Introduction
This chapter examines the cross-border resolution framework recommended in the Financial Stability Board’s (FSB’s) Key Attributes of Effective Resolution Regimes for Financial Institutions (“Key Attributes”), particularly focusing on the legal mechanisms for the cross-border effectiveness of resolution decisions. In doing so, it will focus on the cross-border resolution framework for large international banks or groups, which may generally include global systemically important banks (G-SIBs) and global systemically important financial institutions (G-SIFIs), as well as banks or groups that are not designated as G-SIBs or G-SIFIs but that operate in multiple jurisdictions with systemic significance in some of those jurisdictions.
The chapter is organized as follows. The first section discusses the three pillars of the cross-border cooperation framework laid out in the Key Attributes and the issues that this framework seeks to resolve. The second section focuses on the legal mechanism to give effect to foreign resolution measures, which is the third pillar of this framework. This analysis is completed, in the third section, by examining the challenges in giving effect to foreign resolution measures, including those based on the experience of IMF staff in their work with member countries. The chapter ends with a brief conclusion.
Cross-Border Cooperation Framework of the Key Attributes
As a result of financial globalization, many banking groups expanded their geographical remit and the scope of their activities. 1 These banking groups have global networks of branches and subsidiaries that span multiple jurisdictions, with systemic significance in some of these countries. Their activities often include nonbank financial intermediation (for example, securities and insurance brokerage). Financial, operational, and reputational interdependencies increased among the group entities, giving rise to the spillover of the effects of an entity’s problems in one jurisdiction to other entities in other jurisdictions, with potential systemic implications.
Despite these significant changes, the resolution of banks primarily remained a domestic matter. In many jurisdictions, domestic resolution frameworks lacked effective tools to enable the authorities to resolve a failing bank in a timely manner and differed considerably across jurisdictions. From a cross-border perspective, information sharing and cooperation arrangements between jurisdictions, particularly relevant in handling the failure of complex international banking groups, proved inadequate. Moreover, countries lacked legal mechanisms to give prompt effect to foreign resolution measures.
When confronted with the failure of a cross-border banking group, the home and host authorities’ incentives were misaligned. The protection of domestic interests (for example, safeguarding local depositors and creditors, domestic financial stability, and public funds) often prevailed over the option of a globally coordinated solution that could preserve the benefits of international business lines, financial links, and operational dependencies. National authorities had an incentive to prefer unilateral action, although this carried risks and costs, over the uncertain benefits of a proposed global solution (IMF 2014, 5).
Against this backdrop, it is not surprising that at the time of the 2008 global financial crisis, the resolution of large international banks was carried out in a disorderly fashion even among close-knit jurisdictions. Uncoordinated actions resulted in costly delays and ultimately involved large bailouts of the financial sector at the expense of taxpayers. For this reason, the international policy community endorsed, through the Key Attributes,2 a new comprehensive framework for cross-border cooperation (FSB 2014). Referencing the resolution of a cross-border bank in particular, this framework seeks to enhance cooperation among jurisdictions based on the following three pillars.
Cooperation Mandate and the Removal of Barriers to Cooperation
The Key Attributes recommend that resolution authorities are empowered and strongly encouraged to cooperate with their foreign counterparts. This overarching principle entails assigning a mandate3 to national resolution authorities to achieve cooperative solutions where possible. To support this principle, the Key Attributes recommend that a national resolution authority, as part of its “statutory objectives and functions,” should duly consider the effect of its resolution actions in other jurisdictions.4 Yet, even where a resolution authority is willing to cooperate with foreign resolution authorities, barriers in the national framework may hinder its efforts. To address this, the Key Attributes call on jurisdictions to eliminate such barriers. These may include impediments to information sharing, the trigger of an automatic action in a jurisdiction when a resolution decision is taken by a foreign authority, discrimination against foreign creditors, and inadequate legal protection for the resolution authority and its staff when enforcing foreign resolution measures (FSB 2016a, Explanatory Note 7[b]).
Ex Ante Cooperation Arrangements for G-SIFIs
For G-SIFIs, the Key Attributes recommend establishing crisis management groups (CMGs),5 including the relevant authorities of key jurisdictions. CMGs are also supported by the setup of institution-specific cooperation agreements (COAGs). Because bilateral arrangements among relevant jurisdictions might culminate in a complex web of arrangements that are misaligned and difficult to implement, the Key Attributes contemplate COAGs as multinational arrangements involving the home jurisdiction and all key jurisdictions (FSB 2016a, Annex 2). COAGs would facilitate cooperation through the ex ante commitments of the authorities from all relevant jurisdictions to cooperate in the preparation of recovery and resolution plans, and in the effective implementation of resolution measures.
Cross-Border Enforcement of Resolution Decisions
The Key Attributes seek to ensure that countries have transparent and expedited processes to give effect to foreign resolution measures. The following hypothetical example illustrates why having such processes is important for cross-border resolution.
After the failure of a large Utopian bank that has a branch in Atlantis, the Utopian resolution authority seeks to implement a bail-in resolution strategy through the write-down of the claims of certain classes of Utopian bank’s creditors, including those booked in the Atlantis branch. In a simplified world, at least the following scenarios seem possible: First, the creditors of the branch may launch proceedings in Atlantis to seek to collect the full amount of their claims. Whether and how the Utopian resolution authority can obtain a stay on the actions commenced by the creditors of the branch in Atlantis may impact the success of its bail-in strategy. Second, the resolution authority in Atlantis may decide that it is not in the interest of its jurisdiction to support the resolution strategy of Utopian authorities, and could rather launch its own separate liquidation proceedings in Atlantis and ring-fence the assets of the branch for the primary satisfaction of local creditors. This will again frustrate, at least in part, the Utopia’s bail-in strategy.
Even in a different scenario in which the Utopian bank does not have any physical presence in Atlantis, its orderly resolution may still depend on the effectiveness of Utopian authorities’ decisions in Atlantis. This could be the case when the financial contracts entered into by the Utopian bank are governed by the law of Atlantis. In this situation, the effectiveness of the Utopian authorities’ decision to bail in the liabilities under these contracts would depend on the recognition or support of this measure by the Atlantis authorities.
As illustrated previously, the home resolution authorities’ decisions are effective within their territory. Their decisions do not automatically allow them to assume the control over the bank’s entities or assets in other jurisdictions or to take other resolution measures affecting liabilities governed by the law of those jurisdictions. Addressing this problem is critical in the case of large international banks because these typically operate in multiple jurisdictions6 through a complex web of branches and subsidiaries and have assets and liabilities subject to the laws of different jurisdictions. For this reason, the Key Attributes call for jurisdictions to ensure that their legal frameworks have expedited processes through which a resolution measure taken by a foreign resolution authority can be given legal effect by the host country.
Cross-Border Enforcement Mechanism Under the Key Attributes
As one of the building blocks of the Key Attributes’ cross-border cooperation framework, enforcement of foreign resolution measures presents certain specific features. This section will discuss the general approach adopted and legal mechanisms suggested by the Key Attributes in order to facilitate and encourage giving effect to such foreign measures.
Key Attributes’ Approach to Cross-Border Enforcement
In the resolution of a cross-border bank, three different approaches are, in principle, conceivable.7 At one end of the spectrum of possible approaches, under a territorial approach, the host jurisdiction commences a local liquidation or resolution proceeding over the establishment located in its territory.8 For example, in the United States, the liquidation of the branches of foreign banks is carried out territorially. In the European Union/European Economic Area (EEA), member-states can adopt this approach in relation to the insolvency of the branches of non-EU/EEA banks.
At the other extreme, under the universal approach a cross-border bank is treated as a single entity and its resolution is conducted under a single resolution proceeding in the home jurisdiction. For example, the US bank liquidation framework purports to cover all foreign branches of the liquidated bank. The liquidation or restructuring of a Swiss bank covers all the assets and liabilities of the bank wherever they are located. The EU/EEA Winding Up Directive adopts a universal approach in that the liquidation or reorganization decisions of a member-state are given automatic and mutual recognition in other member-states in which the credit institution has branches.
The universal approach does not apply to subsidiaries; it is mostly relevant only when a large international bank operates as a single global entity through branches (Hupkes 2010). However, the corporate structure of international banks is a complex web of branches and subsidiaries; therefore, neither the universalist nor the territorial approaches are fully adequate to tackle the challenges arising from the resolution of these banks. In addition, the universality principle is based on the prerequisite of a degree of harmonization that can facilitate the recognition of home authorities’ decisions in other jurisdictions.
Between the territorial and universalist models lies the middle ground approach, by which the home resolution authority takes the lead in resolving the bank, and other jurisdictions are encouraged to cooperate with the home authority but retain the discretion not to do so if necessary to protect domestic interests. This middle ground approach is enshrined in the Key Attributes and reflects the earlier work undertaken by the Basel Committee and the IMF in the wake of the global financial crisis.
The Basel Committee’s Cross-Border Resolution Group notes that the discussions on territoriality and universality are theoretical (Bank for International Settlements 2010). A realistic approach is one that not only recognizes the possibility of ring-fencing in a crisis but also seeks to ensure that national frameworks improve the ability of home and host authorities to facilitate the continuity of critical cross-border operations. This model requires greater convergence in national laws, which would likely improve cooperation by promoting a common understanding, predictability, and reliability.
Shortly after the Cross-Border Resolution Group’s report (Bank for International Settlements 2010), the IMF proposed9 a middle ground approach built on an enhanced coordination framework. This approach is based on the premise that adherence by jurisdictions to certain core standards would instill confidence in their willingness and capacity to cooperate while maintaining discretion to take independent action when necessary to protect national interests. These core coordination standards include, among others, a minimum level of harmonization of national frameworks on nondiscrimination against foreign creditors, effective resolution powers, and appropriate creditor safeguards.
In line with the Basel Committee and IMF proposals, the Key Attributes’ middle ground approach relies on the convergence of national frameworks toward effective resolution standards and on enhanced cooperation among national authorities, through, ex ante, formal arrangements. Finally, it requires that jurisdictions have legal mechanisms in place to give effect to the decisions of foreign authorities while retaining discretion to observe their national interests.
Legal Mechanisms for Cross-Border Enforcement
The Key Attributes contemplate two legal mechanisms that establish “transparent” and “expedited” processes to give effect to foreign resolution measures through recognition and support. These are statutory mechanisms rather than purely contractual mechanisms.10
Recognition
Recognition implies that “a jurisdiction would accept the commencement of a foreign resolution proceeding domestically and thereby empower the relevant domestic authority (either a court or an administrative agency) to enforce the foreign resolution measure or grant other forms of domestic relief, for example, a stay on domestic creditor proceedings” (FSB 2016a, Explanatory Note 7[e]).
Recognition, as a cross-border enforcement mechanism, has distinctive features that can be usefully deployed in a cross-border resolution context (FSB 2014, 5). It is not provisional on the initiation of domestic resolution proceedings or the exercise of resolution powers under the domestic law. Thus it can be used to give effect to foreign measures even if the conditions for resolution over the local entity are not met. Also, foreign authorities may seek recognition from the jurisdictions in which the bank under resolution does not have any physical presence, especially in cases when the relevant bank’s assets are located in, or its liabilities are governed by, such a jurisdiction.
The legal effects of recognition will be determined by domestic law. For example, in Hong Kong Special Administrative Region and the United Kingdom, a recognized foreign measure has substantially the same legal effect as it would have if it were made under the laws of these jurisdictions.11 The Bank Recovery and Resolution Directive (BRRD) in the European Union, on the other hand, does not include a specific provision to prescribe the effect of recognition.12 Because jurisdictional approaches may differ, a clear understanding on the legal effects of recognition between the home and host authorities is essential during the resolution planning stage.
From a procedural perspective, recognition can be granted by administrative authorities (for example, France, Germany, Hong Kong Special Administrative Region, Italy, Spain, Sweden, Switzerland, and United Kingdom) or by courts (for example, Australia, Canada, India, Japan, Mexico, South Africa, and United States). Court-based proceedings may be provided in a corporate insolvency regime that is also applicable to banks or under a special recognition framework in the bank resolution law.
Support
In contrast to recognition, the concept of support envisages host resolution authorities giving effect to foreign resolution measures by taking supervisory or resolution measures under their domestic law. These measures aim to achieve in the domestic legal system outcomes that are consistent with the foreign resolution actions (FSB 2016a, Essential Criteria 7.4). Because it relies on the exercise of domestic authorities’ supervisory and resolution powers, this mechanism can apply only in jurisdictions in which the bank under resolution has a regulated presence (for example, branch, subsidiary, or listed securities).
Supporting a foreign resolution action can take different forms. Support can be provided to foreign authorities through the exercise of domestic resolution powers. For example, the host resolution authority can exercise its powers to transfer local assets and liabilities to a private purchaser or bridge bank, or impose a stay on legal actions brought by local creditors, in the context of a resolution measure taken by the home authorities and to support its outcome.
This form of support can apply only under certain circumstances (FSB 2015, 6). First, resolution powers under the domestic framework can in principle be exercised only for an entity that meets resolution conditions. Second, the ability of host authorities to support foreign actions relies on the existence in the national framework of appropriate powers. In the absence of powers that are necessary to support a foreign measure (for example, transfer powers), this form of enforcement would not work.
The exercise of supervisory powers under the domestic law can also support a foreign action in certain cases. For example, it could be expressed through the supervisory approval (FSB 2015, 6) of management or ownership changes in the local entity, arising from the home country’s resolution measures, or through exemptions from the application of certain regulatory requirements that might be triggered by such measures (for example, market disclosure requirements for bail-in).
Support to foreign resolution authorities could additionally take the form of forbearance from taking domestic action.13 In particular, host jurisdictions can support a single point of entry (SPOE) strategy by exercising their discretion not to take any action when the home country’s resolution authority adopts a resolution measure over the parent bank. Yet, limitations on this form of support exist, too. In particular, domestic insolvency frameworks may still allow creditors to initiate insolvency procedures themselves. Hence, even if the supervisory and resolution authorities refrain from taking an action against the bank to support the SPOE strategy, their efforts to support the home resolution strategy may be undermined by actions taken by creditors in the host jurisdiction.
Key Features of Cross-Border Enforcement Mechanisms
Recognition and support are not mutually exclusive, but rather complementary (FSB 2016a, Explanatory Note 7[e]). They may be used on a stand-alone basis or in combination, depending on the circumstances. At the same time, the Key Attributes prescribe a common set of recommendations and safeguards for both recognition and support.
First, the processes by which jurisdictions give effect to foreign measures should be expedited so they can be completed quickly. Second, cross-border enforcement mechanisms in a jurisdiction should be transparent. This entails having in place ex ante mechanisms that are readily accessible by stakeholders and sufficiently predictable in terms of their conditions and outcomes: well-designed statutory regimes for recognition and support may fit these requirements. Moreover, in several jurisdictions, administrative cross-border enforcement processes may provide greater speed compared to court-based processes.
Consistent with the middle ground approach, giving effect to foreign measures is subject to conditions. While there are some exceptions, jurisdictions would rarely provide for the automatic and mutual recognition of resolution measures.14
Under the Key Attributes, host countries could decline to enforce a foreign resolution measure if that would (1) have adverse effects on domestic financial stability, (2) have material fiscal implications, (3) contravene their public policy, or (4) result in the inequitable treatment of local creditors (FSB 2016a, Explanatory Note 7[g]).
However, the formulation of these conditions and the limits of the domestic authorities’ discretion not to enforce foreign measures may differ across jurisdictions. For example, the enforcement of foreign measures under the Key Attributes is provisional on the “equitable treatment” of domestic creditors in foreign proceedings, but there is no universal understanding of the meaning of this concept or how it applies. For example, the concept of equitable treatment may be germane to certain common law countries, whereas civil law countries would focus more on the “equal” treatment of creditors.15 Similarly, it is not clear whether a high threshold should apply to the “public policy” test in a resolution context.16 A clear understanding of these differences and their impact on cross-border enforcement is necessary as part of adequate resolution planning.
Challenges in Implementation
The implementation of the framework envisaged in the Key Attributes, examined previously, gives rise to a number of challenges.
First, having effective cross-border enforcement processes often requires legislative reforms, which have yet to be undertaken in many jurisdictions. Some jurisdictions—for example, the European Union (through the BRRD and the Single Resolution Mechanism Regulation), Singapore, and Switzerland—have made progress in adopting statutory frameworks for the recognition of foreign resolution measures (FSB 2014, 17). However, such statutory frameworks are missing in many other countries, including some FSB members. The establishment of adequate statutory processes for recognition and support appears to be a long-term goal.
In the interim, jurisdictions can employ different strategies for the swift cross-border enforcement of resolution decisions. These are based on contractual approaches and the implementation of an SPOE strategy. The contractual approach is based upon the principle that courts in most countries will recognize and enforce a foreign resolution measure if the parties to the relevant contract have agreed to be bound by the laws of that foreign jurisdiction. This approach may in particular be useful in achieving an extra-territorial effect in two cases: (1) while temporarily staying early termination rights (including as a result of cross-defaults) in financial contracts that are subject to a foreign law; and (2) when subjecting liabilities governed by a foreign law to bail-in. While this approach relies on parties voluntarily agreeing to such provisions, legal frameworks can also empower resolution authorities to require banks to include clauses increasing cross-border enforceability of their resolution actions.17 Important steps have been taken to implement the contractual approach, particularly by the International Swap Dealers Association, in cooperation with the FSB. “ISDA’s “Resolution Stay Protocol” enables parties to amend their master agreements in order to contractually recognize the cross-border effect of temporary stays imposed under the resolution regime applicable to their counterparty or to this counterparty’s certain affiliates, irrespective of the law governing these agreements.
However, the contractual approach is not a perfect substitute for effective cross-border enforcement frameworks enshrined in law (FSB 2014, 11). Although statutory regimes can play a role in encouraging or even requiring contractual arrangements, the effectiveness of this approach is limited by the willingness of market participants to use it. To improve resolvability and prevent the different treatment of similarly situated creditors, the contractual solution needs to be adopted by a firm and its counterparties in relation to all relevant cross-border contracts, including nonstandard contracts. Contractual approaches are generally relevant for a limited set of resolution actions, that is, temporary stays on early termination rights and bail-in. Even in the case of bail-in, certain aspects of a bail-in tool (for example, suspension of trading and automatic cancellation of shares) cannot be implemented only through contractual clauses. “When firms are required to incorporate recognition clauses into their contracts, this would apply only prospectively, which means that such clauses are not applicable to the existing arrangements, unless these are modified.
The need for cross-border recognition frameworks may be lower when an SPOE strategy is pursued because, in this case, resolution powers are applied only to the parent or holding company at the top of the group (FSB 2013). However, the SPOE may not always be the strategy adopted by the authorities; this will depend on many factors, such as the group structure of the institution under resolution. Also, even when it is adopted, some forms of recognition measures in the host countries may still be needed, such as preventing the counterparties of the local subsidiaries from exercising their early termination rights arising under cross-default clauses.
The second challenge relates to jurisdictional discrepancies. Greater harmonization is needed between national resolution regimes. The FSB has called for countries to achieve greater harmonization by fully implementing the Key Attributes. Yet the FSB has noted that only a subset of its members has a resolution regime containing the comprehensive powers recommended by the Key Attributes (FSB 2016b, 10). In addition, many non-FSB members do not have resolution frameworks aligned with the Key Attributes. To enhance the ability of jurisdictions to enforce foreign resolution measures, convergence on a number of important features of domestic resolution regimes—including triggers, resolution powers, and safeguards—would be needed.18
With respect to triggers for the initiation of resolution proceedings, significant differences persist among jurisdictions. These substantial divergences may impede coordinated actions in resolving a cross-border bank (FSB 2016b, 22).
The degree of alignment across jurisdictions regarding resolution powers may have implications for cross-border enforcement. Even when countries have effective cross-border enforcement frameworks, a jurisdiction may be reluctant to recognize a foreign resolution measure that does not exist within its own legal framework. In addition, the host authorities’ abilities to support a foreign action may be limited to the powers available under the domestic regime. A host authority that lacks bail-in powers cannot support the home authority by writing down the liabilities of the branch in its jurisdiction. Hence, the existence of divergent powers of the home and host authorities may lead to suboptimal and inefficient outcomes in a cross-border resolution (FSB 2015, 6).
Alignment with the Key Attributes’ standards on safeguards is critical. Without such safeguards (that is, the equal treatment rule, “no creditor worse off than in liquidation” safeguard, and the protection of set-off and netting rights) in the home jurisdiction, there is a heightened risk that the host authorities will not give effect to the foreign measure on the grounds that it contravenes their public policy or the equitable treatment rule. This issue also affects contractual approaches. Under the International Swap Dealers Association Protocol, only a resolution measure taken under a resolution framework providing certain safeguards (notably, “no creditor worse off than in liquidation” and no cherry-picking) may benefit from a contractual recognition clause (FSB 2014, Annex II). In that regard, convergence to the Key Attributes’ safeguards would increase the usefulness of contractual approaches for cross-border enforcement.
The third challenge concerns incentives. Adequate incentives need to be in place for jurisdictions to cooperate. Many factors and misincentives can discourage cooperation.
Differences in creditor hierarchies between jurisdictions can hinder the cross-border effectiveness of a resolution measure (IMF 2014, 13 et seq). Creditor hierarchy determines how losses would be allocated upon failure of a bank. Significant differences in the creditor hierarchy rules of the home and host jurisdictions, including with respect to the ranking of insured deposits, could mean that the host creditors would receive less in the home proceeding compared to the treatment they would have if a separate proceeding were to be commenced in the host country. In such cases, the host authority may decline to give effect to foreign measures and launch a separate resolution or liquidation proceedings against the branch operating in its jurisdiction. Moreover, material divergences in the hierarchy of claims may even give rise to a public policy consideration in some jurisdictions. Unfortunately, except for limited harmonization within the European Union on the ranking of covered and eligible deposits,19 as well as senior unsecured debt instruments, there is no uniform approach across jurisdictions on creditor hierarchy. The Key Attributes do not provide any guidance on this issue either.
In the case of subsidiaries, the host authorities’ incentive to cooperate would be shaped by the availability of sufficient loss-absorbing capacity at the parent bank or holding company level. Host authorities would also seek assurances that resources generated through bail-in at the parent bank can be downstreamed to local subsidiaries for capital and liquidity (FSB 2013, 15).20 Internal total loss-absorbing capacity requirements may give to the host authorities the necessary comfort that, if needed, they will have capacity to resolve subsidiaries on an ongoing basis without disruption to domestic financial stability or taxpayers’ expense. Therefore, the design of appropriate amount and location of these requirements could align the incentives of home and host authorities (IMF 2014). The resolution planning process is an important forum through which obstacles to cooperation can be identified and incentives aligned.
Fourth, the effective implementation of cross-border cooperation frameworks will depend, to some degree, on how courts will interpret them at the national level. Courts can be involved in giving effect to foreign resolution measures in different ways. Courts can be the competent authorities to adjudicate on recognition requests made by foreign authorities. In the case of support, the host resolution authority’s decision may be subject to a court approval (for example, imposing a stay on creditor actions), as envisaged by the national resolution framework. Moreover, when the recognition framework for the enforcement of foreign measure is led by an administrative authority, interested parties may apply to courts for the judicial review of the authorities’ enforcement decisions or simply for the collection of their claims by seeking to set aside the legal effect of a foreign measure. Given the significant role played by courts, it is therefore not surprising that the effectiveness of a cross-border enforcement framework will depend on the approaches that courts take. Initial experience with the courts’ interpretation of the BRRD demonstrates the challenges in this respect, even in the context of a framework that envisages automatic recognition.21
In addition, when the power to grant recognition or approve a supportive measure lies with the courts, home resolution authorities will still need to engage during the resolution planning phase with their foreign administrative counterparties in the host jurisdiction, seeking to identify legal impediments to recognition or support. The involvement of different authorities in planning and implementation stages may add a degree of uncertainty as to the extent which the desired outcomes in the resolution plans can be achieved in practice.
Fifth, the limits of cooperation and the extent to which cooperation can meet the needs of all affected jurisdictions must be recognized. The resolution strategies being developed for G-SIFIs in CMGs include authorities from home authority and key host jurisdictions. Key host jurisdictions will be determined by the home authority based on the significant or critical operations of the G-SIB, including its material operating entities or the holding company.22
It is possible that the CMGs would not include authorities from smaller jurisdictions, such as low-income countries, where the bank has a presence, including through operations systemically important for that jurisdiction but that are not material for the resolution of group. Whereas the FSB has developed guidance for cooperation and information sharing between CMGs and non-CMG host authorities in jurisdictions where a G-SIFI has a systemic presence, there could still be cases in which the interests of the CMG and non-CMG members are not aligned. In these circumstances, the incentives for such non-CMG jurisdictions to protect their domestic interests by ring-fencing local operations may be higher (IMF 2014, 23). This demonstrates the challenges of cooperation, particularly when a global bank is active in dozens of jurisdictions.
Conclusion
The Key Attributes represent a major achievement in enhancing cooperation in cross-border resolution. A key component of this enhanced cooperation framework is the establishment of expedited and transparent recognition and support mechanisms to give effect to foreign resolution measures. These mechanisms reflect a middle ground approach in which the host authorities are encouraged to defer to the home authority while retaining discretion to take a different action when this is necessary to protect their national interests.
However, a great deal of work remains to be done to implement cross-border enforcement mechanisms suggested by the Key Attributes. Legislative reforms to establish these mechanisms and greater harmonization of national resolution regimes are essential. The successful implementation of these legal mechanisms also depends on the existence of adequate incentives for the authorities to cooperate and on the predictability of courts’ role in cross-border resolution.
Through its lending, surveillance, and technical assistance activity, the IMF is uniquely positioned to promote adherence to the Key Attributes’ cross-border resolution framework by its members, accounting for the characteristics of their financial systems. Given the challenges ahead, the IMF is deeply committed to working with its members and the FSB to identify the legal impediments to cross-border resolution and to develop solutions to address them.
References
Bank for International Settlements (BIS). 2010. Report and Recommendations of the Cross-border Bank Resolution Group. Basel, Switzerland. https://www.bis.org/publ/bcbs169.pdf.
Financial Stability Board (FSB). 2013. Recovery and Resolution Planning for Systemically Important Financial Institutions: Guidance on Developing Effective Resolution Strategies. Basel, Switzerland. http://www.fsb.org/wp-content/uploads/r_130716b.pdf?page_moved=1.
Financial Stability Board (FSB). 2014. “Key Attributes of Effective Resolution Regimes for Financial Institutions.” Basil, Switzerland. https://www.fsb.org/work-of-the-fsb/policy-development/effective-resolu-tion-regimes-and-policies/key-attributes-of-effective-resolution-regimes-for-financial-institutions/.
Financial Stability Board (FSB). 2015. Principles for Cross-Border Effectiveness of Resolution Actions. Basel, Switzerland. http://www.fsb.org/wp-content/uploads/Principles-for-Cross-border-Effectiveness-of-Resolution-Actions.pdf.
Financial Stability Board (FSB). 2016a. Key Attributes Assessment Methodology for the Banking Sector: Methodology for Assessing the Implementation of the Key Attributes of Effective Resolution Regimes for Financial Institutions in the Banking Sector. Basel, Switzerland. https://www.fsb.org/wp-content/uploads/Key-Attributes-Assessment-Methodology-for-the-Banking-Sector.pdf.
Financial Stability Board (FSB). 2016b. Second Thematic Review on Resolution Regimes: Peer Review Report. Basel, Switzerland. https://www.fsb.org/wp-content/uploads/Second-peer-review-report-on-resolution-regimes.pdf.
Hüpkes, Eva. 2010. “Rivalry in Resolution—How to Reconcile Local Responsibilities and Global Interests.” European Company and Financial Law Review 7 (2): 210–39.
International Monetary Fund (IMF). 2010. Resolution of Cross-Border Banks: A Proposed Framework for Enhanced Coordination. Washington, DC. https://www.imf.org/external/np/pp/eng/2010/061110.pdf.
International Monetary Fund (IMF). 2014. Cross-Border Bank Resolution: Recent Developments. Washington, DC. https://www.imf.org/external/np/pp/eng/2014/060214.pdf.
Ross Leckow is currently at the Bank for International Settlements and was previously Deputy General Counsel of the IMF Legal Department. Ender Emre is Counsel of the IMF Legal Department.
For a brief account of the emergence of international banking groups and the cross-border arrangements in place before the global financial crisis, see IMF 2010.
The Key Attributes were endorsed by the G20 at the Cannes Summit in November 2011 as “a new international standard for resolution regimes.” While the FSB adopted in 2014 some additional guidance in relation to information sharing and sector-specific implementation, no changes were made to the original formulation of Key Attributes.
For example, the Dodd-Frank Act requires the Federal Deposit Insurance Corporation to coordinate, to the maximum extent possible, with foreign regulatory authorities regarding the resolution of any failed financial company. In Switzerland, the Financial Market Supervisory Authority is required to coordinate the bank’s bankruptcy proceedings with the competent foreign authorities to the maximum extent possible. In Japan, the Financial Services Agency is empowered to promote international cooperation relating to its functions. However, assigning such an explicit duty is not common among the FSB jurisdictions; when it is provided, there are limitations. For example, under the EU framework, member-states have a duty to cooperate with other member-states only, whereas the Federal Deposit Insurance Corporation’s mandate is limited to cases in which resolution is commenced in the United States.
Key Attributes 2.2 and 3.9.
CMGs are recommended by the Key Attributes 8.1 for G-SIFIs with the objective of enhancing preparedness for, and facilitating the management and resolution of, a cross-border financial crisis affecting the firm. In addition to home authorities, a CMG will include the authorities from jurisdictions host to the entities that are material to the resolution of the group.
For example, Lehman Brothers Holdings operated in 50 countries with 2,985 subsidiaries.
These approaches are more relevant for the treatment of foreign branches of a cross-border bank, rather than for such a bank’s foreign subsidiaries. Subsidiaries are in any event subject to local insolvency proceedings due to their separate legal personality governed by the place of incorporation.
This approach does not constitute a discriminatory action per se. Some jurisdictions may, under their legal framework, distribute the assets to all creditors of the branch, irrespective of their residence, domicile, nationality, or other factors. However, the legal provisions of other jurisdictions would focus on the identity of the creditors (for example, by giving priority to the residents) to ensure that the liquidation procedure ultimately benefits local interests. Because the effectiveness of the territorial approach relies on the existence of a sufficient amount of assets within the reach of the domestic authorities, it may be supported by supervisory rules requiring the branch to maintain sufficient local assets relative to their local liabilities.
See IMF 2010, footnote 1, for further information.
For a discussion of contractual approaches, see the “Challenges in Implementation” section.
The United Kingdom’s Banking Act 2009, sec. 89I, and Hong Kong Special Administrative Region’s Financial Institutions (Resolution) Ordinance, sec. 188.
BRRD, art. 94(4).
Key Attribute 7.2 requires that resolution or insolvency in a jurisdiction should not be triggered automatically as a result of a resolution or insolvency action taken in another jurisdiction. Rather, domestic action should be discretionary.
For instance, the EU’s Winding-Up and Reorganization Directive contemplates automatic and mutual recognition of a member-state’s resolution decision within the EU/EEA.
BRRD, art. 95.
Under private international law and cross-border insolvency frameworks, the “public policy” test sets a high bar, such as contraventions to fundamental principles of law, for the denial of recognition. Please see the Hague Convention on Recognition and Enforcement of Foreign Judgments on Civil and Commercial Matters and the UNCITRAL Model Law on Cross-Border Insolvency. In contrast, when prescribing the grounds for the refusal of enforcement, the BRRD refers to contravention to “local law,” a notion that may be broader than “public policy” (art. 95[e]).
For example, under the BRRD, art. 55, member-states should impose a requirement on banks to insert such recognition clauses in the contracts that creates a liability eligible for bail-in and governed by the law of a third country. A similar provision was introduced recently to the BRRD for the contractual recognition of resolution stays (art. 71a).
See also recital 102 of the BRRD: “Cooperation will be facilitated if the resolution regimes of third countries are based on common principles and approaches that are being developed by the Financial Stability Board and the G20.”
BRRD, art. 108.
To that end, they would need to be assured that the intragroup exposure limits, concentration rules, or set-off rules applied to the parent company would not prevent such flow.
In Goldman Sachs International v. Novo Banco S.A., the UK court had to decide whether the Portuguese authorities’ two decisions transferring the liabilities from the resolved bank to a bridge bank under the national law transposing the BRRD were effective in the United Kingdom, which was the governing jurisdiction under the relevant contracts. While the outcome of the judicial process was ultimately in favor of the recognition, the process indicated that the matter of recognition in a bank resolution context raises highly difficult questions to resolve. In Bayerische Landesbank v. Heta Asset Resolution, the German court decided that the Austrian authorities’ decision to impose a moratorium and restructure the liabilities of an asset management company was not effective in Germany.
The home authority will consider various factors, such as the size of the group’s activities in the host jurisdiction and the impact of those activities on the continuity of the group’s global operations (FSB 2016a, Explanatory Note 8[a]).