Resolution

The Resolution Function ensures financial stability by preparing for and managing the orderly resolution of banks and certain investment services firms. It supports the MFSA’s Resolution Committee through resolution planning, decision-making on liquidation or resolution, and the application of resolution tools when required. The Function operates within the EU resolution framework and cooperates closely with European and local authorities.

The Banking Union

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The Banking Union

The Banking Union (‘BU’) has been established as a response to the 2008 global financial crisis. The crisis portrayed a number of interconnections within the euro area banking sector whereby financial distress in one country quickly impacted others. The BU has been created in 2014 to safeguard credit institutions in Europe to make them more resilient and promote confidence in the financial system, resolve credit institutions without resorting to taxpayers’ money and harmonising supervision.

The BU consists of three Pillars, namely:

  • The Single Supervisory Mechanism;
  • The Single Resolution Mechanism; and
  • The European Deposit Insurance Scheme.

Resolution is derived from the Single Resolution Mechanism (‘SRM’). The SRM is the second pillar of the BU, which was established in 2016. The SRM involves a network of National Resolution Authorities (‘NRAs’) together with the Single Resolution Board (‘SRB’) which collaborate to ensure an orderly approach of resolution of failing entities with minimal costs to the general public, hence protecting financial stability.

SRB

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The Single Resolution Board

The SRB has been established by the Single Resolution Mechanism Regulation (‘SRMR’). The SRB is an independent body within the EU framework and acts as the Central Resolution Authority within the BU. The SRB works alongside other European agencies such as the European Commission, the European Central Bank, and the European Banking Authority (‘EBA’).

The SRB’s main objective is to safeguard taxpayers from state bailouts by ensuring an orderly resolution of ailing credit institutions thus, promoting financial stability.

Resolution Committee

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Resolution in Malta

The MFSA is responsible for the recovery and resolution of credit institutions and certain investment firms in terms of the Bank Recovery and Resolution Directive (‘BRRD’). The BRRD provides that each Member State shall designate a Resolution Authority that can apply the resolution tools and exercise the resolution powers. In Malta, it is the Board of Governors of the MFSA that acts as the Resolution Authority, which delegates its powers to the Resolution Committee, in accordance with the MFSA Act.

The Resolution Authority is also the authority responsible for the resolution central counter parties (‘CCPs’). To date there are no CCPs licensed in Malta. CCPs are regulated by the European Securities and Markets Authority, (‘ESMA’).

As of January 2027, the Resolution Authority will also be responsible for the resolution of insurance and re-insurance undertakings in terms of the Insurance Recovery and Resolution Directive (‘IRRD’).

Resolution Function

Resolution Function

The Resolution Function is responsible for drafting resolution plans for credit institutions and certain investment firms, advises the Resolution Committee on whether an institution should go into liquidation or resolution and the application of resolution tools when necessary.

The Resolution Function interacts regularly with European institutions, particularly with the SRB, due to its role as the Central Resolution Authority within the Banking Union and the EBA. It also interacts with local authorities, such as the Ministry responsible for Finance and the Central Bank of Malta, to carry out its work.

Credit Insitutions

Investment Firms

Insurance

Credit Insitutions

BRRD

The Bank Recovery and Resolution Directive (‘BRRD’) is a key EU legislative framework designed to ensure the stability of the financial system by providing authorities with tools to manage failing credit institutions effectively. The BRRD aims to minimise the impact of credit institution failures on the economy and taxpayers by enabling early intervention measures (‘EIMs’), restructuring, and, if necessary, orderly resolution, while protecting critical functions and safeguarding financial stability.

 

RRR – Subsidiary Legislation 330.09

The Recovery and Resolution Regulations (‘RRR’) (Subsidiary Legislation 330.09) transposed the BRRD into Maltese legislation, providing a legal framework for managing credit institutions in distress. The RRR empowers the supervisory authority to implement EIMs and the Resolution Committee to implement effective resolution measures, ensuring the stability of Malta’s financial system while protecting depositors and minimising risks to taxpayers.

 

SRMR

The Single Resolution Mechanism Regulation (‘SRMR’) is an EU Regulation adopted in July 2014. The SRMR established the SRM to enhance the efficiency and effectiveness of bank resolution within the Eurozone.

Single Resolution Fund (‘SRF’)

The SRF may be used to ensure the efficient application of resolution tools and to exercise resolution powers conferred to the SRB by the SRM Regulation (EU) No 806/2014 (SRMR). The SRF can also be used for credit institutions under the direct remit of NRAs, which would result in the SRB taking over the resolution process.

The SRF has, since 2016, pooled contributions raised at national level from credit institutions. Once a target level of at least 1% of covered deposits is reached, no further contributions will be collected.

According to Article 70(1) of the SRMR, the individual contribution of each credit institution towards the SRF “shall be raised at least annually and shall be calculated pro-rata to the amount of its liabilities (excluding own funds) less covered deposits, […] of all institutions authorised in the territories of all of the participating Member States”.

Such contributions are calculated by the SRB and are primarily based on the target level of at least 1% of covered deposits of all credit institutions within the Banking Union. The target level is also calculated based on the size and risk of each individual institution.

For the SRB to calculate the individual contribution, credit institutions are required to report data to the SRB. In this respect, credit institutions must submit the necessary data used in the calculation of these contributions to the MFSA by 31 January of each year [1]. If a credit institution fails to submit all required data on time, the SRB may use estimates or its own assumptions to calculate the institution’s annual contribution.

The Resolution function acts as an intermediary between the SRB and institutions eligible to pay contributions and also conducts quality assurance checks to the data submitted by institutions in conjunction with the SRB.

[1] A Circular is published on an annual basis providing all the necessary guidance.

Prevention of a Bank Crisis

To mitigate a bank crisis from occurring, entities falling within the scope of the resolution regime are obliged to prepare a recovery plan. The recovery plan shall be annually updated and submitted to the supervisory authority.

The Resolution Authority implements measures to prevent a crisis by drafting resolution plans. These plans set out the strategy to be applied in the event of a bank failure, whilst ensuring continuity of its critical functions and minimising impact on the economy and taxpayers.

The Resolution function carries out both resolvability assessments and Public Interest Assessments (‘PIA’) to determine the Preferred Resolution Strategy (‘PRS’). The PRS determines whether an ailing credit institution, is to be liquidated through Normal Insolvency Proceedings (‘NIP’) or resolved through the application of resolution tools.

Management of a Bank Crisis

Upon determining that an entity is Failing or Likely to Fail (‘FOLTF’) and upon fulfilling the other resolution conditions, the Resolution Committee shall put an entity into resolution and make use of the resolution tools.

i) The start of resolution proceedings:

An entity is deemed to be FOLTF if one of the following conditions are met:

    • Breach of authorisation requirements;
    • Inability to pay its debts as they fall due;
    • The value of assets is lower than that of the liabilities; and
    • Extraordinary public financial support is required.

ii) The resolution tools:

The Resolution Committee has four main resolution tools at its disposal:

  1. Sale of Business

The entity’s assets, rights, liabilities, shares and other ownership instruments are transferred to a third-party buyer.

  1. Asset Separation

Poor quality assets, rights and liabilities are transferred to an asset management vehicle with the aim of maximising their potential value during sale or liquidation.

  1. Bridge Institution

The entity’s assets, rights, liabilities, shares and other ownership instruments are transferred to a bridge bank.

  1. Bail-In

Bail-in enables the write-down or conversion of the liabilities into equity to absorb the losses and restore the capital of the failing entity to enable the credit institution to continue to operate as a going concern. Bail-in consists of two phases:

  • Write-Down: the entity’s net asset value is brought down to zero by reducing eligible liabilities as much as possible to absorb losses.
  • Conversion: eligible liabilities are converted in order to recapitalise the entity or contribute to the capital of the bridge institution.

These tools can be either applied together or individually with the exception of the asset separation tool.

In line with the BRRD, the RRR specifically identifies the protection of depositors as one of the principles and objectives of resolution.

 

In the case of a resolution:

  • Covered depositors up to EUR 100,000 are protected as they are excluded from the scope of bail-in;
  • No depositor may incur losses greater than they would have incurred under NIP.

 

In the case of liquidation:

  • Deposits up to EUR 100,000 are protected by the Depositor Compensation Scheme;
  • In the hierarchy of claims, deposits over EUR 100,000 are given a preferential ranking therefore, they are reimbursed before ordinary creditors.

What is the Role of the Resolution Regime?

The resolution regime involves both planning and execution of a resolution action if a credit institution fails. A resolution plan is drafted for every credit institution, and certain investment firms falling within the scope of the BRRD. Resolution plans are updated on an annual basis.

A resolution plan determines the entity’s critical functions and also specifies the Preferred Resolution Strategy. The resolution plan assesses the resolvability of the entity to identify any impediments to the resolution of the entity.

The resolution plan also sets out the Minimum Requirement for Own Funds and Eligible Liabilities (‘MREL’) to ensure that the entity holds sufficient loss-absorbing capacity.

What is MREL?

MREL is the minimum amount of equity and subordinated debt a credit institution must maintain to ensure that it  has sufficient loss absorbing capacity for an effective resolution action.

MREL is set by the Resolution Committee and is tailored to each entity based on its size, risk profile and systemic importance.

MREL consists of own funds (capital) and eligible liabilities that can be written down or converted into equity, allowing the credit institution to be resolved without using public funds. The objective is to ensure that the credit institution can continue to perform critical functions during resolution therefore, maintaining market confidence, and protect financial stability.

MREL is set out in line with the SRB MREL policy and is reviewed on an annual basis.

What is Bail-In?

Bail-in is one of the resolution tools available to the Resolution Committee. Bail-in ensures that investors rather than the public bear losses first when a credit institution fails. Bail-in enables the Resolution Committee to impose loses on shareholders and creditors and to write down debt owned or convert the value of claims into equity.

The purpose of the bail-in tool is to enable entities to recapitalise themselves and continue to operate by ensuring the continuation of their critical functions. By doing so, credit institutions will be able to keep their critical services operating through resolution while maintaining sufficient financial resources with costs being borne by the credit institution’s owners and investors rather than depositors or taxpayers.

Where Do Depositors, Bond-Holders and Shareholders Rank in Liquidation and Resolution?

Regulation 108 of the RRR specifies the ranking of creditors, defining how bank liabilities are ranked when a credit institution is liquidated or resolved.

Investment Firms

The purpose of resolution for investment firms is to ensure the orderly management of failing institutions in a way that preserves financial stability and public confidence, protects client assets, and minimises taxpayer exposure. Resolution aims to maintain the continuity of critical functions while restructuring or winding down non-viable parts of the firm, especially for firms engaged in activities like market-making or custody.

The Framework for resolution of investment firms is governed by the Bank Recovery and Resolution Directive (‘BRRD’) and the Single Resolution Mechanism Regulation (‘SRMR’) for firms within the Banking Union.

In Malta, there are no large systemic investment firms therefore, all firms fall under the scope of the Investment Firm Regulation (‘IFR’) and the Investment Firm Directive (‘IFD’), which provide a tailored prudential framework based on firm size, complexity, and risk profile.

Resolution planning involves assessing whether a firm is ‘resolution-relevant’ and ‘resolvable’ while, developing strategies to ensure continuity and minimise disruption. Should a firm meet the conditions for resolution, the Resolution Authority within the MFSA may apply resolution tools defined under the BRRD.

In terms of regulation 103 of the Recovery and Resolution Regulations (Subsidiary Legislation 330.09 of the Laws of Malta) (‘RRR’) and the Commission Delegated Regulation (EU) 2015/63 (‘Delegated Regulation’), the Resolution Committee is responsible for collecting ex-ante contributions for the National Resolution Fund (‘NRF’), on an annual basis. The NRF is an integral part of resolution financing arrangements, utilised in case of resolution action for certain investment firms and branches of third country banks. The Resolution Committee is responsible for the collection and possible use of the NRF given that it is administered at a national level.

Insurance

The global financial crisis of 2008 exposed significant vulnerabilities in the financial sector, and its interconnectedness across banking and finance, which also incorporated insurance firms. The crisis underscored the urgent need to develop an effective recovery and resolution framework for both banks and insurance and reinsurance undertakings.

In response, the EU introduced Directive 2009/138/EC (‘Solvency II’), which aimed to strengthen the resilience of insurance and reinsurance undertakings by enhancing prudential supervision, risk management and capital adequacy requirements. While Solvency II marked a substantial step forward, it did not fully eliminate the risk of failures within the insurance sector. Structural challenges, such as prolonged periods of low interest rates, persistent market volatility and exposure to systemic shocks, have continued to exert pressure on the profitability, solvency, and long-term stability of insurers and reinsurers undertakings.

Cross-border failures of such undertakings illustrated the need for the current framework to be addressed to capture such scenario and to organise the orderly departure of the undertaking from the market. As per the BRRD, it is of utmost importance that adequate tools are in place to prevent such failures and where failures occur, minimise the negative repercussions by preserving the continuity of critical functions.

The failure of such undertakings has not only impacted policy holders, and potentially the real economy and the financial stability of the markets where such undertakings operate, but also the trust in the internal markets for insurance and re-insurance undertakings.

The Insurance Recovery and Resolution Directive (‘IRRD’) Directive (EU) 2025/1 of the European Parliament and of the Council, establishes a framework for the recovery and resolution of insurance and reinsurance undertakings whilst providing a harmonisation of procedures at union level for resolving insurance and reinsurance undertakings in a coordinated manner.

From a Maltese perspective, the transposition of the Directive is expected to be completed by the transposition deadline of January 2027. The Resolution Authority for credit institutions within the MFSA will also serve as the Resolution Authority for insurance and reinsurance undertakings.