The experiences from the financial crisis in 2008 led the authorities to draw up a new set of regulations, both to prevent new banking crises and to deal with banks that are hit by a crisis. The relevant rules can be found in chapter 20 of the Financial Institutions Act. The rules for the deposit guarantee scheme are found in chapter 19.
An important goal of the rules is to be able to maintain critical functions during a crisis, such as critical payment services. The rules are also designed so that it is the investors and not the taxpayers who have to bear the losses when a bank fails.
If a bank is failing or is likely to fail, the Ministry of Finance can either decide to liquidate the bank or to carry out what is termed resolution.
Liquidation of a bank can in general be compared to the bankruptcy of a non-bank. In a liquidation, the Norwegian Banks' Guarantee Fund must make the guaranteed deposits available to the depositors within seven working days.
If public interests dictate that the bank has critical functions that should be continued, the bank will be put into resolution. The authorities then have a several possible strategies. An essential part is the concept of bail-in – or internal recapitalization. In the event of a bail-in, the bank's losses will be distributed among the shareholders and certain creditors. This means that low ranking debt instruments are written down as far as necessary to cover losses, and then converted into new equity so that the bank's solvency is restored. Guaranteed deposits are exempt from bail-in. The term bail-in can be seen in contrast to earlier financial crises where governments have had to contribute to handle a failing bank - a bail-out of shareholders and creditors.
The banks contribute annually to the deposit guarantee fund and the resolution fund. The latter can be used to contribute to the effective application of resolution tools. The resolution fund is at the disposal of the Financial Supervisory Authority as the resolution authority, while the Norwegian Banks' Guarantee Fund is responsible for administration and asset management.
A significant difference between liquidation and resolution is that the bank is open and in operation during resolution. This also means that guaranteed deposits are available to customers in a bank that is in resolution.