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Appropriate Institutional and Legal Framework to Deal with Bank Insolvency

Appropriate Institutional and Legal Framework to Deal with Bank Insolvency. V. Sundararajan-IMF June 5, 2003. Outline. Why focus on bank insolvency Relevance to Financial Stability Role of FSAPs and BCP Assessments Findings from FSAPs Objectives of Working Groups.

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Appropriate Institutional and Legal Framework to Deal with Bank Insolvency

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  1. Appropriate Institutional and Legal Framework to Deal with Bank Insolvency V. Sundararajan-IMF June 5, 2003

  2. Outline • Why focus on bank insolvency • Relevance to Financial Stability • Role of FSAPs and BCP Assessments • Findings from FSAPs • Objectives of Working Groups

  3. Why Focus on Bank Insolvency • Banks are fragile with potentially systemic effects • There are major differences between bank insolvency and corporate insolvency • Need for special insolvency regime

  4. Relevance to Financial Stability • An effective bank insolvency regime: • Is crucial for effective banking supervision (Basel Core Principles (BCP) includes this as a precondition for effective supervision; also covered in Core Principle 22) • Crucial to avoid impediments to competition and prevent distortions • Serves to contain bank losses and contingent liabilities for the government • Promotes market discipline

  5. Role of FSAPs and BCP Assessments • Virtually all assessments of compliance with BCPs are conducted in the context of FSAPs and some as part of OFC assessments • To date, compliance assessments conducted in approximately 60 countries • Some of these results, and lessons of experience have been presented in a recent paper to Bank and Fund Boards (SM/02/310) http://www.imf.org/external/np/mae/bcore/ 2002/092302.htm

  6. Example 1, CP1.1:Objectives of the Supervisory Agency There is a high correlation between countries’ level of development and clarity of the objectives of the Supervisory Agency

  7. Example 2, CP1.5:Legal Protection of Supervisors The legal protection of supervisors is an area that needs substantial improvement in a large number of member countries

  8. Example 3, CP22:Implementation of Bank Resolution Measures The implementation of bank resolution mechanisms is rather weak, a large proportion of countries was found materially non-compliant

  9. Objectives of Working Groups • List strengths and weaknesses of the bank insolvency framework in your respective countries • Identify the sources of the strengths and weaknesses, and discuss areas of reform • Distribution of roles and responsibilities • Clear triggers, criteria, and rules for the insolvency phase • Legal protection/operational autonomy • Prepare a list with the issues identified, their causes, and major areas of reform.

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