## _cr1673

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### Introduction and systemic vulnerabilities
- Banking system concentrated, dominated by six domestic banks (four of which are relatively large).
- Five of the six largest domestic banks form two groups with combined market share of 60–70 percent of banking system assets.
- Two banks exhibit significant large exposure risk, with aggregate large exposures being well in excess of the banks’ capital.
- These banks have relatively large exposure risk to foreign banks.
- FSAP stress testing suggests potential vulnerability to credit risks, particularly foreign currency denominated loans.
- Effective concentration into two groups creates potential too-big-to-fail problems, compounded by:
  - lack of viable alternatives to government-funded bail-out under existing resolution arrangements;
  - potential for contagion through adverse impacts on depositor confidence despite low inter-bank exposures;
  - low deposit insurance cap of MDL 6,000.

### Institutional and regulatory progress
- National Committee for Financial Stability (NCFS) established by Government Decision No. 449 on June 2, 2010.
  - Chaired by the Prime Minister; members: the Government; the Parliamentary Commission on Economy, Budget and Finance; the National Bank of Moldova (NBM); Ministry of Finance (MOF); Ministry of Economy (MOE); Deposit Guarantee Fund (DGF); National Commission for Financial Markets (NCFM).
  - Technical Sub-Committee chaired by the Minister of Finance develops coordinated crisis resolution approaches.
  - An NCFS Memorandum of Understanding (MOU) sets guiding principles of crisis resolution and member responsibilities.
- NBM has an internal committee on financial stability chaired by the Deputy Governor.
- Law on Financial Institutions (FIs) provides NBM powers including: place a bank under special supervision; give binding directions in certain circumstances; appoint a special administrator; under special administration undertake recapitalization, transfer of business, and prepare for liquidation.
- Deposit insurance arrangements under DGF provide protection to retail depositors at a very low level (MDL 6,000).

### Legal powers — key deficiencies
- Uncertainty in scope of NBM’s direction power, including ability to require business-structure changes to enable least-cost resolution (e.g., pre-positioning for separation of systemically important business functions).
- NBM can require removal of directors and management but cannot appoint directors or management of its choice unless a special administrator has been appointed.
- Direction and special administration powers apply only to banks and do not extend to subsidiaries or to a holding company, impeding timely and effective group resolution where important functions are in subsidiaries or holding companies.
- Limitations prevent transfer of essential business functions from a subsidiary or holding company to a bridge bank or bridge entity; moratorium protection under administration does not apply to subsidiaries or holding companies.
- Uncertainty over scope and protections associated with business transfer powers:
  - unclear whether transfer covers all contractual rights and obligations, IT systems, and staffing contracts;
  - unclear whether transfers trigger counterparties’ rights of termination given no statutory override.
- Appointment of a special administrator could trigger termination or close-out of financial contracts and exercise of set-off rights by counterparties.
- Major concern: risk of judicial challenges to exercise of resolution powers (directions, appointment of administrator, restructuring under administration). Courts can suspend exercise of powers for up to three months (with potential extension), posing a serious threat to effective resolution.
  - Government has submitted a Bill to Parliament to address this issue (as understood by the mission).
- Significant doubt that NBM has legal authority to establish a bridge bank or other legal entity for resolution (such as an asset management vehicle).
- Uncertainty whether MOF could establish legal entities for resolution purposes (bridge entities or asset management vehicles).
- No specific power to implement a bail-in.
- Absence of statutory powers to enable the Government to provide funding, guarantees or indemnities quickly (without Parliamentary approval).
- Likely greater weaknesses in resolution powers for financial market infrastructure (FMI), insurers, and other FIs (no analysis undertaken but weaknesses suspected).

### Crisis resolution strategies and procedures — gaps
- NBM has developed guidance on some elements of crisis resolution but:
  - no resolvability assessments for systemically important banks;
  - no bank-specific resolution plans developed;
  - no internal guidance for rapid solvency assessment (NBM stress testing methodology could assist);
  - substantial deficiency in generic planning for resolution options (no plans for least-cost recapitalization strategies for systemically important banks, bridge bank resolution, or management of group resolution).
- Little consideration of legal processes and pre-positioning needed for NBM to take collateral over parts of a bank’s loan portfolio quickly.
- Urgent need for a contingency plan covering:
  - solvency assessment;
  - systemic impact assessment of different resolution options;
  - resolvability assessments;
  - bank-specific resolution plans.
- Cross-agency responsibilities:
  - MOF must develop plans for recapitalization arrangements if government-funded or underwritten, and for provision of government funding and guarantees;
  - DGF must review and strengthen plans for prompt pay-out and access to MOF funding if required, and have back-up arrangements if a paying agent bank is unable to perform;
  - NCFM must develop resolution plans for insurers and other FIs under its jurisdiction.
- All plans must be coordinated bilaterally and multilaterally under NCFS.

### Coordination, capacity building, and contingency testing
- NCFS MOU provides a helpful coordination framework; Technical Sub-Committee has made some progress.
- FSAP found relatively little substantive coordination between agencies on crisis resolution planning details.
- Need for much more intensive, regular inter-agency coordination at senior management and working levels.
- No resolution-oriented MOUs between NBM and home resolution authorities of foreign banks operating in Moldova; no MOUs between MOF and counterparts in parent bank jurisdictions—impedes cross-border coordination and implementation of home/host authority plans.
- Capacity-building gaps:
  - no senior-level workshops on crisis resolution strategies and procedures among NCFS members;
  - no significant staff training on resolution;
  - no agency had undertaken a crisis simulation exercise at the time of FSAP.
- Recommendation: hold a cross-agency crisis resolution exercise as soon as practicable and develop a program of regular crisis testing within and across agencies via NCFS; consider cross-border resolution testing later.

### Deposit Guarantee Fund (DGF) observations and pay-out readiness
- Deposit insurance cap: MDL 6,000.
  - Assessment: MDL 6,000 is low by international standards and unlikely to provide depositor confidence in a banking crisis.
- Current fund level insufficient to make pay-outs for more than just small banks or one medium-sized bank; would be unable to fund multiple small/medium bank failures or a large failure without recourse to MOF or NBM.
- No pre-established funding line currently exists to enable rapid provision of funds.
  - Recommended: DGF, MOF and NBM establish a credit line with the MOF and possibly with the NBM.
- Current target period for pay-out: around one month following the closure of a bank.
  - Recommendation: aim to achieve pay-outs within one week of bank closure if possible.
  - Preferable option: immediate depositor access by transferring accounts to another bank or a bridge bank (deposit account transfer).
- Requirements to enable prompt pay-out or transfer:
  - pre-positioning in banks to quickly identify eligible deposit accounts and the amount protected per deposit on a “single customer view” basis;
  - development of procedures to exercise business transfer powers to transfer protected balances, accounts and associated IT systems to another bank or bridge bank.
- High priority attention recommended for DGF and NBM to develop these capabilities.

### Recovery planning, resolvability assessments, and resolution options
- NBM has required banks to establish recovery plans, updated annually; banking supervision undertakes regular reviews (extent unclear).
- NBM should ensure recovery plans are comprehensive and cover all recovery steps to restore a bank to financial soundness and minimize risk of depositor and counterparty confidence loss.
- NBM should assess viability of each bank’s recovery plan including range of recovery actions and pre-positioning by banks (documentation for issuance of capital instruments, indicative term sheets, capital-raising strategies, documentation for underwriting, documentation for making loan portfolios available for liquidity support).
- NBM to determine actions needed by itself and other government agencies to assist banks (fast-tracking regulatory approvals, exemptions from stock exchange listing requirements, legal processes for repo or collateralization of loan portfolios, temporary dispensations from prudential requirements).
- Private capital options: reassess major shareholders’ willingness to inject capital; preferred capital injection in cash or government securities; alternatives must be low-risk assets situated in Moldova and controllable by a special administrator if necessary.
- Testing: banks should be required to conduct regular testing of recovery plans under NBM oversight; regular testing could be part of crisis simulation exercises.

- Resolvability assessments for systemically important banks should include:
  - mapping principal businesses, core functions, corporate structures;
  - assessing extent of outsourcing of key operational functions and robustness of Service Level Agreements;
  - identifying obstacles to separating systemically critical functions in resolution;
  - assessing retention of FMI membership and bridge entity access to FMIs;
  - assessing whether administrator appointment or business transfer could trigger events of default by counterparties.
- Bank-specific resolution plans should be prepared for systemically important banks, informed by resolvability assessments and NBM-developed resolution strategies.

- Resolution strategy and plan options include:
  - Recapitalization: rights issues, issue of shares to government or another party, preference shares or subordinated debt meeting Basel III loss absorption requirements.
  - Bridge bank: transfer of all business or just systemically important business; impaired assets could be left in failed bank, transferred to bridge bank at market value, or to an asset management vehicle.
  - Bail-in: existing law does not permit bail-in; possible approach includes retaining tranches of debt in failing bank and transferring remaining debt and assets to a bridge bank; bridge bank capitalized by issuance of shares to government and new capital injection; creditors left in failed bank compensated if required under “no creditor worse off” principle.
  - Transfer of deposit book and unimpaired assets to another existing bank at market value—consider mechanics, IT functionality, and funding needed if asset-liability shortfalls arise.

### Resolution funding arrangements
- Current resolution funding available via the DGF is constrained by provision that it must not contribute funding to a greater level than it would have applied in paying out depositors of the failing bank.
- DGF insufficiently funded for a large bank failure or systemic crisis.
- Funding options to consider:
  - providing the DGF with a funding line from the MOF which is pre-appropriated (up to a defined limit) so MOF does not need budget approval when funding is drawn down;
  - providing the DGF with a back-up funding line via the NBM, indemnified by the Government, up to a defined limit;
  - providing the Government with a pre-appropriated source of resolution funding for capital support, guarantees and indemnities, without need for budget approval, subject to a defined funding cap;
  - establishing a statutory authority for the Government to levy banks and other FIs to recover government funding outlays that cannot be recovered through sale of the failed bank’s assets;
  - establishing a pre-funded financial stability fund, contributed to by all banks and other FIs, potentially on a risk-based fee basis.
- Consider costs and benefits of each option and combinations to establish robust resolution funding arrangements that minimize taxpayer risk and enable recovery of government outlays.

### Identified legal amendment priorities (paragraph 30, sub-paragraphs a–o)
- (a) NBM should have unequivocal power to appoint directors and management of its choosing without shareholder or board consent and without invoking special administration; same power should apply to holding companies and subsidiaries.
- (b) Amend Law on FI to ensure NBM can require group companies to provide continuity of essential services or procure from third parties.
- (c) Grant specific statutory power to issue directions to subsidiaries and holding companies similar in scope to those for banks.
- (d) Extend special administration power to all subsidiaries and holding companies of a bank.
- (e) Amend Law on FI to enable special administrator to by-pass shareholder consent and override shareholder rights to permit merger, acquisition, sale of substantial business, recapitalization or other restructuring.
- (f) Consider empowering NBM to implement business transfer outside special administration.
- (g) Clarify that business transfer includes all legal rights and obligations (IT, staff contracts, etc.).
- (h) Amend Law on FI to enable transfer of some or all business of a bank holding company and subsidiaries to another entity, including a bridge entity.
- (i) Amend Law on FI to make clear appointment of a special administrator or transfer of business are not grounds for contract termination or set-off, provided contracts are being honored within a specified period (e.g., 48 hours).
- (j) Explicitly empower NBM to establish a bridge bank rapidly (e.g., within 24 hours), including fast-tracking registration and licensing powers and powers to appoint/remove directors of the bridge entity.
- (k) Explicitly empower NBM to establish entities for resolution purposes (asset management vehicles) with powers to appoint/remove directors and issue binding directions.
- (l) Include an explicit bail-in power in Law on FI, designed with regard to FSB Key Attributes and the EU Bank Recovery and Resolution Directive.
- (m) Adjust moratorium arrangements: avoid long moratoria; consider a 48-hour moratorium suspension of counterparty actions with protections where contracts are transferred to an appropriately capitalized bridge bank.
- (n) Consider adopting a “no creditor/shareholder worse-off” provision to lower risk of judicial challenges and enable ex post compensation consistent with Key Attributes.
- (o) Change law to limit risk of judicial challenge suspending resolution actions while providing scope for ex post compensation under the “no creditor/shareholder worse off” principle.

### Coordination, testing, and cross-border arrangements
- Domestic NCFS initiatives suggested:
  - ensure NCFS meets regularly (e.g., quarterly or six monthly) with a defined agenda to oversee financial crisis preparedness;
  - ensure Technical Sub-Committee meets regularly (e.g., monthly or quarterly) to coordinate development of a comprehensive contingency plan;
  - require Technical Sub-Committee to report progress to NCFS at each meeting;
  - establish NCFS working groups (bank resolution strategies chaired by NBM; resolution funding chaired by MOF; FMI resolution co-chaired by NBM and NCFM; insurance/other FI resolution chaired by NCFM);
  - establish bilateral MOUs between NBM and MOF, NBM and DGF, MOF and NCFM, and NBM and NCFM;
  - hold regular workshops on resolution strategies and crisis simulation exercises across NCFS agencies at least every two years.
- Crisis simulation exercises:
  - priority: NCFS hold a crisis exercise as soon as practicable.
  - The World Bank agreed to assist with a crisis exercise being held in April 2014 (as noted in the source).
  - Debrief immediately after the exercise recommended; regular internal and cross-agency exercises thereafter.
- Cross-border crisis resolution:
  - No resolution-specific MOUs between NBM and foreign counterparts, or MOF and foreign counterparts, for foreign banks operating in Moldova—vulnerability.
  - Suggested actions: develop MOUs for foreign banks with substantial operations in Moldova; consider resolution frameworks covering early warning, solvency assessment, recovery plans, resolvability assessments, resolution plans, and communications; consider occasional cross-border crisis simulation exercises.

### Key recommendations (preserve original numbering, priority, and timeframe)
- 1. Amend Law on NBM to include in Article 4 an objective relating to the promotion of financial stability. Suggested NBM develop and publish information on interpretation and meeting of the objective.
  - Priority: High
  - Timeframe: As soon as possible.
- 2. Amend Law on NBM to include in Article 5 a specific reference to NBM being responsible for resolution of banks and set out objectives for resolution.
  - Priority: High
  - Timeframe: As soon as possible.
- 3. Amend Law on NBM to make NBM, its staff and agents immune from liability for actions taken (or omitted) in bank resolution, except where actions were taken in bad faith or with fraudulent intent. Similar provisions for DGF and NCFM.
  - Priority: High
  - Timeframe: As soon as possible.
- 4. Amend or clarify Law on NBM to empower NBM to issue indemnities to staff and agents to protect against legal costs, fees and other expenses from legal processes or judicial challenges. Similar for DGF and NCFM.
  - Priority: High
  - Timeframe: As soon as possible.
- 5. NBM, as lead resolution authority, strengthen crisis resolution capacity: develop comprehensive guidance, hold senior-level workshops, undertake regular staff training and internal and cross-agency crisis resolution exercises. MOF, NCFM and DGF to take similar actions.
  - Priority: High
  - Timeframe: As soon as possible.
- 6. NBM strengthen its Committee on Financial Stability by establishing a working group from all relevant NBM areas to develop detailed crisis resolution plans.
  - Priority: High
  - Timeframe: As soon as practicable.
- 7. NBM, MOF, NCFM and DGF develop closer working relationships to establish more coordinated cross-agency crisis resolution arrangements.
  - Priority: High
  - Timeframe: As soon as practicable.
- 8. NBM take stronger leadership role in NCFS Technical Sub-Committee on strategic and technical bank crisis resolution planning; consider Governor chairing the Sub-Committee and Head of MOF replacing Minister of Finance as member.
  - Priority: High
  - Timeframe: As soon as practicable.
- 9. NBM ensure banks are pre-positioned to facilitate collateralised loans secured against their loan portfolios to enable rapid provision of liquidity in a crisis.
  - Priority: High
  - Timeframe: As soon as practicable.
- 10. Consider legal amendments recommended in paragraph 30 of the Technical Note for resolution powers; assess as priority for bank resolution powers and lower priority for insurers, savings institutions and FMIs.
  - Priority: High for bank resolution powers. Medium—for other FI resolution powers.
  - Timeframe: As soon as practicable for bank resolution powers. Medium-term for other FI resolution powers.
- 11. NBM review each bank’s recovery plan regularly, assess pre-positioning requirements, require regular recovery plan testing and reporting to NBM.
  - Priority: High
  - Timeframe: As soon as practicable.
- 12. NBM develop resolvability assessments for all systemically important banks and keep these under regular review.
  - Priority: High
  - Timeframe: As soon as practicable.
- 13. NBM review existing arrangements to detect emerging stress in banks and in the financial system, with a view to establishing a reliable set of early warning indicators.
  - Priority: High
  - Timeframe: As soon as practicable.
- 14. NBM review its framework for undertaking solvency assessments of banks, particularly under acute time pressure, and undertake periodic testing of these arrangements.
  - Priority: High
  - Timeframe: As soon as practicable.
- 15. NBM, in close liaison with MOF, DGF, NCFM and NCFS, develop bank resolution strategies, including a contingency plan for major bank failures and other threats; develop bank-specific resolution plans.
  - Priority: High
  - Timeframe: As soon as practicable.
- 16. NCFM, in close liaison with NCFS, MOF and NBM, develop insurance and other FI resolution strategies and resolution plans; institution-specific plans for at least large FIs.
  - Priority: Medium
  - Timeframe: Medium-term.
- 17. Coordination and cooperation arrangements between NCFS agencies be considerably strengthened both multilaterally and bilaterally.
  - Priority: High
  - Timeframe: As soon as practicable.
- 18. NBM establish MOUs with home supervisory and resolution authorities for banks operating in Moldova and develop coordinated cross-border crisis resolution approach with MOF. Consider similar approach for other FIs with significant cross-border operations.
  - Priority: Medium
  - Timeframe: Medium-term.
- 19. NBM and NCFS undertake regular crisis simulation exercises to test and refine bank crisis resolution strategies and bank-specific plans; NCFM undertake similar exercises for non-bank FI crisis resolution strategies.
  - Priority: High
  - Timeframe: As soon as practicable.
- 20. MOF and NCFS assess crisis resolution funding arrangements, potentially including pre-appropriated funding lines via MOF and possibly a financial stability fund, to establish robust, cost-effective funding arrangements that can be drawn on quickly and provide the option of recovering taxpayer-funded outlays.
  - Priority: High
  - Timeframe: As soon as practicable.

*Prepared by Geof Mortlock, Consultant to the IMF (as presented in the EXECUTIVE SUMMARY).*

### EXECUTIVE SUMMARY __________________________________________________________________________ 4

### _cr1673 - EXECUTIVE SUMMARY __________________________________________________________________________ 4

### Introduction and Systemic Vulnerabilities
- The banking system is concentrated, dominated by six domestic banks (four of which are relatively large).
- The six banks de facto appear to form two groups of banks (involving five of the six largest domestic banks) having combined market share of 60–70 percent of banking system assets.
- In two banks there is significant large exposure risk, with aggregate large exposures being well in excess of the banks’ capital.
- These banks also have relatively large exposure risk to foreign banks.
- FSAP stress testing suggests a potential vulnerability to credit risks, particularly as regards foreign currency denominated loans.
- The effective concentration into two groups gives rise to a potential too big to fail problem, compounded by:
  - lack of viable alternatives to government-funded bail-out under existing resolution arrangements;
  - potential for contagion through adverse impacts on depositor confidence despite low inter-bank exposures;
  - low deposit insurance cap of MDL 6,000.

### Institutional and Regulatory Progress
- Establishment of the National Committee for Financial Stability (NCFS) on June 2, 2010, to promote a coordinated framework for responding to a financial crisis.
- NCFS is chaired by the Prime Minister and comprises: the Government; the Parliamentary Commission on Economy, Budget, and Finance; the National Bank of Moldova (NBM); Ministry of Finance (MOF); Ministry of Economy (MOE); Deposit Guarantee Fund (DGF); and the National Commission for Financial Markets (NCFM).
- A Technical Sub-Committee chaired by the Minister of Finance develops a coordinated approach to financial crisis resolution.
- An NCFS Memorandum of Understanding (MOU) sets out guiding principles of crisis resolution and member responsibilities.
- NBM has an internal committee on financial stability chaired by the Deputy Governor.
- Law on Financial Institutions (FIs) provides NBM with powers: place a bank under special supervision; give binding directions in certain circumstances; appoint a special administrator; once under special administration, undertake options including facilitating recapitalization, transferring business, and preparing for liquidation.
- Deposit insurance arrangements under DGF provide protection to retail depositors at a very low level.

### Legal Powers — Key Deficiencies
- Uncertainty in the scope of NBM’s direction power, including ability to require business structure changes to enable least-cost resolution (e.g., pre-positioning for separation of systemically important business functions).
- NBM can require removal of directors and management, but cannot appoint directors or management of its choice unless a special administrator has been appointed.
- Direction and special administration powers apply only to banks and do not extend to subsidiaries or to a holding company, impeding timely and effective group resolution where important functions are in subsidiaries or holding companies.
- Limitations prevent transfer of essential business functions from a subsidiary or holding company to a bridge bank or bridge entity; moratorium protection under administration does not apply to subsidiaries or holding companies.
- Uncertainty over scope and protections associated with business transfer powers:
  - unclear whether transfer covers all contractual rights and obligations, IT systems, and staffing contracts;
  - unclear whether transfers trigger counterparties’ rights of termination given no statutory override.
- Appointment of a special administrator could trigger termination or close-out of financial contracts and exercise of set-off rights by counterparties.
- Major concern: risk of judicial challenges to exercise of resolution powers (directions, appointment of administrator, restructuring under administration). Courts can suspend exercise of powers for up to three months (with potential extension), posing a serious threat to effective resolution.
  - It is understood that the Government has submitted a Bill to Parliament to address this issue.
- Significant doubt that NBM has legal authority to establish a bridge bank or other legal entity for resolution (such as an asset management vehicle).
- Uncertainty whether MOF could establish legal entities for resolution purposes (bridge entities or asset management vehicles).
- No specific power to implement a bail-in.
- Absence of statutory powers to enable the Government to provide funding, guarantees or indemnities quickly (without Parliamentary approval).
- Likely greater weaknesses in resolution powers for financial market infrastructure (FMI), insurers, and other FIs (no analysis was undertaken but weaknesses are suspected).

### Crisis Resolution Strategies and Procedures — Gaps
- NBM has developed guidance on some elements of crisis resolution but:
  - no resolvability assessments for systemically important banks;
  - no bank-specific resolution plans developed;
  - no internal guidance for rapid solvency assessment (NBM stress testing methodology could assist);
  - substantial deficiency in generic planning for resolution options (no plans for least-cost recapitalization strategies for systemically important banks, bridge bank resolution, or management of group resolution).
- Little consideration of legal processes and pre-positioning needed for NBM to take collateral over parts of a bank’s loan portfolio quickly.
- Urgent need for a contingency plan covering:
  - solvency assessment;
  - systemic impact assessment of different resolution options;
  - resolvability assessments;
  - bank-specific resolution plans.
- Responsibility is cross-agency:
  - MOF must develop plans for recapitalization arrangements if government-funded or underwritten, and for provision of government funding and guarantees;
  - DGF must review and strengthen plans for prompt pay-out and access to MOF funding if required, and have back-up arrangements if a paying agent bank is unable to perform;
  - NCFM must develop resolution plans for insurers and other FIs under its jurisdiction.
- All plans must be coordinated bilaterally and multilaterally under NCFS.

### Coordination and Capacity Building — Needs
- NCFS MOU provides a helpful coordination framework; Technical Sub-Committee has made some progress.
- FSAP found relatively little substantive coordination between agencies on crisis resolution planning details.
- Need for much more intensive, regular inter-agency coordination at senior management and working levels.
- No resolution-oriented MOUs between NBM and home resolution authorities of foreign banks operating in Moldova; no MOUs between MOF and counterparts in parent bank jurisdictions—this impedes cross-border coordination and implementation of home/host authority plans.
- Capacity-building gaps:
  - no senior-level workshops on crisis resolution strategies and procedures among NCFS members;
  - no significant staff training on resolution;
  - no agency had undertaken a crisis simulation exercise at the time of FSAP.
- Recommendations: hold a cross-agency crisis resolution exercise as soon as practicable and develop a program of regular crisis testing within and across agencies via NCFS; consider cross-border resolution testing later.

### Key Recommendations (Table 1)
- The recommendations below preserve the original numbering, priority, and timeframe exactly as presented.

1. The Law on NBM be amended to include in Article 4 an objective relating to the promotion of financial stability. If this amendment is made, it is suggested that the NBM could usefully develop and publish information on how it interprets financial stability and seeks to meet the statutory objective.
   - Priority: High
   - Timeframe: As soon as possible.

2. The Law on NBM be amended to include in Article 5 a specific reference to the NBM being responsible for the resolution of banks. The Law should set out the objectives for resolution—e.g., maintaining the stability of, and confidence in, the financial system, and protecting depositors.
   - Priority: High
   - Timeframe: As soon as possible.

3. The Law on NBM be amended to make the NBM, its staff and agents immune from liability for any actions taken (or omitted to be taken) in the context of bank resolution, other than where the actions (or decisions not to act) were taken in bad faith or with fraudulent intent. Similar provisions should be provided in the laws governing the DGF and NCFM and their staff and agents.
   - Priority: High
   - Timeframe: As soon as possible.

4. The Law on NBM be amended or clarified to empower the NBM to issue indemnities to its staff and agents to protect them against legal costs, fees and other financial expenses which could be incurred in connection with legal processes or judicial challenges. A similar provision should be included in the laws governing the DGF and the NCFM.
   - Priority: High
   - Timeframe: As soon as possible.

5. The NBM, as lead resolution authority, strengthen its capacity for crisis resolution, including through the development of more comprehensive guidance on crisis resolution processes and procedures, holding senior-level workshops on scenario-based resolution strategies, undertaking regular staff training and holding internal and cross-agency crisis resolution exercises. The MOF, NCFM and DGF also need to take similar actions to build their policies and procedures for crisis resolution pertaining to their respective areas of responsibility.
   - Priority: High
   - Timeframe: As soon as possible.

6. The NBM strengthen its Committee on Financial Stability by establishing a working group drawn from all relevant areas of the NBM to develop detailed crisis resolution plans that facilitate a whole-of-central bank approach to crisis resolution.
   - Priority: High
   - Timeframe: As soon as practicable.

7. The NBM, MOF, NCFM and DGF develop closer working relationships with each other, with a view to establishing more closely coordinated cross-agency crisis resolution arrangements.
   - Priority: High
   - Timeframe: As soon as practicable.

8. The NBM take a stronger leadership role in the NCFS Technical Sub-Committee with respect to the strategic and technical aspects of bank crisis resolution, including in respect of developing a whole-of-government approach to contingency planning, more comprehensive guidance on bank resolution options, capacity building cross-agency workshops and holding regular cross-agency crisis resolution exercises. It may be appropriate for the Governor of the NBM to chair the NCFS Technical Sub-Committee and for the Minister of Finance to cease to be a member of the Sub-Committee (being replaced by the Head of the MOF).
   - Priority: High
   - Timeframe: As soon as practicable.

9. The NBM ensure that banks are pre-positioned to facilitate collateralised loans secured against their loan portfolios to enable rapid provision of liquidity in a crisis.
   - Priority: High
   - Timeframe: As soon as practicable.

10. Consideration be given to the legal amendments recommended in paragraph 30 of this Technical Note in respect of resolution powers. These should be assessed as a matter of priority for bank resolution powers. As a lower priority, a similar review of resolution powers should be undertaken in respect of the powers available to resolve insurers, savings institutions and FMIs.
   - Priority: High for bank resolution powers. Medium—for other FI resolution powers.
   - Timeframe: As soon as practicable for bank resolution powers. Medium-term for other FI resolution powers.

11. The NBM review each bank’s recovery plan on a regular basis, assess pre-positioning requirements and require each bank to conduct regular recovery plan testing and to report the results of the testing to the NBM.
   - Priority: High
   - Timeframe: As soon as practicable.

12. The NBM develop resolvability assessments for all systemically important banks and keep these under regular review.
   - Priority: High
   - Timeframe: As soon as practicable.

13. The NBM review its existing arrangements to detect emerging stress in banks and in the financial system, with a view to establishing a reliable set of early warning indicators.
   - Priority: High
   - Timeframe: As soon as practicable.

*Prepared by Geof Mortlock, Consultant to the IMF (as presented in the EXECUTIVE SUMMARY).*

### 14. The NBM review its framework for undertaking solvency

### 14. The NBM review its framework for undertaking solvency assessments of banks, particularly under acute time pressure, and undertake periodic testing of these arrangements

### Key recommendations (extracted)
- Recommendation 14: The NBM review its framework for undertaking solvency assessments of banks, particularly under acute time pressure, and undertake periodic testing of these arrangements.
  - Priority: High
  - Timeframe: As soon as practicable.
- Recommendation 15: The NBM, in close liaison with the MOF, DGF, NCFM and NCFS, develop bank resolution strategies, including a contingency plan for dealing with major bank failures and other threats to financial system stability. Bank-specific resolution plans should be developed in conjunction with this.
  - Priority: High
  - Timeframe: As soon as practicable.
- Recommendation 16: The NCFM, in close liaison with the NCFS, MOF and NBM, develop insurance and other FI resolution strategies and resolution plans. Institution-specific resolution plans should be developed for at least the large FIs.
  - Priority: Medium
  - Timeframe: Medium-term
- Recommendation 17: The coordination and cooperation arrangements between the NCFS agencies be considerably strengthened both multilaterally and bilaterally, having regard to the suggestions in this Technical Note.
  - Priority: High
  - Timeframe: As soon as practicable.
- Recommendation 18: The NBM establish MOUs with home supervisory and resolution authorities for the banks operating in Moldova, and develop a coordinated approach to cross-border crisis resolution, in close coordination with the MOF. To the extent relevant, consideration should be given to developing a coordinated approach to cross-border crisis resolution for other FIs with significant cross-border operations.
  - Priority: Medium
  - Timeframe: Medium-term
- Recommendation 19: The NBM and NCFS undertake regular crisis simulation exercises to test and refine bank crisis resolution strategies and bank-specific resolution plans, with banks and other external parties being role-played by NBM and other NCFS member agency staff. The NCFM, in liaison with the NCFS, undertake similar crisis simulation exercises to test and refine non-bank FI crisis resolution strategies.
  - Priority: High
  - Timeframe: As soon as practicable.
- Recommendation 20: The MOF and NCFS undertake an assessment of crisis resolution funding arrangements, potentially including pre-appropriated funding lines via the MOF, and possibly a financial stability fund, with a view to establishing robust, cost-effective funding arrangements that can be drawn on quickly in a crisis, and which provide the option of recovering any taxpayer-funded outlays.
  - Priority: High
  - Timeframe: As soon as practicable.

### Institutional roles and existing framework
- The FSAP mission assessed bank crisis resolution arrangements; findings are relevant to insurance, FMI and other FIs though not formally assessed.
- The National Committee for Financial Stability (NCFS):
  - Established by Government Decision No. 449 on June 2, 2010.
  - Chaired by the Prime Minister; members include: the Government; the Parliamentary Commission on Economy, Budget and Finance; the NBM; Ministry of Economy (MOE); MOF; DGF; and NCFM.
  - A Technical Sub-Committee chaired by the Minister of Finance exists to develop coordinated crisis resolution approaches.
  - An MOU has been established setting guiding principles of crisis resolution and member responsibilities.
- The NBM has an internal committee on financial stability chaired by the Deputy Governor to coordinate crisis resolution policies and procedures.

### NCFS responsibilities (as per decree and MOU)
- Managing an extraordinary financial crisis.
- Defining a systemic crisis.
- Presenting to the Government proposals for policies and procedures on deposit protection and bank recapitalization.
- Establishing communications between authorities in managing a systemic financial crisis.
- Issuing official statements in the crisis resolution process.
- Restoring credibility in the banking system.
- Agreeing on strategic responsibilities of each member agency in crisis resolution.
- Proposing measures to respond to an extraordinary financial crisis.

### Observed gaps in coordination and preparedness
- Practical coordination between agencies on crisis resolution is limited; meetings have been mainly high-level rather than focused on detailed contingency planning.
- Need for closer bilateral and multilateral coordination with an emphasis on detailed contingency plans.

### NBM as resolution authority — powers and deficiencies
- Powers under the Law on FIs and Law on NBM include the ability to:
  - Place a bank under special supervision.
  - Issue binding directions to a bank (e.g., remove directors/management, suspend activities).
  - Appoint a special administrator who can assume control of a bank.
  - Implement restructuring while under special administration, including recapitalization or transfer of business.
  - Provide liquidity support to a solvent bank.
  - Provide liquidity support to the banking sector in domestic and foreign currency (FX support subject to monetary policy and FX reserve constraints).
- Significant legal gaps and deficiencies exist that impede effective, rapid resolution:
  - Missing powers such as bridge bank powers and powers of bail-in limit resolution options.
  - The Law on NBM does not explicitly state financial stability or bank resolution objectives:
    - Article 4 (objectives) makes price stability the primary objective and states: “without prejudice to the primary objective, the National Bank shall promote and maintain a financial system based on market principles and shall support the general economic policy of the state”.
    - The Law on NBM is silent on an explicit objective of promoting financial system stability and lacks a formal statement of responsibility for resolution of financial distress in banks.
    - Recommendation: Consider amending Article 4 to include specific objectives such as maintaining financial stability and protecting depositors.
  - Article 5 (tasks of the NBM) is silent on the role of NBM as a resolution authority; suggested amendment to include explicit reference to the bank resolution function.

### Legal protections and staffing concerns
- Current legal protections for the NBM, its staff and agents involved in resolution are limited.
  - Risk of legal actions, including significant civil or criminal sanctions, could impede resolution actions.
  - Potential reluctance of NBM staff to accept roles (special administrator, liquidator) or for external parties to act as advisers.
  - Strong recommendation: Amend the Law on NBM to make the NBM, its staff and agents immune from liability for actions taken (or omitted) in the context of bank resolution, except where actions were taken in bad faith.
  - Consider authority for NBM and DGF to issue indemnities to staff and agents covering legal costs, fines or fees arising from legal processes.

- Capacity issues:
  - NBM has expertise in supervision and financial stability but appears to have underinvested in bank crisis resolution capacity.
  - No resolvability assessments have been undertaken for systemically important banks.
  - No bank-specific resolution plans prepared.
  - Internal guidance focuses mainly on procedural arrangements and liquidation; little guidance on alternative resolution options (least-cost bridge bank, bail-in) or banking group resolution implementation.
  - Suggested NBM actions:
    - Develop resolvability assessments for systemically important banks.
    - Prepare resolution plans for each systemically important bank.
    - Develop comprehensive guidance on resolution options, including bail-in and bridge bank options.
    - Establish capacity-building program: scenario-based workshops for senior management, staff training, and crisis simulation exercises.

### MOF and DGF roles and recommended actions
- MOF responsibilities:
  - Advise Government on fiscal implications and funding needs of bank recapitalization or government support.
  - Determine form and terms of any government funding.
  - Ensure DGF can access additional funding if shortfalls arise.
  - Advise on policies to minimize or avoid public funding needs, including bail-in options.
  - Suggested MOF actions:
    - Focus on pre-arranged rapid funding mechanisms and terms to minimize taxpayer risk.
    - Build capacity via scenario-based workshops, staff training and crisis simulation exercises in coordination with NBM and NCFM.

- DGF observations and recommendations:
  - Current deposit insurance cap: MDL 6,000.
    - Assessment: MDL 6,000 is low by international standards (after adjusting for factors like per capita GDP) and unlikely to provide depositor confidence in a banking crisis.
  - Current fund level insufficient to make pay-outs for more than just small banks or one medium-sized bank; would be unable to fund multiple small/medium bank failures or a large failure without recourse to MOF or NBM.
  - No pre-established funding line currently exists to enable rapid provision of funds.
    - Recommended: High priority for DGF, MOF and NBM to establish a credit line with the MOF and possibly with the NBM.
  - Pay-out speed:
    - Current target period for pay-out: around one month following the closure of a bank.
    - Recommendation: Aim to achieve pay-outs within one week of bank closure if possible.
    - Preferable option: Immediate depositor access by transferring accounts to another bank or a bridge bank (deposit account transfer).
    - Requirements to enable prompt pay-out or transfer:
      - Pre-positioning in banks to quickly identify eligible deposit accounts and the amount protected per deposit on a “single customer view” basis.
      - Development of procedures to exercise business transfer powers to transfer protected balances, accounts and associated IT systems to another bank or bridge bank.
    - High priority attention recommended for DGF and NBM to develop these capabilities.

### Overall assessment and priorities
- Moldova has many foundational elements for bank resolution (NCFS, legal powers in Law on FIs, DGF), but substantial gaps remain in law, coordination, capacity and funding preparedness.
- High-priority actions include:
  - Remedying legal gaps (bridge bank and bail-in powers; explicit NBM resolution objectives and tasks).
  - Strengthening legal protections and indemnities for resolution actors.
  - Establishing rapid contingency funding arrangements (credit lines, possible financial stability fund).
  - Increasing DGF capacity and raising practical readiness for rapid pay-outs or deposit transfers (single customer view, business transfer procedures).
  - Conducting resolvability assessments, drafting bank-specific resolution plans for systemically important banks, and running regular crisis simulation exercises with NCFS agencies and relevant market participants.

*Source: IMF Technical Note on crisis resolution arrangements for the Republic of Moldova (excerpts provided).*

### 22.      There is also a need to strengthen the understanding of bank resolution issues and

### _cr1673 - 22.      There is also a need to strengthen the understanding of bank resolution issues and

### Strengthening understanding and capacity at the NBM
- The NBM should invest more resources in undertaking regular workshops for senior management on crisis resolution, including scenario-based “walk-through” exercises to identify how particular crisis scenarios would be responded to by the NBM.
- Workshops should be held on a regular basis to help senior management refine their approach and be better prepared for a crisis response.
- Wider staff training on crisis resolution should accompany workshops as part of a regular program on crisis resolution capacity-building.

### Crisis simulation program
- The NBM should undertake a regular program of crisis simulation exercises involving all relevant senior management (including the Governor) and lower-level staff.
- The program should test different elements of crisis resolution, including:
  - solvency assessment (under acute time pressure);
  - systemic impact assessment, including the systemic impact of different resolution options;
  - scenario-based responses to different types of bank crisis;
  - appointment of a special administrator and determination of the nature of the directions the NBM would give to the administrator;
  - design and implementation of least-cost recapitalization;
  - establishment of a bridge bank and transfer of business to a bridge bank;
  - provision of liquidity support to solvent banks experiencing liquidity difficulties;
  - coordination with other agencies (especially the MOF and DGF) and the NCFS;
  - cross-border coordination;
  - management of public communications, both reactive and proactive.

### Whole-of-central bank approach to planning
- Crisis response involves most parts of a central bank: banking supervision, a dedicated crisis resolution team, payment system staff, legal advisers, communications staff, staff providing liquidity to banks, monetary policy staff, and possibly FX reserves managers.
- A whole-of-bank approach is essential for crisis resolution planning.
- Although the NBM committee on financial stability involves senior-level staff from most areas, it does not sufficiently involve lower-level staff; there is scope to improve coordination and cross-fertilization of ideas.
- It is suggested that a working-level cross-department committee be established to facilitate detailed crisis resolution planning, with close oversight by the financial stability committee.

### Coordination with MOF, DGF, NCFS and other agencies
- Much closer coordination is needed between the NBM, MOF, NCFM and DGF on crisis resolution planning; current bilateral and multilateral coordination is insufficient.
- The NBM needs to work closely with the MOF to assess and develop least-cost crisis resolution options, including bail-in and the possibility of a dedicated financial stability fund or pre-approved resolution funding from the government.
- The NBM and MOF must coordinate on design of the recapitalization process, terms of capital instruments, funding arrangements for government-funded recapitalization, and the form and nature of government control over supported banks.
- The NBM and DGF must have a close working relationship on plans to prepare a bank for liquidation to enable rapid and accurate pay-out, including pre-positioning to calculate deposit balances on a single customer view basis.
- Contingency coordination is required if the DGF’s paying agent bank is in difficulty at the time of pay-outs.
- Public communications must be closely coordinated between the NBM and DGF.

### Leadership in NCFS Technical Sub-Committee
- The NBM, as lead resolution authority, needs greater leadership in the NCFS Technical Sub-Committee on technical and strategic crisis resolution planning.
- Suggested NBM actions include developing a crisis resolution contingency plan, enhancing cross-agency coordination, organizing cross-agency workshops, and running crisis simulation exercises.
- It may be appropriate for the Governor of the NBM to chair the Technical Sub-Committee, and for the Minister of Finance to cease membership so the Sub-Committee has a more technical focus; the Head of the MOF would appropriately be a member.

### Liquidity provision and collateral procedures
- The NBM can provide liquidity to a bank taking collateral under the Law on NBM.
- In most crisis situations, the NBM would likely need to take collateral in the form of parts of a bank’s loan book.
- The NBM should ensure legal procedures are in place to take collateral over a bank’s loan portfolio rapidly (e.g., within 24 hours) and that banks are pre-positioned to facilitate this.
- Pre-identification of bank assets for collateral and development of portfolios of loans eligible for sale and repurchase for liquidity support purposes are suggested.

### Resolution powers — identified gaps and recommended legal amendments (paragraph 30, sub-paragraphs a–o)
- The Law on FI provides NBM with a range of powers but contains many gaps and deficiencies that would impede resolution speed, options, and certainty; these should be addressed as a matter of high priority.
- (a) Appointing directors and management:
  - NBM can remove directors and management, but cannot require immediate appointment of specified persons as directors or management (bypassing shareholder consent) unless a bank has been placed into special administration.
  - Recommendation: NBM should have unequivocal power to appoint directors and management of its choosing without shareholder or board consent and without invoking special administration; same power should apply to holding companies and subsidiaries.
- (b) Maintaining continuity of essential services:
  - Law on FI not sufficiently clear that NBM can ensure continuity of essential services by requiring group companies to provide services to the entity in resolution, successor, or acquiring entity, or procure services from unaffiliated third parties.
  - Recommendation: Amend Law on FI to put these matters beyond doubt.
- (c) Issuing directions to bank subsidiaries and holding companies:
  - Current law gives no ability to issue directions to subsidiaries or a holding company of a bank; relying on indirect direction risks delays or obstruction.
  - Recommendation: Grant specific statutory power to issue directions to subsidiaries and holding companies similar in scope to those for banks.
- (d) Appointing a special administrator to bank subsidiaries and a holding company:
  - NBM cannot appoint a special administrator to subsidiaries or a holding company; this could impede resolution where essential functions are located there.
  - Recommendation: Extend special administration power to all subsidiaries and holding companies of a bank.
- (e) By-passing shareholder approval:
  - Law requires special administrator to seek shareholder approval for some resolution elements; law unclear on whether special administrator can override shareholders, risking delays and judicial challenges.
  - Recommendation: Amend Law on FI to enable special administrator to by-pass shareholder consent processes and override shareholder rights to permit merger, acquisition, sale of substantial business, recapitalization or other restructuring.
- (f) Transfer of business outside special administration:
  - Law empowers transfer of business from a bank in special administration but not outside special administration.
  - Recommendation: Consider empowering NBM to implement a business transfer without first appointing a special administrator.
- (g) Scope of business transfer power:
  - Law unclear whether business transfer includes all legal rights and obligations, including IT functionality and staff contracts.
  - Recommendation: Clarify in law that transfer includes all legal rights and obligations.
- (h) Transferring the business of subsidiaries and holding companies:
  - No power to transfer business of a bank holding company or subsidiaries to another entity.
  - Recommendation: Amend Law on FI to enable transfer of some or all business of a bank holding company and subsidiaries to another entity, including a bridge entity.
- (i) Risk of contractual termination and set-offs:
  - Law does not make clear that appointment of a special administrator or transfer of business are not grounds for contract termination or set-off under financial contracts, creating risk of counterparties exercising termination rights.
  - Recommendation: Amend Law on FI to make clear these acts do not constitute grounds for termination or set-off, provided that, within a specified period (e.g., 48 hours) the financial contracts in question are being honored in accordance with their contractual terms.
- (j) Bridge bank powers:
  - No explicit power to enable NBM to establish a bridge bank.
  - Recommendation: Amend law to explicitly empower NBM to establish a bridge bank rapidly (e.g., within 24 hours), possibly fast-tracking joint stock company registration procedures, and permit NBM to issue a license immediately if satisfied on financial capacity, governance, risk management and operational arrangements even if not all normal licensing requirements met.
  - Powers would include appointing/removing directors and management of the bridge entity, establishing/amending its constitution, and issuing binding directions.
- (k) Establishing other entities for resolution purposes:
  - No explicit provision empowering NBM to establish a company to acquire other business of a bank or its subsidiaries (e.g., asset management vehicle).
  - Recommendation: Make explicit that NBM can establish such entities, with powers to appoint/remove directors and management, establish/amend constitution, and issue binding directions.
- (l) Bail-in:
  - No provision in Law on FI to implement a bail-in (conversion or write-down of specified debt tranches).
  - Recommendation: Include an explicit bail-in power in Law on FI, designed with regard to FSB Key Attributes and taking into account the EU Bank Recovery and Resolution Directive.
- (m) Moratorium:
  - Existing moratorium associated with appointment of a special administrator is fixed at two months.
  - Concern: A lengthy moratorium risks counterparties declining derivatives business with Moldovan banks; derivatives contracts often enable close-out upon appointment of an administrator.
  - Suggested compromise: Appointment of a special administrator or business transfer does not constitute grounds for close-out/termination, and a moratorium of up to 48 hours suspends counterparty actions, with right of close-out/termination restored after 48 hours if contracts are not being honored; law should prevent close-out or set-off where, within 48 hours, contracts have been transferred to an appropriately capitalized bridge bank and will continue to be honored.
- (n) No creditor/shareholder worse-off:
  - Law on FI inadequately provides that no creditor or shareholder will be rendered worse off under resolution than under conventional liquidation.
  - Recommendation: Consider adopting a provision to give effect to this principle to lower risk of judicial challenges and enable ex post compensation consistent with the Key Attributes.
- (o) Risk of judicial challenge and suspension of resolution actions:
  - Many NBM powers can be challenged in court, risking suspension of powers for several months and impeding speed and certainty of resolution.
  - Strong recommendation: Change law to exempt resolution powers from such challenge, while providing scope for ex post compensation under the “no creditor/shareholder worse off” principle.

### Applicability to other financial institutions
- Many powers discussed for banks are also applicable to resolution of insurers, non-bank deposit-taking institutions, non-bank credit providers and FMIs, with appropriate modifications.
- Authorities should consider applicability of paragraph 30 matters to other categories of FI.

### Recovery planning, resolvability and resolution planning
- The NBM has required banks to establish recovery plans, which are required to be updated annually.
- The banking supervision department of the NBM undertakes regular reviews of recovery plans, but the extent of review is unclear.
- The NBM should take all reasonable steps to ensure recovery plans are comprehensive and cover all recovery steps needed to restore a bank to financial soundness in a credible timeframe that minimizes risk of loss of depositor and counterparty confidence.

*Source: _cr1673 - 22.      There is also a need to strengthen the understanding of bank resolution issues and (PDF chapter/section).*

### 33.      In this context, the NBM should assess the viability of each bank’s recovery plan. This is

### _cr1673 - 33.      In this context, the NBM should assess the viability of each bank’s recovery plan. This is

### Assessment of bank recovery plans and pre-positioning
- The NBM should assess the viability of each bank’s recovery plan in terms of:
  - the range of recovery actions covered (including recapitalization, access to private liquidity support, parent support where applicable, and stakeholder communications);
  - the pre-positioning undertaken by banks to ensure the plan can be actioned.
- Important pre-positioning items banks should prepare:
  - documentation for issuance of capital instruments;
  - indicative term sheets for capital instruments;
  - capital-raising strategies;
  - documentation needed for underwriting of capital issuance;
  - documentation for making loan portfolios available for liquidity support.

### Regulatory and government facilitation for recovery plan implementation
- The NBM should determine actions needed by itself and other government agencies to assist banks, including:
  - fast-tracking regulatory approvals for capital issuance;
  - exemptions from normal stock exchange listing requirements to seek shareholder approval for capital-raising;
  - legal processes in the NBM to enable entrance into sale and repurchase agreements or taking collateral via a bank’s loan portfolio;
  - temporary dispensations from prudential requirements (e.g., temporary relaxation of capital requirements and large exposure limits for a defined period pending implementation of recovery actions).

### Private sources of capital injection
- The NBM should re-assess ability and willingness of major shareholders to inject further capital, including assessment of:
  - quality and location of assets underlying any capital injection the NBM would consider acceptable.
- Preferred form of capital injection:
  - cash consideration or government securities;
  - alternatives must be low-risk assets legally and operationally situated in Moldova (controllable by a special administrator if necessary).
- Other private capital options to consider:
  - sale of shares in the distressed bank to another local bank, a foreign bank, or an institutional investor.
- Constraints to ensure when facilitating private funding:
  - avoid unduly exacerbating market concentration of banks;
  - avoid increasing contagion risk;
  - avoid undermining corporate governance and risk management of the bank in question.

### Testing of recovery plans
- Banks should be required by the NBM to conduct regular testing of recovery plans under NBM oversight.
- Regular testing could be part of an ongoing program of crisis simulation exercises to enhance capacity to respond to a range of crisis scenarios.

### Resolvability assessments (systemically important banks)
- The NBM should undertake regular resolvability assessments of all systemically important banks to identify least-cost resolution options meeting system stability objectives.
- Resolvability assessments should include:
  - assessing principal businesses and services core to franchise value and critical financial/economic functions;
  - mapping essential and systemically important functions and corporate structures, and assessing how legal/corporate structures relate to principal business lines and critical/core functions;
  - assessing extent key operational functions (payment operations, trade settlements, custodial functions) are outsourced and robustness of Service Level Agreements for continuity to bridge institutions or surviving parts of a resolved bank;
  - assessing obstacles to separating systemically critical functions in resolution and ensuring their continuity;
  - assessing whether the bank being resolved could retain membership of FMIs and whether a bridge entity could access FMIs;
  - assessing arrangements to facilitate transfer of payment operations to a bridge institution or third party purchaser;
  - assessing whether appointment of an administrator or transfer of business could trigger events of default by counterparties.

### Bank-specific resolution plans and resolution strategies
- Bank-specific resolution plans should be prepared for at least the systemically important banks, informed by resolvability assessments and NBM-developed resolution strategies.
- Resolution strategy and plan options to include:
  - Recapitalization:
    - rights issue to existing shareholders, possibly underwritten by the government on commercial terms;
    - issue of shares direct to the government or another party with appropriate dilution of existing shareholder value based on bank valuation;
    - if government funding is used, consider terms to minimize taxpayer risk, ensure appropriate dilution of existing shareholders, and facilitate cost-effective timely sale of government shareholding;
    - options might include preference shares or subordinated debt which meets Basel III loss absorption requirements.
  - Establishing a bridge bank under temporary government ownership:
    - transfer all business or just systemically important business to the bridge bank;
    - impaired assets could be left in failed bank, transferred to the bridge bank (at market value), or transferred to an asset management vehicle (at market value);
    - plan should consider form and terms of capital injection to protect taxpayer risk, dilute existing shareholders consistent with assessed value, and facilitate subsequent sale.
  - Implementing a bail-in:
    - existing law in Moldova does not permit a bail-in in terms of directly converting debt to equity or writing down debt;
    - possible approach: retain some tranches of debt (e.g., subordinated debt and senior unsecured bonds, and potentially uninsured deposits) in failing bank and transfer remaining debt and assets to a bridge bank;
    - bridge bank capitalized through issuance of shares to the government, funded via net asset position from partial debt transfer and new capital injection;
    - creditors left in failed bank would be compensated if required under the “no creditor worse off” principle.
  - Transfer of deposit book and unimpaired assets to another existing bank willing to assume the business at market value:
    - consider mechanics and pre-positioning needed, including required payments and IT functionality;
    - consider funding needed if there is a shortfall in assets to match liabilities transferred.

### Coordination and testing of resolution strategies and plans
- Resolution strategies and bank-specific plans need close liaison between the NBM and MOF, with input from the DGF and NCFM.
- Plans should be coordinated across the NCFS in accordance with the established MOU.
- Strategies and plans should be subject to workshopping, training, and regular testing through crisis simulation exercises to become “living” documents.

### Resolution funding arrangements
- Current resolution funding available is via the DGF, constrained by provision that it must not contribute funding to a greater level than it would have applied in paying out depositors of the failing bank.
- The DGF is insufficiently funded for any large bank failure or a systemic banking crisis.
- The Government, in liaison with the NCFS, needs to assess funding options to facilitate effective crisis resolution with objectives to minimize taxpayer risk, ensure commercially priced and structured government funding, exhaust private sector funding options first, and recover government outlays from those who benefit.
- Resolution funding options to consider include:
  - providing the DGF with a funding line from the MOF which is pre-appropriated (up to a defined limit) so MOF does not need budget approval when funding is drawn down;
  - providing the DGF with a back-up funding line via the NBM, indemnified by the Government, up to a defined limit;
  - providing the Government with a pre-appropriated source of resolution funding for capital support, guarantees and indemnities, without need for budget approval, subject to a defined funding cap;
  - establishing a statutory authority for the Government to levy banks and other FIs (as appropriate) to recover government funding outlays that cannot be recovered through sale of the failed bank’s assets;
  - establishing a pre-funded financial stability fund, contributed to by all banks and other FIs (as appropriate), potentially on a risk-based fee basis.
- Consideration should be given to costs and benefits of each option and combinations thereof to establish robust resolution funding arrangements.

### Domestic coordination arrangements (NCFS)
- The NCFS provides a sound basis for cross-agency coordination but has not been used as effectively as it could be for detailed resolution coordination and planning.
- Suggested initiatives to strengthen domestic coordination:
  - ensure NCFS meets regularly (e.g., quarterly or six monthly) with a well-defined agenda to oversee and coordinate financial crisis preparedness;
  - ensure the Technical Sub-Committee meets regularly (e.g., monthly or quarterly) and is tasked with coordinating development of a comprehensive contingency plan for crisis resolution;
  - require the Technical Sub-Committee to report comprehensive progress to the NCFS at each NCFS meeting;
  - establish NCFS working groups to progress different elements of crisis resolution, each required to report regularly to the Technical Sub-Committee, such as:
    - bank resolution strategies (chaired by the NBM);
    - resolution funding (chaired by the MOF);
    - FMI resolution (co-chaired by the NBM and NCFM);
    - insurance/other FI resolution (chaired by the NCFM).
  - establish bilateral MOUs between NBM and MOF, NBM and DGF, MOF and NCFM, and NBM and NCFM to set out responsibilities and basis for bilateral coordination and cooperation;
  - hold regular workshops on resolution strategies between member agencies;
  - hold a crisis simulation exercise across all NCFS agencies at least every two years.

### Crisis simulation exercises
- Crisis exercises help test and refine guidance on resolution options and build capacity within and across agencies.
- Recommendation: NCFS give priority to holding a crisis exercise as soon as practicable.
  - The World Bank agreed to assist with a crisis exercise being held in April 2014.
  - It is suggested a debrief for all participants be held immediately after the exercise or on the following day to draw out key lessons.
- After an initial exercise, NCFS and each agency should undertake regular crisis simulation exercises—some within each agency and some across the NCFS—with CEOs of all NCFS member agencies participating.

### Cross-border crisis resolution
- Need development of cross-border crisis resolution arrangements, particularly if foreign banks grow in market share or Moldovan banks establish subsidiaries/branches abroad.
- Currently no resolution-specific MOUs between the NBM and foreign counterparts, or MOF and foreign counterparts, for foreign banks operating in Moldova—this is a vulnerability.
- Suggested actions:
  - develop MOUs for foreign banks with substantial operations in Moldova to firm up expectations of each agency’s responsibilities in cross-border resolution;
  - consider developing resolution frameworks covering responsibilities and actions on early warning systems, solvency assessment, systemic impact assessment, recovery plans, resolvability assessments, resolution plans, and communications arrangements;
  - consider holding occasional cross-border crisis simulation exercises, particularly for foreign banks with substantial market presence in Moldova.

*Source: Republic of Moldova — International Monetary Fund (excerpt).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr1673.pdf_