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---

### INTRODUCTION / OVERVIEW
- The National Bank of Georgia (NBG) is the lead authority for managing problem banks, with powers to appoint a temporary administrator, declare insolvency and bankruptcy, and commence liquidation.
- Legal framework sources: Law of Georgia on Activities of Commercial Banks (LACB), Organic Law of Georgia on the National Bank of Georgia (NBG Law), and NBG regulations/decrees (notably a 2012 ELA decree).
- No Deposit Insurance Scheme (DIS) exists in Georgia.
- Historical bank sector evolution:
  - 229 active banks operated in 1994.
  - As of the first quarter of 2014, there were 21 banks in Georgia.
- Recent practical experience with resolution and liquidation is limited:
  - The last significant insolvency-based liquidations were closed in 2009.
  - A recent appointment of a temporary administrator was primarily for governance verification and did not lead to resolution.

### EMERGENCY LIQUIDITY ASSISTANCE — FINDINGS
- Legal authorization and basic features:
  - NBG explicitly authorized to provide ELA to viable commercial banks facing temporary liquidity needs.
  - Statutory features: duration of the loan should not be longer than three months; interest rate should not be less than the rate of the NBG overnight facility; collateral types are determined by the NBG based on a list of eligible assets.
  - A 2012 Decree n.6 (ELA Decree) sets procedural rules, monitoring, departmental responsibilities, and provides a template contract.
- Flexibility in systemic circumstances:
  - In circumstances where financial stability is endangered, the NBG Board may extend duration, change interest rate, and provide ELA without collateral.
  - No guidance on principles, criteria, or safeguards for these special circumstances.
- Legal and operational uncertainties:
  - Unclear whether collateral rules for monetary policy operations apply automatically to ELA or whether other collateral can be accepted ad hoc.
  - For nonmarketable collateral (bank loans and other claims), a uniform 20 percent haircut is applied; the NBG Board may apply or depart from such haircuts without general guidance.
  - NBG staff note collateral is legally perfected upon disbursement of the ELA.
- Moral hazard and exposure risks:
  - No statutory requirement that ELA interest rates be penalty rates; interest may be set at or above the overnight facility rate.
  - Historical instances where marginally solvent banks with negative regulatory capital received significant and long-lasting ELA.
  - Given limited safety net and crisis management tools, ELA risks transforming into long-term support or open bank assistance, exposing the NBG to significant financial risk.

### EMERGENCY LIQUIDITY ASSISTANCE — POLICY RECOMMENDATIONS
- Clarify government role in systemic crises:
  - Explicitly recognize the government’s role and require government indemnification (compensation in cash or government securities) before NBG provides ELA when systemic stability is at stake.
  - Maintain discretionary decisions for both the NBG to provide ELA and the government to indemnify the NBG.
- Tighten ELA conditions to mitigate moral hazard:
  - Consider introducing steeper penalty interest rates (higher than the overnight facility rate) while avoiding turning liquidity problems into solvency problems.
  - Raise the bar for extensions beyond the initial three months; possibly match longer durations with higher penalty rates.
- Clarify and strengthen collateral rules:
  - Define the range of acceptable collateral, valuation and haircut rules, standardization and transferability, definitions of solvency and systemic risk, and collateral management (earmarked or pooled, cross-border collateral).
  - Draw from monetary policy collateral rules where appropriate while retaining flexibility for systemic cases and enhancing legal certainty.
- Enhance accountability and transparency:
  - Formalize internal approval procedures; explicitly require the Supervision Department to issue a “solvency opinion” and lead ELA decision-making proposals to the NBG Board.
  - Report on ELA usage to parliament and/or publicly once confidentiality concerns subside, aligning reporting with predefined criteria and sound practices.

### RESOLUTION FRAMEWORK — FINDINGS
- Temporary administration:
  - NBG can appoint a temporary administrator in cases including inability to pay depositors, failure to meet obligations, and “special cases, when the interests of the bank’s depositors and other creditors are jeopardized.”
  - Temporary administrators are accountable to the NBG and do not benefit from legal protection in discharging their functions unless they are NBG employees.
  - Law does not specify time limits for extension of the temporary administration, eligibility criteria for appointment, or required oversight and periodic monitoring of the administrator’s actions.
- Bank liquidation:
  - Liquidation framework is more detailed but overall the resolution framework lacks important features and needs amendments to align with international best practices to enable speedy and cost-effective resolution.

### RESOLUTION FRAMEWORK — POLICY RECOMMENDATIONS
- Overhaul the bank resolution regime to:
  - Enhance the temporary administration process, including early appointment of temporary administrators when a bank shows signs of financial difficulty.
  - Facilitate application of resolution tools in a timely manner.
  - Reinforce safeguards and specify oversight, time limits, and eligibility criteria for temporary administrators.

### DEPOSIT INSURANCE SCHEME (DIS) — FINDINGS
- Georgia currently has no DIS.
- Authorities have committed to introducing a DIS in the context of the upcoming association agreement with the European Union (EU) within a seven-year period.
- Considerations favor a shorter implementation timeframe than seven years:
  - A DIS would support public confidence, minimize too-big-to-fail risk, and complete a comprehensive financial safety net.
  - Design must address past authorities’ concerns about unintended consequences of a DIS.

### DEPOSIT INSURANCE SCHEME — POLICY RECOMMENDATIONS
- Establish a DIS promptly with design features in line with international best practices, including:
  - An adequate mandate.
  - Reliable funding arrangements.
  - Appropriate coverage levels.
  - Strong governance.
  - Clear inter-institutional cooperation arrangements.
- Carefully consider DIS design to mitigate moral hazard and other unintended consequences.

### CRISIS PREPAREDNESS AND MANAGEMENT — FINDINGS
- Recent steps taken:
  - A memorandum of understanding between the Ministry of Finance (MOF) and the NBG has been established.
  - The NBG has begun to require recovery and resolution plans (RRPs) for major banks.
- Remaining impediments:
  - Certain legal impediments may still hinder NBG cooperation with domestic and foreign agencies.
  - Government is prohibited from owning shares in financial institutions, which may constrain certain intervention options.
  - Legal and institutional arrangements for rapid government deployment of crisis management responses need review.

### CRISIS PREPAREDNESS AND MANAGEMENT — POLICY RECOMMENDATIONS
- Remove impediments to cooperation between the NBG and domestic and foreign agencies and enable possible government interventions in a crisis.
- Consider establishing a Financial Stability Council.
- Strengthen requirements for recovery and resolution planning.

### TABLE: MAIN RECOMMENDATIONS (as presented)
- Revise the framework for emergency liquidity assistance to mitigate financial risks for the NBG by clarifying rules on collateral, tightening the provisions on duration and interest rate, and spelling out explicitly the role of the government in systemic crises.
  - Priority: High
  - Timeframe: 6–12 months
- Overhaul the bank resolution regime by enhancing the temporary administration process and providing for the appointment of a temporary administrator at an early stage of a bank’s financial difficulty, facilitating the application of resolution tools, and reinforcing safeguards in the resolution process.
  - Priority: High
  - Timeframe: 6–12 months
- Establish a deposit insurance scheme, underpinned by features in line with international best practices, consisting of an adequate mandate, funding, coverage, governance, and inter-institutional cooperation arrangements.
  - Priority: High
  - Timeframe: 6–12 months
- Enhance crisis preparedness and management arrangements by removing impediments to cooperation between the NBG and domestic and foreign agencies, and for possible government interventions in a crisis, setting up a Financial Stability Council, and strengthening the requirements for recovery and resolution planning.
  - Priority: Medium
  - Timeframe: 1–2 years

### TEMPORARY ADMINISTRATION AND LIQUIDATION — DETAILS
- Temporary administrator powers:
  - Takes over shareholders’ and managerial powers.
  - Can pursue actions to remedy the bank’s financial situation, including blocking funds of individuals and legal entities.
  - Authority to arrange a merger, recapitalization, or acquisition of assets and assumption of liabilities by another bank.
  - NBG may set up and manage a temporary bank.
- Liquidation process:
  - Handled by the NBG and triggered by revocation of a bank license.
  - Regime set out in the NBG Law, the LACB, and implementing regulations (general insolvency law does not apply).
  - Grounds for license revocation include failure to meet regulatory capital ratios, loss of creditors’ confidence, unhealthy banking practices, and insolvency (assets lower than liabilities).
  - NBG exclusively competent to declare bankruptcy or insolvency.
- Liquidator powers and oversight:
  - NBG appoints liquidator; liquidator conducts inventory, may sell fixed assets at public auction, transfer other assets, and arrange assumption of liabilities by other banks.
  - Liquidator must have appropriate qualifications and experience.
  - NBG may lend to a liquidator and may terminate appointment at will.
- Creditor hierarchy on liquidation (order stated in law):
  - NBG claims, and claims that arose after license revocation, are satisfied first.
  - Followed by individual depositors.
  - Other deposits held by legal entities.
  - State claims.
  - Other unsecured creditors.
- Secured claims:
  - Law preserves position of secured creditors by carving out claims on collateral.
  - Liquidator can pool amounts received from realization of assets to satisfy creditors.
  - Legal uncertainties due to Tax Code amendments affecting priority; special regime for financial collateral arrangements prevails over other security interests.

### JUDICIAL REVIEW AND REMEDIES
- Challenges to NBG actions:
  - Brought to the administrative court; administrative court review is a necessary prerequisite for civil damages lawsuits.
  - Administrative court review does not stay the NBG act until a final decision.
  - Burden of proof lies with the plaintiff; courts can enter into the merits of NBG decisions.
  - Remedies can entail monetary compensation or unwinding of the decision, unless unwinding is not practically possible.
- Empirical note:
  - Court challenges are not very frequent; no recent bank resolution cases to draw lessons from.
- Recommendation:
  - Amend relevant laws to explicitly limit remedy available to claimants to compensation for loss, without possibility of unwinding the resolution measure.

### IDENTIFIED WEAKNESSES AND AREAS FOR IMPROVEMENT
- Temporary administration regime lacks:
  - Oversight and monitoring requirements (e.g., periodic reporting to NBG).
  - Prescription that temporary administrators act under conservative principles.
  - Specification of who can be a temporary administrator and required professionalism and integrity criteria.
  - Legal status of temporary administrators as public officials.
  - Recommendation: Revise regime to explicitly reflect oversight, qualifications, status, and principles; enshrine general principles in primary law and procedural rules in NBG regulations or decrees.
- Triggers for temporary administration:
  - Current triggers rely on inability to fulfill obligations or jeopardized depositors’/creditors’ interests.
  - Insolvency defined exclusively by a balance sheet test (assets lower than liabilities).
  - Recommendation: Broaden triggers to permit early intervention based on nonviability or likely nonviability inferred through several criteria (e.g., breach of capital or liquidity requirements, unsafe and unsound conditions), and allow intervention without suspending operations or revoking license.
- Tools and legal certainty:
  - Law insufficiently specifies governance and prudential rules for bridge banks, criteria for asset management companies, and safeguards for recapitalization.
  - Recommendation: Expand toolbox (including statutory debt restructuring) and clarify legal rules enabling immediate effect tools when needed.
- Implementation impediments:
  - Civil Code rule that transfer of a bank’s claim is subject to consent of relevant creditors is not waived in the LACB.
  - Counterparties’ rights to terminate contracts upon resolution measures should be temporarily restricted.
  - Creditor hierarchy should be revised to avoid conflicts across laws and remove obstacles to transfer of secured claims.
- Safeguards:
  - Introduce independent evaluation of failed bank’s assets and liabilities.
  - Enshrine “no creditor worse off” principle.
  - Revisit provision allowing NBG to lend to the liquidator to better protect NBG’s financial exposure.
- Systemic crisis capabilities:
  - Revisit current inability for government to provide temporary extraordinary support in several possible forms.

### GOVERNANCE ARRANGEMENTS AND SEPARATION OF FUNCTIONS
- Current setup:
  - NBG Supervision Department handles problem banks by defining resolution strategy, examining alternatives, and assessing costs versus straight liquidation.
- Concern:
  - Lack of separation between supervision and resolution raises conflicts of interest and regulatory forbearance risk.
- Suggested approaches:
  - Implement internal governance arrangements and checks and balances; design collegial decision-making processes where supervision and resolution are within the same agency.
  - Consider a small structurally separate unit for recovery and resolution planning and crisis preparedness with distinct reporting lines; scale staffing up in crises.
  - Recognize that a separate resolution authority may not be feasible in a small country; internal governance changes can preserve broader institutional setup.

### BOX 1 — LEGAL CONSIDERATIONS IN APPLICATION OF RESOLUTION TOOLS (SELECTED)
- Sale of business (purchase and assumption):
  - Enable transfer of assets and liabilities as a pool to allocate losses to certain creditor categories; enable rapid disposal mechanisms with strict confidentiality and ex post transparency.
- Bridge bank:
  - Transfer assets and liabilities to publicly owned vehicles for limited durations; require expedited procedures and clarified governance and prudential rules.
- Capital increases:
  - Temporary administrator must estimate capital shortfall, recognize losses, write down capital, and draw a new balance sheet to accompany injection of new capital; special provisions depart from general corporate law.
- Debt restructuring (statutory bail-in):
  - Conversion of debt into equity and/or debt haircuts to restore capital requirements; special features include limited creditor approvals and a more limited judicial role.

### DIS — RATIONALE AND DESIGN FEATURES (BOX 2: PRELIMINARY GUIDANCE)
- Rationale for establishing a DIS (FSAP view):
  - Support public confidence: past bank liquidations took several years for depositors to be reimbursed.
  - Reduce “too-big-to-fail” risk: an implicit, discriminatory state guarantee currently advantages certain banks.
  - Provide adequate funding tools in resolution: absence of DIS may put undue pressure on the NBG and lead to misuse of ELA.
  - Conjuncture: introduction seems timely when banks’ profitability is relatively high.
  - Savings rate: a DIS could increase savings as indicated by survey responses.
- Funding and coverage guidance:
  - Favor an ex ante funded DIS to minimize systemic risk and avoid pro-cyclicality; possibility to levy extraordinary premiums and authority to borrow from the MOF.
  - Funding at inception options: government contribution to initial capital or gradual build-up through bank contributions with government borrowing as backstop.
  - Coverage benchmark: 80/20 recommended by the International Association of Deposit Insurers (i.e., not less than 80 percent of depositors and 20 percent of deposits amount covered).
  - World Bank technical assistance (April 2014) finding: based on deposits data as of February 28, 2014, a coverage amount of GEL 5,000 per individual depositor per bank would provide 100 percent insurance for 96.64 percent of all individual depositors and 20.91 percent of their deposited amount (meeting the 80/20 rule).
- Governance and operational role:
  - Ensure DIS independence from industry and government; spell out public interest function if DIS is a separate legal entity.
  - DIS should be operationally able to make quick payouts and legally able to fund resolution transactions subject to the “least cost” test.
  - Close cooperation required between DIS (if a legal entity) and the NBG.

### CRISIS PREPAREDNESS AND MANAGEMENT — CURRENT GAPS AND ACTIONS
- Legal limitations on cooperation:
  - NBG cooperation with foreign supervisors requires confidentiality safeguards; prior to FSAP no equivalent provisions existed for cooperation with MOF or foreign resolution authorities for contingency planning or systemic crisis response.
- MOF–NBG collaboration:
  - MOF and NBG informally share system-wide information; memorandum of understanding signed in June 2014 for exchange of information and crisis response coordination.
- Recovery and Resolution Plans (RRPs):
  - NBG requires most systemic banks to prepare RRPs as part of ICAAP; RRPs currently focus on contingent measures and procedural steps.
  - Recommendation: further advance RRPs, integrate with stress tests, and enhance regulatory basis for intrusive NBG powers to implement RRP actions.
- NBG internal arrangements:
  - NBG has an internal contingency plan linked to stress tests and capital needs; a Financial Stability Committee exists at staff level but needs formalization at managerial levels.
- Extraordinary measures and legal constraints:
  - NBG can impose bank holidays and operational restrictions; government may provide loans through ordinary budgetary authorization but state guarantees require parliamentary ratification.
  - Specific provision prohibits the government from owning shares in banks and other financial institutions.

### LEGAL AND INSTITUTIONAL RECOMMENDATIONS FOR STRENGTHENING CRISIS FRAMEWORK
- Remove legal impediments to cooperation:
  - Enable and require NBG to cooperate with competent domestic and foreign authorities in bank resolution or crisis, subject to confidentiality safeguards.
  - Revisit automatic revocation of a bank license when a foreign parent “has lost authority to carry out its operations in its home country” to allow flexibility and cross-border cooperation.
  - Clarify regime for branches of foreign banks upon insolvency or liquidation.
- Establish a Financial Stability Council:
  - Formalize structured arrangements comprising NBG, MOF, other regulatory agencies and stakeholders to meet regularly, share information and prepare policy responses, simulation exercises, crisis communication plans, and rules for extraordinary public support.
- Advance RRPs and legal basis:
  - Require comprehensive RRPs (or resolution-plan information) from systemic banks based on proportionality; integrate stress-test analysis more structurally into RRPs.
- Enhance government crisis toolkit:
  - Allow MOF to own shares in banks and financial institutions in a crisis context, provided ownership is temporary, extraordinary, accompanied by loss allocation measures, and transparent.
  - Review parliamentary ratification requirement for each government guarantee while maintaining oversight on public debt and contingent fiscal liabilities.

### APPENDIX I — EXAMPLES OF RECOVERY AND RESOLUTION PLANS (SELECTED INTERNATIONAL PRACTICES)
- Financial Stability Board (FSB) guidance:
  - RRPs should reflect firm-specific circumstances, severe stress scenarios, and make no assumption that taxpayers’ funds will be relied on.
  - Recovery plan essential elements include actions to strengthen capital, sales of subsidiaries, voluntary liability restructuring, funding measures, liquidity transfers, contingency arrangements, triggers, and communication strategies.
  - Resolution plan elements include regulatory thresholds for official action, interdependencies, loss estimates for creditors, resolution funding sources, operational continuity, cross-border processes, and communication strategies.
- United Kingdom (SS 18/13, SS 19/15):
  - Recovery plans: board approval, complete menu of recovery options for liquidity and capital stresses, forward-looking triggers, escalation processes, operational plans for access to central bank liquidity, and communication plans.
  - Resolution plans: resolution packs to enable authorities to identify resolution strategies, barriers, remedial actions, corporate structure, operational continuity, liquidity needs, collateral, and critical functions.
- United States:
  - Firms with total consolidated assets of US$50 billion must submit resolution plans and credit exposure reports; plans map business lines, exposures, funding, jurisdictions, critical operations, and should demonstrate resolvability under the Bankruptcy Code.
- European Union (BRRD):
  - Directive aims to ensure institutions can be resolved speedily while preserving systemically important functions and ensuring shareholders and creditors, not taxpayers, bear losses.
  - Proposed implementation date: January 1, 2015.
  - Recovery and resolution plan annex requirements cover strategic analysis, communication, capital and liquidity actions, timeframes, impediments, critical functions, valuation and marketability processes, corporate governance integration, contingency funding sources, and frameworks of indicators and triggers.

*Source: EXECUTIVE SUMMARY (Technical Note), Georgia — International Monetary Fund; excerpts from IMF FSAP mission report and Appendix I examples.*

### EXECUTIVE SUMMARY ___________________________________________________________________________ 4

### EXECUTIVE SUMMARY

### INTRODUCTION / OVERVIEW
- The National Bank of Georgia (NBG) is the lead authority for managing problem banks, with powers to appoint a temporary administrator, declare insolvency and bankruptcy, and commence liquidation.
- Legal framework sources: Law of Georgia on Activities of Commercial Banks (LACB), Organic Law of Georgia on the National Bank of Georgia (NBG Law), and NBG regulations/decrees (notably a 2012 ELA decree).
- No Deposit Insurance Scheme (DIS) exists in Georgia.
- Historical bank sector evolution:
  - 229 active banks operated in 1994.
  - As of the first quarter of 2014, there were 21 banks in Georgia.
- Recent practical experience with resolution and liquidation is limited:
  - The last significant insolvency-based liquidations were closed in 2009.
  - A recent appointment of a temporary administrator was primarily for governance verification and did not lead to resolution.

### EMERGENCY LIQUIDITY ASSISTANCE (ELA) — FINDINGS
- Legal authorization and basic features:
  - The NBG is explicitly authorized to provide ELA to viable commercial banks facing temporary liquidity needs.
  - Statutory features: duration of the loan should not be longer than three months; interest rate should not be less than the rate of the NBG overnight facility; collateral types are determined by the NBG based on a list of eligible assets.
  - A 2012 Decree n.6 (ELA Decree) sets procedural rules, monitoring, departmental responsibilities, and provides a template contract.
- Flexibility in systemic circumstances:
  - In circumstances where financial stability is endangered, the NBG Board may extend duration, change interest rate, and provide ELA without collateral.
  - No guidance is provided on principles, criteria, or safeguards for these special circumstances.
- Legal and operational uncertainties:
  - It is unclear whether collateral rules for monetary policy operations apply automatically to ELA or whether other collateral can be accepted ad hoc.
  - For nonmarketable collateral (bank loans and other claims), a uniform 20 percent haircut is applied; the NBG Board may apply or depart from such haircuts without general guidance.
  - NBG staff note collateral is legally perfected upon disbursement of the ELA (important to avoid uncollateralized claims if the borrowing bank becomes insolvent).
- Moral hazard and exposure risks:
  - No statutory requirement that ELA interest rates be penalty rates; interest may be set at or above the overnight facility rate but not necessarily higher than it.
  - Historical instances where marginally solvent banks with negative regulatory capital received significant and long-lasting ELA.
  - Given limited safety net and crisis management tools, ELA risk transforming into long-term support or open bank assistance, exposing the NBG to significant financial risk.

### EMERGENCY LIQUIDITY ASSISTANCE — POLICY RECOMMENDATIONS
- Clarify government role in systemic crises:
  - Explicitly recognize the government’s role and require government indemnification (compensation in cash or government securities) before NBG provides ELA when systemic stability is at stake.
  - Maintain discretionary decisions for both the NBG to provide ELA and the government to indemnify the NBG.
- Tighten ELA conditions to mitigate moral hazard:
  - Consider introducing steeper penalty interest rates (higher than the overnight facility rate) while avoiding turning liquidity problems into solvency problems.
  - Raise the bar for extensions beyond the initial three months; possibly match longer durations with higher penalty rates.
- Clarify and strengthen collateral rules:
  - Define the range of acceptable collateral, valuation and haircut rules, standardization and transferability, definitions of solvency and systemic risk, and collateral management (earmarked or pooled, cross-border collateral).
  - Draw from monetary policy collateral rules where appropriate while retaining flexibility for systemic cases and enhancing legal certainty.
- Enhance accountability and transparency:
  - Formalize internal approval procedures; explicitly require the Supervision Department to issue a “solvency opinion” and lead ELA decision-making proposals to the NBG Board.
  - Report on ELA usage to parliament and/or publicly once confidentiality concerns subside, aligning reporting with predefined criteria and sound practices.

### RESOLUTION FRAMEWORK — FINDINGS
- Temporary administration:
  - The NBG can appoint a temporary administrator in cases including inability to pay depositors, failure to meet obligations, and “special cases, when the interests of the bank’s depositors and other creditors are jeopardized.”
  - Temporary administrators are accountable to the NBG and do not benefit from legal protection in discharging their functions unless they are NBG employees.
  - The law does not specify time limits for extension of the temporary administration, eligibility criteria for appointment, or required oversight and periodic monitoring of the administrator’s actions.
- Bank liquidation:
  - The bank liquidation framework is more detailed, reflecting historical experience, but overall the resolution framework lacks a number of important features and needs amendments to align with international best practices to enable speedy and cost-effective resolution.

### RESOLUTION FRAMEWORK — POLICY RECOMMENDATIONS
- Overhaul the bank resolution regime to:
  - Enhance the temporary administration process, including early appointment of temporary administrators when a bank shows signs of financial difficulty.
  - Facilitate application of resolution tools in a timely manner.
  - Reinforce safeguards and specify oversight, time limits, and eligibility criteria for temporary administrators.

### DEPOSIT INSURANCE SCHEME (DIS) — FINDINGS
- Georgia currently has no DIS.
- The authorities have committed to introducing a DIS in the context of the upcoming association agreement with the European Union (EU) within a seven-year period.
- Considerations favor a shorter implementation timeframe than seven years:
  - A DIS would support public confidence, minimize too-big-to-fail risk, and complete a comprehensive financial safety net.
  - Design must address past authorities’ concerns about unintended consequences of a DIS.

### DEPOSIT INSURANCE SCHEME — POLICY RECOMMENDATIONS
- Establish a DIS promptly with design features in line with international best practices, including:
  - An adequate mandate.
  - Reliable funding arrangements.
  - Appropriate coverage levels.
  - Strong governance.
  - Clear inter-institutional cooperation arrangements.
- Carefully consider DIS design to mitigate moral hazard and other unintended consequences.

### CRISIS PREPAREDNESS AND MANAGEMENT — FINDINGS
- Recent steps taken:
  - A memorandum of understanding between the Ministry of Finance (MOF) and the NBG has been established.
  - The NBG has begun to require recovery and resolution plans (RRPs) for major banks.
- Remaining impediments:
  - Certain legal impediments may still hinder NBG cooperation with domestic and foreign agencies.
  - The government is prohibited from owning shares in financial institutions, which may constrain certain intervention options.
  - Legal and institutional arrangements for rapid government deployment of crisis management responses need review.

### CRISIS PREPAREDNESS AND MANAGEMENT — POLICY RECOMMENDATIONS
- Remove impediments to cooperation between the NBG and domestic and foreign agencies and enable possible government interventions in a crisis.
- Consider establishing a Financial Stability Council.
- Strengthen requirements for recovery and resolution planning.

### TABLE: MAIN RECOMMENDATIONS (as presented)
- Revise the framework for emergency liquidity assistance to mitigate financial risks for the NBG by clarifying rules on collateral, tightening the provisions on duration and interest rate, and spelling out explicitly the role of the government in systemic crises.
  - Priority: High
  - Timeframe: 6–12 months
- Overhaul the bank resolution regime by enhancing the temporary administration process and providing for the appointment of a temporary administrator at an early stage of a bank’s financial difficulty, facilitating the application of resolution tools, and reinforcing safeguards in the resolution process.
  - Priority: High
  - Timeframe: 6–12 months
- Establish a deposit insurance scheme, underpinned by features in line with international best practices, consisting of an adequate mandate, funding, coverage, governance, and inter-institutional cooperation arrangements.
  - Priority: High
  - Timeframe: 6–12 months
- Enhance crisis preparedness and management arrangements by removing impediments to cooperation between the NBG and domestic and foreign agencies, and for possible government interventions in a crisis, setting up a Financial Stability Council, and strengthening the requirements for recovery and resolution planning.
  - Priority: Medium
  - Timeframe: 1–2 years

*Source: EXECUTIVE SUMMARY (Technical Note), Georgia — International Monetary Fund.*

### 18. Through temporary administration, the NBG may, in theory, arrange for certain

### 18. Through temporary administration, the NBG may, in theory, arrange for certain

### Temporary administration and resolution powers
- The temporary administrator:
  - takes over shareholders’ and managerial powers;
  - can pursue all necessary actions to remedy the financial situation of a bank, including by blocking funds of individuals and legal entities.
- The law states that the temporary administrator has authority to arrange:
  - a merger with another bank;
  - a recapitalization of the bank under administration;
  - the acquisition of all or part of its assets and the assumption of its liabilities by another bank.
- Under the NBG Law, the NBG may set up and manage a temporary bank.
- The legal provisions enabling these powers are described as concise and general.

### Liquidation process and triggers
- The liquidation process:
  - is handled by the NBG and is triggered by the revocation of a bank license;
  - is a self standing regime set out in the NBG Law, the LACB, and in implementing regulations (the general provisions of the insolvency law do not apply).
- Grounds upon which the NBG may determine to revoke a bank license include, inter alia:
  - a bank no longer complies with regulatory capital ratios;
  - loss of creditors’ confidence for failure to fulfill obligations and to ensure the safety of assets entrusted to it;
  - involvement in unhealthy banking practices, pernicious for depositors and financial position;
  - insolvency, defined as when the bank’s assets are lower than its liabilities.
- The competence to declare a bank bankrupt or insolvent lies exclusively with the NBG.

### Liquidator powers and NBG oversight
- Upon revoking a bank license:
  - the NBG appoints a liquidator;
  - the liquidator conducts an inventory of assets and liabilities;
  - the liquidator is authorized to sell fixed assets at public auction, transfer other assets, and arrange for assumption of liabilities by other banks.
- Qualifications and oversight:
  - the liquidator must have appropriate qualifications and professional experience;
  - the NBG may lend to a liquidator for the discharge of its functions;
  - the NBG may request relevant information at any time;
  - the NBG may terminate at will the appointment of a liquidator.

### Creditor hierarchy and treatment of secured claims
- Creditor hierarchy on liquidation (order stated in law):
  - NBG claims, as well as claims that arose after license revocation, are satisfied first;
  - followed by individual depositors;
  - other deposits held by legal entities;
  - state claims;
  - other unsecured creditors.
- The law preserves the position of secured creditors by carving out from the creditor hierarchy their claims on the collateral.
- The liquidator can pool amounts received separately from the realization of assets to satisfy the failed bank’s creditors.
- Legal uncertainties have arisen on the treatment of secured creditors, with recent Tax Code amendments affecting priority:
  - If tax authorities register a lien over the debtor’s assets, the priority enjoyed by the state shall be determined with reference to the date when the tax claim arose (see Article 239, paragraph 2, of the Tax Code).
  - If the property encumbered by the tax lien is sold, all secured interests perfected after the registration of the tax lien are cancelled, except where an asset was encumbered prior to registration to satisfy a bank claim (or other financial institutions’ claims); in that case, the bank’s secured interest is not altered.
  - Authorities report that the security interest attached to the bank’s claim would maintain its legal status and priority also upon its sale or transfer.
  - A special regime applies to financial collateral arrangements, which would prevail over other security interests accorded by law.

### Judicial review and remedies
- Challenges to NBG actions:
  - are brought to the administrative court;
  - review by the administrative court is a necessary prerequisite for filing a lawsuit before the civil court for damages arising from the NBG act.
- Procedural features:
  - the administrative court review does not stay the NBG act until a final court decision is issued;
  - the burden of proof lies with the plaintiff;
  - courts can enter into the merits of NBG decisions;
  - remedies can entail monetary compensation or unwinding of the relevant decision, unless the latter is not practically possible.
- Empirical note:
  - court challenges are not very frequent, and there are no recent cases of bank resolution to draw lessons from.
- Recommendation from the text:
  - relevant laws should be amended to explicitly limit the remedy available to claimants to compensation for loss, without the possibility of unwinding the resolution measure.

### Identified weaknesses in the legal framework and areas for improvement
- General observation:
  - The legal framework refers to certain bank resolution powers but remains to be tested in practice; provisions are general and may not yield a predictable, uniform, and legally certain process.
- Specific weaknesses and suggested improvements:
  - Temporary administration regime:
    - law lacks oversight and monitoring requirements for temporary administrators (e.g., periodic reporting to the NBG; required NBG authorization for certain transactions);
    - no prescription that temporary administrators act under conservative principles (e.g., on lending limits);
    - does not specify who can be a temporary administrator or applicable professionalism and integrity criteria;
    - legal status of temporary administrators (as public officials exercising a public function) is not mentioned.
    - Recommendation: Revise regime to explicitly reflect oversight, qualifications, status, and principles; enshrine general principles in primary law and procedural rules in NBG regulations or decrees.
  - Grounds (triggers) for temporary administration:
    - current triggers refer to inability to fulfill obligations or that depositors’ and creditors’ interests are jeopardized;
    - insolvency definition linked exclusively to a “balance sheet” test (assets lower than liabilities);
    - recommendation: comprehensively revise triggers to permit NBG discretion to resolve a bank via temporary administration at an earlier stage, based on nonviability or likely nonviability inferred through several criteria (e.g., breach of capital or liquidity requirements, unsafe and unsound conditions), and without necessarily suspending operations or revoking license.
    - Note: The possibility to take control of a problem bank with positive equity should be assessed against possible constitutional constraints (see footnote discussion on Article 21).
  - Objectives and principles:
    - best practices: resolution should preserve financial stability, protect depositors and public confidence, and minimize taxpayer support; losses should be imposed on shareholders and creditors (least-cost resolution).
    - Georgian framework partially recognizes these elements; the 2002 NBG Decree on the “Analytical Framework for Problem Bank Resolution” mentions least-cost strategy but is not always clear or coherent.
    - Recommendation: More thoroughly enshrine principles and objectives in legislation; explicitly incorporate these principles in the NBG’s mandate as resolution authority.
  - Tools:
    - law merely states that temporary administrator can “arrange” transactions and that NBG can set up/manage a temporary bank—insufficient legal certainty on rules accompanying tools.
    - Aspects needing specification: governance and prudential requirements of a bridge bank; criteria for establishment of an asset management company and assets purchase; safeguards and procedures in recapitalization of a bank.
    - Suggestion: Expand toolbox to include other resolution techniques (e.g., statutory debt restructuring); note limitations of certain tools such as mergers which may lack loss-absorbing features.
    - Recommendation: Do not exclude using tools with immediate effect without completing all steps of temporary administration.
  - Effectiveness in implementation:
    - impediments include Civil Code rule that transfer of a problem bank’s claim is subject to consent of relevant creditors (e.g., depositors) and this rule is not waived in the LACB;
    - counterparties’ rights to terminate contractual arrangements upon adoption of a resolution measure should be temporarily restricted to facilitate implementation;
    - creditor hierarchy rules should be revised to avoid conflicts across laws (e.g., Tax Code, Law on Payment Systems and Payment Services) and to remove obstacles to transfer of secured claims (e.g., preserve position of secured creditors whose claim was perfected after registration of a tax lien).
  - Safeguards:
    - introduce requirement for independent evaluation of a failed bank’s assets and liabilities to guide attribution of losses;
    - enshrine the “no creditor worse off” principle (compare losses in resolution with treatment in straight liquidation);
    - revisit provision allowing NBG to lend to the liquidator to better protect NBG’s financial exposure.
  - Systemic crises:
    - current inability for the government to provide financial support under extraordinary circumstances on a temporary basis and through several possible forms should be revisited to cater for full spectrum of possible crisis responses (see paragraphs 35 and 41).

### Governance arrangements and separation of functions
- Current setup:
  - NBG Supervision Department handles problem banks by defining resolution strategy, examining alternatives, and assessing costs against straight liquidation.
- Concern:
  - lack of separation between supervision and resolution raises potential conflicts of interest and regulatory forbearance risk (authorities may lack incentives to "pull the plug").
- Suggested approaches:
  - implement internal governance arrangements and checks and balances in line with international best practices;
  - where resolution and supervision are conducted by the same agency, design collegial decision-making processes to reconcile conflicts;
  - consider establishing a small structurally separate unit (in calm periods) to handle recovery and resolution planning and crisis preparedness, with possible different reporting lines (e.g., to a deputy governor or NBG governor) and liaison with the DIS once established; staffing to be scaled up in crisis times.
- Flexibility note:
  - creating a separate resolution authority may not be feasible in a small country like Georgia; internal governance changes can preserve broader institutional setup without establishing a separate agency.

### Box 1 — Legal considerations in application of resolution tools (selected)
- General principle:
  - resolution tools resemble business transactions but must incorporate public law elements that allow authorities to override shareholders’ and creditors’ consent.
- Sale of business (purchase and assumption):
  - enable transfer of assets and liabilities as a pool to allocate losses to certain creditor categories by leaving selected liabilities with the problem bank and passing others to the acquirer;
  - enable rapid disposal mechanisms (open auction and, in exceptional cases, informal bidding) with strict confidentiality and ex post transparency.
- Bridge bank:
  - transfer assets and liabilities to publicly owned vehicles for limited durations; require expedited procedures and clarified governance and prudential rules.
- Capital increases:
  - temporary administrator must estimate capital shortfall, recognize losses, write down capital, and draw a new balance sheet to accompany injection of new capital; special provisions depart from general corporate law on capital reorganizations.
- Debt restructuring (statutory bail-in):
  - conversion of debt into equity and/or debt haircuts to restore capital requirements; special features include limited creditor approvals and a more limited judicial role.

### Deposit Insurance Scheme (DIS)
- Context:
  - in the association agreement with the European Union, Georgian authorities commit to introducing a DIS.
- Considerations:
  - authorities have weighed pros and cons: preserving public confidence, mitigating bank runs, ensuring industry contribution versus maintaining market discipline, moral hazard, and costs for banks and clients.
- Timeline:
  - the recently signed association agreement envisages introduction of a DIS with timing currently planned for seven years; no other specific features have been determined so far.

*International Monetary Fund — GEORGIA (excerpt from the provided content unit)*

### 28. The FSAP mission supports the establishment of a DIS and considers it appropriate to

### _cr1508 - 28. The FSAP mission supports the establishment of a DIS and considers it appropriate to

### Rationale for establishing a Deposit Insurance Scheme (DIS)
- FSAP supports establishment of a DIS and considers it appropriate to set it up earlier than the envisaged seven-year period.
- Acknowledged reservations: moral hazard concerns given fiscal costs had a DIS existed during past banking distress; need for gradual institutional capacity building for the financial sector.
- Key considerations favoring a DIS given the current juncture of the Georgian financial sector:
  - i. Public confidence
    - Past bank liquidations took several years for depositors to be reimbursed.
    - Clarifications in creditor hierarchy rules have improved liquidation processes, but lengthy liquidation cannot be excluded in future insolvency cases.
    - Main function: protect insured depositors by ensuring a prompt payout, preserving public confidence and minimizing risk of a bank run and deposit outflows.
  - ii. Reducing the “too-big-to-fail” risk
    - An implicit, free, and discriminatory DIS effectively exists today because banks deemed too-big-to-fail have a de facto cost advantage over smaller banks.
    - A DIS would remove or reduce this implicit state guarantee and level the playing field for smaller banks.
    - DISs, supported by a good communication strategy, can maintain public confidence and foster deposit placement with small and medium banks, potentially increasing banking sector competition.
  - iii. Adequate funding tools in resolution
    - Absence of a DIS may put undue pressure on the NBG and lead to misuse of Emergency Liquidity Assistance (ELA).
    - Risk: central bank resources could be used to fund troubled banks for a protracted period, disguising open bank assistance and increasing fiscal costs.
    - A DIS is a key component in funding problem banks’ resolution and may mitigate these risks.
  - iv. Conjuncture
    - Introduction of a DIS seems timely now when banks’ profitability is relatively high.
  - v. Savings rate
    - A DIS could increase savings, as indicated by survey responses summarized in the source.

### Design features of a DIS (Box 2: preliminary guidance)
- Public interest function
  - DIS should be vested with a public interest function aimed at protecting insured deposits and contributing to financial stability.
  - If established as a separate legal entity (potentially as a commercial company under domestic tradition), the public interest function must be spelled out in the legal framework and informed by public law elements.
- Funding
  - Favor an ex ante funded DIS to minimize systemic risk and avoid pro-cyclicality.
  - Possibility to levy extraordinary premiums on the industry and authority to borrow from the MOF.
  - Funding at inception options:
    - Government contribution to initial capital to boost credibility; or
    - Gradual build-up through bank contributions with possibility of government borrowing as backstop.
- Coverage
  - Coverage should balance insuring enough depositors to support financial stability and mitigating moral hazard via a reasonably low amount.
  - Internationally accepted benchmark: 80/20 recommended by the International Association of Deposit Insurers, i.e., not less than 80 percent of depositors and 20 percent of deposits amount covered by a DIS.
  - World Bank technical assistance (April 2014) finding: based on banking sector deposits data as of February 28, 2014, a deposit insurance coverage amount of GEL 5,000 per individual depositor per bank would be sufficient to provide 100 percent insurance for 96.64 percent of all individual depositors and 20.91 percent of their deposited amount (meeting the 80/20 rule).
- Governance
  - Ensure adequate independence from the industry and the government; sound governance arrangements required.
- Operational effectiveness and role in resolution
  - DIS should be operationally able to make quick payouts when a bank is liquidated.
  - Legal framework should allow DIS funds to be used to fund resolution transactions in the interest of depositors (e.g., “filling the hole” between assets and liabilities in a sale to a healthy acquirer), subject to the “least cost” test (i.e., up to the amount that would be otherwise covered in a liquidation).
- Inter-institutional arrangements
  - Where DIS is a legal entity, it should closely cooperate with supervisory and resolution authority (NBG) to share information on problem banks and be operationally ready for pay-outs or resolution.

### Crisis preparedness and management — current gaps and actions
- Legal limitations on cooperation
  - NBG cooperation with foreign supervisors requires adequate confidentiality safeguards under NBG law, but prior to the FSAP mission no equivalent provisions existed for cooperation with other agencies (MOF or foreign resolution authorities) for contingency planning or systemic crisis response.
- MOF–NBG collaboration
  - MOF and NBG informally share system-wide information and have recently entered a formal arrangement.
  - Financial stability plan prepared in 2009 was not implemented.
  - A memorandum of understanding between NBG and MOF was signed in June 2014 for exchange of information relevant for financial stability and coordination of crisis responses; effective implementation is important.
- Recovery and Resolution Plans (RRPs)
  - NBG requires the most systemic banks to prepare RRPs as part of ICAAP; RRPs currently focus on contingent measures (asset sales, liability exercises, rights issues) and procedural steps (shareholders’ assembly for capital increase, Board delegation).
  - NBG assesses feasibility and effectiveness of RRP measures; further advancement and broader integration with stress tests recommended.
- NBG internal arrangements
  - NBG has an internal contingency plan linked to stress tests and resulting capital needs.
  - A Financial Stability Committee exists at staff level but needs formalization at highest managerial positions.
- Extraordinary measures and legal constraints
  - NBG can impose a bank holiday, restrict banks’ operations, set exemptions, or take other actions to maintain financial stability.
  - Government may provide financial assistance in the form of loans through ordinary budgetary authorization without a specific parliamentary appropriation; however, state guarantees need parliamentary ratification.
  - Specific legal provision prohibits the government from owning shares in banks and other financial institutions.

### Legal and institutional recommendations for strengthening crisis framework
- Remove legal impediments to cooperation
  - NBG should be able and required to cooperate with competent domestic and foreign authorities in bank resolution or crisis, subject to confidentiality safeguards and preservation of domestic financial stability.
  - Revisit automatic revocation of a bank license when a foreign parent “has lost authority to carry out its operations in its home country” to allow NBG flexibility and promote cross-border cooperation.
  - Clarify legal regime applicable to branches of foreign banks upon insolvency or liquidation.
- Establish a Financial Stability Council
  - Formalize structured arrangements comprising NBG, MOF, other regulatory agencies and stakeholders to meet regularly, share information and analysis, and prepare policy responses.
  - Council activities: develop guidelines and checklists of roles and responsibilities (including DIS), crisis communication plans, simulation exercises, verify operational procedures, and elaborate rules for extraordinary public support and related legal powers.
- Advance RRPs and legal basis
  - Require comprehensive RRPs (or submission of relevant resolution-plan information) initially from systemic banks based on proportionality.
  - Enhance legal basis to allow NBG intrusive powers to implement RRP actions.
  - Integrate stress-test analysis more structurally into RRPs.
- Enhance effectiveness of government crisis response toolkit
  - Allow MOF to own shares in banks and financial institutions in a crisis context, provided such ownership is temporary, extraordinary, accompanied by measures allocating losses to relevant stakeholders, and contributes to transparency and fairness.
  - Review requirement that each government guarantee be ratified by parliament while maintaining strong oversight over public debt and contingent fiscal liabilities.

*Source: IMF FSAP mission report excerpts on DIS design, crisis preparedness, and management for Georgia.*

### Appendix I. Examples of Recovery and Resolution Plans

### Appendix I. Examples of Recovery and Resolution Plans

### Financial Stability Board — Objective and governance of RRPs
- Recovery and resolution planning should take into account the specific circumstances of the firm and reflect the nature, complexity, interconnectedness, level of substitutability, and size of the firm.
- The underlying assumptions of the RRPs and stress scenarios should be sufficiently severe.
- The RRPs should make no assumption that taxpayers’ funds can be relied on to resolve the firm.
- The RRPs should serve as guidance to firms and authorities in a recovery and resolution scenario. They do not imply that the authorities would be obliged to implement them or be prevented from implementing a different strategy whenever it is needed to resolve a financial institution.

### Financial Stability Board — Recovery plan (FSB)
- Serves as a guide to the recovery of a firm that has not yet met conditions for resolution. There should be a reasonable prospect of recovery.
- Is developed by the firm’s senior management and its credibility and ability to be effectively implemented is assessed by the authorities.
- Must be updated at regular intervals and upon the occurrence of events that materially changes the firm’s structure or operations, its strategy or risk exposure.
- Should include the following essential elements:
  - Actions to strengthen the capital situation;
  - Possible sales of subsidiaries and spin-off of business units;
  - Possible voluntary restructuring of liabilities through debt-to-equity conversion;
  - Measures to secure sufficient funding and adequate availability;
  - Consideration to possible transfers of liquidity and assets within the group;
  - Assessment of requirements to maintain membership in financial market infrastructures;
  - Contingency arrangements that enable the continuation of operations as recovery measures are implemented;
  - Triggers for implementation of the recovery plan or individual measures; and
  - Communication strategy with the authorities, the public, the financial market, and the staff.

### Financial Stability Board — Resolution plan (FSB)
- The resolution plan serves as a guide to achieve an orderly resolution in the event that recovery measures are not feasible or have proven ineffective. Identifies potential resolution strategies and assesses the necessary preconditions and operational requirements for implementation.
- The plan is developed and maintained by the authorities. They may decide not to disclose a resolution plan or parts of it. All relevant authorities should participate in the recovery and resolution planning.
- Firms should provide the information required for resolution planning on a timely basis.
- In addition, the authorities should identify:
  - Regulatory thresholds and legal conditions for the initiation of official actions and scope for authorities’ discretion;
  - Interdependencies and the impact on other business lines and legal entities; markets and other firms;
  - Estimate of losses to be borne by creditors and any premium associated with various resolution strategies;
  - Range of sources available for resolution funding;
  - Process for disbursements by deposit insurance funds and other insurance schemes;
  - Processes for preserving uninterrupted access to financial market infrastructures;
  - Processes and systems to support the continued operation of critical functions;
  - Processes for cross-border implementation of the resolution strategies; and
  - Communication strategies and processes to coordinate communication with foreign authorities.

### United Kingdom — Recovery plans (based on SS 18/13)
- Firms are required to maintain and update recovery plans that outline credible recovery actions to implement in the event of severe stress. The objective of the plan is to enable firms to restore their business to a stable and sustainable condition.
- The recovery plan is a firm’s complete menu of options addressing a range of severe financial stresses caused by idiosyncratic problems, market-wide stress, or both.
- It is expected that the recovery plan includes all credible options for addressing both liquidity and capital difficulties.

Key elements:
- Confirmation that the firm’s Board of Directors or other appropriate senior governance committee or group have reviewed and approved the recovery plan.
- Summary of a firm’s complete list of recovery options and an overview of the full range of further possible options.
- Identification of any remedial actions that should be taken to improve the credibility and effectiveness of individual recovery options.
- Description of each recovery option, including the firm’s assessment of the probable success and quantitative estimate of each option’s benefits.
- Assessment of the implications of the option on the franchise and viability of the firm.
- Embedding the recovery plan into the firm’s existing risk management framework.
- Identification of a range of forward-looking triggers to activate the implementation of the recovery plan. Triggers should go beyond regulatory capital and liquidity ratios and include internal quantitative and qualitative metrics from the firm’s overall risk management framework, and shall allow sufficient time for corrective actions to be taken.
- Clear description of the escalation and decision-making process that shall ensure effective action is taken in a timely manner.
- Identification of the key people involved and their roles and responsibilities.
- Operational plan for accessing central bank liquidity facilities.
- Communication plan to ensure that stakeholders (internal and external) are given timely and appropriate information during the firm’s recovery process.

### United Kingdom — Resolution plans (based on SS 19/15)
- Firms are required to submit resolution packs containing information to enable the authorities to prepare for orderly resolution.
- The information submitted in resolution packs will allow the authorities to identify the appropriate resolution strategy for a firm; work with firms to identify barriers to an optimal resolution plan; and develop the remedial actions for the removal of barriers.
- The authorities will assess and determine in detail the corporate structure and the legal entity information, economic functions, strategy, resolution trigger events, operational continuity, liquidity needs, collateral, critical functions, payment, and clearing and settlement systems.

### United States — Resolution plan requirements
- Each nonbank financial company supervised by the Federal Reserve Board and each bank holding company with total consolidated assets of US$50 billion must periodically submit to the Board, the Federal Deposit Insurance Corporation and the Financial Stability Council a resolution plan or ‘‘living will’’ that includes:
  - Information regarding the manner and extent to which any insured depository institution affiliated with the company is adequately protected from risks arising from the activities of any nonbank subsidiaries of the company;
  - Full descriptions of the ownership structure, assets, liabilities, and contractual obligations of the company;
  - Identification of the cross-guarantees tied to different securities;
  - Identification of major counterparties;
  - A process for determining to whom the collateral of the company is pledged; and
  - Any other information that the Board and the corporation jointly require by rule or order.
- The proposed rule would require a strategic analysis by the covered company of how it can be resolved under Title 11 of the U.S. Code (the ‘‘Bankruptcy Code’’) in a way that would not pose systemic risk to the financial system. In doing so, the company must map its:
  - Business lines to material legal entities and provide integrated analyses of its corporate structure;
  - Credit and other exposures;
  - Funding, capital, and cash flows;
  - The domestic and foreign jurisdictions in which it operates; and
  - Its supporting information systems for core business lines and critical operations.
- The Dodd-Frank Act requires that in applying the requirements of Section 165(d) to any foreign nonbank financial company supervised by the Board or any foreign-based bank holding company, the Board give due regard to the principle of national treatment and equality of competitive opportunity, and to take into account the extent to which the foreign financial company is subject, on a consolidated basis, to home-country standards that are comparable to those applied to financial companies in the United States.

Required periodic submissions under the proposed rule:
1. A plan for the rapid and orderly resolution of the Covered Company under the Bankruptcy Code in the event of material financial distress at or failure of the Covered Company (‘‘Resolution Plan’’); and
2. A report on the nature and extent to which the Covered Company has credit exposure to other significant nonbank financial companies and significant bank holding companies and on the nature and extent to which other significant nonbank financial companies and significant bank holding companies have credit exposure to the Covered Company (‘‘Credit Exposure Report’’).

### European Union — EU Recovery and Resolution Directive (BRRD) and recovery plans
- The EU draft Directive is designed to provide “adequate tools at European Union level to effectively deal with unsound or failing credit institutions.” It aims to make sure a bank or an institution can be resolved speedily and with minimal risk to financial stability.
- The Directive preserves systemically important functions when a bank fails so that, on failure, shareholders and creditors, rather than taxpayers, bear the losses.
- The proposed implementation date for the draft Directive is January 1, 2015.
- Member states shall ensure that each institution draws up and maintains a recovery plan providing, through measures taken by the management of the institution or by a group entity, for the restoration of its financial situation following significant deterioration.

Annex information requirements for the recovery plan include:
- A summary of the key elements of the plan, strategic analysis, and summary of overall recovery capacity;
- A summary of the material changes to the institution since the most recently filed recovery plan;
- A communication and disclosure plan outlining how the firm intends to manage any potentially negative market reactions;
- A range of capital and liquidity actions required to maintain operations of, and funding for, the institution's critical functions and business lines;
- An estimation of the timeframe for executing each material aspect of the plan;
- A detailed description of any material impediment to the effective and timely execution of the plan, including consideration of impact on the rest of the group, customers, and counterparties;
- Identification of critical functions;
- A detailed description of the processes for determining the value and marketability of the core business lines, operations, and assets of the institution;
- A detailed description of how recovery planning is integrated into the corporate governance structure of the institution, as well as the policies and procedures governing the approval of the recovery plan and identification of the persons in the organization responsible for preparing and implementing the plan;
- Arrangements and measures to conserve or restore the institution's own funds;
- Arrangements and measures to ensure that the institution has adequate access to contingency funding sources, including potential liquidity sources, an assessment of available collateral, and an assessment of the possibility to transfer liquidity across group entities and business lines, to ensure that it can carry on its operations and meet its obligations as they fall due;
- Arrangements and measures to reduce risk and leverage;
- Arrangements and measures to restructure liabilities;
- Arrangements and measures to restructure business lines;
- Arrangements and measures necessary to maintain continuous access to financial markets infrastructures;
- Arrangements and measures necessary to maintain the continuous functioning of the institution's operational processes, including infrastructure and IT services;
- Preparatory arrangements to facilitate the sale of assets or business lines in a timeframe appropriate for the restoration of financial soundness;
- Other management actions or strategies to restore financial soundness and the anticipated financial effect of those actions or strategies;
- Preparatory measures that the institution has taken or plans to take in order to facilitate the implementation of the recovery plan, including those necessary to enable the timely recapitalization of the institution; and
- A framework of indicators that identifies the points at which appropriate actions referred to in the plan may be taken.

### European Union — Resolution plans (BRRD)
- The resolution authority will prepare a resolution plan for an institution (at an entity and group level) setting out options for resolving the institution in different scenarios, including systemic instability.
- The resolution plan will include details of how to apply the resolution tools and how to make sure the institution continues to provide critical functions. Specifically, the resolution plan shall include:
  - Summary of the key elements of the plan;
  - Summary of the material changes to the institution that have occurred after the latest resolution information was filed;
  - Demonstration of how critical functions and core business lines could be legally and economically separated, to the extent necessary, from other functions so as to ensure continuity upon the failure of the institution;
  - Estimation of the timeframe for executing each material aspect of the plan;
  - Detailed description of the assessment of resolvability;
  - Explanation by the resolution authority as to how the resolution options;
  - Detailed description of the different resolution strategies that could be applied according to the different possible scenarios and the applicable timescales;
  - Description of critical interdependencies;
  - Description of options for preserving access to payments and clearing services and other infrastructures;
  - Analysis of the impact of the plan on the employees of the institution; and
  - Plan for communicating with the public.

*Source: Appendix I. Examples of Recovery and Resolution Plans (Financial Stability Board, United Kingdom, United States, and the European Union).*

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