Resolution tool for banks
De Nederlandsche Bank (DNB) has four tools at its disposal to take a failing bank into resolution and minimise the impact on customers, other financial institutions and our economy.
Resolution tool 1: bail-in
In a bail-in, the bank’s rescue is paid for by the shareholders and creditors. This is in contrast to a bail-out, in which the government uses taxpayers’ money to rescue a bank. A bail-in consists of two steps:
Step 1: passing on losses to shareholders and creditors.
We turn first to the shareholders to cover the losses. Their shares consequently fall in value or become worthless. If the losses exceed the bank's shareholders’ equity, some creditors will also need to contribute. 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 they would incur in bankruptcy. This is referred to as the “no creditor worse off” (NCWO) principle.
Step 2: ensuring that the bank has sufficient capital for its relaunch.
We convert part of the bank’s remaining debts into shares, so that it has sufficient capital for a successful relaunch. 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. For example, money in payment and savings accounts up to EUR 100,000 is never written off or converted, as these are covered by the Dutch deposit guarantee scheme.
To illustrate how the bail-in tool works, we have elaborated a stylised example.
Resolution tool 2: sale of business
We may sell all or part of the bank. In resolution, this does not require the shareholders’ approval. The sale may include a transfer of the shares, or only, for example, certain assets and liabilities, such as savings deposits and mortgage loans. In this way customers retain access to their payment and savings accounts and the buyer can continue the bank’s critical functions. We ensure that the sales process is as competitive and transparent as possible.
Resolution tool 3: bridge bank
We 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 remaining part of the bank will go bankrupt. A bridge bank is a temporary solution pending the sale of the bank's principal activities to a financially sound market operator. In the meantime, the bank can continue to provide its main services. In principle, the bridge bank must be sold within two years.
The shares in the bridge bank are held by the bridge foundation, which is set up by DNB and whose directors we appoint. A bridge foundation can be the shareholder of multiple bridge banks.
Resolution tool 4: asset and liability management vehicle
We 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 is similar to the use of a bridge bank in that it also involves 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 bridge foundation. We can only use this resolution tool in combination with at least one other resolution tool.