6. Problem Bank Resolution 1

Some basic terms  Resolution;  reorganization;  administration;  insolvency;  liquidation  problem bank 2

Accountable authorities  central bank  regulation authority  treasury department  deposit insurance company   3

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 4

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 5

 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. 6

 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. 7

 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.  Mexico’s resolution regime for banks introduced in 2006 lists five objectives: protect depositors’ interests and creditor rights; prevent a greater and unnecessary deterioration of bank´s assets; minimise the negative impact on the rest of the financial system; protect the payment system; and reduce potential fiscal costs. 8

 Some countries’ resolution arrangements are subject to least-cost requirements  Some countries specify objectives linked to depositor, consumer or policyholder protection. 9

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.” 10

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.” 11

 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 12

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. 13

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”). 14

 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 15

 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. 16

 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. 17

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 18

China’s Resolution Regime  Handling Unexpected Events;  Early Interventions;  Takeover and Reorganization;  Suspension for Internal Rectification;  Bank Closure;  Bankruptcy 19