CORRECTIVE ACTION, AND CRISIS MANAGEMENT AND RESOLUTION
In order to preserve financial system stability, the BM has legal mechanisms and instruments that allow it to take preemptive action over institutions deemed unviable, at risk of non-viability or insolvency, especially corrective action measures and resolution powers and instruments.
If a financial institution should undergo liquidation, financial stability preservation shall be ensured by preventing the deposit rush through the repayment in good time of deposits insured by the Deposit Guarantee Fund.
Corrective action measures
In light of the Law on Credit Institutions and Financial Companies, in order to safeguard financial system stability, the Banco de Moçambique has in place has a set of measures to be adopted when institutions do not fulfill or at risk of not fulfilling the rules that govern their business. These are corrective action measures.
The purpose of the corrective measures is essentially to ensure the recovery of the struggling institution so as to ensure that it continues to carry out its activities once the hardships that have affected it have been remedied.
In light of the Law on Credit Institutions and Financial Companies, if the applied corrective action measures do not enable overcoming the situation or prove insufficient, the BM may, alternatively:
- Implement one or more resolution measures; or
- Revoke the business permit, following the liquidation regime.
What is a bank resolution?
Bank resolution is the process of restructuring an institution by a resolution authority, in this case, the BM, through the implementation of a set of resolution powers and instruments provided for by Law, when the legal requirements for its application are met to achieve certain purposes.
The BM may apply resolution measures based on the following resolution instruments:
- Partial or total disposal of the business;
- Partial or total transfer of business to transitional institutions;
- Asset segregation;
- Reduction or conversion of own funds instruments.
When does a financial institution undergo resolution?
A financial institution shall undergo resolution when the following requirements are met:
- If the BM, in the exercise of its powers of resolution authority, declares that an institution is at risk of non-viability or insolvency;
- It is not foreseeable that the insolvency situation will be prevented within a reasonable time by measures implemented by the institution itself or by the implementation of corrective measures;
- Resolution measures are necessary to safeguard public interest;
- If the institution's entry into liquidation, as a result of the withdrawal of the business permit, does not allow for achieving the purposes of the implementation of resolution measures more effectively.
Why are resolution measures applied?
The BM shall apply resolution measures for the following purposes:
- Ensuring the continuity of the provision of financial services essential to the economy;
- Preventing serious consequences for financial stability, including avoiding contagion between entities, market infrastructure, and upholding market discipline;
- Safeguarding the interests of taxpayers and public funds by minimizing the use of public financial backing;
- Protecting depositors whose deposits are guaranteed by the Deposit Guarantee Fund;
- Protecting funds and assets held by institutions in the name and on behalf of their clients and the provision of related investment services.
If an institution cannot undergo resolution, it shall be subject to liquidation as provided for in the applicable Law.
DEPOSIT GUARANTEE AND RESOLUTION FUND
The role of the Deposit Guarantee Fund also contributes towards the ongoing financial stability and confidence:
- On the one hand, deposits with financial institutions, duly authorized to hold deposits and savings, benefit from a guarantee, up to the limit laid down by Law, with the fund providing for repayment to depositors;
- On the other, the Deposit Guarantee Fund may be called upon to finance resolution measures that the bank applies to an institution for the purpose, inter alia, of preventing the occurrence of serious consequences for financial instability as a result of the institution being at risk of non-viability or insolvency.