Resolution

What is resolution?

Resolution is the process of restructuring a credit institution or an investment firm (hereinafter collectively: institution) or a group thereof, which is failing or likely to fail, to ensure the continuity of the institution’s essential functions, to preserve the stability of the financial intermediary system, and to restore the viability of all or part of the institution or the group.

In Hungary, the resolution powers are exercised by the Central Bank of Hungary (MNB), acting in its capacity as the resolution authority.

Resolution objectives

The resolution objectives set out in the applicable legislation are as follows:

  1. protecting public funds by minimizing the need for and the use of extraordinary public financial support of any form;
  2. ensuring the continuity of the performance of critical functions;
  3. preventing the escalation of adverse effects jeopardising the stability of the financial intermediary system, or eliminating such effects;
  4. protecting the deposits covered by the deposit insurance scheme, including the National Deposit Insurance Fund (OBA), and the investments covered by the investment protection scheme, including the Investor Protection Fund (Beva);
  5. protecting client funds and client assets; and
  6. maintaining the confidence of depositors and investors to preserve the stability of the financial intermediary system.

Conditions for Resolution

The Central Bank of Hungary acting in its capacity as the resolution authority shall order and launch the resolution proceedings if all of the following conditions are met:

  1. the Central Bank of Hungary acting in its capacity as the supervisory authority determines that the institution is failing or likely to fail;
  2. the Central Bank of Hungary acting in its capacity as the resolution authority states that, given the circumstances, it is unlikely that any measure other than the resolution measures would prevent the institution from becoming insolvent, and
  3. according to the judgement of the Central Bank of Hungary acting in its capacity as the resolution authority, the resolution is justified by the public interest.

Resolution tools

The following resolution tools are available to the Central Bank of Hungary acting in its capacity as the resolution authority:

  1. The sale of business tool: means the sale of all or part of an institution under resolution to another market participant who is not a bridge institution. This resolution tool is supposed to be the primary tool of resolution.
  2. The bridge institution tool: if the sale of assets is not a viable option, the assets and liabilities, as well as the critical functions of the institution under resolution can be taken over by a “bridge credit institution” or “bridge investment firm” established with a majority control of the state or the resolution fund. This is a temporary solution, also indicated by its name, until a buyer can be found for the institution under resolution.
  3. The asset separation tool: means the separation of the “good” and “bad” assets of the institution, which can be achieved by transferring the “good assets” to other institutions and eliminating the remaining part, or vice versa, by transferring the “bad assets” separated from the institution to a resolution asset management vehicle. In both cases, the main goal is to ensure the continuity of the essential functions of the institution.
  4. The bail-in tool: means that the unsecured creditors of the institution under resolution (e.g., bondholders) are involved in the absorbing of loss by writing off their claims or converting them into equity. It should be emphasized that deposits or parts of deposits not exceeding EUR 100,000 guaranteed by the National Deposit Insurance Fund (OBA) cannot be included in the bail-in.

The above resolution tools can be used individually or in combination, provided that the asset separation tool cannot be used alone, but only in conjunction with another resolution tool.