Rationale underlying the Intervention Act
The credit crisis has clearly shown that the old instruments available to DNB, such as the power to petition for application of the emergency regulations or for an adjudication of bankruptcy, are not adequate to ensure the orderly resolution of a financial enterprise in difficulties. Deployment of these instruments may lead to:
- the cessation of the public function fulfilled by financial enterprises. Banks, for instance, manage savings, grant credits and ensure orderly payments. Insurers, for instance, cover risks and manage investments for future pension benefits. The bankruptcy of a financial enterprise may give rise to grave social unrest, especially in cases where a large group of customers is affected.
- impairment of assets and risks of contagion. When the emergency regulations are declared applicable to a financial enterprise of if a financial enterprise is adjudicated bankrupt, the activities performed by that enterprise cease all of a sudden. This has disastrous consequences for the value of the enterprise’s outstanding market positions and may give rise to market, liquidity and credit risks for its counterparties.
If the financial enterprise is relatively large in proportion to the size of the Dutch economy and/or if it is heavily integrated within the Dutch financial system, bankruptcy may even threaten the stability of the Dutch financial system as a whole. In this light, it is necessary for the current set of crisis instruments to be strengthened.
New powers for DNB and the Minister of Finance
The Intervention Act provides for a number of new powers for DNB, which may be exercised once the District Court has agreed to DNB’s judgement that the criterion for intervention has been satisfied. That criterion is that there must be (a) signs of a dangerous development regarding the equity capital, liquidity, solvency or technical provisions of a bank or insurer, and that (b) it is in reason foreseeable that this development will not be reversed sufficiently or in good time. The principal new powers to be assigned to DNB relate to:
- the sale of the problem institution to a private party by transfer of shares;
- the transfer of the problem institution to a private party, with funding from the deposit guarantee scheme;
- Ø the transfer of the problem institution’s assets and/or liabilities to a private party, permitting the problem institution to be split up into a good bank and a bad bank.
In cases where no private party is willing to come to the rescue, a possibility is transfer to a bridge institution, which temporarily takes over the problem institution in whole or in part.
Apart from the ex ante test whether the criterion for intervention by DNB has been satisfied, the Intervention Act relies on the ‘no-creditor-worse-off’ principle: in the event of transfer of part of the assets and/or liabilities, it must be prevented that the problem institution’s creditors are prejudiced.
In addition, the Intervention Act assigns two special powers to the Minister of Finance: the power to intervene in the internal powers of a financial enterprise and the power to expropriate assets and/or liabilities of or securities issued by a financial enterprise. The Minister may decide to do so if there is a grave and immediate threat to the stability of the financial system.
Finally, the Intervention Act provides for the inoperability of certain contractual trigger event provisions that would detract from the new powers of DNB and the Minister of Finance. If the authorities are taking action to effect the orderly resolution of a financial institution, such trigger events would entitle the institution’s counterparties to terminate contracts and withdraw funds lent to the institution. Such action could further impair the problem institution’s liquidity position, potentially undermining an orderly resolution.
The Intervention Act is in line with recent action taken to strengthen the set of crisis instruments in several European countries and with announced policy measures by the European Commission and the Financial Stability Board (FSB).
Orderly resolution of a problem institution
The table below compares DNB’s new intervention measures with the possibilities of application of the emergency regulations or adjudication of bankruptcy. The assessment is based on four common criteria for resolution:
- maintaining depositors’ and policy holders’ confidence;
- 2. maintaining market confidence and confidence of lenders;
- continuity of the problem institution’s vital functions (payments, lending, etc.), and
- reducing moral hazard by confronting shareholders and other suppliers of risk-bearing capital as much as possible with the losses which they would have suffered upon liquidation.