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ELEMENTS OF A BANK RESOLUTION FRAMEWORK

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ELEMENTS OF A BANK RESOLUTION FRAMEWORK Powered By Docstoc
					ELEMENTS OF A BANK
RESOLUTION FRAMEWORK

                                                                                                            Wouter Bossu
                                                                                                     IMF Legal Department
The views expressed herein are those of the author and should not be attributed to the IMF, its Executive Board, or its management.

                                                                                                         Jodhpur, India - 2011
              KEY TAKE-AWAYS
• Banks are businesses of a very particular
  nature...

• ...which makes it difficult to resolve them under
  general insolvency law...

• ...and requires specific, carefully designed bank
  resolution frameworks
                  ROADMAP
1. Specific Nature of Banks

2. Problems with General Insolvency Law

3. Design Features of Bank Resolution
   Frameworks
          1.Specific Nature of Banks
Banks are different from ordinary commercial or industrial
businesses for the following 4 reasons:
1. Liabilities—may be short-term, to the public, insured
(DGS), backstopped by other banks, or guaranteed by State
2. Assets—vulnerable to rapid quality deterioration in
case of insolvency of bank
3. Systemic Nature—banks may be systematically
relevant; their disorderly failure would cause other banks
to fail
4. Official Financial Support—often financial support
from central bank and/or MoF, possibly combined with
explicit or implicit back-up of DGS by the State
2. Problems with General Insolvency Law
General insolvency law is ill-suited to deal with ailing
banks for the following reasons:
•creditor-driven procedures insufficiently internalize financial
stability and fiscal cost concerns
•the threshold for intervention is too late
•bankruptcy trustees have little understanding of nature of banks
and connection with financial system
•insolvency toolkit is too blunt
•automatic and full moratorium rapidly destroys value
•lengthy procedures cause public to distrust other banks, which
may cause run
3. Design Features of Bank Resolution Frameworks

A. Broader Public Policy Objectives
Ø   Bank resolution frameworks pursue essentially three
    public policy objectives:
•   minimizing financial instability
•   minimizing fiscal cost
•   satisfying creditors according to their rank

Ø The public interest may justify infringing upon
  shareholder and creditors rights beyond what is typical
  in general insolvency law
   3. Design Features of Bank Resolution Frameworks

 B. Early Shift toward Official Control

 Most bank resolution frameworks include mechanism to
    shift control over troubled bank to (non-judiciary)
    official sector before insolvency triggers are met

 Such “official administration” regimes typically feature:
▫ appointment and steering by central bank/supervisory agency
▫ based upon quantitative and/or qualitative triggers
▫ with mandate to assess the bank, restructure when possible, and prepare
  for liquidation if unavoidable
▫ Replacement of board of directors, and sometimes also general assembly
  of shareholders
3. Design Features of Bank Resolution Frameworks
C. Flexible Resolution Tools
Adequate bank resolution frameworks include the
   following tools to resolve ailing banks:

▫ Transfer of Assets (including systemically relevant
  activities) and Liabilities
▫ Forced Mergers (“shotgun wedding”)
▫ Mandatory Private and Public Recapitalization
▫ Orderly Liquidation

Some countries have also included mandatory debt
   restructuring in their tool kit
3. Design Features of Bank Resolution Frameworks
D. Supportive Mechanisms
• Legal underpinnings for official financial support in budget or
  other laws

• Interaction with DGS rules: may DGS “top up” P&A?

• Depositor preference

• Flexible moratoria/stays

• Insolvency protection for new financing

• Protection for netting, financial contracts and collateral

• Transfer mechanisms for financial contracts
3. Design Features of Bank Resolution Frameworks

E. Institutional Aspects
• Clear designation and mandates of the bank resolution agency

• Interaction with DGS?

• Where relevant, adequate coordination mechanisms with
  micro-prudential supervisor and central bank

• Clearly defined role for MoF

• Coordination with Market and Competition Authorities may
  also be relevant
Conclusions
The orderly resolution of banks requires a specific
legal framework that:
•balances private and public policy objectives

•provides a well-calibrated institutional set-up

•allows to restructure banks rapidly and flexibly

•comprises robust supportive mechanisms that go
beyond insolvency

				
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