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 (1)Limit risks to financial stability (2)Maximise bank’s franchise (3)Preserve continuity of contractual arrangements (4)Penalise bank management and shareholders (5)Treat creditors equitably (6)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: (1)Replacement (2)Detachment (3)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 (1)The structure of international banks (2)Subsidiaries versus branches (Lastra) (3)Single versus separate entity resolution (Lastra) (4)Home/host country conflicts of interest (Mayes) (5)Lack of enforceability of financial contract law across jurisdictions (6)Difficulty of preserving global financial stability (7)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