Resolution Authority

The Recovery and Resolution Act (RRA), transposing the European Recovery and Resolution Directive (2014/59/EU – BRRD), provides a framework for addressing the “too-big-to-fail” issue and hence contributes to strengthening the stability of the Liechtenstein financial system. The BRRD requires EEA Member States to establish a national Resolution Authority vested with specifically designed resolution powers.

The FMA took over the functions of the national Resolution Authority on January 1, 2017. Within the FMA, the Financial Stability Division is responsible for resolution matters since 1 April 2022.

The Resolution Authority, amongst others, is tasked with drawing up resolution plans. It is authorized – having regard to the resolution objectives – to apply the resolution tools and to exercise its resolution powers (RAA Article 82).

The resolution objectives are:

• to ensure the continuity of critical functions;
• to avoid a significant adverse effect on the financial system;
• to protect public funds by minimizing reliance on extraordinary public financial support;
• to protect covered deposits and investments;
• to protect client funds and client assets.

The resolution tools are the following:

• the sale of business tool;
• the bridge institution tool;
• the asset separation tool;
• the bail-in tool.

In taking over the function of the national Resolution Authority the FMA continues adding important elements to its role of ensuring the stability of the Liechtenstein financial market, the protection of clients and the implementation of and compliance with recognized international standards.

Recovery and Resolution Act (RRA – German only)

Recovery and Resolution Ordinance (RRO – German only)

Article 121 of the Bank Recovery and Resolution Act (RRA) requires the establishment of a specific resolution financing mechanism. The mechanism, fully funded by banks and investment firms seated in Liechtenstein, should support the effective application of resolution instruments and powers. The financial means of the mechanism will be administrated by the «Anstalt» (“Anstalt zur Finanzierung finanzmarktstabilisierender Massnahmen”), which was installed by law.

The financial means available under this mechanism are intended to support the effective application of the resolution regime if necessary (e.g. if a bank or investment firm fails and shall be resolved). The funds of the resolution financing mechanism may only be used to the extent necessary for effective application and for the purposes set out in Art. 122 RRA. Specifically, the funds may be used to collateralize assets or liabilities of the institution under resolution, to provide capital for a bridge institution or to compensate shareholders and creditors (after a “bail-in”).

The resolution financing mechanism shall be funded by the Liechtenstein banks and investment firms on a pro rata basis according to a contribution scale anchored by law. The target level is defined with at least 1% of the covered deposits of all institutions authorized in Liechtenstein. The target shall be reached by December 31, 2027. The calculation of contributions is carried out by the Financial Market Authority (FMA) Liechtenstein as the national resolution authority.

For the period 2023, the contributions amounted to a total of CHF 5.3 million. Currently the financial means of the resolution mechanism amounts to more than CHF 31 million.

The “Bail-in-tool” is a key resolution instrument in order to recapitalize a failing bank of public interest. In contrast to a bail-out, bail-in procedures place the burden of loss absorption and recapitalization on owners and certain creditors of the bank, not on the taxpayer. When applying the tool, the FMA (in its role as resolution authority) may write down liabilities of the institution or convert them into ordinary shares. Both measures are aimed to stabilize the bank and prepare it for resolution, e.g. selling the entity to a new investor.

The following guidance provides an overview of the principles and steps involved in executing the bail-in process:

The insolvency ranking of liabilities plays an important role in the resolution of banks even outside of insolvency. This is because the regulatory loss cascade, for example when implementing the write down and conversion of capital instruments (WDCCI) or the bail- in instrument is fundamentally based on the insolvency ranking.

Commission Implementing Regulation (EU) 2021/763 requires the resolution authority to disclose information on the ranking of bank liabilities in the national insolvency proceedings. By publishing the special legal insolvency ranking, the FMA contributes to higher legal certainty and transparency.