29 October 2018

BIS: How to manage failures of non-systemic banks? A review of country practices

Insolvency regimes generally share a number of common objectives and procedural features. Broadly speaking, a liquidator is charged with realising the assets and settling creditors’ claims in accordance with the applicable creditor hierarchy and principles such as equal treatment of creditors of the same class. The liquidator is generally required to carry out that task in a way that maximises value for creditors. 

However, ordinary corporate insolvency regimes are not best suited to the specific characteristics of banking business and particular risks that arise when a bank fails. The unique susceptibility of banks to runs and their importance to the functioning of the financial system and real economy through activities such as deposit-taking, provision of credit and transmission of payments mean that bank failure is significantly more likely to give rise to public policy concerns than ordinary corporate failures. These concerns have motivated the development of resolution regimes for systemically important banks. However, banks that do not meet the thresholds or conditions for the application of resolution regimes are subject to winding-up under the applicable insolvency regime. While some countries have developed bank-specific insolvency procedures, in others a bank insolvency must be managed under the ordinary corporate regime. 

Bank-specific regimes typically have a number of common features that reflect the public interest concerns associated with bank failure. Those features, which include the objectives of the liquidator, an expanded role for administrative authorities and a reduced role for creditors in the proceedings, are aimed in particular at protecting depositors by ensuring as far as possible minimum interruption of access to at least part of their funds and, more generally, at promoting  speed and efficiency in the insolvency procedure.

Most bank insolvency regimes have a depositor protection objective, in addition to the conventional insolvency objective of maximising value for creditors. By contrast, few have explicit financial stability objectives since, where financial stability is a driving concern in the failure of systemically important banks, resolution is generally the more appropriate approach.

Typically, bank insolvency proceedings can be opened on a wider range of grounds than ordinary corporate insolvency. The ability to open insolvency proceedings on supervisory grounds reflects bank-specific characteristics, such as the difficulty of valuing banks’ assets; the peculiar fragility of banks; and the possible speed of decline. Timely opening of insolvency also protects preferred claims of depositors, in particular by maximising the assets that are available to cover those claims.

Bank-specific regimes generally feature an enhanced role for administrative authorities and reduced procedural involvement for creditors compared with ordinary corporate bank insolvency. This feature tends to be common, to a greater or lesser extent, irrespective of whether the bank insolvency regime is administrative or court-based. It reflects the “public interest” dimension of bank insolvency and may support a more streamlined and faster process.

Generally speaking, timely and fast-moving insolvency proceedings better preserve asset value, thus better protecting preferred claims of depositors, in particular by maximising the assets that are available to cover those claims. Administrative regimes, where the insolvency is conducted or overseen by an administrative authority, may prioritise public interest objectives such as depositor protection. An administrative authority with appropriate expertise may be better able to direct a complex procedure efficiently and in a way that is consistent with its own statutory objectives. An administrative regime may also provide a wider range of options for bank insolvency by conferring on the responsible authority additional instruments beyond conventional liquidation actions, which may increase available options in insolvency. However, depositor protection objectives may also be achieved within a framework of appropriately modified court-based procedures.

Given the large variety of practices in bank insolvency regimes, some guidance on effective features and practices would be beneficial. Even in the limited sample of 12 jurisdictions covered in this study, country practices differ substantially. This may complicate cross-border insolvencies. Moreover, as this study highlights, there is considerable variation in the range of instruments available in insolvency. Some international discussion about the suitable range of insolvency instruments and institutional and procedural features that are effective in addressing the public interest dimension of bank insolvency could contribute to a broader understanding of efficient procedures.

Full speech

© BIS - Bank for International Settlements