OREANDA-NEWS. October 15, 2014. The Ministry of Finance has drafted a bill that, if passed by Parliament, would allow the Financial Supervision Authority to take over the management of failing banks.

The draft legislation transposes the European Union's Bank Recovery and Resolution Directive into national law, and is considered unlikely to affect Estonia's banks, which are largely controlled by Nordic financial institutions and have performed well on stress tests.

The major aim is to reduce the risk of state-funded bank bailouts in Europe to a minimum.

The Financial Supervision Authority will be responsible for drawing up a recovery and resolution strategy for each bank and banking sector. Banks will have to start compiling regular asset-recovery plans.

In a situation where a failing bank is not yet insolvent, the Financial Supervision Authority will have the right to demand changes to management, put a moratorium on dividend payments, and, if worst comes to worst, dismiss the management and appoint a temporary administration.

These measures will ensure that all financial difficulties are resolved promptly and smoothly, the ministry said.

The key mechanism to reduce the liablities of of a failing bank will be the conversion of its subordinated debt into equity or writing it off altogether. According to the ministry, this may result in some creditors losing their capital.

The banks will also have to start making regular contributions to a crisis resolution fund, which will be attached to the existing Guarantee Fund.

The amassed resources will be used to guarantee the obligations of failing institutions, issue loans, acquire problematic assets, and pay out compensations to creditors and shareholders.

The Ministry of Finance characterized the new measures as tough. However, the widespread intervention that they allow is justified by strong public interest, it said.

It contrasted the situation with state intervention during the recent financial crisis when a number of banks in Europe were bailed out with public funds. "So in this case the responsibility will be placed of the shoulders of the shareholders and the creditors, who from now on will have to reckon more with the possibility of losing their investments," the ministry said.

The new draft act is scheduled to enter into force in January 2015.