24 May 2013

IMF: Belgium - Technical Note on Crisis Management and Bank Resolution Framework

The IMF finds that the crisis revealed several weaknesses in the framework for crisis management and bank resolution. Some of those weaknesses were overcome by the passing of new legislation, but there remains room for further improvement.

Key recommendations include:

Formalise the institutional arrangements for resolution—While the  overarching financial stability mandate of the National Bank of Belgium (NBB) is appropriate, there are opportunities to make explicit and enhance its role as the  resolution authority. Moreover, there is scope to formalise inter-institutional  coordination, which at present largely occurs via informal channels and on an ad hoc basis. In particular, the authorities should consider establishing a cross-institutional  Coordination Group, composed of top level officials. Moreover, the introduction of  recurrent crisis management simulations would allow the authorities to test the  coordination arrangements and potential application of the crisis management toolkit.

Require recovery and resolution plans—The authorities are testing draft  guidelines for recovery plans through pilot projects with selected firms that are of systemic importance, irrespective of the absence of a legal requirement for the  preparation of recovery and resolution plans (RRP). As a near-term follow-up to the  pilots, the planned extension of the scope of the work toward the development of resolution plans should proceed, where relevant, in cooperation with home and host  authorities. Going forward, recovery and resolution plans should be made mandatory for  all Belgian firms that are of systemic importance, including financial market  infrastructures (FMIs) and insurance companies.

Enhance the framework for orderly and effective resolution—The NBB can  utilise a range of measures to intervene proportionally should a bank breach the law or  regulations. A procedure to transfer assets and liabilities of, or shares in, firms considered  systemically important subject to an ex ante judicial review, has been introduced. The  procedural aspects of this tool should be revised to reduce the uncertainty and mitigate  potential stability risks that the ex ante judicial review entails. In addition, consideration  should be given to broadening the scope of such powers to holding companies and  nonsystemic institutions, with the latter allowing for more cost-effective resolution strategies.

Enhance framework for bank liquidation and insolvency—Under Belgian law,  banks are subject to the general bankruptcy proceedings that are ill suited to address the  specific features of credit institutions. The authorities are encouraged to enhance bank  insolvency framework by allowing a rapid transfer of a credit institution’s critical functions (e.g. payment services, trade finance) to a third party, under the oversight of the resolution authority. Furthermore, the NBB should be empowered to directly initiate such procedure before court.

Re-design the Deposit Guarantee Scheme (DGS)—Protection for up to  €100,000 per depositor is provided by a two-tier system comprised of the Protection  Fund for Deposits and Financial Instruments (PF) and the Special Protection Fund for  Deposits, Life Insurance Policies, and Capital of Approved Cooperative Corporations (SF).  The creation of a segregated fund, financed via ex ante industry contributions and with  robust arrangements for back-up funding, would increase transparency and allow for  prompt and cost-effective payouts. The remaining resources available in the PF and the contributions paid to date into the SF should be utilised to satisfy the initial needs of the  fund. A sufficiently ambitious minimum target size for the fund should be set, eventually allowing the fund to absorb a simultaneous default of several mid-size institutions. The authorities should also consider the introduction of depositor preference, which would benefit the deposit guarantee scheme in case of a payout to depositors, through the subrogation of the rights of insured depositors that is already foreseen in the Belgian legal framework. The recalibrated deposit insurance scheme should be allowed to contribute funding to resolution actions, up to the amount of what its distributions would have been in case of a deposit payout. Finally, going forward, shares issued by cooperative corporations should be excluded from coverage.

Full document

© International Monetary Fund