Financial Stability Authority's assessment: banks' resolution capabilities need improvement

The new report published by FFSA provides a comprehensive assessment of the resolution capabilities of Finnish banks at the end of 2024. The requirements for banks' resolution capabilities relate, among others, to loss absorbency and recapitalisation, liquidity and funding and securing operational continuity. In addition, banks will have to take care of managing data and information systems, communication, and a possible business restructuring. These requirements are specified annually during the resolution planning work.

"A banking crisis can disrupt the whole of society. That is why banks’ financial difficulties must be resolved in an orderly, swift and efficient manner. Bank resolution is a challenging situation for which both authorities and banks need to be well prepared. Over the past few years, banks have invested heavily in improving their resolution capabilities. The banks assessed in the report did not have critical shortcomings in their preparation, although there is room for further improvement," says Jaakko Weuro, Director General of FFSA.

A resolution mechanism aimed at the orderly winding down or restructuring of troubled banks

Past financial crises have shown how problems at one bank can spread more widely and threaten the stability of the entire financial system. At the time, the authorities had no choice but to bail out the big and financially important banks with public money. The costs of banking crises grew so high that they even threatened the solvency of some countries.

To manage banking crises, a completely new regulatory framework and effective authority powers for its implementation were needed. In Finland, these powers are held by the FFSA. The FFSA will place a failing bank into resolution proceedings if this is necessary to ensure the continuity of the bank's critical services, preserve financial stability and minimise the use of taxpayers' money.

The alternative to resolution is bankruptcy. This can be done provided that the above-mentioned objectives of the resolution are not compromised. In such a situation, customers' deposits are protected through the Deposit Guarantee Scheme, i.e. the FFSA will pay depositors deposit guarantee compensation from the Deposit Guarantee Fund within seven working days.

In this report, the FFSA describes how deciding between resolution and bankruptcy is done. This is also the first time that the FFSA lists which banks within its remit would be subject to resolution in the event of a bank facing serious financial problems. The aim of the FFSA is to increase transparency in the functioning of the resolution system. In future, FFSA will publish an assessment of banks’ resolution capabilities on an annual basis.