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The World Bank

The World Bank. Bank Insolvency Framework and the Global Bank Insolvency Initiative Ernesto Aguirre, Manager of Banking Regulation June 20, 2002. Contents. Bank Insolvency Framework vs Corporate Insolvency - Definition - Concept of Bank Insolvency - Starting Point - Objectives

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The World Bank

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  1. The World Bank Bank Insolvency Framework and the Global Bank Insolvency Initiative Ernesto Aguirre, Manager of Banking Regulation June 20, 2002

  2. Contents • Bank Insolvency Framework vs Corporate Insolvency - Definition - Concept of Bank Insolvency - Starting Point - Objectives • Importance of the Bank Insolvency Framework - Concept - Country Examples • The Bank Insolvency Initiative - Objectives - Participants - Work Program - Contents

  3. What is the Bank Insolvency Framework and how it differs from the general (corporate) insolvency framework.

  4. Bank Insolvency Framework Definition Set of measures that should (have to) be taken by the State Authorities to confront actual/potential bank insolvency.

  5. Bank Insolvency Framework b) Applicable concept of Bank Insolvency Insufficient criteria for triggering actions under the BI Regime: • Balance sheet insolvency: Liabilities exceed assets • Liquidity insolvency: Failure to pay obligations as they fall due • Regulatory insolvency: Non-compliance with minimum solvency ratios

  6. Bank Insolvency Framework b) Applicable concept of Bank Insolvency (cont.) For banks the perception of the supervisor is key. “A bank is insolvent when the bank regulator says so...” • Concept of insolvency as a trigger point: Whenever a competent, independent regulator perceives the bank as potentially (imminent?) or actually insolvent measures under the BI regime should start to be taken.

  7. Bank Insolvency Framework c) Starting point: Bank Intervention Measures from the State Authorities which imply a direct interference with the administration of the Bank. Examples: • Cease and desist NO • Order to change directors NO or administrators

  8. Bank Insolvency Framework c) Starting point: Bank Intervention (cont.) • Recapitalization ordersNO • “Recovery Program”NO- when specific implementation and design are carried out by the banks’ administration YES- when implementation or specific design are made by (or under the orders from) the banking regulator or its agents

  9. Bank Insolvency Framework c) Starting point: Bank Intervention (cont.) • Agent of the Bank RegulatorYES in the Board of Administration(veto powers, etc.) • “Controlled administration”YES • Administration YES(with or w/o ownership participation

  10. Bank Insolvency Framework d) Objectives Primary objectives • To protect the payment systems • To preserve the efficient provision of credit and banking services to the economy

  11. Bank Insolvency Framework d) Objectives (cont.) Preconditions: • Public confidence in the Banking System • Technical capability of the Banking System

  12. Bank Insolvency Framework d) Objectives (cont.) Secondary objectives • Market discipline • Efficiency of the process • Equity of treatment

  13. Bank Insolvency Framework Secondary Objectives (cont.) The secondary objectives become the paramount ones when the bank has been closed (Banking Liquidation) and it is only in this context that all principles applicable to Corporate insolvency apply equally to the two processes. ( i.e. The 3 secondary objectives, plus all principles reflected in Principle 6 of the Legal Framework for Corporate Insolvency)

  14. Bank Insolvency Framework Conclusion The scope of the BI regime is: • Very wide, and • Different from the scope of the CI Regime (similar only in the context of Bank Liquidation)

  15. II. Importance of the Institutional, legal and regulatory framework to deal with bank insolvency, including in the context of systemic crisis Strategy- - - - - - -Framework- - - - -Implementation

  16. Country Examples-Mexico 1994

  17. Country Examples-Thailand 1997

  18. Country Examples-Korea 1997

  19. Country Examples-Ecuador 1998

  20. Turkey 1999Adequate legal framework but not sufficient

  21. Global Bank Insolvency Initiative Objectives: To determine the appropriate institutional, legal and regulatory framework to deal with bank insolvency including in the context of systemic crises. ( “the framework”) To, progresively, create an international consensus regarding the framework including best practices and alternatives to deal with bank insolvency.

  22. Bank Insolvency Initiative Objectives: • To design a methodology for the assesment of the countries’ institutional, legal and regulatory framework to deal with bank insolvency, and • To facilitate the provision of technical assistance to countries for the improvement of their “framework”.

  23. Participating Institutions

  24. Work Program(2002-2003) • 2 Global seminars (Basle, Washington) • 5 Regional seminars (Uruguay, Poland, Malaysia, South Africa, Lebanon) • Core Consultative Group • Final report and supporting documents • Regional Support Groups • Consultation/ Questionnaire and global database • Internet web-site

  25. Key Framework

  26. Key Framework

  27. Key Framework

  28. Beyond the Legal Framework • Crises type 4 • Judicial system • Enforcement capabilities • Other issues

  29. The World Bank Bank Insolvency and the Global Bank Insolvency Initiative Ernesto Aguirre, Manager of Banking Regulation, June 20, 2002

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