6. Problem Bank Resolution

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6. Problem Bank Resolution
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Some basic terms

• Resolution
• reorganization
• administration
• insolvency
• liquidation
• problem bank

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Accountable authorities

• central bank
• regulation authority
• treasury department
• deposit insurance company
• http//www.bankofengland.co.uk
• http//www.fdic.gov/

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National resolution regimes and tools

• Broadly speaking, there looks to be three broad
  types of resolution regime
• Special resolution regimes
• Special administration or management regimes,
• Mixed regimes

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A. Objectives

• Special resolution regimes tend to be based on
  public interest objectives, such as the
  maintenance of financial stability or the
  protection of retail depositors

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• The new German arrangements, encapsulated in the
  recent Bank Restructuring Act, specify objectives
  relating to the aversion of wider systemic risks
  emanating from bank failures.

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• The special resolution regime in the United
  Kingdom, adopted under the Banking Act of 2009,
  lists five statutory objectives protect and
  enhance financial stability protect and enhance
  confidence in the banking sector protect
  depositors protect public funds and avoid
  interfering with property rights in contravention
  of rights under the European Convention on Human
  Rights.

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• the Dodd-Frank Act balances the requirements of
  mitigating risk to the financial system
  promoting financial stability imposing losses on
  creditors, shareholders and responsible
  management and directors and maximising
  recoveries.
• Mexicos resolution regime for banks introduced
  in 2006 lists five objectives protect
  depositors interests and creditor rights
  prevent a greater and unnecessary deterioration
  of banks assets minimise the negative impact on
  the rest of the financial system protect the
  payment system and reduce potential fiscal costs.

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• Some countries resolution arrangements are
  subject to least-cost requirements
• Some countries specify objectives linked to
  depositor, consumer or policyholder protection.

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B. Scope of resolution regimes

• BCBS Recommendation 1 provides that national
  authorities should have appropriate tools to deal
  with all types of financial institutions in
  difficulties so that an orderly resolution can be
  achieved that helps maintain financial stability,
  minimise systemic risk, protect consumers, limit
  moral hazard and promote market efficiency.

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1. Financial institutions to which resolution
regimes apply

• BCBS Recommendation 1 provides that national
  authorities should have appropriate tools to deal
  with all types of financial institutions in
  difficulties so that an orderly resolution can be
  achieved that helps maintain financial stability,
  minimise systemic risk, protect consumers, limit
  moral hazard and promote market efficiency.

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• commercial banks and other deposit-taking
  institutions
• solo legal entity basis ?a consolidated group
  basis? bank holding companies ?
• investment banks
• mutual/hedge funds
• asset management firms
• insurance companies
• financial market infrastructure firms
• more than one resolution regime

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2. Distinction between systemic and non-systemic
firms

• In most countries the resolution
  arrangements do not explicitly distinguish
  between systemically important firms and other
  firms.
• There are some exceptions, however.

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C. Resolution triggers

• BCBS Recommendation 1 provides that resolution
  regimes should enable the authorities to respond
  rapidly, flexibly and under conditions of legal
  certainty to a wide variety of circumstances.
• They should provide for a process of early
  intervention with clear conditions governing
  their application.
• Countries were asked to provide details of the
  legal conditions which permit the resolution
  authority in their jurisdiction to activate or
  trigger a resolution regime (ie resolution
  triggers).

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• Resolution triggers vary across countries
• In general, they are pre-insolvency, based on
  qualitative regulatory criteria eg breach of
  laws, prudential or regulatory thresholds, or
  supervisory orders, conduct of business in a
  manner not consistent with the interests of
  depositors, or a threat to the stability of the
  financial system

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• The triggers are generally exercised at the
  discretion of the authorities
• How to address the regulatory forbearance issue
• In some countries, there is a close connection
  between resolution triggers and the available
  resolution powers.

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• In the United Kingdom, for example, certain
  general conditions need to be satisfied before
  any resolution power can be exercised, but
  additional conditions need to be satisfied before
  the resolution authorities may exercise a
  property transfer power or the power to take the
  bank into temporary public ownership.

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D. Resolution powers (other than bail-in)

• 1. Power to assume control
• 2. Transfer powers
• 3. Power to impose moratoria on enforcement of
  third party claims
• 4. Powers to require essential services to
  continue
• 5. Powers to delay public disclosure of market
  sensitive information
• 6. Time limits for exercising resolution powers
• 7. Legal protection for the resolution authority
  and its officials

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Chinas Resolution Regime

• Handling Unexpected Events
• Early Interventions
• Takeover and Reorganization
• Suspension for Internal Rectification
• Bank Closure
• Bankruptcy