FINANCIAL SECTOR FORUM

1
FINANCIAL SECTOR FORUM
STANDARDS FOR CREDITOR RIGHTS AND CORPORATE
INSOLVENCY SYSTEMS
Chantilly, Virginia 20 June 2002
Gordon W Johnson The World Bank
2
TOPICS COVERED

• Role of Debt Resolution Mechanisms
• Context of the WB Principles
• Lessons ROSC Pilot Program
• FY03 and Beyond

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DEBT RESOLUTION MECHANISMS

• Foster commercial confidence and predictability
• Markets more accurately price, manage, resolve
  default risk
• Establish a predictable backdrop for negotiations
• Reduce asset deterioration and promote credit
  access
• Safety valve for corporate distress
• Salvage viable businesses and preserve jobs
  (rescue)
• Efficient transfer of assets (bankruptcy)
• Vital to balance in commercial relationships
• Encourage responsible corporate behavior
  governance
• Penalize owners and managers who lack financial
  discipline or behave irresponsibly

4
INTL FINANCIAL ARCHITECTURE THE GLOBAL AGENDA
INTERNATIONAL MEASURES
NATIONAL MEASURES

• Improve transparency and disclosure by all market
  participants
• Remove regulatory bias in intl lending
• Support better risk management by highly
  leveraged institutions and counter-parties
• Develop, disseminate and support implementation
  of intl standards and codes
• Enhance surveillance
• Increase private sector involvement in crisis
  prevention
• Mobilize official contingent financing

• Improve transparency of domestic markets
• Strengthen financial systems and related
  underpinnings through implementation of
  international standards
• Strengthen debt management
• Establish appropriate and consistent exchange
  rate regimes
• Establish appropriate sequencing and safeguards
  for capital account liberalization
• Strengthen social safety nets

PREVENTION
CRI SI S
RESOLUTION

• Strengthen capacity and instruments for official
  financial support
• Establish framework and modalities for private
  sector involvement in crisis resolution
• Establish safeguards and policies for lending
  into arrears

• Provide effective bankruptcy and workout
  mechanisms
• Support financial and corporate restructuring
• Mitigate social consequences of crises

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CORE STANDARDS ASSESSMENT AREAS
- Data Dissemination (IMF) - Fiscal
Transparency (Basle Core) - Public Debt
Management (IMF/WB)
- Monetary and Financial Policy - Banking
Supervision (Basle Core) - Insurance
Supervision (IAIS) - Security Regulation
(IOSCO) - Payment and Settlement (CPSS)
- Corporate Governance (OECD) - Accounting
Auditing (IAS/ISA)
- Insolvency Creditor Rights (WB)
- Anti-Money Laundering (IMF/WB)
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CONTEXT FOR CREDIT ACCESS

• Credit is lifeblood of modern commerce
• Depends on willing lenders and lending options
• Reasonable and manageable repayment risk
• Increasing significance of collateral
• Reliable creditor enforcement mechanisms
  essential
• Increasing significance of collateral
• Collateral provides greater assurance of
  recovery
• Ineffective security leads to underutilized
  asset values
• Broadest range of security (movable and
  immovable)
• Reliable and fair legal mechanisms
• Legal, Institutional and Regulatory Frameworks
• Provide a predictable backdrop for resolution

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RISK ASSESSMENT CONTINUUM
Enforcement Insolvency
Credit Culture
Financial Distress

• Credit Assessment
• Information
• Identify Security
• Negotiation
• Contracting
• Registry
• Monitoring

• Risk Assessment
• Information
• Identify Options
• Negotiation
• Amend Contracts
• Possible action
• Monitoring

• Enforcement
• Formal Insolvency
• Liquidation, Rescue
• Security Rights
• Information
• Negotiation (Plan)
• Implementation
• Monitoring

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INSOLVENCY STANDARDS AREAS COVERED
Credit Access
Credit Management
Credit Resolution

• Credit Protection
• Collateral Systems
• Registries (Notice) Transparency
• Enforcement Procedures
• Public Auction Collections

• CRM Practices
• Asset Resolution Devices
• Legal Framework for Workouts
• Tax Other Laws (ie, Tax treatment of NPLs)

• Corporate Exit Mechanisms
• Liquidation
• Rehabilitation
• Quasi-formal restructuring
• Implementation
• Institutional
• Regulatory

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CONTEXT FOR INSOLVENCY SYSTEMS
Monetary Fiscal
Governmental Political
Tax other laws
State
Mortgage laws
Secured Creditors
Bank Regulators
Collateral laws
Creditors
Contract/Commercial
Environmental, Company, Tariff others
Employees
Labor laws
Regulatory
Enterprise
Legal
Company laws
Professionals
Insolvency System
Shareholders
Securities laws
Administrative
Directors etc
Others laws
Institutional
Cultural Social
Economic Commercial
Courts Bankruptcy Commercial Civil
Agency
Accounting Auditing
Corporate Governance
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PRO-CREDITOR vs PRO-DEBTOR
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PILOT ROSC Lessons Applications

• Total 12-13 - AFR, EA, ECA, LAC, MNA, SA
• 6 Linked to FSAPs Croatia, Czech Republic,
  Lithuania, Russia, Slovakia, Ukraine
• 6 Led/Linked to Technical Assistance Argentina,
  Brazil, Czech Republic, Lithuania, Slovakia,
  Turkey
• SAL Programs Turkey (PFPSAL 2), Slovak (EFSAL)
• Crisis Management Argentina Workout framework
• FY03 15 Countries, Launch Global FIRM

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FORUM INSOLVENCY RISK MANAGEMENT
Global FIRM (Partners) EU, IMF, OECD, OHADA,
UNCITRAL ADB, AfDB, ALOS, EBRD, IADB, IFC INSOL,
IBA (J), IPBA, IABA, Donors
Secretariat World Bank
Research Training Center World Bank
Regional Dialogue Networks

• Global Insolvency Law Database
• Knowledge Dissemination
• Capacity Building/Distance Learning
• Transparency

AFR
EAP
ECA
LAC
MNA
SA
FIRST
Technical Assistance