator(s) for affiliated components to ensure some coordination.
  - DNB empowered to determine the “interests” that should guide curators; this power might be used to instruct curators to consider interconnectedness with other group components.
- Recommendation: enhance intra-group coordination without collapsing estates
  - Avoid collapsing insolvency estates of group entities into one single estate with a single body of creditors.
  - Preferred alternative: include an explicit mechanism in law whereby resolution procedures of a bank and its subsidiaries and affiliates are closely coordinated by the courts and DNB.
  - Ideally, allow coordination between Dutch authorities and foreign administrators or liquidators of foreign affiliates or subsidiaries.

*Source: _cr11207 - 22.      The authorities currently have two mechanisms for restructuring troubled (excerpt).*

### 32.      Such enhanced coordination tools would naturally be buttressed by strong

### _cr11207 - 32.      Such enhanced coordination tools would naturally be buttressed by strong

### Cross-border cooperation
- Resolution framework includes underpinnings for intensive cross-border coordination, with the EU “Winding Up Directive” being particularly helpful.
- DNB may request the opening of insolvency procedures over Dutch branches of foreign banks, without being under an absolute obligation to do so (Article 3:206), providing discretion to cooperate with foreign resolution authorities.
- For banks established in the Netherlands, the AFS explicitly recognizes the role of the Dutch courts in coordinating insolvency procedures with administrative and judiciary authorities in host countries.
- Recommendations to strengthen the framework:
  - Explicitly authorize official administrators to coordinate their actions with foreign counterparts with jurisdiction over the bank’s branches, subsidiaries and affiliates.
  - Institute a specific mandate to take into account other countries’ financial stability concerns insofar as that would not be detrimental to the interest of the Netherlands.
  - Fine-tune the AFS (Article 3:209–211) to make ring-fencing optional when the EM is opened against the Dutch branch of a foreign bank, allowing a Dutch liquidator to cooperate with the home country liquidator if reconcilable with Dutch national interest.

### Deposit Guarantee Scheme (DGS) — overview and rationale for reform
- Historical role: DGS originally designed to pay out insured depositors within a reasonable time frame (which could easily take months).
- Contemporary view: DGS can play a more prominent role in bank resolution, minimizing fiscal cost and depositor distress and maximizing trust, assisted by ex ante funded schemes and well-designed depositor preference rules.
- Current Dutch practice: When a bank becomes insolvent, DNB pays out covered depositors for their insured deposits, and recuperates subsequently those amounts from the other banks.24
- Shortcomings of current approach:
  - DGS funds cannot be used to support bank resolution transactions, limiting authorities’ effective resolution toolkit in crisis.
  - Potential regulatory arbitrage by some banks not fully internalizing the costs of deposit safety relative to other EU member states.
- Urgent reform needed: redesign DGS away from a “pay-box system” into an effective tool for resolving insolvent banks, while retaining the current institutional set-up of the DGS.

### Ex-ante funding
- Recommendation: DGS should be funded ex ante by contributions paid by banks in proportion to their insured deposits.
- Contribution design options:
  - Flat rate.
  - Risk-based basis — theoretically attractive but poses practical challenges for adequate risk measurement and avoidance of regulatory arbitrage.
- Investment of contributions: once paid in, contributions should be invested with due regard to liquidity so funds are readily available for pay-out.
- If funds are insufficient to fully cover insured deposits:
  - Authorities should be explicitly authorized to close the funding gap through loans or grants, or a combination of the two (Loans being the first best option).
  - Official support preferred to credit lines from other banks, which could act pro-cyclically and exacerbate systemic distress.
  - Future reform should clarify whether official financial support for DGS shortfalls should be provided by the MoF or DNB.

### Use of DGS funds as a bank restructuring tool
- Recommendation: DGS should be allowed to financially support certain bank restructuring transactions.
- Specific authorization: DGS should be explicitly authorized to perform, at the request of DNB, its insurance obligations by financially supporting the transfer of insured deposits to another bank.
- Transfer mechanisms:
  - Auction of the relevant component of the deposit book.
  - “Purchase and assumption” transactions (insured deposits and corresponding assets transferred to a transferee bank).
- Role of DGS in such transactions:
  - Top up the transaction in case of insufficient assets to fully compensate the transferee for acquiring the liabilities, but only up to the amount of insured deposits.
  - Condition: the transferor bank must subsequently be put into liquidation to avoid open bank assistance benefiting pre-insolvency stakeholders.
- Governance and limits:
  - DGS powers should be well circumscribed; DGS support strictly supportive of the overall resolution strategy designed and implemented by DNB.
  - The DGS should not be transformed into a full-fledged bank resolution authority in lieu of DNB.
- Operational preparedness:
  - Authorizations should be complemented by regulatory obligations for availability of information on insured depositors, operational manuals, contractual frameworks and due diligence tools to prepare and perfect transfers rapidly.
  - Consideration should be given to potential use of “bridge banks” if private acquirers are not available.

### Depositor preference
- Recommendation: Insured depositors and/or the DGS (directly or through subrogation) should be given a high ranking priority right over the estate of the failed bank.
- Rationale and effects:
  - After paying insured depositors, the DGS would be subrogated to their claims; without priority, the DGS would remain an unsecured creditor and likely suffer severe financial losses pari passu with other unsecured creditors.
  - A priority right grants the DGS a preferential right over unencumbered assets of the insolvent bank’s estate, enabling recovery by preference over ordinary unsecured creditors.
  - Immediate effects: protects the DGS, contributing banks and the public purse; minimizes final cost of insurance, possibility of shortfalls, and need for official support and topping-up by other banks.
  - Facilitates “purchase and assumption” transactions by creating an inequality between insured depositors and other senior creditors, justifying transfers of insured deposits while leaving senior creditors behind.

### Closing the circle — liability and incentives for forceful action
- Recommendation: Enhance the liability threshold for the State, DNB, the AFM and official administrators so they are only liable in the event of gross negligence or willful misconduct.
- Purpose:
  - Support forceful official action in times of distress by reducing litigation risk that could deter decisive resolution measures.
  - Recognize decision-making under imperfect information (including asset valuation) and urgency; encourage willingness to take difficult decisions aimed at avoiding disastrous scenarios.
- Legal standard:
  - Liability should only be triggered by gross negligence or willful misconduct, with the burden of proof lying firmly with plaintiffs.25

*Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11207.pdf*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11207.pdf_