XII Revocation of the Banking License
- T. Asser
- Published Date:
- April 2001
1. Grounds to Revoke the Banking License
For a bank, the revocation of its banking license signals the end of its life as a bank. Except for banks whose corporate charter and banking license are combined in one instrument,358 the revocation of the banking license would normally not signal the end of the bank as a corporation; rather, revocation of a bank’s license means revocation of its authority to engage in core banking activities—taking deposits from the public and using them to make loans. As a bank’s activities usually include other activities not requiring a banking license, there is at least a question whether the former bank should not be permitted to continue these other activities as a corporation without a banking license.359
In some countries, the law covers the main regulatory measures—corrective action, taking control of a bank, and license revocation—under the same grounds.360 The same is true where and to the extent that the law formulates regulatory measures as limits or conditions attaching to the banking license.361 In other countries, the law gives special grounds for revocation of the banking license. Accordingly, the banking license may be revoked—for instance, when the bank violates a provision of the banking law or regulations, or disregards a guideline, warning, or agreement made pursuant to the banking law;362 or only when such violations are exceptionally serious;363 or when the interests of the bank’s depositors or other creditors are threatened;364 or when the bank is no longer meeting its obligations as they mature.365 Several banking laws authorize revocation of the banking license on the ground that continuation of the authority to conduct banking activities would not be in the public interest.366 Generally, the grounds for license revocation are broadly phrased because it is impossible for the legislature to foresee all possible circumstances in which a bank should be closed.
Sometimes, the law sets standards in the form of statutory presumptions that a certain ground for regulatory action exists if one of the standards is met. Thus, for instance, in Germany, revocation of the banking license is authorized when there is a danger that the bank will be unable to meet its obligations toward its creditors; the law then provides that such danger exists, inter alia, if the bank loses half of its capital, reserves, and surplus, or if the bank has lost 10 percent of its capital, reserves, and surplus during each of the last three years.367
Insolvency per se does not always provide sufficient justification for revocation of the banking license. Neither does a court order opening insolvency proceedings under insolvency law. The reason is that the bank might yet be rescued or be transferred to another institution. In several countries, the law requires for the revocation of a bank’s license a finding by the bank regulator that corrective measures specified in the banking law could not ensure the viability of the bank.368 This seems a proper approach as it requires the regulator to conduct a final review of the chances of success of corrective action. However, if the finding would be required for all banks in distress, it would implicitly impose on the regulator the duty to do for every bank all that is within its power to save it, which obviously would go too far.
Generally, the law provides a reasonable degree of discretion to the bank regulator for revoking a banking license by including broadly phrased grounds for license revocation and thereby leaving room for judgment. In this area of bank regulation, regulatory discretion is important, for several reasons. The revocation of a banking license requires careful judgment, based on the particular circumstances of each case, because the decision to revoke the license of a bank is final, and practically irrevocable as the law normally requires prompt liquidation of each bank whose license has expired. In situations where one or more statutory grounds for license revocation have been met, the bank regulator should nevertheless have authority to let a bank keep its license—for instance, when the infraction of the bank is relatively minor and license revocation would be an abuse of authority; when a bank is deemed too big to fail; or when, in a systemic banking crisis, a mindless application of the rules would lead to the wholesale closure of the banking system.
2. Authority to Revoke the Banking License
Usually, the banking law provides for revocation of the banking license upon request of the bank (or its owners or management),369 or when the banking license has not been used to engage in banking activities for a certain period of time.370 Normally, such request will be granted if the bank is deemed solvent and the proceeds of the bank’s liquidation would be adequate to cover the bank’s liabilities.371 Hereinafter, only revocation of the banking license as a regulatory response to banking problems will be discussed.
The bank regulator is generally given exclusive authority to revoke the banking license. There are good reasons for doing so. As was discussed before, a regime where an agency other than the bank regulator is responsible for revocation of the banking license tends to weaken accountability. And if that agency is a member of the political establishment,372 the regime is exposed to risk of political pressure and interference. In some countries, the law attempts to compromise by requiring that a banking license be revoked only upon the recommendation of the bank regulator.373 In practice, however, the problem is not that too many banking licenses are improperly revoked, but rather that too few banking licenses are revoked. Controlling the authority of the bank regulator to revoke the banking license by making it subject to the consent of another authority is equally objectionable. Although a regime of shared responsibility may be effective in countries with a strong tradition of political discipline, it is rarely effective in most other countries.
There are conditions, however, when the law makes revocation of the operating license of a bank mandatory, leaving no room for discretion on the part of the bank regulator. This may be the case, for instance, when it has been decided that the bank is to be liquidated. Thus, in England, the banking license must be revoked if a winding-up order has been made against the bank or a resolution has been passed for the bank’s voluntary winding-up;374 in other circumstances, including the making of an administration order in relation to the bank under general insolvency law, revocation of the banking license is optional,375 because the bank might yet be saved.
In some countries, the authority to revoke the banking license need not be exercised in cases where the bank is liquidated, regardless of the form such liquidation may take, when the bank is a corporation and its liquidation has the legal effect of dissolving the corporation.376
3. Legal Effects of Revocation of the Banking License
The most obvious effect of the revocation of a bank’s operating license is that, from the time that the revocation takes effect, the bank is no longer authorized to engage in core banking activities, such as receiving deposits from the public and using these to make loans.
In several countries, the law provides that if the banking license is revoked the bank must be liquidated or be wound up in bankruptcy.377 Although there is a certain logic to such provisions, there are many activities engaged in by banks that are unregulated, do not require a banking license, and therefore are also carried out by nonbanks. This is particularly true for so-called universal banks offering securities and insurance brokerage services to the public. Why should corporations that lose their banking license not be permitted to continue engaging in unregulated activities that do not require a banking license? The former bank could continue its corporate life as a finance company. In England, the banking law does not require the liquidation of a bank when its banking license is revoked, even though the bank would be prohibited from engaging in regulated activities such as the acceptance of deposits. In other countries, the liquidation of a bank losing its banking license is optional under the law,378 or the bank losing its banking license need only repay and liquidate deposits received from the public.379
Unlike receivers, provisional administrators do not have the powers of bank owners. Therefore, provisional administrators must operate within the legal corporate structure of the bank to which they are appointed. Accordingly, provisional administration should be limited to those cases where it is expected that a bank in distress can be managed and operated back to regulatory compliance from within the institution or to conserve the value of the bank for its creditors pending its merger or liquidation. Provisional administration should be carried out in compliance with a clear plan of action adopted by the bank regulator, preferably in agreement with the bank’s owners, and specifying detailed objectives of the administration.
The banking law should provide for a special receivership for banks supplementing the general insolvency regime, in order to provide an efficient system of restructuring and transfer of banking business where prompt action is required for compelling systemic reasons. The special bank receivership should be limited in scope and be carried out under judicial administration by the bank regulator or a trustee supervised by the bank regulator. The receivership provisions in the law could be modeled on principles of general insolvency law. The role of the judiciary in instituting and administering the bank receivership, and in protecting the interests of bank creditors and owners, can be calibrated to reflect the legitimate interests of the bank regulator, the need for efficiency, and the sociojuridical traditions of the country concerned.
The law should grant the bank regulator the exclusive authority to issue and to revoke the operating license of a bank. In principle, such authority should be discretionary.