Bank Resolution and Depositor Compensation in Jersey

Working with each bank, a resolution plan will be developed. Each plan will set out the actions that will be taken if that bank fails. The JRDCA will review these plans periodically and update them where necessary.

A preferred resolution strategy for each bank will be identified, which will depend on things like how much harm its failure would cause to the Island and what kind of structure it has.

The three main strategies are:

Bail-in

The bank's equity is written off, and debts written down, to absorb losses. Then it is recapitalised – the debtholders whose debt was written down are issued equity and become the new shareholders. In the medium-term, the bank would be restructured to address the causes of failure and restore market confidence.

Sale or Transfer

The bank or some of its assets and liabilities are sold immediately or after a short period. This may include transferring its critical functions to a temporary ‘bridge bank’ controlled by the JRDCA, before being sold on.

Bank Winding up

The bank would enter a form of insolvency. The Jersey Bank Depositors Compensation Scheme (JDCS) would provide protection of up to £50,000 for deposits placed in Jersey per person, per Jersey banking group, for local and international depositors in line with international standards.  For more information on the JDCS see here.

Resolution strategies are based on two approaches: “single point of entry” and “multiple point of entry”, below describes the difference between these strategies:

Single point of entry (SPE)

A SPE resolution involves the application of resolution powers for example, bail-in and or transfer tools, generally at the level of the top parent or holding company of a group by a single resolution authority, most likely by the authority in the jurisdiction that has responsibility for the global consolidated supervision of a group.

Multiple point of entry (MPE)

A MPE resolution strategy normally involves the application of resolution powers by two or more resolution authorities to different parts of a group and is likely to result in a break-up of the group into two or more separate parts. The resolution powers applied to the separate parts need not be the same and could include resolution options such as bail-in, use of a bridge bank and or transfer of business or wind-down.

The SPE approach is more likely to be suitable for banks that are centrally structured and operated, and are mainly funded through the parent company, and that can transfer losses from operating companies to the parent company. On the other hand, the MPE approach is more likely to be suitable for banks that have material subsidiaries that are independently operated and funded.

MREL serves to prevent a dependence on public financial support, helping to ensure that shareholders and creditors bear the cost of failure by absorbing losses and recapitalising the failed bank.

MREL is a separate minimum requirement set by resolution authorities to ensure that a bank maintains sufficient eligible instruments to facilitate the implementation of the preferred resolution strategy.

The JRDCA is responsible for setting MREL requirements for each Jersey Bank, in consultation with the JFSC.

It is expected that, in practice, this will only apply to Jersey Incorporated Banks. The JRDCA will consult with Home Resolution Authorities when setting MREL requirements for Jersey Incorporated Banks that are part of a group.

Article 34 of the Resolution Law specifies conditions that must be met prior to the application of a resolution tool or when applying specific tools. These resolution conditions include:

• that the bank is failing or is likely to fail;
• that it is not reasonably likely that any other action will prevent failure within a reasonable timeframe; and
• that it is in the Jersey public interest to take a resolution action.

If the resolution conditions are met, the JRDCA may use one or more of its Resolution Powers or Tools to resolve the bank.

The banking sector in Jersey is comprised predominantly of Jersey Branches of Overseas Incorporated Banks. Of the handful of Jersey Incorporated Banks, the majority are themselves subsidiaries of banking groups headquartered in other jurisdictions.

Just over half of Jersey Banks are part of Banking Groups that have been designated by the Financial Stability Board as Global Systemically Important Banks and several other Jersey Banks are part of Banking Groups designated as Domestic Systemically Important Banks in their home jurisdictions. As such, most Jersey Banks are subject to Resolution Planning at a group level.

The JRDCA expects to coordinate closely with relevant Home Resolution Authorities in developing and implementing local resolution plans that align to group preferred resolution strategies. Where the JRDCA can obtain sufficient comfort that group resolution plans provide adequate protection to a Jersey Bank's critical functions during a resolution event, the level of local resolution planning and preparations for resolution can be reduced accordingly. In such scenarios, the JRDCA will focus its resolution planning activities on:

• Ensuring appropriate coordination and communication plans are in place; and
• Ensuring that the Jersey Bank’s local operations have been adequately captured by group preparations for resolution and, if not, ensuring sufficient local preparations are implemented.