An effective resolution framework ensures the smooth settlement of issues facing the problem bank in a manner that it does not emanate the abnormal disruption in the financial system. Resolution plan mainly addresses the areas like assessment of critical functions, identification of impediments and resolvability, application of different resolution strategies, timeframe of resolution and assessment of cost of resolution. In the execution of successful resolution exercise, there must be clearly stated roles and functions on the following key areas in line with the FSB’s Key attributes of resolution regime 2014.
Key objectives of successful Resolution Regime are characterized by the following;
- Ensuring the continuity of smooth and uninterrupted financial system of the country
- Ensuring the protection of depositor’s money
- Ensuring the protection of public funds and taxpayer’s money
- Ensuring that public confidence in financial system remains intact
Legal and regulatory framework empowers SBP to effectively resolve the problem institutions. It derives most of the resolution power from Banking Companies Ordinance 1962.
Deposit Protection Scheme:
Deposit protection scheme (DPS) is a formal institutional arrangement, designed to secure the depositor’s money partly or wholly in case of a bank’s failure. DPS is considered integral safety-net tool to ensure the soundness of the banking system, maintain public confidence and protect small depositors in case of a bank failure.
Given its importance in bank resolution, State Bank of Pakistan is working for instituting explicit deposit protection scheme. SBP in consultation with various stakeholders developed draft of Deposit Protection Corporation (DPC) Act in the light of Core Principles for Effective Deposit Insurance Systems as propounded by International Association of Deposit Insurers (IADI). The Act is in the final stages of enactment.
Lender of Last Resort (LoLR):
Emergency Liquidity Assistance is typically available only in exceptional circumstances at the discretion of the central bank in stress situations. The challenge is, however, to meet legitimate needs for liquidity while avoiding the provision of liquidity to banks with no prospects of recovery. Under section 17-B of SBP Act, the State Bank is allowed to extend LoLR facility against admissible securities/ collaterals, to a scheduled bank.