Session V: Insolvency Resolution

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Session V Insolvency Resolution

• Peter Brierley
• Bank of England

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Introduction

• What these papers are about
• - OPTIMAL RESOLUTION OF SYSTEMIC BANKS
• Objective of Authorities
• - ORDERLY AND EFFICIENT RESOLUTION

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Orderly and efficient resolution of systemic banks

• Key Requirements
• Limit risks to financial stability
• Maximise banks franchise
• Preserve continuity of contractual arrangements
• Penalise bank management and shareholders
• Treat creditors equitably
• Reimburse insured depositors rapidly

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Preservation of Financial Stability

• Balance between maintaining financial stability
  and limiting moral hazard
• Too big to fail (Lastra, Mayes)
• Constructive ambiguity versus transparency (Nieto
  and Wall)
• Need for pre-emptive strike prior to insolvency
• PCA/SEIR (Nieto and Wall)
• Pre-insolvency workout
• Role of financial authorities
• But inconsistency with insolvency regime and/or
  company law.

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Preservation of Financial Stability

• Preserve the Banks systemic activities
• Not the same as rescuing the bank
• Hupkes (2004) options
• Replacement
• Detachment
• Immunisation
• Key problem area termination/close out rights

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Separate regime for systemic bank insolvency?

• Distinguishing features of large bank failure
• potential disruption to payment and settlement
  systems
• losses to creditors via interbank markets
• creditors include large numbers of depositors
  unable to mitigate risks or bear losses
• dangers of systemic crises via contagion

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Separate Regime for systemic bank insolvency?

• Key Advantages (Nieto and Wall)
• Clarity
• Avoids tendency to forbearance
• Greater role/powers of financial authorities, eg
  in effecting business transfers
• Avoidance of potential conflicts between
  financial authorities and insolvency officials

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Separate regime for systemic bank insolvency?

• Issues/problems
• pre-specified triggers
• substantial legislative changes required in
  countries which resolve banks using corporate
  insolvency regime
• court-based insolvency procedures emphasise
  equitable treatment of creditors
• Compromise solution
• mixed regime

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Resolving a systemic bank with international
operations

• Identified as major issue by Lastra and Mayes
• Key issues/problems
• The structure of international banks
• Subsidiaries versus branches (Lastra)
• Single versus separate entity resolution (Lastra)
• Home/host country conflicts of interest (Mayes)
• Lack of enforceability of financial contract law
  across jurisdictions
• Difficulty of preserving global financial
  stability
• Issues even more complex with LCFIs (Mayes)

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Resolving a systemic bank with international
operations

• Possible Solutions
• Need to avoid imposing economically inefficient
  constraints on international banks
• Many suggested solutions would require changes to
  legislation or, in EU, to existing directives
• Bilateral deals not really an option
• Supranational authorities not (yet) practical
  politics
• Improved cross-border co-operation the only
  realistic current option