Bank resolution tools
DNB has four tools that it can use to take a failing bank into resolution.
In a bail-in the bank’s rescue is paid for by the shareholders and creditors. This is in contrast to a bail-out, where the government uses taxpayers' money to save the bank. A bail-in consists of two steps:
Step 1: passing on losses to shareholders and creditors.
DNB turns first to the shareholders to cover the losses. Their shares then become worthless. If this fails to cover all losses, the bank's creditors are expected to step in This involves the full or partial write-off of their claims on the bank. The losses borne by all shareholders and creditors in resolution must not exceed those that would be incurred in bankruptcy. This is known as the No Creditor Worse Off (NCWO) principle.
Step 2: ensuring that the bank has sufficient capital to continue its activities.
DNB converts part of the bank's remaining debts into shares, in order to generate sufficient capital to continue its activities. The creditors whose debts are converted effectively become the bank's new shareholders. This treatment cannot be applied to all of a bank’s debts. Savings deposits up to EUR 100,000 are never converted, for example.
In its Communication on the use of the bail-in tool, DNB presents a simplified, hypothetical case illustrating how it intends to use it for a bank. See the Communication
DNB may sell all or part of the bank. This does not require shareholders’ approval. The sale may include a transfer of the shares, or only, for example, certain assets and liabilities, such as savings deposits and mortgages. In this way customers retain access to their payment and savings accounts and the buyer can continue the bank’s critical functions. DNB ensures that the sale process is as competitive and transparent as possible.
DNB may transfer all or part of a failing bank to a “bridge bank” that is wholly or partly publicly owned. The bridge bank is an independent entity with its own banking licence. If part of the bank is transferred, the remainder of the old bank goes bankrupt. A bridge bank is a temporary solution pending a sale to a market participant. In the meantime the bank can continue to provide its main services. The bridge bank must in principle be sold within two years.
The shares in the bridge bank are held by the bridging foundation, which is established by DNB and whose directors are appointed by DNB. A bridging foundation can be the shareholder of multiple bridge banks.
Asset and liability management vehicle
DNB may transfer a bank’s loss-making assets to an asset and liability management vehicle so that they are no longer on the bank’s balance sheet. This tool is similar to a bridge bank in that it also involves DNB transferring part of the failing bank to another undertaking. The key difference is that this vehicle does not have a banking licence and does not hold deposits, for example. The assets will gradually be realised or sold and the vehicle will ultimately cease to exist. The shares in the vehicle are held by the bridging foundation. This resolution tool can only be used in combination with at least one other resolution tool.