## _cr15253 ## Source details **Canonical URL:** [_cr15253](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15253.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15253.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15253.pdf.json) --- ### EXECUTIVE SUMMARY — Key findings - Arrangements for crisis management, bank and group resolution, and the financial sector safety nets are well developed and tested; roles, responsibilities, accountabilities and information sharing arrangements among the MOF, the Finanstilsynet (FSA), Norges Bank (NB) and the Banks’ Guarantee Fund (BGF) are generally well defined and functioning. - The MOF is, de facto, the lead resolution authority; the FSA has resolution responsibilities and executes MOF resolution decisions based on FSA recommendations formulated routinely in consultation with NB and often with the BGF. - The BGF’s private sector governance impedes full integration into resolutions and crisis preparedness and management frameworks; further steps should be considered to overcome obstacles. - The current legal framework provides substantial powers and flexibility to deal with failing or failed banks but needs strengthening in several respects; a public-private sector banking law commission is formulating new legislation to transpose the EU’s Bank Recovery and Resolution Directive (BRRD) into Norwegian law. - Key legal issues to address include ensuring operational independence of the resolution authority, adequate legal protections, adopting the full resolution toolkit set out in the Financial Stability Board’s Key Attributes (KAs), and distinguishing between going and gone concern resolution. - The FSA has begun to implement a recovery plan requirement for the largest banks but the legal and regulatory framework for institution-specific resolution plans and resolvability assessments is not in place; resolution planning for the largest domestic banks should be initiated as soon as possible. - Norway-specific expectations for recovery and resolution plans of foreign bank subsidiaries and branches have not been formally articulated; this is significant for the second, third and fourth-largest banks in Norway by assets. - Both NB and the BGF can provide emergency liquidity assistance, and the BGF can provide solvency support; relevant policies are in place at NB but not at the BGF. - There are no standing arrangements for the provision of resolution funding under the control of the resolution authorities; one should be considered as part of the new legislation. - The BGF offers a high level of deposit insurance coverage and is well funded; governance (five of seven board members are current bank executives) gives rise to potential conflicts of interest and impedes information flows from the FSA. - See Table 1 (in source) for a summary of key recommendations and priorities (explicit priorities such as H and M are used in Table 1). ### Institutional arrangements and governance - Review objective: identify areas where current arrangements may fall short of emerging international best practices and standards and make specific recommendations for alignment with reference to the FSB Key Attributes. - Norway is transposing the BRRD into Norwegian law as an EEA member; the BRRD largely sets a minimum level for harmonization and some recommendations may go beyond BRRD specifications. - Financial system structure and licenses: - As of end-2013, 18 commercial banks and 106 savings banks were licensed to operate in Norway. - Foreign banks and credit institutions operated 42 branches in Norway. - Institutional framework: - Four bodies responsible: Ministry of Finance (MOF), Finanstilsynet (FSA), Norges Bank (NB), Banks’ Guarantee Fund (BGF). - MOF takes all resolution decisions in practice; FSA formulates options and recommendations and executes MOF’s resolution decisions. - BGF governance (five active bankers among seven board members) creates impediments to full public-sector integration. - Legal/constitutional roles: - The King has early intervention and resolution powers under the Guarantee Schemes Act (GSA), delegated to the MOF. - MOF powers include responsibilities under Chapter 2 of the Financial Institutions Act (FIA) (ownership authorizations, capital requirements, systemic importance, countercyclical buffer, liquidity requirements). - Information sharing: - No restrictions on exchange of non-public information between NB, MOF, and FSA; FSAct Section 7 and NBA Section 12 permit or exempt sharing. - Information exchange with BGF is more limited by BGF operating procedures; FSA can inform BGF staff of potential problem institutions but BGF board is generally not informed of watch-list. ### Cross-border arrangements and coordination - Norway is party to the EEA treaty and must implement EU directives and regulations into Norwegian law. - Regional/EU MOUs and arrangements: - 2003 regional central bank MOU (Denmark, Finland, Iceland, Sweden, Norway) — limited activity; Contact Group meetings no longer take place. - Since 2010 party to EU MOU on financial stability cooperation. - 2010 Nordic-Baltic Cooperation Agreement providing for Nordic-Baltic Cross-Border Stability Group (NBSG) and a “Preliminary Framework for Burden Sharing”; subgroups largely inactive. - Nordea Crisis Management Group (CMG): - CMG is resolution college for Nordea (designated G-SIFI by FSB). - All three Norwegian authorities participate; MOF takes the lead. - CMG roles: oversee group-wide recovery plan, prepare group-wide resolution strategy and plan, assess impediments to resolution, enter into cross-border cooperation agreements. - Cross-border legal framework needs: - Ensure transparent and expedited mechanisms to give effect in Norway to foreign resolution measures consistent with FSB KA 7 (mutual recognition or supportive consistent measures). - Current Norwegian framework does not discriminate on creditor nationality and does not trigger automatic action in Norway based on initiation of resolution elsewhere. ### Crisis preparedness — recovery plans, resolution planning, simulation exercises - Recovery plans: - FSA has begun implementing recovery plan requirements for largest banks; FSB KAs require recovery plans for systemically important banks and BRRD mirrors requirement. - DNB timeline: - EBA Recommendation January 23, 2013 requested group recovery plans by end-2013. - DNB submitted a plan in late 2013; FSA reviewed and requested enhancements in June 2014; revised plan submitted August 2014; further enhancements expected and a revised plan expected by August 2015. - Assessment: governance arrangements for recovery planning are sound; recovery plan appears comprehensive; DNB improving recovery options. - Nordea Bank Norway: recovery plan iterations in 2012, 2013, third iteration November 2014; supervisory college and CMG to provide formal feedback before second half of 2015. - FSA rolled out recovery plan requirements in stages in late 2014 to Kommunalbanken and five large regional savings banks; requested submission by end-2015. - No decision yet on broader roll-out; BRRD transposition will require consideration. - Resolution plans and resolvability assessments: - Legal and regulatory framework for institution-specific resolution plans is not in place; substantive work has not been undertaken. - MOF has not adopted a policy framework nor specified delegation extent to FSA for resolution plans/resolvability assessments. - DNB and Nordea: resolution college for DNB will be needed; Nordea resolution planning progressing as part of Swedish draft strategy that was not endorsed by CMG; working group yet to be formed. - No explicit legislative power to require structural changes specifically to enhance resolvability; existing approval powers for structural changes reflect similar objectives but do not explicitly address operational support continuity. - Simulation exercises: - Domestic tripartite exercises (MOF, NB, FSA) in 2012 and 2013; scenarios included solvency of a medium sized bank (2012) and payment system continuity (2013). - Another tripartite exercise planned for early 2016; BGF generally not part of these exercises and is role-played by others. - Regional cross-border exercise planned under NBSG for 2017. - Key crisis-preparedness recommendations: - Begin group-wide resolution planning and resolvability assessments for DNB and larger savings banks (consider Appendix I—Annexes 3 and 4 of KAs). - Define formal policies for recovery planning specific to Norwegian regime, including local information requirements for subsidiaries and branches of foreign banks. - Define policies for resolution plans and resolvability assessments and specify MOF delegations to FSA. - Integrate BGF into crisis simulation exercises and advocate more regular regional exercises. ### Early intervention powers and recommended revisions - FSA early intervention powers: - Set out under Section 4 of the Financial Supervision Act (FSAct) and Section 2–9(d) of the FIA. - Under Section 5 of the FSAct FSA can convene board meetings and submit proposals. - Under the GSA FSA powers include ordering changes in governing bodies (Section 3), notifying NB and BGF of inadequate capital, notifying MOF if insolvent, controlling financial business once placed in public administration, appointing administration board and auditor, approving final accounts and distribution in liquidation under public administration. - Recommended revisions to early intervention: - Update language in section 4(7) FSAct to more clearly express Basel Core Principles expectations that supervisors can address violations and unsafe and unsound practices. - Establish clear consequences for failure to implement corrective measures; consider granting FSA authority to impose administrative fines. - Consider adding a trigger for public administration based on persistent failure to take corrective action. - Broaden bases for corrective measures to encompass unsafe and unsound practices and reinforce corrective powers to include initiation of public administration for non-implementation. ### Emergency Liquidity Assistance (ELA) and NB standing facilities - NB’s legal basis and powers: - Norges Bank Act Section 19: NB may “grant liquidity loans to, make deposits with, and extend credit in other forms to commercial banks and savings banks.” - Section 22: NB has broad powers to lend to “entities other than banks in the financial sector.” - Circular 1/2012: banks must enter an “Agreement on the pledging of financial collateral for loans from Norges Bank”; may not apply to non-bank borrowers under Section 22. - Collateral eligibility and haircuts: - NB publishes eligible securities list and values; eligibility factors include listing, volume outstanding, currency, government guarantee, ABS criteria. - Exclusions: bonds/notes/short-term paper issued by companies of which the bank/group owns more than 33 percent, CDOs, securities issued by banks/financial institutions. Covered bonds and certain ABS may be eligible. - Haircuts: range from 1 percent to 22 percent depending on security type and residual maturity; examples include 1 percent for AAA government securities with residual maturity ≤ 1 year, and 22 percent for fixed-rate covered bonds of Norwegian issuers unrated or rated A- or lower with residual maturity > 7 years. - Post-2008: 2008 relaxations largely reversed in 2010; 2010 raised haircuts and tightened criteria; as of 2012 NB no longer accepts bonds issued by banks except covered bonds. - Standing facilities and market operations: - Intraday facility (intraday D-loan) interest-free; conversion to overnight D-loan carries interest 100 basis points higher than key policy rate. - Overnight deposit facility with tiering/quota system; quota sum currently equals around 45 billion NOK; NB steers reserves between 30 and 40 billion NOK. - Market operations via F-loans and F-deposits; auctions determine rates and aggregate allotments. - NB ELA (S-loans) policy (April 2004): - ELA granted only when financial stability may be threatened if support not provided. - Bank must be solvent: solvency defined as capital in excess of the 8 percent total capital requirement. - Interest rate must be above market rate. - Collateral and maturity requirements are flexible. - NB will seek direct information from banks to make independent solvency judgments as complement to FSA assessment. - Legal/operational ELA issues: - Legal question whether NB rejection of ELA request could be challenged by bank; MOF and Ministry of Justice engaged; change in law may be required (potentially addressed in BRRD transposition). ### BGF ELA and solvency support; Deposit Guarantee Scheme (DGS) - BGF powers: - Under Section 2 of GSA BGF can provide liquidity and/or capital support to banks directly or via a guarantee. - Provision of support requires vote of at least five board members and cannot be granted if fund balance after support is deemed insufficient to cover deposit guarantee obligations; policies defining this restriction have not been developed. - BGF can borrow under Articles of Association but lacks written policies on borrowing purpose/conditions and has no committed back-up funding facility. - Past use and government support: - NB provided a NOK 5 billion loan to the BGF that was used to fund a sale of an Icelandic bank subsidiary; BGF repaid NB from sale proceeds. - During global financial crisis government made NOK 50 billion available via State Finance Fund; 28 banks applied for NOK 4.1 billion; one bank received NOK 27 million in preference shares; all banks later redeemed and fund closed. - Deposit Guarantee Scheme scope and statistics: - Membership: commercial and savings banks with head office in Norway must be members (Section 2–1); at present 131 members (124 bank members and 7 foreign branch members); 16 specialized foreign-bank subsidiaries licensed to take deposits are not BGF members. - Coverage: deposits insured to NOK 2 million (Section 2–10(2)); anticipated reduction to EUR 100,000 after transition period ending January 1, 2019. - At end-June 2014 total deposits eligible for coverage were NOK 2,067 billion, of which NOK 1,163 billion or 56.3 percent were insured. Of total depositors, 98.6 percent were fully insured. - BGF governance: - Special legal entity governed by industry; MOF must approve Articles of Association. - Board: seven members including one each from NB and FSA; five elected members normally CEOs of member banks; elected for two years; chairman/deputy appointed for one year. - Board voting: four members suffice for most decisions; at least five members required to approve financial support to a bank. - Business Manager: engaged by board, traditionally the Managing Director of Finance Norway; board delegated emergency powers to grant support of NOK 100 million secured and NOK 50 million unsecured. - Day-to-day staff: twelve; Finance Norway provides legal and IT support and additional staffing in times of need. - Fund size, limits and fees: - Legal minimum fund: at least equal to 1.5 percent of guaranteed deposits plus 0.5 percent of measurement bases for capital adequacy requirements for members. - Mandatory minimum fund balance for 2014 was NOK 24.3 billion. Actual balance at beginning of 2014 was NOK 26.4 billion (NOK 26 billion invested in government securities). - Current fund balance represents 2.7 percent of insured deposits. Assuming reduction in insured deposit level to the EU standard (EUR 100,000), the fund balance would represent 6.2 percent of insured deposits. Combined required minimum resolution fund and deposit insurance fund balances under BRRD is 1.8 percent (for comparison in source). - Members must guarantee any deficiency relative to minimum; BGF may draw on guarantees only in amount of 10 percent of minimum mandatory fund balance in a single year. - Deposit insurance premium (risk-based): - Annual fee basis: 0.1 percent of total guaranteed deposits plus 0.05 percent of measurement base for capital adequacy requirement. - Members with tier 1 capital adequacy below 8 percent: fee increased by 4 times number of percentage points short of 8 percent. - Members with tier 1 capital adequacy greater than 8 percent: fee reduced by 4 times number of percentage points exceeding 8 percent, up to maximum deduction of 35 percent. - Fee calculated based on guaranteed deposits and risk-weighted assets at end of Q3 and Q4 two years prior and end of Q1 and Q2 prior to year of payment. - Prior fee holiday eliminated as of January 1, 2013; members must contribute regardless of fund size and no provision for fee reduction based on fund size. - Operational capacity and payout: - Deposit payouts can be triggered by MOF decision to place bank under public administration, FSA conclusion that bank cannot repay deposits, or no later than 21 days after FSA learns bank has not repaid deposits due. - Operational capacity to enable payout within 5 business days or less is nearly in place; GSA amended to provide disbursements “within one week”; BGF expects to achieve for all but a few deposit types (for which it will apply to MOF for exemption). - Disbursements for branches of foreign banks are limited to amounts not covered by home jurisdiction DGS and cannot exceed disbursement that would have been made by most comparable DGS in branch host state. - Key BGF recommendations: - Define explicit recusal policies for board members addressing actual and prospective conflicts, including potential acquirer interests. - Define policies for conditions under which BGF would grant liquidity and solvency support (EU DGS Directive Article 11 should guide). - Define acceptable loan collateral policies and borrowing purpose/conditions. - Seek to formalize a back-up funding arrangement. - Relax legal restriction on drawing on members’ guarantees in case of fund deficiency. - Adopt policies on recusal, provision of support, and borrowing. ### Resolution regime — objectives, current practice, and recommended reforms - Objectives of modern resolution regimes: - Maintain financial stability and continuity of critical services; - Minimize costs and avoid unnecessary destruction of value; - Ensure losses fall on shareholders and creditors per claim hierarchy, not taxpayers. - Current Norwegian regime: - Chapter 4 of GSA provides basis for range of resolution techniques through public administration; has been used effectively historically. - Powers include placing distressed bank under public administration; administration board assumes authority of board and general meeting and may transfer activities, merge, recapitalize, or wind up. - “No creditor worse off” safeguard via the Creditors Security Act. - Need for strengthening and BRRD transposition: - Current regime requires strengthening to fully comply with FSB KAs. - Authorities plan public consultation by end of this year and draft law next year (source notes extended revision schedule but advises completing sooner). - Key recommended legal framework enhancements: - Operational independence (FSB KA 2.5): ensure operational independence and clarify roles where MOF and FSA both function as resolution authorities; make statutory objectives explicit per FSB KA 2.3 (financial stability, depositor protection, avoiding unnecessary destruction of value, minimizing resolution costs, cross-jurisdictional impact). - Legal protection and indemnification (FSB KA 2.6): provide statutory legal protection for resolution authorities, officers, staff, and agents for good-faith actions; indemnification arrangements for litigation costs. - Triggers for resolution (FSB KA 3.1): adopt range of quantitative and qualitative triggers enabling initiation at point of non-viability well before balance sheet insolvency; qualitative triggers to include supervisory judgment and serious loss of confidence; quantitative triggers to include capital/liquidity thresholds. - Distinct going concern vs gone concern rules: separate provisions and toolkits for going concern (e.g., bail-in, bridge banks, AMCs, moratorium authority) and gone concern (liquidation, claims snapshot), avoid applying creditor-summons/closing-date rules to going concern. - Moratorium and stay on actions: insert express authority to impose moratorium on payments and stay on actions when appropriate. - Disparate treatment of creditors: permit disparate treatment within same priority class in specified circumstances to contain systemic effects or maximize value. - Suspension of early termination clauses: suspend early termination clauses triggered by public administration initiation, with safeguards per FSB KA 4.3. - Bridge banks and AMCs: explicitly authorize their use and address policy parameters (time limits, scope). - Use of BGF funds in P&A transactions: clarify law to permit BGF funds to facilitate purchase and assumption transactions to protect insured depositors and be subject to “least cost test.” - Role of courts/judicial review: ensure resolution actions cannot be stayed or unwound; remedies for successful legal challenge should be limited to monetary compensation. - Liquidation and insolvency: - General insolvency frameworks focus on creditor value maximization and may harm financial stability; recommend specifying primary liquidation rules in resolution framework or adjust bankruptcy rules for stability objectives. - Recommended liquidation powers: express authority for rapid P&A transfers, authority for liquidator to organize rapid transfers of assets/contracts/staff to preserve functions, depositor preference, limit or exclude creditors committee, clear triggers for winding up that do not depend on specified time periods. - Key resolution recommendations (summary): - Clearly identify resolution authority roles and ensure operational independence. - Provide legal protection from liability for resolution authorities and agents for good-faith actions. - Establish earlier non-viability triggers for resolution. - Establish distinct sets of rules for going concern and gone concern resolution. - Authorize disparate treatment of creditors where necessary; suspend early termination clauses with safeguards; ensure ability to transfer assets/liabilities without stakeholder consent. - Explicitly authorize bridge banks and AMCs and clarify BGF use to facilitate P&A transactions subject to least cost test. - Ensure courts cannot unwind resolution actions; remedies limited to compensation. ### Asset encumbrance and implications for resolution - Encumbrance findings: - Asset encumbrance increases cost of resolution to unsecured creditors, depositors, and deposit insurer; authorities should limit encumbrance or devise mechanisms to minimize its impact. - At year-end 2014 banks had transferred 54 percent of their residential mortgages to mortgage companies funded by covered bonds — 2 percentage points lower than at year-end 2013. - Largest banks and medium-sized banks each showed a decline of about 2 percentage points of assets transferred in 2014. - On average about 23 percent of banks’ assets have been encumbered via this mechanism. - No other substantial encumbrance means exist (no repo markets, no ABS markets), with one small exception noted. - Recommendation: - Include extent of asset encumbrance among criteria for setting individual banks’ MREL requirements. ### Tabulated and procedural recommendations (selected, priorities noted in source) - Enhance legal framework for resolution to comply with FSB Key Attributes (operational independence, legal protections, full toolkit, earlier triggers, cross-border resolution, going/gone concern distinction). - Priority: H (For action within the next 12 months) - Institution: MOF/FSA - Begin resolution planning for largest domestic banks, including assessing impediments to resolvability. - Priority: H (For action within the next 12 months) - Institution: MOF/FSA - Formally articulate Norway-specific expectations for recovery/resolution plans of foreign bank subsidiaries and branches. - Priority: M (For action within the next 24 months) - Institution: MOF/FSA - Establish a source of resolution funding under resolution authority control. - Priority: M - Institution: MOF - Secure a committed back-up funding facility for the BGF. - Priority: M - Institution: BGF - Relax legal constraints on BGF drawing upon members’ guarantees for fund deficiencies. - Priority: M - Institution: MOF - Integrate BGF into crisis simulation exercises. - Priority: M - Institution: All - Develop BGF recusal policies and policies for provision of support and borrowing. - Recusal Priority: H (For action within the next 12 months) — Institution: BGF/MOF - Support and borrowing policies Priority: M — Institution: BGF _Italic: EXECUTIVE SUMMARY and selected chapters, NORWAY, INTERNATIONAL MONETARY FUND (content derived from _cr15253)._ ### EXECUTIVE SUMMARY ___________________________________________________________________________ 5 ### EXECUTIVE SUMMARY ### Key Findings (paragraphs 1–8) - Arrangements for crisis management, bank and group resolution, and the financial sector safety nets are well developed and tested. Roles, responsibilities, accountabilities and information sharing arrangements among the MOF, the Finanstilsynet (FSA), Norges Bank (NB) and the Banks’ Guarantee Fund (BGF) are generally well defined and functioning. The MOF is, de facto, the lead resolution authority, and the FSA has resolution responsibilities as well. The MOF takes decisions based on the recommendations of the FSA, which are formulated routinely in consultation with NB and often with the BGF. The FSA executes MOF’s resolution decisions. Due to its private sector governance, there are impediments to integrating the BGF fully into the resolutions and crisis preparedness and management frameworks, and further steps should be considered to overcome obstacles in this regard. - The current legal framework provides substantial powers and flexibility to deal with failing or failed banks but needs to be strengthened in several respects. A public-private sector banking law commission is currently working to formulate new legislation to transpose the EU’s Bank Recovery and Resolution Directive (BRRD) in Norwegian law. The commission and government also should take into account the requirements of the Financial Stability Board’s Key Attributes for Effective Resolution Regimes for Financial Institutions, the internationally agreed standard, in drafting the new legislation. Key issues in this respect include ensuring the operational independence of the resolution authority as well as adequate legal protections, adopting the full resolution toolkit set out in the Key Attributes, and distinguishing between going and gone concern resolution. - The FSA has begun to implement a recovery plan requirement for the largest banks. However, the legal and regulatory framework for institution-specific resolution plans, and for the assessment of potential impediments to resolvability that help to underpin them, is not in place; further, substantive work toward developing resolution strategies and plans has not yet been undertaken. Resolution planning for the largest domestic banks should be initiated as soon as possible. - The authorities have not formally articulated their expectations regarding the Norway-specific elements of the recovery and resolution plans of foreign bank subsidiaries and branches. This is of significance to the second, third and fourth-largest banks in Norway by assets. While some policy in this regard is being formulated in the context of the work of supervisory colleges and the Nordea Crisis Management Group, and notwithstanding the roles and ultimate responsibilities of the home authorities, a comprehensive and consistent policy framework should be developed. - The authorities make good use of simulation exercises to enhance crisis preparedness. This includes domestic unilateral, bilateral, and tripartite exercises as well as regional exercises; although it has been several years since a significant regional exercise was undertaken, one is planned for 2017. The BGF is generally not a part of the domestic exercises, and means to better integrate it should be considered. - Both NB and the BGF can provide emergency liquidity assistance, and the BGF can provide solvency support. Relevant policies are in place at NB but not at the BGF. There are no standing arrangements for the provision of resolution funding under the control of the resolution authorities, and one should be considered as part of the new legislation. - The BGF offers a high level of deposit insurance coverage and is well funded. All banks must be members. It is governed by the banking industry (five of seven board members are current bank executives) and operated by the Bankers’ Association. Its private sector character impedes information flows from the FSA, and gives rise to potential conflicts of interest in decisions regarding support to members. The BGF should adopt a clear and comprehensive policy for recusal of board members in such matters. The BGF can borrow and should adopt policies regarding for what purpose and under what conditions it can borrow. At present the BGF does not have a committed back-up funding facility, and efforts to secure one should be pursued. Members must guarantee any deficiency in the size of the fund relative to a legally mandated minimum, but the current legal constraint on BGF’s ability to draw on the guarantee should be relaxed. - See Table 1 for a summary of key recommendations. ### Institutional arrangements and governance (paragraphs 9–17) - Review objective: identify areas where current arrangements may fall short of emerging international best practices and standards and make specific recommendations for alignment, with reference to the FSB Key Attributes for Effective Resolution Regimes for Financial Institutions. - Norway is in the process of revising its legal framework in part to transpose the EU BRRD into Norwegian law; the BRRD is applicable to Norway as a member of the European Economic Area. The BRRD largely sets a minimum level for harmonization of national laws and the report notes that some recommendations may go beyond BRRD specifications. - The Norwegian financial system is dominated by banks, often part of larger financial conglomerates, some based in other Nordic countries. The FSA reported that as of the end of 2013, 18 commercial banks and 106 savings banks were licensed to operate in Norway. In addition, foreign banks and credit institutions operated 42 branches in Norway. - Institutional framework: responsibilities for crisis management, bank resolution and financial sector safety nets are distributed between four bodies: the Ministry of Finance (MOF), the Finanstilsynet (FSA), Norges Bank (NB), and the Banks’ Guarantee Fund (BGF). The MOF takes all resolution decisions and is the lead resolution authority in practice; the FSA also has resolution responsibilities and formulates options and recommendations to the MOF, consulting NB and the BGF as appropriate. The BGF’s private-sector governance (five active bankers on its seven-member board) creates impediments to full integration into crisis preparedness and management. - The institutional arrangements are well established with defined roles, responsibilities, accountabilities and information sharing arrangements; establishing adequate operational independence of the resolution authorities may remain a challenge. Human capital and institutional memory from stresses since the late 1980s are noted as assets. - Constitutional/legal roles: the King has early intervention and resolution powers under the Guarantee Schemes Act (GSA). These powers have been delegated to the MOF. - MOF responsibilities: financial stability in the context of economic policy; propose legislation; issue regulations (some delegations to FSA); powers under Chapter 2 of the Financial Institutions Act (FIA) include authorizing ownership in financial institutions, issuing regulations to promote financial stability, regulating capital requirements, disclosure, systemic risk capital buffer, defining systemically important institutions, conducting prudential regulation including countercyclical capital buffer and liquidity requirements. The wide range of powers means MOF is, in principle, involved in what would be supervisory activities in most jurisdictions; many functions are delegated to FSA though the extent is somewhat ambiguous, particularly for larger banks. - MOF as lead resolution authority: powers delegated from the King under Chapter 4 of the GSA allow MOF to trigger resolutions and, in practice, be the key decision-maker. MOF can order an institution to be placed under public administration (including parent and related firms) and to release an institution from public administration. - FSA responsibilities: supervises banks, insurance companies, pension funds, investment firms, securities fund management and market conduct, stock exchanges and market places, settlement centers and securities registers, real estate agencies, debt collection agencies, external accountants, and auditors. Supervision includes analysis of reported data, on-site inspections, thematic inspections, and monitoring macroeconomic conditions and other developments that may pose risks to financial stability. FSA undertakes analyses of risks facing banks and other institutions and of possible sources of future instability in the financial system. ### Table 1 — Key Recommendations (summary, as presented) - Enhance the legal framework for resolution to comply with the requirements of the Financial Stability Board’s Key Attributes for Effective Resolution Regimes for Financial Institutions, in particular with regard to operational independence of the resolution authorities, legal protections, adoption of the full resolution toolkit, establishing earlier triggers for resolution, cross-border resolutions, and distinguishing going-concern from gone-concern resolution. - Priority: H (For action within the next 12 months) - Institution: MOF/FSA - Begin resolution planning for the largest domestic banks, including assessing potential impediments to resolvability. - Priority: H (For action within the next 12 months) - Institution: MOF/FSA - Formally articulate expectations regarding the Norway-specific elements of the recovery and resolution plans of foreign bank subsidiaries and branches. - Priority: M (For action within the next 24 months) - Institution: MOF/FSA - Establish a source of resolution funding under the control of the resolution authority. - Priority: M - Institution: MOF - Secure a committed back-up funding facility for the BGF. - Priority: M - Institution: BGF - Relax legal constraints on the ability of the BGF to draw upon members’ guarantees of deficiencies in the amount of the fund. - Priority: M - Institution: MOF - Find means to include the BGF in crisis simulation exercises. - Priority: M - Institution: All - Develop policies for recusal of BGF board members. - Priority: H (For action within the next 12 months) - Institution: BGF/MOF - Develop policies for provision of support by the BGF. - Priority: M - Institution: BGF - Develop policies applicable to borrowing by the BGF. - Priority: M - Institution: BGF *Source: EXECUTIVE SUMMARY, NORWAY, INTERNATIONAL MONETARY FUND* ### 18. The FSA has a range of early intervention powers. These are set out under Section 4 of ### 18. The FSA has a range of early intervention powers. These are set out under Section 4 of ### Early intervention powers and resolution responsibilities - The FSA’s early intervention powers are set out under Section 4 of the Financial Supervision Act (FSAct) and Section 2–9(d) of the FIA. - Under Section 5 of the FSAct the FSA has the power to convene meetings of an institution’s board of directors, control committee and supervisory board and to submit proposals at such meetings. - Under the GSA the FSA has early intervention powers and resolution responsibilities that include: - ordering changes in the composition of an institution’s governing bodies (Section 3); - notifying NB and the relevant guarantee fund if it determines that an institution has inadequate capital; - notifying the MOF if it determines that an institution is insolvent; - controlling the financial business of an institution once placed in public administration by the MOF; - appointing and overseeing the administration board and auditor for an institution in public administration; and - approving the final accounts and proposed distribution of proceeds of the liquidation of an institution under public administration. ### Norges Bank (NB) — tasks and powers relevant to resolution - NB’s tasks and responsibilities relevant to resolutions are set out in the Norges Bank Act (NBA). - NB responsibilities and powers include: - monitor developments in the money, credit and foreign exchange markets (Section 1); - inform the MOF when “there is a need for measures to be taken by others than the Bank in the field of monetary, credit or foreign exchange policy” (Section 3); - serve as the lender of last resort to banks and under Section 19 has broad powers to “grant credit on special terms” to banks; - under Section 22, broad powers to lend to “entities other than banks in the financial sector”; - coordination in decision-making with the MOF (Section 1 and in practice). ### Banks’ Guarantee Fund (BGF) - The BGF is the deposit insurer, is funded and governed by banking industry executives, and can provide liquidity and/or solvency support to mitigate the need for or support an official resolution action. - Under Section 2 of the GSA it can provide liquidity and/or capital support to banks directly or via a guarantee. - Governance composition: five of its seven board members are current bank executives; the other two board members are senior officials from NB and the FSA. ### Domestic collaboration and information sharing - There are no restrictions on the exchange of non-public information between NB, the MOF, and the FSA; various legal provisions require information sharing among them. - Under the FSAct, sharing of confidential information by the FSA with NB and the MOF is permitted (Section 7). - Under the NBA, sharing of information with the MOF and the FSA is explicitly exempt from the duty of confidentiality (Section 12). - Under the GSA, the FSA should inform NB when it learns of liquidity or capital problems in a financial institution, and should notify NB and the BGF when a bank is potentially failing. - NB and the BGF are to provide their view as to whether the bank can recover on its own, or can do so with their assistance, and should include details of any assistance they, at their discretion, are willing to offer. - If the FSA believes the bank cannot be restored to health, it must notify the MOF; the MOF may order the bank to be placed under public administration. - Information exchange with the BGF is more limited: - Operating procedures within the BGF generally preclude sharing information with its (private sector) board. - The FSA can inform BGF staff of potential problem institutions; the two institutions’ respective views can be exchanged. - When the BGF visits problem institutions they make reports to the institutions afterwards; these reports are not sent to the FSA but the FSA can request a copy from the institutions directly. The BGF can request copies of FSA supervisory visit reports. ### Institutional meetings and MOUs - Formalized consultation: semi-annual tripartite meetings on financial stability (MOF, FSA, NB) chaired by the Permanent Secretary of the MOF; more frequent meetings when appropriate. - Meetings include presentations by NB and the FSA on economic developments and the state of the markets; programs for dealing with crises and contingency planning sometimes discussed. - Supervisory issues regarding individual banks generally are not discussed. - Regular bilateral meetings: usually quarterly meetings between the MOF and the FSA, the NB and the FSA, and the NB and the MOF. - There is no formal MOU among the three authorities for crisis management or otherwise, and no formal MOU involving the BGF and any of the public authorities. - Bilateral MOUs between NB and the FSA are in place addressing supervisory arrangement for payments and securities settlement and clearing systems where both have supervisory responsibilities. - Policy stance: bias against using inter-agency committee structures for decision-making to preserve clarity regarding lines of authority and accountability. ### A. Cross-Border Arrangements and Coordination - Norway is a party to the treaty on the European Economic Area (EEA) and is required to implement EU directives and regulations governing the financial sector into Norwegian legislation. - Regional and EU multilateral arrangements: - 2003 regional central bank MOU with Denmark, Finland, Iceland, and Sweden on Management of a Financial Crisis in Banks with Cross-border Establishments; activity under the MOU is limited and Contact Group meetings no longer take place. - Since 2010 Norway is a party to the EU MOU on financial stability: Memorandum of Understanding on Cooperation between the Financial Supervisory Authorities, Central Banks and Finance Ministries of the European Union on Cross-border Financial Stability. - 2010 Nordic-Baltic Cooperation Agreement On Cross-Border Financial Stability, Crisis Management and Resolution (Denmark, Finland, Iceland, Sweden, Estonia, Latvia, Lithuania, Norway) providing for a Nordic-Baltic Cross-Border Stability Group (NBSG) and including a “Preliminary Framework for Burden Sharing.” Subgroups established have become mostly inactive; further elaboration of burden-sharing not achieved partly due to lack of consensus. - Nordea Crisis Management Group (CMG): - The CMG is the resolution college for Nordea, designated by the Financial Stability Board (FSB) as a globally systemically important financial institution (G-SIFI). - CMG roles under the FSB’s Key Attributes: oversee production of group-wide recovery plan; prepare group-wide resolution strategy and plan; assess impediments to resolution and remedy them; enter into cross-border cooperation agreements among CMG members. - All three Norwegian authorities participate in the CMG, with the MOF taking the lead. - Cross-border resolution legal framework needs: - Authorities revising legal framework for crisis management should ensure transparent and expedited mechanisms to give effect in Norway to foreign resolution measures consistent with FSB KA 7 (mutual recognition or supportive consistent measures). - Current Norwegian legal framework does not discriminate against creditors on nationality and does not trigger automatic action in Norway based on initiation of resolution in another jurisdiction. - Nordic-Baltic coordination arrangements could serve as a forum to harmonize national legal frameworks to support coordinated resolutions. ### B. Key Recommendations - Determine whether any or all the public authorities would find value in a domestic-level MOU among the three authorities addressing resolution and crisis preparedness related policies and processes, and if so, put one in place. - In the process of transposing the BRRD into local law or otherwise, better integrate and leverage the BGF into the public sector institutional arrangements. ### Crisis preparedness — overview - Key components: recovery planning by banks (particularly systemically important banks), resolution planning by resolution authorities, resolvability assessments, regular testing exercises, and incorporation of lessons learned. - FSB Key Attributes: recovery plans, resolution plans, and resolvability assessments should be updated at least annually, or upon material change within the bank. ### A. Recovery Plans - The FSA has begun to implement a recovery plan requirement for the largest banks. - FSB Key Attributes: systemically important banks are to prepare recovery plans. - EU BRRD mirrors this requirement and is being transposed into Norwegian law. - Trigger and timeline for DNB: - January 23, 2013 EBA Recommendation to home supervisors for 39 large European banks, including DNB, requesting group recovery plans by end-2013. - FSA requested DNB’s group recovery plan by the deadline; DNB submitted the plan in late 2013. - FSA reviewed and requested enhancements in June 2014 (strengthening governance arrangements; expanding information on group structures such as IT services). - DNB submitted a revised plan in August 2014. - Further enhancements soon will be requested by the FSA and a revised plan is expected by August 2015. - Assessment: governance arrangements established by DNB for recovery planning seem sound; recovery plan appears comprehensive; DNB is taking measures to improve the potential effectiveness of its recovery options. - Nordea Bank Norway: - Recovery plan prepared and refined in context of the CMG as part of Swedish Nordea Group recovery plan process. - Initial plan submitted by Nordea in 2012; revised in 2013; third iteration tabled in November 2014. - Supervisory college and CMG will provide formal feedback before the second half of 2015. - Roll-out: - FSA rolled out recovery plan requirements in stages: late 2014 kick-off meeting with Kommunalbanken, and five large regional savings banks (Sparebank 1 Nord-Norge, Sparebank 1 SMN, Sparebank 1 SR-Bank, Sparebanken Vest, and Sparebanken Sor). - All were requested to submit recovery plans by the end of 2015. - FSA relies primarily on EBA guidance to define recovery plan requirements. - No decision yet on expanding recovery plan requirement to other banks; transposition of BRRD will require consideration. - Norwegian branches of major foreign banks: - FSA reviewed recovery plans of Norwegian branches in the context of supervisory colleges for Danske Bank and Handelsbanken; FSA focused on specification of information relating to Norwegian operations. - Stand-alone recovery plans for foreign bank subsidiaries: - MOF and FSA do not require stand-alone recovery plans for local subsidiaries of foreign banks and have not decided whether to require them, including for subsidiaries systemically important in Norway. Decision involves implications for Norway as home supervisor to systemically important subsidiaries in other jurisdictions (e.g., the Baltics). ### B. Resolution Plans and Resolvability Assessments - Legal and regulatory framework for institution-specific resolution plans is not in place and substantive work toward preparing them has not yet been undertaken. - FSB Key Attributes (systemically important banks) and BRRD (in principle for all banks, subject to proportionality) require resolution plans and resolvability assessments. - The MOF has not adopted a policy framework for resolution plans or resolvability assessments, nor initiated substantive work; has not specified the extent of delegation to the FSA. - DNB and supervisory college: - Given DNB’s size, a resolution college will need to be formed soon for DNB. - FSA has initiated discussion with the ECB regarding its participation in the DNB supervisory college. - Nordea Bank Norway: - Resolution planning for Nordea Bank Norway is progressing only as part of the draft resolution strategy for the Swedish Nordea group prepared pursuant to the FSB G-SIFI initiative. - Strategy developed by Swedish authorities and shared in June 2014 with the CMG; the plan was not endorsed by the CMG. - CMG agreed that a working group would be established to further elaborate the strategy; the working group has yet to be formed. - Authorities have not required or undertaken a resolvability assessment of Nordea Bank Norway; Swedish authorities’ resolvability assessment of Nordea group, which in principle should address Norwegian operations, has not been shared with the CMG. - Powers to require structural changes to enhance resolvability: - No explicit power in current legislation to require changes in structure or operations of a bank specifically to enhance resolvability. - Existing legislation provides powers to the MOF, in some cases delegated to FSA, to approve structural changes in banks. - Current policy objectives applied to such approvals are generally consistent with objectives underlying resolvability assessments (e.g., simplicity and transparency). - Other matters relevant to enhancing resolvability (e.g., ensuring operational support essential to continuity of critical functions in resolution) are not part of current policy. ### C. Crisis Management Planning - Tripartite simulation exercises: - Two exercises involving MOF, NB and FSA were undertaken in 2012 and 2013. - Exercises were full-day, included top-level staff and executives, and covered institution-specific and systemic crisis scenarios. - 2012 scenario: solvency problems in a medium sized bank evolving into a systemic crisis. - 2013 scenario: ensuring continued operation of the payment system. - Another tripartite exercise is planned for early 2016. - The BGF is not part of these exercises and is role-played by others. *Italic: Content derived from _cr15253 - 18. The FSA has a range of early intervention powers. These are set out under Section 4 of* ### 42. The FSA and the BGF have undertaken an exercise to help ensure the ability to meet ### _cr15253 - 42. The FSA and the BGF have undertaken an exercise to help ensure the ability to meet ### Deposit payout exercise and Crisis Management Group (CMG) - The FSA and the BGF undertook an exercise in 2014 to help ensure the ability to meet the 5-day deposit payout requirement; the exercise tested and enhanced the capacity of banks and their data processing providers to fulfill the BGF’s automated payout capacity. - A key element—identification of critical functions and core business lines, including cross-border operations—was generally agreed by CMG members. - The Swedish authorities tabled a cross-border cooperation agreement (COAG in FSB Key Attribute parlance) addressing CMG member responsibilities for implementing resolution. - Ambiguity remains as to the extent of delegation, particularly for larger banks. ### Norges Bank (NB) internal simulation exercises - NB uses internal simulation exercises involving multiple units, sometimes involving FSA. - NB’s Crisis Management Group conducted: - a major simulation exercise in 2013 testing ELA policies and procedures and involving the FSA, with a focus on the solvency assessment required under NB policy to enable ELA; a key outcome was a new procedure for providing NB with relevant information to strengthen NB’s independent judgment on solvency; - one major and five minor simulation exercises in 2014. The major 2014 exercise was a one-day event testing NB’s response to severe market-wide funding stress and involved senior management including the governor; the five minor exercises aimed to improve efficiency of analysis and decision-making in crisis situations. ### Regional crisis simulation planning - Planning is underway for a regional cross-border crisis simulation exercise under the auspices of the NBSG, envisioned in 2017. - Given the significant presence of regional banks in Norway, authorities are advised to advocate for more regular conduct of regional exercises. ### Key recommendations on resolution planning (group-wide and information policies) - Begin group-wide resolution planning and resolvability assessments for DNB and the larger saving banks, taking into consideration Appendix I—Annexes 3 and 4 of the Key Attributes for Effective Resolution Regimes. - Define formal policies for recovery planning specific to the Norwegian regulatory and supervisory regime, including policies on the required information content related to local operations of subsidiaries and branches of foreign banks. - Define policies for resolution plans and resolvability assessments for banks (and insurers); including the information required on local operations of subsidiaries and branches of foreign banks, and nature of local resolvability assessments. - Define delegations from MOF to FSA for resolution planning and resolvability assessments. - Consider means to better integrate BGF into crisis simulation exercises. - Consider to advocate more regular conduct of regional simulation exercises. - See Chapter on Resolution Regime for related recommendations on the legal framework underpinning recovery and resolution planning and resolvability assessments. ### Early intervention: framework and current legal basis - Early intervention aims to authorize supervisory action while the bank remains under shareholders and management control; it can include ordinary enforcement powers and special provisions for particular difficulties such as insufficient capital. - The legal framework in Norway combines: - ordinary supervisory powers to require remedial measures as part of ongoing supervision; and - specified additional powers triggered when a bank reaches a certain level of difficulty but before formal resolution is necessary. - Section 4 of the FSAct authorizes the FSA to order a bank “to rectify [any] matter if an institution's bodies have failed to discharge their duties as required by provisions laid down in or pursuant to law, or have acted in breach of the terms of the institution’s license.” - The FIA (section 2–9d) allows the FSA to require banks not in compliance with capital, liquidity, and risk assessment requirements to: - change the organization, management, and control of the businesses and the strategies, processes, policies, and procedures; - maintain a capital requirement higher than the minimum; - change or limit the business; - reduce the risk associated with the business, including products and systems; - reduce the difference in maturity between the institutions’ liabilities and assets; - curb the performance-related remuneration; - devote the profit for the year to increase tier 1 capital adequacy and not to pay out dividend and interest. - Chapter 3 of the GSA contains additional early intervention powers; triggers include inability to meet obligations as they fall due, inability to meet capital adequacy or other prudential requirements, or circumstances causing a serious loss of confidence or losses that will substantially weaken the bank’s financial position. - GSA-authorized actions include calling for audited financials, ordering changes in management or board composition, imposing restrictions or conditions on activities, or convening a shareholders’ meeting. If audited financials raise concerns about loss of capital, a sequence of shareholder meeting steps is required; ultimately the King may unilaterally write down share capital and subordinated debt. ### Recommended revisions to early intervention - Update language in section 4(7) of the FSAct to more clearly express Basel Core Principles (BCPs) expectations that supervisors can address violations of law and regulations as well as unsafe and unsound practices. - Establish clear consequences for banks failing to carry out required corrective measures; consider granting the FSA authority to impose administrative fines if required corrective measures are not implemented. - Consider adding a trigger for placing a bank in public administration based on persistent failure to take corrective action when required. - Key recommendations: - Consider enhancing the existing framework to explicitly broaden the bases for requiring corrective measures to encompass unsafe and unsound practices. - Consider reinforcing corrective measures powers by adding the authority to initiate public administration for failure to implement corrective measures. ### Extraordinary Financial Assistance and Emergency Liquidity Assistance (ELA) - Resolution of systemically important bank failures may require extraordinary financial assistance; such public support should be subject to strict conditionality. - Both NB and the BGF can provide ELA. NB also offers two standing facilities. ### Norges Bank standing facilities – legal basis, collateral, and operations - Legal basis: - Norges Bank Act Section 19: NB may “grant liquidity loans to, make deposits with, and extend credit in other forms to commercial banks and savings banks.” - Section 22: NB has broad powers to lend to “entities other than banks in the financial sector.” - Circular 1/2012: Guidelines for Pledging Securities and Fund Units as Collateral for Loans in Norges Bank requires a bank to enter an “Agreement on the pledging of financial collateral for loans from Norges Bank” to obtain access; this requirement need not apply to potential non-bank borrowers under Section 22. - Collateral eligibility: - NB publishes a list of eligible securities and fund units and the value at which it will lend against each; the list can be updated daily in principle. - Securities issued by foreign issuers, and bonds, notes and short-term paper issued by Norwegian private entities, are subject to credit rating requirements; covered bonds issued under Norwegian law by Norwegian mortgage companies are exempt from the credit rating requirement unless backed by loans secured on property located outside Norway. - Eligibility factors include where the security is listed, volume outstanding, currency of denomination, existence of a government guarantee; additional criteria apply to ABS. - Excluded from eligibility: bonds, notes and short-term paper issued by companies of which the bank (or a bank in the same group) indirectly or directly owns more than 33 percent, collateralized debt obligations, and securities issued by banks and other financial institutions. A bank may pledge securities backed by assets issued by itself or by an entity in the same group (e.g., covered bonds and ABS). Bonds issued by holding companies that largely own insurance companies, covered bonds and other ABS are eligible. - Haircuts: - All collateral is subject to a pre-set haircut; securities are classified into one of four categories for haircut determination. - Haircuts range from 1 percent (e.g., fixed or floating rate government securities rated AAA with a residual maturity of 1 year or less) to 22 percent (for fixed-rate covered bonds of Norwegian issuers that are unrated or have a credit rating A- or lower, and securities issued by private Norwegian issuers with a credit rating of A- down to and including BBB-, with a residual maturity of greater than 7 years). - Post-2008 crisis adjustments: - 2008: NB relaxed eligibility requirements (expanded eligibility to certain money market fund and unit trust investments, lowered certain credit rating requirements and lowered minimum volume outstanding requirements); changes were little utilized and reversed in 2010. - 2010: haircuts were reviewed and all haircuts were raised; notable changes included increasing the haircut on all floating rate securities to recognize counterparty risk as well as market risk, substantially raising the haircut on ABS to 15 percent, and raising the haircut on foreign currency from 3 percent to 5 percent. - As of 2012 NB no longer accepts as collateral bonds issued by banks, with the exception of covered bonds. - Facilities and market operations: - NB operates two standing facilities and conducts market operations. - Intraday facility (intraday D-loan): interest-free loans against collateral to ensure smooth interbank payment settlements; failure to repay converts the loan into an overnight loan (overnight D-loan) which carries an interest rate 100 basis points higher than the key policy rate. - Overnight deposit facility: banks choose their level of overnight deposits; a “tiering” or “quota” system remunerates deposits within each bank’s quota at the key policy rate and deposits above the quota at the reserve rate, which is 100 basis points lower than the key policy rate. The sum of individual quotas currently equals around 45 billion NOK. NB steers overall reserves to be in a range between 30 and 40 billion NOK via market operations. - Market operations are normally conducted through F-loans (supplying reserves) or F-deposits (draining reserves); interest rates are determined by auction with NB deciding the aggregate allotment; banks’ interest rate bids are ranked in descending order and awarded at the submitted interest rate if within the aggregate amount. Maturities on F-loans and deposits are determined by NB and may vary between one day and several weeks. There are no provisions to target F-loans to individual banks, though technically feasible. ### Norges Bank ELA policy (S-loans) - NB’s ELA facility of special loans to individual banks, designated S-loans, is highly flexible and was used extensively in the crisis of the late 1980s and early 1990s. - Current policy (April 2004) stipulates: - ELA is granted only when financial stability may be threatened if support is not provided; - the bank must be solvent; solvency is defined as having capital in excess of the 8 percent total capital requirement; - the interest rate must be above the market rate; - collateral and maturity requirements are flexible. - A recent crisis simulation outcome: NB will seek information directly from banks to make an independent judgment on solvency as a complement to FSA’s assessment. - No bank sought or was granted an S-loan during the recent global crisis. *Source: _cr15253 - 42. The FSA and the BGF have undertaken an exercise to help ensure the ability to meet* ### 63. The S-loan facility for non-banks is rarely used, is therefore not subject to specific ### _cr15253 - 63. The S-loan facility for non-banks is rarely used, is therefore not subject to specific ### Emergency Liquidity Assistance (NB and S-loan/F-loan facilities) - The S-loan facility for non-banks is rarely used, not subject to specific written policy, and was used once during the recent global crisis. - Norges Bank (NB) provided a NOK 5 billion loan to the BGF that in turn lent the funds to a subsidiary of an Icelandic bank for a period of less than one month to arrange the sale of the subsidiary to a local savings bank. - NB secured the loan via liens on BGF assets held outside NB. The BGF recovered the funds from the proceeds of the sale of the subsidiary and repaid NB. - During the recent financial crisis, NB and the Ministry of Finance (MOF) devised a program in which the MOF issued bonds that were swapped with banks in exchange for covered bonds; swapped bonds could be used as collateral for NB lending, sold into the market, or held on balance sheet. Use was limited overall, though at least one large bank made extensive use. - NB provided long-term funding to medium and small banks unable to participate in the swap facility via its F-loan (fixed interest rate) program: - Initial loan tenor: 2-year period, later extended to 3 years. - Access and interest rates determined by auction. - Maximum allocation: NOK 1 billion. ### Legal and operational issues for NB ELA - There is a legal question whether rejection by NB of a request for ELA could lead to a bank challenging the decision. - NB has raised this issue with the MOF as a potential obstacle to efficient crisis-resolution measures; MOF has raised it with the Ministry of Justice. - A change in law is required to clarify the matter; this may be included in revisions associated with transposition of the BRRD. ### Bank Guarantee Fund (BGF) ELA and solvency support - The BGF can provide ELA to ensure a member can fulfill obligations, continue activities, or have activities transferred to another institution. - Under Section 2–12(1) of the GSA, BGF can provide liquidity support to banks directly or via guarantees. - Provision of such support requires the vote of at least five board members, and cannot be granted if the balance of the fund after the provision of support is deemed insufficient to cover its deposit guarantee obligations. - Policies defining the meaning of this restriction and the circumstances under which BGF would grant ELA have not been developed. - This facility was used once in recent years, funded by a loan from NB (as described above). - Solvency support: - No standing arrangements for provision of solvency support under control of the resolution authority (MOF). - Solvency support is available from the BGF as provided in GSA Section 2–12(1)(c), but MOF has no formal authority over its availability or use. - Provision of solvency support requires vote of at least five board members and cannot be granted if the balance of the fund after such provision is deemed insufficient to cover deposit guarantee obligations. - Policies defining the meaning of this restriction and circumstances for granting solvency support have not been developed. - It is envisioned that transposition of the BRRD into national legislation will provide resolution authorities a source of resolution funding. ### Past government solvency support (crisis response) - Tier 1 solvency support was made available by the government during the global financial crisis via the State Finance Fund to provide tier 1 capital to banks considered sound. - Of the NOK 50 billion made available, 28 banks applied for NOK 4.1 billion in hybrid tier 1 capital. - One bank received NOK 27 million in preference shares. - All banks subsequently redeemed the capital and the State Finance Fund was closed. ### Key Recommendations (from the source) - Take further steps to ensure availability of information to NB to make a solvency determination per its policies in the event of a sudden request for ELA, including steps to mitigate the operational challenges in making a timely assessment. - Consider establishing a standing mechanism for resolution funding available to the resolution authorities. - Note: The design of the standing mechanism for resolution funding should be such that any eventual losses are imposed on the industry and not taxpayers. - Define policies addressing the circumstances under which BGF would grant ELA and solvency support. - Define policies interpreting the potential restriction on BGF granting ELA or solvency support due to the inadequacy of the size of the fund. ### Resolution regime: objectives and current practice - Modern resolution regimes aim to permit expeditious and orderly resolution of financial institutions to: - maintain financial stability and ensure continuity of critical financial services and functions; - minimize costs of resolution and avoid unnecessary destruction of value; - ensure losses fall on shareholders and creditors in accordance with the applicable hierarchy of claims, rather than taxpayers. - The Norwegian resolution regime (Chapter 4 of the GSA) provides a basis for a range of resolution techniques through public administration and has been used effectively to resolve failing or failed banks. - Historical practice: - 1990s crisis: bank-owned guarantee funds handled most failures in smaller banks by capital injections and guarantees; government provided capital infusions into three largest banks when crisis became systemic (legislation allowed the King in Council to write down bank shares to zero under certain conditions). - 2008 crisis: failures of an Icelandic bank branch and subsidiary were handled—subsidiary sold quickly with no losses to depositors or BGF; branch placed into public administration and wound down with BGF arranging transfers/redemptions up to NOK 2 million (BGF coverage maximum). Customers with deposits in excess of NOK 2 million avoided loss due to asset values. - Within last five years, authorities dealt with smaller problem banks by requiring management changes without formal FSA action; legal framework authorizes formal action ordering a change in management if necessary. ### Features of current resolution framework and safeguards - The framework provides powers required under FSB Key Attributes (KA), and incorporates a key safeguard: - Authorities can place a distressed bank under public administration (mechanism for restructuring, return to operations, or winding up/liquidation). - The administration board assumes authority of the institution’s board of directors and the general meeting of shareholders. - The administration board can take actions available to the board/shareholders, including transfer of activities to another institution, merger, or recapitalization. - The law incorporates the “no creditor worse off” safeguard via the Creditors Security Act, which sets applicable priority of claims. ### Need for strengthening and transposition of BRRD - The current resolution regime requires strengthening to come into full compliance with the FSB KAs. - Work to transpose the EU BRRD into Norwegian law is underway; authorities plan to produce a public consultation document by the end of this year and complete the draft law next year. - Given banking sector stability and authorities’ confidence in early identification of problems, the revision schedule is extended; however, completing revisions sooner is advisable to avoid deficiencies in a systemic crisis. ### Recommended revisions and key concerns - Operational independence of resolution authorities (FSB KA 2.5): - The MOF has been identified as resolution authority, but the FSA also has specific responsibilities in carrying out resolutions, effectively making FSA a resolution authority as well. - The framework should ensure operational independence of each entity that qualifies as a resolution authority and clearly identify roles and responsibilities. - Making explicit statutory objectives of resolution, in line with FSB KA 2.3, would clarify responsibilities (objectives: financial stability and continuity of important financial services; protection of depositors; avoiding unnecessary destruction of value; minimizing costs of resolution and considering cross-jurisdictional impacts). - MOF role challenge: - MOF’s broad political accountability raises risk of undue political influence on resolution decisions. - If public funds are involved, MOF must have a say; MOF should provide structural arrangements to separate resolution decisions from other MOF responsibilities. - Legal protection and indemnification (FSB KA 2.6): - Law should provide legal protection for resolution authorities, their officers, staff, and agents for good-faith actions in resolution. - Current Norwegian practice (general tort act, "Skadeerstatningsloven") may not meet the FSB KA standard; full compliance may require a specific statutory provision directly protecting employees from lawsuits if the good faith standard is met. - At minimum, clear arrangements for indemnification of employees for costs of lawsuits while acting in good faith should be established. - Triggers for resolution (FSB KA 3.1): - Resolution should be triggered at minimum when a bank is no longer viable or is likely to be no longer viable and well before balance sheet insolvency. - Current framework: the only basis for initiating public administration other than insolvency is failure to meet capital adequacy requirements—focus solely on capital adequacy is too narrow. - Recommendation: adopt a range of quantitative and qualitative triggers to allow early intervention: - Qualitative triggers based on supervisory judgment (e.g., circumstances entailing serious loss of confidence or losses that will substantially weaken or threaten the institution’s financial position). - Quantitative triggers based on prudential requirements (e.g., failure to meet specific capital or liquidity thresholds). - Having a range of triggers provides flexibility to respond to varied circumstances, including cases where viability is unclear (e.g., when significant fraud calls into question reliability of reported information). *Source: _cr15253 - 63.* ### 82. The resolution framework should contain distinct sets of provisions for going concern ### The resolution framework should contain distinct sets of provisions for going concern and gone concern resolution ### Rationale for distinct going concern and gone concern provisions - Blurring going concern and gone concern processes fails to take into account their fundamental differences: - A gone concern resolution (winding up and liquidation) necessitates taking a snapshot of claims as of a specified date, disposing of the assets, and distributing proceeds to claimants in accordance with the order of priority for liquidation. - A going concern resolution involves no fixing of claims and distribution of proceeds and aims to avoid unnecessary destruction of value while maintaining continuity of systemically important financial services and critical functions. - Not clearly establishing robust rules for going concern resolution may undermine the objective of avoiding unnecessary destruction of value. - Maintaining continuity of systemically important financial services and critical functions requires a broad toolkit of resolution techniques through both going concern and gone concern resolutions. - Even in a less litigious jurisdiction, the theoretical possibility of lawsuits during stress situations (e.g., failure of a bank or a full-scale financial crisis) warrants addressing legal risks. ### Specific measures to create distinct rules for going concern and gone concern resolution - Institution continuity and moratorium authority: - The institution should clearly remain open and be able to continue normal business. - Eliminate existing provisions that prohibit acceptance of deposits or payments to depositors and creditors without FSA approval and substitute express authority for the FSA to impose a moratorium on payments if necessary. - Treatment of liabilities arising during administration: - Reconsider the provision that treats deposits and other liabilities established during the period of administration as preferential debt; such preference is unclear if the bank remains open or is resolved through a merger/transfer. - Claims closing date and creditor summons: - The provision for summoning creditors and setting a closing date for claims should not apply to going concern resolutions; that process is normally part of bank closure and wind-up. - Resumption of ordinary operations: - Current provision authorizing resumption of ordinary operations is unnecessary for going concern resolution; instead, establish the procedure for ending public administration and returning the bank to private control, addressing directors and shareholders. - Reduction of claims and bail-in: - Reformulate provisions relating to reduction of claims to establish a robust basis for bail-in as contemplated by the FSB KAs; current wording appears to assume a determination of claims as in liquidation. - Bail-in is a key going concern technique involving write-down and/or conversion of debt to equity while the entity continues to operate. - Moratorium on payments and stay on actions: - Resolution regime should authorize imposition of a moratorium on payments and a stay on actions against the bank once resolution has been initiated. - Current law effectively authorizes moratoriums by prohibiting payments without FSA approval; recommend reversing emphasis and inserting express authority to impose a moratorium when appropriate. ### Additional issues to address in updating the framework - Disparate treatment of similarly-situated creditors: - Amend law to allow disparate treatment of creditors within the same class of priority, as set out in KA 5, if necessary to contain systemic impact or to maximize value for all creditors as a whole. - Suspension of early termination clauses: - Early termination clauses triggered by initiation of public administration should be suspended (while preserving rights to terminate for nonperformance). - For financial contracts, suspension should be limited in accordance with FSB KA 4.3 to avoid undue market disruption. - Ability to act without consent of counterparties and customers: - Resolution authority must have power to implement resolution measures directly, without consent of private stakeholders; legal framework must override shareholders’ consent and contractual prohibitions on assignment. - Bridge banks and Asset Management Companies (AMCs): - Framework should explicitly provide for use of bridge banks and AMCs; address policy issues such as setting a time limit on bridge bank existence and specifying the scope of AMCs’ powers. - Use of BGF funds in purchase and assumption transactions: - Law should clarify that BGF funds may be used to facilitate purchase and assumption (P&A) transactions whereby good assets and insured deposits are transferred to a healthy institution, and cash or liquid assets may be transferred to make the transaction commercially feasible. - Such payment by the deposit insurance fund is justified as protection of insured depositors and likely smaller than direct payouts under a “least cost test.” - Current GSA provision authorizing BGF support does not clearly cover this type of payment. - Role of courts and judicial review: - Explicitly address the role of courts to ensure resolution actions may not be stayed or unwound; if a challenge succeeds, the only remedy for a complainant should be compensation to avoid delays that undermine financial stability. - One court ruling in the 1990s crisis supported this principle; legislating it would provide certainty. ### Legal review, recovery plans, and resolvability assessments - Review potentially applicable laws (e.g., companies’ law and securities law) to ensure their requirements do not create obstacles to effective resolution: - Companies’ law requirements may interfere with write-down of shares or issuance of new shares in recapitalization; streamlining or overriding may be necessary to balance corporate law objectives and financial stability. - Securities law disclosure requirements for corporate transactions may need streamlining to avoid undue delay in resolution. - Legal underpinnings for recovery and resolution plans and resolvability assessments: - The FSA should have authority to require banks and insurance companies to submit satisfactory recovery plans. - The FSA should have authority to require a bank or financial group to restructure if necessary following a resolvability assessment. ### Key Recommendations (summary) - Clearly identify roles and responsibilities of the resolution authority (or authorities) and ensure operational independence. - Provide legal protection from liability for resolution authorities, their officers, and staff for good faith actions in resolution, including the administration board appointed to carry out resolutions. - Establish earlier triggers for resolution relating to the point of non-viability to enable initiation well before balance sheet insolvency. - Establish distinct sets of rules for going concern and gone concern resolutions. - Authorize disparate treatment of creditors in specified circumstances when necessary to contain systemic effects or to maximize value for all creditors as a whole. - Suspend early termination clauses but provide appropriate safeguards for financial contracts. - Ensure ability to transfer assets and liabilities without consent of shareholders or contractual counterparties. - Explicitly authorize use of bridge banks and AMCs. - Clarify that BGF funds can be used to facilitate transfer of insured deposits and good assets to a healthy institution, subject to a “least cost test.” - Ensure courts cannot unwind resolution actions and that remedies for affected parties, if a decision is considered unlawful, are limited to monetary compensation. ### Bank liquidation and insolvency — limitations of general insolvency frameworks - General insolvency frameworks focus on maximizing value for creditors and do not adequately take into account preserving financial stability; ordinary bankruptcy tends to cause rapid and severe deterioration in the value of banking assets. - Even in liquidation, the framework should permit swift transfer of insured deposits and good assets to a healthy institution or bridge bank to minimize destruction of value. ### Current regime concerns for winding up and liquidation of banks - Reliance on general Norwegian bankruptcy law for winding up and liquidation should be reconsidered: - Current framework is an administrative FSA-run public administration process, but application of ordinary bankruptcy provisions “insofar as appropriate” is unclear (who decides appropriateness and on what basis). - Ordinary bankruptcy’s long freeze over balance sheet assets is harmful to banking asset values. - Recommend primary rules for conducting liquidation be specified in the resolution framework itself or adjustments be made to applicable general bankruptcy rules to address financial stability objectives. ### Recommended liquidation provisions and adjustments - Express power to transfer to a third party (including a bridge bank) subsets of assets, liabilities, and combined portfolios (i.e., P&A transactions) in the case of actual insolvency before completion of liquidation. - Authority for the liquidator to organize rapid transfers of assets (e.g., shares in single purpose vehicles responsible for IT and payment system services) or, if not separately incorporated, rapid transfer of relevant assets, contracts, and staff to a solvent acquirer to ensure continuity of functions. - A depositor preference giving depositors a higher claim against assets of the bank than other unsecured creditors. - Consider limiting or excluding a creditors committee to avoid allowing creditors to block necessary resolution actions; the nature of banks and financial stability interest weigh against inclusion of a creditors committee. - Clear triggers for initiation of winding up and liquidation that do not depend on passage of a specified time period or require completion of specified actions by the resolution authority beforehand. ### Key recommendation on liquidation - Revise the current framework for liquidation to permit resolution actions (such as swift transfer of assets and liabilities to a healthy institution) that preserve financial stability, minimize disruption, and avoid unnecessary destruction of value. ### Deposit Guarantee Scheme (DGS) — legal basis, scope, and governance - Legal basis: - The legal framework for Norway’s deposit guarantee scheme is set out in the GSA. The BGF is funded and operated by the industry for the purpose of supporting its customers. - Scope and coverage: - Commercial and savings banks with their head office in Norway must be members of the BGF (Section 2–1). - Branches of banks with head offices in other EEA states may join if their home country DGS does not give branch depositors protection equal to that of the BGF. - At present there are 131 members in total, including 124 bank members and 7 foreign branch members. - There are 16 specialized subsidiaries of foreign banks licensed by FSA to take deposits but not members of the BGF. - Deposits are insured to NOK 2 million (Section 2–10(2)); this is reduced by any amount covered by foreign DGS. - The fund may not cover losses on certain deposits, such as those of companies in the same group as the member institution, or deposits derived from activities judged criminal. - When the BGF makes a disbursement to cover depositor losses, it is subrogated to depositors’ rights (Section 2–13). - It is anticipated that the level of coverage will be reduced to EUR 100,000 in order to comply with EU requirements after a transition period ending January 1, 2019. - At end-June 2014, total deposits eligible for coverage were NOK 2,067 billion, of which NOK 1,163 billion or 56.3 percent were insured. Of total depositors, 98.6 percent were fully insured. - Governance: - The BGF is a special legal entity governed by the industry; the MOF must approve its Articles of Association. - No member has a proprietary right to the BGF’s funds, and no winding-up proceeding may be initiated against it (Section 2–4(2)). - The general meeting of members, held once a year, is its highest authority, and elects five board members and five alternates. - Each member has one representative and one vote. - The full board consists of seven members, including one each from NB and the FSA. - The elected members are appointed for two years. The chairman and deputy chairman are appointed by the board for terms of one year, traditionally from among the five elected directors. - The five elected board members are nominated by the board’s elections committee and usually are CEOs of member banks; traditionally nominees include representatives of DNB and Nordea and a fifth member from smaller independent banks and branches. - Board decisions can be taken by the vote of four members, except that at least five members must vote in favor of a proposal to provide financial support to a bank. - The MOF’s approval of the BGF’s Articles of Association gives it a certain degree of influence over BGF policies and operation. *Source: The resolution framework should contain distinct sets of provisions for going concern and gone concern resolution (IMF country report text).* ### 95. The BGF board has engaged a Business Manager, who is simultaneously and by ### _cr15253 - 95. The BGF board has engaged a Business Manager, who is simultaneously and by ### Governance and conflicts of interest - The BGF board has engaged a Business Manager, who is simultaneously and by tradition the Managing Director of Finance Norway, the Bankers’ Association. The board has delegated the responsibility to manage the BGF to the Business Manager, including emergency powers to grant support of NOK 100 million on a secured basis and NOK 50 million unsecured. - The BGF is run day-to-day by a full-time staff of twelve. Finance Norway provides legal and IT support and additional staffing in times of need. - Internal procedures limit sharing of information on specific banks with private sector board members until a potential decision is required; the board is not informed of the watch-list of problem banks. - The board composition (five current bank executives among seven members) impedes integration into the public safety net and the flow of information between the FSA and the BGF. - No formal board policies for recusal are in place; recusal is evaluated at the outset of each meeting but there are no detailed policies specifying bases for mandatory recusal. - A board decision to provide liquidity or solvency support requires the vote of at least five of the seven board members. - The need for recusal may undermine the board’s ability to function in cases involving medium or large problem banks, since employing institutions may have actual or potential financial interests; alternates may also need to recuse themselves. ### Operations and preparedness - BGF staff actively identifies problem banks and meets semi-annually with the FSA; the BGF maintains its own list of problem banks and, in coordination with FSA, conducts onsite visits. - The BGF automated the deposit payout process to comply with a legal change requiring payouts in five days rather than the prior three months; this capacity is largely in place and is regularly tested and enhanced with FSA. - Investment policy was overhauled and portfolio management outsourced. After liquidity problems in 2008 (resulting in a NOK 5 billion loan from NB), the BGF increased government bonds to close to 75 percent of the fund. - To meet the five-day payout requirement introduced in 2013, the BGF changed its investment policy to limit the fund to investments solely in global government bonds with a credit rating of AA or higher and changed management from active to passive, significantly reducing operating expenses. ### Fund characteristics, funding capacity, and limits - The minimum level of the fund is set in law: the fund must be at least equal to the sum of 1.5 percent of guaranteed deposits plus 0.5 percent of the sum of the measurement bases for the capital adequacy requirements for members. There is no cap on fund size. - If the fund falls short of the minimum, the shortfall must be guaranteed by members, calculated the same way as the annual fee. - Mandatory minimum fund balance for 2014 was NOK 24.3 billion. Actual balance at beginning of 2014 was NOK 26.4 billion. That balance was invested almost entirely in government securities (NOK 26 billion). - Current fund balance represents 2.7 percent of insured deposits. Assuming a reduction in the insured deposit level to the EU standard (EUR 100,000), the fund balance would represent 6.2 percent of insured deposits. This compares with combined required minimum resolution fund and deposit insurance fund balances under the BRRD of 1.8 percent. - The BGF can borrow under its Articles of Association, but there are no written policies specifying purposes and conditions for borrowing. The BGF previously borrowed for liquidity once during the recent crisis (NOK 5 billion from NB). - There is no committed back-up funding facility. Members must guarantee any deficiency relative to the mandatory minimum fund balance, but the BGF may only draw on those guarantees in the amount of 10 percent of the minimum mandatory fund balance in a single year. A request for a committed facility at NB was declined; a previous line of credit with a foreign bank was re-priced and allowed to lapse. ### Deposit insurance premium - The deposit insurance premium is risk-based: - Annual fee basis: 0.1 percent of total guaranteed deposits plus 0.05 percent of the measurement base for the capital adequacy requirement. - For members with tier 1 capital adequacy below 8 percent, the fee is increased by a percentage addition of 4 times the number of percentage points by which the tier 1 capital adequacy falls short of 8 percent. - For a member with tier 1 capital adequacy greater than 8 percent, the fee is reduced by a percentage deduction of 4 times the number of percentage points by which the tier 1 capital adequacy exceeds 8 percent, up to a maximum deduction of 35 percent. - The annual member fee is calculated on the basis of guaranteed deposits and risk-weighted assets at the end of the third and fourth quarter of the calendar year, two years prior to the year of payment and at the end of the first and second quarter of the calendar year, prior to the year of payment. - The prior fee holiday when the fund reached the minimum size was eliminated as of January 1, 2013; members must contribute to the BGF regardless of fund size and there is no provision for fee reduction based on fund size. ### Reimbursement and payout capacity - Deposit payouts can be triggered by: a decision to place a bank under public administration; when the FSA concludes a bank is not in a position to repay deposits; and in any case not later than 21 days after the FSA learns the bank has not repaid deposits that have fallen due. In practice, the MOF decides on all resolutions, which may involve a deposit payout. - Operational capacity to enable a payout period of 5 business days or less is nearly in place; the GSA was amended to provide that “disbursements to depositors in the event of a banking crisis should occur within one week.” The BGF expects to achieve this for all but a few deposit types, for which it will apply to MOF for an exemption. - Disbursements for deposits of branches of foreign banks are to be made only to the extent they are not covered by the home jurisdiction DGS; disbursements for a member's branch in another EEA state cannot exceed the disbursement that would have been made by the most comparable DGS in the branch's host state or cover depositors other than those covered by the host’s scheme. ### Key recommendations (BGF) - Define explicit policies addressing under what conditions board members must recuse themselves, considering both actual and prospective conflicts, including for example the potential that the bank by which they are employed might be a potential acquirer of a bank requiring support subject to board approval. - Define policies addressing conditions under which BGF would or would not consider granting liquidity and solvency support to avert the failure of a member. The criteria in the EU DGS Directive (Article 11) should guide such policies. - Define policies addressing acceptable BGF loan collateral and related criteria. - Define policies addressing for what purposes and under what conditions BGF can borrow. - Seek to formalize a back-up funding arrangement. - Relax the legal restriction on the ability to draw on members’ guarantees in the case of a fund balance deficiency. - See additional recommendations applicable to the BGF in the Chapter on Emergency Financial Assistance above. ### Impact of asset encumbrance on resolutions — summary findings - Asset encumbrance increases the financial cost of resolution to unsecured creditors, depositors, and the deposit insurer; authorities need to limit encumbrance or devise mechanisms to minimize its impact, particularly on depositors and the deposit insurer. - The extent of asset encumbrance has stabilized. At year-end 2014 banks in total had transferred 54 percent of their residential mortgages to mortgage companies funded by covered bonds — 2 percentage points lower than at year-end 2013. - Both the largest banks and the medium-sized banks showed a decline of about 2 percentage points of assets transferred in 2014. - On average, about 23 percent of banks assets have been encumbered via this mechanism. - There are no other substantial means by which banks can encumber assets (e.g., there are no repo markets, no ABS markets), with one small exception noted. ### Table 2: Assets Transferred to Mortgage Companies (In billions of NOK) - Type bank Total assets Assets transferred to mortgage company As a percentage of total assets - Large banks 363784923 % - Medium-sized banks 68415222 % - Smaller banks 3136119 % - Total 4634106223 % ### Recommendation on asset encumbrance and resolution - Include the extent of asset encumbrance among the criteria for setting individual bank’s MREL requirements. *Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15253.pdf* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15253.pdf_