New rules on deposit guarantee schemes and bank recovery and resolution

Today, the Ministry of Finance has proposed new legislation to implement the deposit guarantee schemes directive and the bank recovery and resolution directive.

“The proposed legislation will continue and strengthen the Norwegian deposit guarantee scheme. A strong deposit guarantee scheme protects depositors, and contributes to confidence in the banking system. The proposal also includes a broad set of new rules to prevent and manage bank failures, in accordance with the EU bank recovery and resolution directive. The new framework will contribute to lower risk in the banking sector, and may prevent great costs to the Norwegian economy and public finances,” says Minister of Finance Siv Jensen.

The deposit guarantee scheme
The deposit guarantee scheme is an important part of the Norwegian financial markets legislation. In order to implement the recast EU deposit guarantee scheme directive (directive 2014/49/EU), the Ministry of Finance has today proposed a small number of amendments to the current legislation. The most significant proposal is to introduce unlimited protection for certain types of deposits for up to 12 months. These are deposits resulting from residential real estate transactions, deposits linked to particular life events (such as marriage, divorce, retirement, dismissal, redundancy, invalidity or death), and deposits based on insurance benefits or compensation for criminal injuries or wrongful conviction.

The Norwegian deposit guarantee scheme’s general coverage level remains at NOK 2 million for the aggregate deposits of each depositor in each bank. The Norwegian Government is still negotiating with the European Commission with a view to maintain the NOK 2 million coverage level when the deposit guarantee scheme directive is incorporated into the EEA Agreement.

Bank recovery and resolution
Today’s proposed legislation will fully implement the EU bank recovery and resolution directive (directive 2014/59/EU) in Norway. The proposal therefore includes comprehensive new rules on recovery and resolution plans, early intervention measures and resolution tools. The proposal designates the Financial Supervisory Authority of Norway (Finanstilsynet) as the resolution authority, although it leaves to the Ministry of Finance to decide whether an institution meets the conditions for resolution. The current Norwegian legislation is based on many of the same principles as the bank recovery and resolution directive, and the directive’s resolution tools are not too different from measures available to Norwegian authorities today. The introduction of bail-in as a resolution tool will however be a significant new element.

New deposit guarantee and resolution funds
Relative to the size of the domestic banking sector, the Norwegian Banks’ Guarantee Fund is among the largest guarantee funds in Europe. By year-end 2016, the fund amounted to approximately NOK 32.5 billion, equivalent to 2.75 percent of deposits covered by the Norwegian deposit guarantee scheme. In addition to financing the guarantee scheme, the fund may be used to provide support to prevent member banks from failing.

In order to establish financing arrangements in accordance with the deposit guarantee schemes directive and the bank recovery and resolution directive, the Ministry of Finance proposes to transfer the existing funds to two new funds, a deposit guarantee fund and a resolution fund. After the proposed transfer, the deposit guarantee fund will amount to approximately NOK 14.6 billion (or 1.22 per cent of covered deposits), while the resolution fund will reach 17.9 billion (or 1.53 per cent of covered deposits). The Ministry proposes an annual contribution requirement equivalent to 0.08 and 0.1 percent of covered deposits to the deposit guarantee fund and the resolution fund respectively. These contribution requirements are somewhat higher than the current contribution level, but on par with contributions paid in 2010, relative to the size of the banking sector.

The Ministry emphasizes that the guarantee scheme and the resolution authority must have adequate financial resources at their disposal, preferably raised through ex-ante contributions, in order to fulfil the deposit guarantee and enable effective application of resolution tools. In accordance with the directives, the Ministry also proposes that the contributions shall be adjusted in proportion to the risk profile of each institution.

Organization of Banks’ Guarantee Fund
The Ministry of Finance proposes that the Banks’ Guarantee Fund shall continue to administer the deposit guarantee scheme, as well as manage the new deposit guarantee and resolution funds. Moreover, the Ministry proposes that the Banks’ Guarantee Fund shall assist Finanstilsynet in carrying out its new tasks as the resolution authority. Reflecting its new tasks and responsibilities, the Banks’ Guarantee Fund should be subject to a separate Banks’ Guarantee Fund Act, and have a board of supervisors appointed by the Ministry.

Background
Today’s legislative proposal from the Ministry of Finance is based on the Banking Law Commission’s report NOU 2016: 23. The Ministry has largely endorsed the report’s recommendations, but has in general proposed legislation that more closely mirrors the EU directives.