In 1991, Norges Bank laid down guidelines for the handling of banks placed under public administration.1 Pursuant to these guidelines, Norges Bank will only settle a transaction to or from such a bank at the request of the administrators in bankruptcy. However, the Act relating to Payment Systems, passed on 19 December 1999, allows participants in payments systems subject to supervision by Norges Bank to make an agreement that settlement shall be carried out with a participant that is under public administration. Norges Bank has revised the guidelines for the handling of a bank under public administration to enable participants to make such an agreement, but in other respects maintains the guidelines from 1991.
The provisions of this circular replace the guidelines of 1991.
Loans, accounts and brokers' guarantees
Banks' access to loans and deposits is laid down in the Lending Regulation (Regulation relating to Banks' Access to Loans and Deposits in Norges Bank, etc. (2001.04.25 no. 0473)) and the provisions pursuant to the regulation. Practical routines associated with banks' collateral for loans is laid down in the "Agreement relating to financial collateral for loans" and "Agreement relating to financial collateral in other central banks".2 Banks must also enter into an Account Maintenance and Settlement Agreement with Norges Bank in order to be able to take part in payment settlements in Norges Bank and to borrow from Norges Bank. If a bank is placed under public administration, or if bankruptcy proceedings are initiated for a bank that is resident in another country, all these agreements cease to apply from the date on which the decision is made. The right to borrow from Norges Bank lapses on the same date, if Norges Bank has not already suspended the bank's right to borrow (cf. Section 14 of the Lending Regulation).
If a bank is placed under public administration, Norges Bank will terminate the bank's sight deposit account. Any debit balance will be transferred to an account for defaulted claims. In order to cover any claims, Norges Bank will realise the collateral the bank has posted in accordance with the Agreement relating to financial collateral for loans. Any positive account balance or collateral over and above what is needed to meet Norges Bank's claims will be transferred to the administrators in bankruptcy, or the bankruptcy estate if the bank is resident in another country. If the collateral posted by the bank is not sufficient to meet Norges Bank's claim, the uncovered claim will be reported to the administrators in bankruptcy or the bankruptcy estate as a claim for dividend.
Any guarantees a bank has pledged for securities firms in the securities settlement cease to exist when the bank is placed under public administration. In such a case, Norges Bank will notify the Norwegian Central Securities Depository that the guarantees to the securities firms have lapsed, and ask the securities firms to obtain a guarantee from another bank, so that they can continue to participate in settlements.
Handling of payment orders to and from a bank under public administration
Payment orders accepted for settlement in Norges Bank before the decision about public administration has been taken, are final and binding for the administrators in bankruptcy.
If a payment order to or from a bank under public administration is not settled, it will as a general rule be rejected by Norges Bank. If such transactions are involved in a netting process, the clearing house will be requested to deliver a new netting result without transactions that involve this bank. Payment orders entered in the system after the bank has been placed under public administration may be binding if the clearing house, central counterparty or Norges Bank can substantiate that they were not aware, nor should have been aware, that insolvency proceedings had been opened when the payment order was entered in the system (see the Payments Act, Section 4-2 third paragraph).
Netting results from payment or securities settlement systems that have been approved pursuant to Section 4-1 of the Payments Act and reported to EFTA Surveillance Authority pursuant to Section 4-5 of the Act can be settled even if they contain payment orders to or from a bank under public administration. This presupposes that the participants in the system have agreed that such orders are to be executed if they are received by the system before the decision concerning public administration (see Section 4-2 of the Payments Act). Furthermore, Norges Bank and the system must have established agreements that netting results shall be settled with orders to and from a bank under public administration. Such an agreement will not imply a settlement guarantee from Norges Bank.
Norges Bank may take an order to or from a bank under public administration for settlement at the request of the administrators in bankruptcy or the bankruptcy estate. The administrators in bankruptcy/bankruptcy estate are responsible for ensuring that there is cover for outgoing orders from the bank under public administration.
Continued participation in payment settlements
The administrators in bankruptcy may with the approval of Kredittilsynet (the Norwegian Financial Supervisory Authority) decide that the bank's activities shall be continued, partly or in their entirety. If the bank is to continue taking part in settlements in Norges Bank, the administrators in bankruptcy must enter into new agreements with Norges Bank concerning account maintenance and payment settlements.
Information to external institutions and authorities
If a bank is placed under public administration, Norges Bank will provide the banking associations and institutions that deliver gross transactions or netting results to Norges Bank with information about the handling of settlements in Norges Bank. Norges Bank will also keep the Ministry of Finance and Kredittilsynet informed about the settlements and other matters associated with the central bank's handling of the situation.
Footnotes
1 In February 1991, the guidelines were appended to a letter that was sent to banks, banking associations and institutions that delivered netting results to Norges Bank.
2 Agreement relating to financial collateral in other central banks is only relevant to banks that use the Scandinavian Cash Pool.