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Session V: Insolvency Resolution

Session V: Insolvency Resolution. Peter Brierley Bank of England. Introduction. What these papers are about: - OPTIMAL RESOLUTION OF SYSTEMIC BANKS Objective of Authorities: - ORDERLY AND EFFICIENT RESOLUTION. Orderly and efficient resolution of systemic banks. Key Requirements

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Session V: Insolvency Resolution

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  1. Session V: Insolvency Resolution Peter Brierley Bank of England

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

  3. Orderly and efficient resolution of systemic banks • Key Requirements • Limit risks to financial stability • Maximise bank’s franchise • Preserve continuity of contractual arrangements • Penalise bank management and shareholders • Treat creditors equitably • Reimburse insured depositors rapidly

  4. 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.

  5. Preservation of Financial Stability • Preserve the Bank’s systemic activities • Not the same as rescuing the bank • Hupkes’ (2004) options: • Replacement • Detachment • Immunisation • Key problem area: termination/close out rights

  6. 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

  7. 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

  8. 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

  9. 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)

  10. 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

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