Frequently asked questions

Brief answers to some of the most frequently asked questions about resolution. This information will be updated in response to questions received.

Resolution and its objectives

What is resolution?

Resolution in the financial sector means the restructuring of a financial institution or group which is failing or likely to fail. It is undertaken in the public interest, in order to preserve financial stability and to protect client assets of the institution or group.

What is the main aim of resolution - the rescue or winding-down of the financial institution?

The aim of resolution is to preserve financial stability and ensure the continuity of the critical functions of the financial system. This entails, for example, ensuring unlimited access to deposits and the functioning of payment systems. At the same time, the main task is to provide depositors with the highest protection possible. The aim is therefore not to rescue or wind down the financial institution. Nevertheless, the resolution process may result in the sale of the institution, or parts of its business, or in it being fully or partially wound down.

How is provided the protection of customer deposits at the banks against which the resolution action is initiated by the Resolution Council?

In accordance with § 59 par. 1 of the Act on crisis management in the financial market  bail-in tool can not be applied to covered deposits. Covered deposits (as defined in § 3 par. 3 of the Deposit Protection Act) are deposits, which in the case of insolvency proceedings against bank are paid to their owners by the Deposit Protection Fund (Slovak DGS).

Does resolution apply only to banks?

The current resolution framework applies to banks and to those investments firms that have share capital of at least €730,000, as well as to financial institutions subject to consolidated supervision. The European Commission is at present considering the possibilities for expanding the scope of the resolution framework to include other types of financial institutions, particularly in the areas of insurance, asset management, and financial infrastructure.

Is it no longer possible for a failing bank to be wound down through normal insolvency proceedings?

An insolvent bank may still be subject to insolvency proceedings. Resolution is preferred to insolvency proceedings only where it is necessary in the public interest. If the winding-down of a failing institution in insolvency proceedings were to result in wider economic and financial instability and heavy losses, the preference would be for resolution. An important difference between insolvency and resolution is that resolution proceedings are faster (ideally taking place over the course of a weekend).

Institutional aspects

What is the role of NBS vis-à-vis the Council?

Four members of Resolution Council are NBS staff members. They are appointed to the Council, and may be removed, by the Governor of NBS. NBS is also responsible for providing expertise to the Council and organising its functioning.

Why is the contact telephone number for the Council given as that of NBS?

NBS is responsible for advising and organising the work of the Council, which also includes the Council's communication with media and the public. These tasks are carried out by NBS's Resolution Section, which has been established for this purpose.

Why was the Council established as a separate institution? Will another government agency not be a burden on public finances?

The Council, as the national resolution authority in Slovakia, was established as a completely new public institution. Establishing the Council as a separate institution ensured compliance with the independence requirement and with the requirement that resolution activities be kept separate from the supervision function.

The Council is composed of ten members, drawn from NBS, the Ministry of Finance of the Slovak Republic, and the Debt and Liquidity Management Agency and the State Treasury. Members of the Council are not entitled to remuneration or reimbursement of expenses related to their function. It is the task of NBS to provide expertise to the Council and organise its functioning.

Resolution tools

What does 'bail-in' mean?

The bail-in tool is a resolution tool that allows an institution on the verge of insolvency to be recapitalised without using taxpayers' money. Failing institutions are not to be bailed out with public funds, but instead their losses are to be absorbed first by shareholders and, at a later stage by unsecured creditors (including bondholders), whose claims will be written down or converted into equity (possibly resulting in a change in control). In this way it is possible to prevent the institution (or its part) from being wound down and to safeguard its operation and the assets of its clients.

What is the main difference between the bail-in tool and measures involving a transfer of assets (whether to a private entity, bridge institution, or asset management vehicle)?

In order to maintain the critical functions of a failing institution, resolution may involve the transfer of some or all of the business (including certain liabilities) to a third party. It may therefore happen that the original institution is divided into a 'good' part, which continues functioning under the ownership and administration of a third party, and a 'bad' part, which is wound down under normal insolvency proceedings.

In contrast to this option, the bail-in tool results in the preservation of the original institution, albeit with a change in the shareholders structure and with a reduction in the overall size of the balance sheet owing to the write-down of losses.

National and European systems

What is the relationship between the Resolution Council and the Single Resolution Board?

The Resolution Council is the national resolution authority established in Slovakia. The Single Resolution Board (SRB) is the common resolution authority for all EU Member States participating in the Single Resolution Mechanism (SRM), i.e. the euro area countries and those EU Member States that have opted to participate in the SRM. The Resolution Council cooperates closely with the SRB, mainly with regard to financial institutions incorporated in Slovakia.

Is there a similar resolution system operating elsewhere in the world?

The Act on resolution in the financial market enacts in Slovak law the EU's Bank Recovery and Resolution Directive (BRRD). This Directive harmonises across the EU the approach to resolution in the financial sector. Outside the EU, many countries have begun to set up resolution mechanisms in the wake of the financial crisis, including, for example, the United States and Japan.

Resolution fund and financial contributions

What is the national resolution fund and why was it established? How does it relate to the Deposit Protection Fund?

The national resolution fund ('the fund') is financed by financial contributions from financial institutions, i.e. from banks and certain investment firms. The fund is to be used under strictly defined conditions in the event of resolution.

The fund in Slovakia was established in 2015. The fund's financial means are held in an  account with NBS and do not constitute part of the government budget. The fund is administered by the Deposit Protection Fund.

What is mutualisation?

Mutualisation relates to the use of the fund's financial means for group-level resolution involving an institution incorporated in Slovakia. Mutualisation refers to the use of multiple national resolution funds for this purpose.

And what are compartments?

In addition to the national resolution fund, established in 2015, a Single Resolution Fund (SRF) has begun operation from 1 January 2016. The SRF is a common fund for euro area countries and those EU Member States that have voluntarily opted to participate in the Single Resolution Mechanism.

The participating countries have agreed that for a transition period lasting until 1 January 2024 at the latest, the SRF will be divided into 'national compartments'. Each country involved will transfer to the SRF the financial contributions raised at the national level, which will then be allocated to the corresponding national compartments and used primarily for resolution activities in the given country.

When will banks and investment firms be notified about the amount of their contribution to the resolution fund for 2018? When can banks and investment firms expect their 2018 contribution to the resolution fund to fall due?

Based on Article 3 of the Agreement on the transfer and mutualisation of contributions to the Single Resolution Fund  (SRF), SRB expects that contributions will be due in June 2018.

Adjustments to resolution fund contributions (specified in Regulation (EU) No 806/2014) are due to take effect from 1 January 2016. What impact will they have? Will the Act on resolution in the financial market be amended?

Since Regulation (EU) No 806/2014 is directly applicable in EU Member States - taking precedence over national law - the Act will not have to be amended. In 2015, contributions constituted income of the resolution fund, and from 2016 they will be transferred to the Single Resolution Fund in accordance with the methodology of the Single Resolution Board. 

Minimum requirement for own funds and eligible liabilities (MREL)

What is MREL?

MREL stands for minimum requirement for own funds and eligible liabilities which is an obligation that shall be met at all times by banks and investment firms with share capital exceeding 730,000, in relation to the total liabilities and own funds. 

Why MREL?

The main purpose of MREL is to prevent institutions to structure their liabilities in a way that could limit the  application of bail in tool or other resolution tool. Insufficient MREL would negatively affect loss absorption and recapitalisation capacity of institutions from their own internal financial sources.

Calibration and setting of MREL?

MREL has to be applied by a resolution authority. The amount of MREL should be related to the appropriate resolution strategy envisaged in the resolution plan.  

The amount of MREL is calculated according to Article 31 of the Resolution Law, BRRD, SRMR and Commission Delegated Regulation (EU) No. 1450/2016 of 23 May 2016 supplementing Directive 2014/59/EU of the European Parliament and of the Council with regard to regulatory technical standards specifying the criteria relating to the methodology for setting the minimum requirement for own funds and eligible liabilities.

Legislative changes of MREL?

The legislative changes regarding BRRD and SRMR, which include MREL calibration are in progress. Development of the legislative process and major conclusions will be communicated.