01 September 2020

New legislation on resolution procedures for credit institutions and investment firms

Central Bank of Iceland

The Act on Recovery and Resolution of Credit Institutions and Investment Firms, no. 70/2020 (the Act is only in Icelandic), enters into force on 1 September 2020. The purpose of the new Act is to preserve financial stability and minimise the adverse implications of financial shocks by protecting insured deposits and investors, customers’ assets and vital company operations, and minimising the risk that capital contributions from the Treasury will be needed.

According to the Act, the Central Bank of Iceland is entrusted with powers of resolution – i.e., administrative powers – to take action and prepare and execute resolution procedures for credit institutions and investment firms.

The provisions of the Act apply to credit institutions and large investment firms. At present, ten credit institutions in Iceland and no investment firms fall under the scope of the Act. The role of the resolution authorities is to assess the resolvability of these credit institutions and prepare recovery plans for credit institutions not subjected to conventional winding-up proceedings. In order to achieve the objectives of the Act, the Central Bank of Iceland is authorised to apply one or more clearly defined resolution measures, either singly or together. For example, the Bank will be authorised to establish a bridge institution that will take over the assets and/or liabilities of a credit institution in resolution proceedings, sell operations or operational units from a credit institution in resolution proceedings, and split up assets held by such an undertaking and transfer them to an asset management vehicle. In addition, the Central Bank of Iceland will be authorised to demand that a credit institution satisfy minimum requirements for own funds and eligible liabilities (MREL); i.e., to demand that the institution’s capital and other funding be sufficient to recapitalise should it be subjected to resolution proceedings, through write-downs of subordinated debt.

The Central Bank’s decisions on the basis of the Act will be taken with reference to the relevant credit institutions’ recovery plans, which are currently in preparation. In connection with recovery plan preparation, the Central Bank will soon request data from credit institutions falling under the scope of the Act. This data collection will be part of the preparation for the Bank’s decisions on institution-specific MRELs. In the future, credit institutions may be required to ensure that their market-based funding satisfies the Bank’s MREL criteria in terms of form and amount.

A separate department, the Resolution Fund, has been established within the Depositors' and Investors' Guarantee Fund (DIGF). The Resolution Fund, which operates under the auspices of the Central Bank, is intended to finance resolution proceedings in accordance with recovery plans. The contribution to the Resolution Fund for 2020 has already been decided, with a transfer of 1.2 b.kr. from the Deposit Department of the DIGF. The same will be done in 2021, but thereafter, it is assumed that the fund will be financed with fees charged to credit institutions falling under the scope of the Act.

The passage of the new Act will incorporate the provisions of EU Directive 2014/59/EU, called the Bank Recovery and Resolution Directive (BRRD), into Icelandic law. Previously, Act no. 54/2018 amending the Act on Financial Undertakings, no. 161/2002, was passed in order to implement the BRRD provisions centring on recovery plans and timely intervention in case of shocks affecting financial institutions’ operations.

The Central Bank of Iceland encourages financial undertakings, the Icelandic Financial Services Association, and other stakeholders to acquaint themselves thoroughly with the contents of the Act. Queries about the Act may be sent to skilavald@sedlabanki.is.

Press release no. 29/2020
1 September 2020