In today’s global economy, credit institutions play a critical role in providing financial services to individuals, businesses, and governments. However, the failure of a credit institution may result in far-reaching consequences, as we have recently seen with banking crises in Switzerland, the US, and, potentially, Europe.
In response, many countries have developed credit institution resolution procedures to ensure that credit institutions in distress are handled in an orderly and efficient manner, while minimizing the impact on the financial system. Understanding these laws and procedures is therefore of utmost importance for anyone involved in the banking sector.
In the EU, and particularly the Banking Union (BU), the credit institution recovery and resolution regime is part of a wider approach to the regulation of credit institutions which consists of three pillars. The first pillar serves the purpose of banking supervision, the second pillar consists of the credit institution recovery and resolution regime, whereas the third pillar focuses on the deposit insurance scheme. The three pillars are supported by the backbone of the so-called single rulebook, a set of legal rules governing different aspects of the BU. Broadly speaking, the single rulebook has two components: EU-level authorities and directly applicable regulations, and national-level authorities and directives that need to be transposed into national laws.
For most of the EU and BU, member states have implemented the relevant legal acts into national law. Croatia, being a member of both, is no exception. Focusing on the credit institution recovery and resolution, the relevant legal rules are contained in the Croatian Resolution of Credit Institutions and Investment Companies Act (Zakon o sanaciji kreditnih institucija i investicijskih društava – Resolution Act) which is largely based on Directive 2014/59/EU of the European Parliament and of the Council of 15 May 2014 (BRRD), the primary EU directive within the context of this topic. Under the EU / Croatian resolution regime coupled with the relevant EU regulations, the resolution authority (either the Croatian National Bank or the Single Resolution Board) may generally apply four resolution tools: the sale-of-business tool, the bridge-institution tool, the asset-separation tool, and the bail-in tool. To apply those tools, the resolution authorities may exercise a wide range of powers, including taking control over an institution under resolution and transferring its rights, assets, or liabilities to another entity.
Among other things, the Resolution Act contains an extensive set of rules excluding the applicability of general corporate law rules. These are especially relevant to the resolution authorities’ powers which involve many features that are traditionally subject to strict corporate law regulation. At first glance, it seems that the resolution authorities exercising such powers in Croatia are bound by the same corporate law rules that usually apply. However, considering those exemptions, a significant portion of corporate law becomes virtually irrelevant.
In the context of Croatian credit institutions, which mostly belong to international groups, the relevant tools may be the sale-of-business tool and asset-separation tool, which allow the resolution authority to carve out (good standing) Croatian subsidiaries and transfer them to another entity.
Overall, the credit institution recovery and resolution framework under the Resolution Act seems well-structured, appropriately transposing the BRRD, and, in conjunction with the relevant EU regulations, providing a sufficient framework for an efficient recovery and resolution procedure.
The banking crises that occurred in the US and Switzerland serve as a stark reminder of the importance of sound credit institution recovery and resolution frameworks. Although the scale of the recent banking distresses is not yet entirely clear, many fear that the current situation may trigger a global financial crisis of similar or even larger proportions to the one in 2008. Considering that the three BU pillars have been established with the explicit purpose of preventing such crises, the EU’s banking sector should be, at least in theory, significantly safer today. However, the legal rules underlying these frameworks can be complex and difficult to navigate, and it is crucial for credit institutions to seek professional legal assistance to properly interpret and ensure full compliance. By doing so, credit institutions can mitigate the risk of non-compliance and contribute to the overall stability of the financial system.
By Jasna Zwitter-Tehovnik, Partner, Ivan Males, Counsel, and Anze Molan, Junior Associate, DLA Piper Weiss-Tessbach