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The information in this document should under no circumstance be interpreted as professional, financial or legal advice, as it represents general clarifications for informing the public. Any decision to initiate actions based on this document must be preceded by consulting legislative texts mentioned in it and eventually by specialised assistance.

1. What is banking resolution?
2. Why were new national and European rules regarding resolution introduced?
3. Which are the resolution authorities in Romania?
4. Which are the types of entities for whom NBR is resolution authority?
5. Which are the key elements of the Law no. 312/2015 regarding the entities under the scope of the National Bank of Romania?
6. Which are the resolution objectives?
7. What conditions trigger a resolution action?
8. Which are the general principles of resolution?
9. Which are the resolution tools?
10. What is the sale of business tool?
11. What is the “bridge bank” tool?
12. What is the asset separation tool?
13. What is the “bail-in” tool?
14. How does the bail-in work?
15. What liabilities are explicitly excluded from bail-in?
16. In addition to the explicit exclusions provided by the law, are there other categories of liabilities that might be excluded from bail-in, subject to certain limits and conditions?
17. Is there a possibility that the eligible deposits over EUR 100,000 may not be included in the bail-in?
18. What are the risks of bail-in for depositors?
19. Can institutions build a liability structure that will prevent the application of bail-in? What is the minimum requirement of own funds and eligible liabilities - MREL?
20. Does the new national regulatory framework on bank resolution allow recourse to public financial support (“bail-out”)? What are the public financial stabilisation tools and under what conditions can they be used?
21. Which is the role of the Ministry of Public Finance in the bank resolution?
22. What safeguards for creditors does Law no. 312/2015 provide?
23. What is the Single Resolution Mechanism?
24. Does Romania participate in the Single Resolution Mechanism?

1. What is banking resolution?

Banking resolution is a process of restructuring a credit institution that aims to ensure the continuity of critical functions offered to its clients (e.g. deposits and payment services), to restore the viability of all or part of the institution, as well as to liquidate the residual part of the institution under normal insolvency proceedings, while safeguarding financial stability. The process is managed by an authority designated by the legislator for this purpose (resolution authority), which has a set of specific tools and powers. The resolution can be performed only when the resolution conditions are met and based on well-defined principles and objectives( see questions 6 and 8).

2. Why were new national and European rules regarding resolution introduced?

The recent financial crisis has pinpointed the lack of adequate tools in several Member States of the European Union (EU) to deal effectively with failing credit institutions and investment firms. Often confronted with the possibility of the failure of systemically important institutions and in the absence of a credible mechanism for crisis management, governments had no other option to maintain financial stability but to use public funds. Government interventions have been carried out mostly by using public funds (“bail-out”) that represent, in fact, taxpayers’ money. This led to a sharp increase in budget deficits in many European countries, with the subsequent measures to cap deficits leading to harsh austerity policies.

In order to find a solution to the above mentioned problems, new rules regarding financial crisis management have been introduced in the EU, whereby an important role has Directive 2014/59/EU on the recovery and resolution of credit institutions and investment firms (known in economic literature as the BRR Directive after its English acronym).

The BRR Directive envisages introducing a harmonized minimum set of resolution tools and powers in all EU Member States, as well as the institutionalisation and enhancement of cooperation between the national resolution authorities in solving the crises of cross-border banking and financial groups. The implementation of the Directive enables national authorities to intervene promptly in case of distressed banks, in order to ensure continuity of their critical services, while reducing the potential impact of the bank`s difficulties on the economy and the financial system. Furthermore, the protection of the depositors covered by the legislation regarding the deposits guarantees and the integrity of public finances are ensured. In the latter case, the rules of BRR aim that the private investors to be primarily loss bearers.

The BRR Directive was transposed into Romanian legislation through Law no. 312/2015 regarding the recovery and resolution of credit institutions and investment firms, as well as for amending and supplementing certain acts in the financial field (published in the Official Gazette, Part I, No. 920 of 11 December 2015). Its provisions came into force, in whole, starting 1 January 2016.

3. Which are the resolution authorities in Romania?

According to the BRR Directive, Member States may have one or more resolution authorities. In Romania, the Romanian legislature has designated two resolution authorities: the National Bank of Romania and the Financial Supervisory Authority, their powers being established by Law no. 312/2015.

4. Which are the types of entities for which the NBR is the resolution authority?

In accordance with Law no. 312/2015, the National Bank of Romania is the resolution authority at individual level for credit institutions, Romanian legal entities, as well as branches in Romania of credit institutions in third countries (non-EU states). Moreover, the National Bank of Romania is the group-level resolution authority when it is also the competent authority responsible for the consolidated supervision of a group whose parent undertaking is a credit institution or which, if the parent undertaking is a financial holding company or a mixed financial holding company, includes a credit institution as well.

5. Which are the key elements of Law no. 312/2015 regarding the entities under the scope of the National Bank of Romania?

The aforementioned law distinguishes several phases in the recovery and resolution process, providing the supervisory authority and the resolution authority with specific tools and powers, which are becoming increasingly intrusive, depending on the severity of the situation:

• Preparation: in this phase, credit institutions and other entities, to which specific provisions of Law no. 312/2015 apply, should develop and update annually their recovery plans that have to be evaluated by the National Bank of Romania, in its capacity as supervisory authority. In parallel, the resolution authority shell draw up resolution plans that include actions which the National Bank of Romania may take where the institutions meet the conditions for resolution;
• Early intervention: the National Bank of Romania, as a supervisory authority, may activate early intervention measures if an institution does not meet the prudential requirements laid down in the relevant legislation (see Article 149 of Law no. 312/2015) or is likely to infringe them in the near future. The institution must restore its financial situation by taking the measures specified in the recovery plan. The supervisory authority may require the institution, inter alia, to convene the general meeting of the shareholders, to draw up a negotiation plan for debt restructuring, to change the business strategy, and to make changes to its legal or operational structures. Moreover, the competent authority may appoint one or more temporary administrators, either to replace or to temporarily work with the management body of the institution;
• Resolution: this phase is activated only if the resolution conditions are met (see question 7) for the institution concerned. The National Bank of Romania, as resolution authority, will apply a specific set of resolution tools (see question 9), harmonised at Union level.

Law no. 312/2015 includes also provisions related to resolution financing arrangements as well as to the resolution of cross-border groups.

6. Which are the resolution objectives?

The National Bank of Romania, in its capacity as a resolution authority, shall use in its activity the tools and powers that best achieve the objectives of the resolution. These objectives are:

1. to ensure the continuity of critical functions;
2. to avoid a significant adverse effect on the financial system, in particular by preventing contagion and by maintaining market discipline;
3. to protect public funds by minimising reliance on extraordinary public financial support;
4. to protect depositors covered by the deposit guarantee legislation and investors covered by investor-compensation schemes according to capital market legislation;
5. to protect client funds and client assets.

When pursuing the above objectives, NBR shall seek to minimise the cost of resolution and avoid destruction of value unless necessary to achieve the resolution objectives.

7. What conditions trigger a resolution action?

The resolution tools shall apply to institutions only when the following conditions are cumulatively fulfilled:

• the institution is failing or is likely to fail;
• there is no reasonable prospect that any alternative private sector measures or supervisory actions would prevent the failure of the institution within a reasonable timeframe;
• the resolution action is necessary for the public interest in order to achieve one or more objectives of the resolution.

An institution shall be deemed to be failing or likely to fail in one or more of the following circumstances:

1. the institution infringes or could infringe the requirements for continuing authorization;
2. the assets of the institution are or could be less than its liabilities;
3. the institution is or there are objective elements to support a determination that the institution will, in the near future, be unable to pay its debts or other liabilities as they fall due;
4. with some exceptions, extraordinary public financial support is required.

8. Which are the general principles of resolution?

When applying the resolution tools and exercising the resolution powers, the National Bank of Romania observes the following principles:

1. the shareholders of the institution under resolution bear first losses;
2. creditors of the institution under resolution bear losses after the shareholders in accordance with the order of priority of their claims under normal insolvency proceedings, save as expressly provided otherwise in the Law no. 312/2015;
3. management body and senior management of the institution under resolution are replaced, except in those cases when the retention of the management body and senior management, in whole or in part, as appropriate to the circumstances, is considered to be necessary for achieving the resolution objectives;
4. management body and senior management of the institution under resolution shall provide all necessary assistance for the achievement of the resolution objectives;
5. individuals and legal persons are made liable under civil or criminal law for their responsibility for the failure of the institution;
6. except where otherwise provided in Law no. 312/2015 creditors of the same class are treated in an equitable manner;
7. no creditor shall incur greater losses than would have been incurred if the credit institution or other specific entity under resolution had been wound up under normal insolvency proceedings in accordance with the safeguards in Law no. 312/2015;
8. covered deposits are fully protected;
9. resolution action is taken in accordance with the safeguards in the Law no. 312/2015.

9. Which are the resolution tools?

Law no. 312/2015 transposing into national legislation the provisions of BRR Directive, states that the National Bank of Romania is empowered to apply the following resolution tools:

1. the sale of business tool;
2. the bridge institution tool;
3. the asset separation tool;
4. the bail-in tool.

The resolution tools may be applied individually or in any combination. As an exception, the assets separation tool may be applied only together with another resolution tool.

10. What is the sale of business tool?

By using the sale of business tool, the National Bank of Romania is exercising its power to transfer shares/other instruments of ownership issued by an institution under resolution or any assets, rights or liabilities of an institution under resolution, without obtaining the consent of the shareholders or any third party other than the purchaser, on commercial terms, to a purchaser that is not a bridge institution.

11. What is the “bridge bank” tool?

By using the bridge bank tool, the National Bank of Romania is exercising its power to transfer shares/other instruments of ownership issued by one or more institutions under resolution or any assets, rights or liabilities of one or more institutions under resolution, without obtaining the consent of shareholders in a bridge institution that has been created for this purpose, that is wholly or partially owned by one or more public authorities and controlled by the National Bank of Romania, as the resolution authority. The Bank Deposit Guarantee Fund, as the administrator of the bank resolution fund can be shareholder of the bridge bank. The bridge institution must be transferred to the private sector when circumstances allow without exceeding two years after the date on which the last transfer from an institution under resolution pursuant to the bridge institution tool was made. The National Bank of Romania may extend this period for one or more additional one-year periods.

12. What is the asset separation tool?

By using the asset separation tool the National Bank of Romania is exercising its powers to transfer assets, rights or liabilities of an institutions under resolution or a bridge-bank to one or more legal entities (asset management vehicles) which are wholly or partially owned by one or more public authorities and are controlled by the National Bank of Romania, as the resolution authority. The Bank Deposit Guarantee Fund, as the administrator of the Bank Resolution Fund can be shareholder of the asset management vehicles.

13. What is the “bail-in” tool?

The bail-in tool is the tool whereby the resolution authority exerts its powers to convert to equity or reduce the principal amount of certain claims of the institution under resolution in order to contribute to the absorption of losses and recapitalization of the institution to the extent sufficient to comply with the authorisation and to continue to carry out the activities for which it is authorised as well as to maintain market confidence. Applying the bail-in measures is always preceded by the absorption of losses by shareholders and by the owners of other equity instruments. The bail-in is applicable in all Member States and represents the main element of the reform of the bank crisis management system in Europe.

14. How does the bail-in work?

The bail-in tool is not applied in a broad-based or completely discretionary manner. Bail-in is applied only in case of an institution that is failing or is likely to fail, and its mechanism is based on two important principles:

1. no creditor is worse off than under normal insolvency proceedings; and
2. there must be a strict hierarchy of claims. In exceptional circumstances, the National Bank of Romania, as the resolution authority, may exclude or partially exclude certain liabilities from the application of the write-down or conversion powers, according to the legislation in force.

The bail-in tool is applied using the “waterfall principle”: the person that invests in higher risk instruments (also with higher return) will bear losses or will be subject to conversion of claims into shares before other creditors. Only after the value reduction or conversion of the riskier claims will the next riskier category follow.

In a simplified presentation (for details, see Law no. 312/2015), the order of applying bail-in for credit institutions, Romanian legal persons, is:

• Shareholders;
• Holders of other instruments of ownership;
• Other subordinated creditors;
• Unsecured creditors;
• Natural persons, micro- and small- and medium-sized enterprises with deposits larger than EUR 100,000 (only for the amounts above the coverage limit of deposits).

15. What liabilities are explicitly excluded from bail-in?

Article 286 of Law no. 312/2015 provides the categories of liabilities of the institutions for which the National Bank of Romania, as the resolution authority, does not exercise the powers of write-down or conversion. These explicit exclusions are presented hereunder, in a simplified manner:

1. covered deposits (deposits covered by the Deposit Guarantee Fund within the limit of EUR 100,000, in RON equivalent, per depositor and per bank);
2. secured liabilities, including covered bonds and other covered liabilities;
3. liabilities that arise by virtue of holding client assets and client money (e.g. content of safe deposit boxes) provided that the client is protected under the applicable insolvency law;
4. liabilities that arise by virtue of a fiduciary relationship provided that the beneficiary is protected under the applicable insolvency and civil law;
5. liabilities to institutions, excluding entities that part of the same group, with an original maturity of less than seven days;
6. liabilities with a remaining maturity of less than seven days, owed to systems or operators of systems designated in line with legal provisions or to their participants and arising from the participation in such a system;
7. liabilities to an employee, in relation to accrued salary, pension benefits or other fixed accumulated remuneration, except for the variable component of remuneration that is not regulated by a collective bargaining agreement;
8. liabilities to commercial creditors arising from the provision to the institution under resolution of goods and services that are critical to the daily functioning of its operations;
9. liabilities to tax and social security authorities, provided that these liabilities are preferred under the applicable law;
10. liabilities to deposit guarantee schemes arising from contributions due in accordance with the relevant legislation.

16. In addition to the explicit exclusions provided by the law, are there other categories of liabilities that might be excluded from bail-in, subject to certain limits and conditions?

Yes. In extraordinary circumstances when the use of the bail-in tool is not possible within a reasonable period, or it would jeopardise the continuity of critical functions or would generate systemic risks, the National Bank of Romania (as resolution authority), after notifying and after receiving the approval of the European Commission, can exclude (in whole or partially) certain liabilities from the application of the instrument.

16.1 Loss absorption from other clients

In case the NBR decides to make exclusions, it can increase the write-down or conversion limit applied to other eligible liabilities in order to consider the excluded liabilities, provided that the principle of „no credit worse off” is complied with (see question 22).

16.2 Using the Bank Resolution Fund for loss absorption and recapitalization

If the losses that would have been covered by the excluded liabilities have not been transferred in full to other creditors, the resources of the bank resolution fund (administered by the Bank Deposit Guarantee Fund – FGDB) may be used, only if the shareholders and the holders of other instruments of ownership, as well as the holders of relevant capital instruments and other eligible liabilities of the institution under resolution have contributed to the loss absorption and recapitalisation equal to an amount not less than 8% of total liabilities including own funds of the institution under resolution.

16.3 Alternative financing

In extraordinary circumstance, after the Bank Resolution Fund provided the above mentioned financing of 5%, after which all unsecured and non-preferred liabilities - other than eligible deposits - have been written down or converted in full, the NBR may seek ”alternative financing” (e.g. budgetary resources). As an exception, if the previous stated conditions are met, the resources for the annual contribution to the Resolution Funs that have not yet been used may represent “alternative financing”.

17. Is there a possibility that the eligible deposits over EUR 100,000 may not be included in the bail-in

Yes. In case of a bail-in, the national legislation on resolution transposing the BRR Directive offers the possibility of using public funds instead of eligible deposits over 100,000 EUR, as a last resort and complying with specific conditions and limitations (see Question 16). The decision of the national resolution authority to exclude uncovered deposits is, however, subject to a process of “constrained flexibility”: all exclusions that require a contribution from the bank resolution fund or from an alternative source of finance may be carried out by the NBR only with the approval of the European Commission.

18. What are the risks of bail-in for depositors?

Covered deposits, that are eligible deposits covered by the Bank Deposit Guarantee Fund – FGDB up to EUR 100,000 (RON equivalent) per depositor and per bank, are not subject to bail-in. The category of eligible deposits includes deposits of natural persons (comprising sight deposits and current account deposits), small- and medium-sized enterprises/other similar entities, as well as large companies (the latter deposit category is guaranteed within the limit of above mentioned ceiling since 1 January 2016).

It should also be noted that the deposits of natural persons, micro- and small- and medium-sized enterprises have a preferred treatment for the amount over EUR 100,000, per depositor and per bank. These deposits have a higher rank than the claims of other unsecured creditors and are used only in case their claims are not sufficient to absorb losses and to ensure the adequate capitalization of the institution under resolution.

In extraordinary circumstances and in accordance with limits and special conditions, some deposits over EUR 100,000 could be excluded from bail-in in order to avoid starting a large-scale contamination that will affect financial stability (see questions 16 and 17).

19. Can institutions build a liability structure that will prevent the application of bail-in? What is the minimum requirement of own funds and eligible liabilities – MREL?

The existence of legal provisions regarding the explicit exclusion of some liabilities from bail-in (see question 15) may determine banks to structure their liabilities in such a way to prevent the efficient functioning of this resolution instrument (e.g. obtaining finance by issuing covered bonds). In order to prevent such a possibility and to avoid contamination within the banking system, Law no. 312/2015 stipulates that credit institution shall at all times meet minimum requirements of own funds and eligible liabilities. This requirement aims to ensure that the institutions can absorb losses and are able to restore solvency after resolution in order to fulfill the requirements for continuing authorization and gain market confidence. The minimum requirements shall be calculated as the amount of own funds and eligible liabilities expressed as a percentage of total liabilities and own funds of the concerned institution. The minimum requirement will not be the same for all banks but will be calculated by the resolution authority for each credit institution, considering its size, economic model, funding mode and risk profile.

20. Does the new national regulatory framework on bank resolution allow recourse to public financial support (“bail-out”)? What are the public financial stabilisation tools and under what conditions can they be used?

An important objective of the BRR Directive is to minimise as much as possible the allocation of costs associated with the recovery and resolution of credit institutions to taxpayers. In this context, the Directive allows public intervention only in exceptional circumstances to avoid systemic crises and only temporarily. Also, public interventions are conditioned by a preliminary cost-sharing of the bank resolution between shareholders and creditors in the largest extent possible.

In transposing the relevant provisions of the BRR Directive, Law no. 312/2015 introduces into national law the following public financial stabilisation tools:

1. public equity support tool;
2. temporary public ownership tool (nationalisation).

The public financial stabilisation tools shall be used as a last resort, after having assessed and exploited the other resolution tools to the maximum extent practicable in order to maintain financial stability, as determined by the Ministry of Finance after consulting the National Bank of Romania. The use of these instruments is subject to the EU state aid rules.

21. Which is the role of the Ministry of Public Finance in the bank resolution?

The measures for granting extraordinary public financial support are taken by the Ministry of Public Finance in close cooperation with the National Bank of Romania. For the effective application of these measures, the Ministry of Public Finance has, by law, specific powers of resolution:

• In case of implementing the instrument of public equity support, the Ministry of Public Finance may invest in the full range of own funds instruments of the institution under public intervention. The Ministry of Public Finance has the obligation to transfer the capital holding in the institution concerned to the private sector as soon as commercial and financial circumstances allow it;
• In case of the second instrument of financial stabilisation, namely temporary public ownership tool, the Ministry of Public Finance may make one or more transfer orders in which the transferee is either an entity designated by the Ministry or a company wholly owned by the state. The Ministry of Public Finance should ensure that the institutions subject to the transfer are managed professionally and on a commercial basis and become privately owned as soon as commercial and financial circumstances allow it.

22. What safeguards for creditors does Law no. 312/2015 provide?

Law no. 312/2015, which transposes the BRR Directive, contains a number of safeguards for creditors. One of them is known as “no creditor worse-off” - NCWO. According to this safety mechanism in case of applying bail-in, the resolution authority will ensure that the involved shareholders and creditors do not incur greater losses than they would have incurred if the institution had been wound up under normal insolvency proceedings. If such losses do occur, shareholders and creditors are entitled to appropriate compensation from the Bank Resolution Fund, administered by the Bank Deposit Guarantee Fund, based on an independent valuation.

23. What is the Single Resolution Mechanism?

On 1 January 2016, the Single Resolution Mechanism became fully operational. This mechanism is the second pillar of the Banking Union, which adds to the Single Supervisory Mechanism, launched in November 2014. The third pillar, the European Deposit Insurance Scheme, is still in the discussion stage. Participation in the Banking Union, which seeks deeper integration of national banking systems, is mandatory for Eurozone countries and voluntary for any other EU country.

The Single Resolution Mechanism involves the centralisation at European level of certain powers conferred by the BRR Directive to the national resolution authorities. It includes the national resolution authorities in the euro area, a Single Resolution Board and a Single Resolution Fund. The Single Resolution Board is a European agency that is responsible for the resolution of the largest banks in the Banking Union. The agency develops resolution plans and draws up resolution schemes in the event of materialisation of the crisis for all banks supervised by the European Central Bank and all cross-border banks. The resolution scheme is then approved or rejected by the European Commission or, in certain cases, by the EU Council within 24 hours.

National resolution authorities have the obligation to implement the resolution decisions adopted by the Single Resolution Board. For the other banks, the national resolution authorities remain in charge of resolution planning and implementing resolution tools, unless resolution action requires resources from the Single Resolution Fund. In that case, the Single Resolution Board shall adopt the resolution scheme for the bank concerned. The resources of the Single Resolution Fund, under the control of the Single Resolution Board, shall be set up gradually, over a period of eight years, from the contributions of banking institutions under the jurisdiction of the Single Resolution Mechanism.

24. Does Romania participate in the Single Resolution Mechanism?

No. Romania is a non-euro country and therefore has no obligation to participate in the Single Resolution Mechanism or other pillar of the Banking Union. As an EU member state, Romania may participate voluntarily in the Banking Union, through the mechanism of close cooperation, which would mean joining both the Single Supervisory Mechanism and the Single Resolution Mechanism (and in the future the European Deposit Insurance Scheme).

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