a. Threat of bankruptcy
Resolution can be triggered when an entity goes bankrupt or is at risk of bankruptcy. This threat arises on the basis of analyses by both the supervisor and the resolution authority. The prerequisites for insolvency may include:
- failure of the entity to meet capital requirements
- failure of the entity to comply with legal requirements in such a way as to justify withdrawal of authorization to operate
- the likelihood that the entity will not pay its debts or liabilities in the near future
- the entity’s requirement of extraordinary public assistance.
b. Public interest
The fundamental premise for triggering resolution is a public interest assessment. The draft of the IRRD provides that a resolution action is in the public interest if the action is necessary to achieve one or more of the resolution objectives and is proportionate to those objectives, and liquidating the institution under standard insolvency proceedings would not achieve those objectives to the same extent.
The IRRD defines the objectives of resolution as follows:
- to protect policyholders, beneficiaries, and claimants
- to maintain financial stability, in particular by preventing contagion and by maintaining market discipline
- to ensure continuity of critical functions
- to protect public finances by minimizing the use of extraordinary public financial support.
If at least one of the above objectives would not be achieved in bankruptcy but can be achieved through resolution, there is a rationale for triggering this procedure.
c. Exhaustion of supervisory actions with respect to an insurance or reinsurance company with FOLTF (failing or likely to fail) status
