Chapter

XIV Banking System Restructuring

Author(s):
T. Asser
Published Date:
April 2001
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1. Overview

Once a systemic banking crisis412 occurs, the monetary authorities must act quickly and decisively to contain the crisis and its effects on the national economy. A systemic banking crisis generally requires measures that address not only the banking system itself but also the root causes and the effects of the crisis outside the banking sector. Thus, for instance, the authorities will not only try to contain the crisis by restoring public confidence in the banking system and to preserve a minimum of essential banking services, including measures to compensate for the sharp contraction in bank credit that typically follows a banking crisis, but will also take steps to protect other parts of the financial sector, such as the capital markets, and payment and securities transfer systems.

Restoring public confidence in the banking system, at home and abroad, is one of the most urgent and daunting tasks facing the monetary authorities. The recent history of banking crises in the United States, Latin America, Scandinavia, and East Asia teach that usually, to be successful, a response to a systemic banking crisis must include the following key elements.413

An interagency bank crisis team should be appointed to prepare a comprehensive bank restructuring program for adoption by the political establishment and to coordinate execution of the program among the various agencies concerned, such as the bank regulator, the deposit insurance agency, the central bank, and the ministries of finance, treasury, and economic affairs. It is preferable to entrust bank restructuring to an interagency team. Usually the effects of a systemic banking crisis extend well beyond the banking system. In a national economic crisis, the restructuring of the banking sector will largely depend on the ability of the domestic corporate sector to meet its liabilities toward the banks, and may well require corporate sector reform. Finally, the operational and financial assistance needed for the rehabilitation of the banking sector exceeds the capacities of the bank regulator, usually demands significant fiscal outlays and far-reaching structural reforms of the regulatory and legal frameworks in which banks operate, and therefore requires the firm support of the political establishment.

Recent analyses of banking crises in the 1990s show that the probability of success of a bank restructuring program is improved and the negative macroeconomic impact of a banking crisis is reduced if, from the beginning, the program is conceived and presented to the public as a consistent and comprehensive strategy; programs that developed in a piecemeal fashion over time were deemed less successful.414

A bank restructuring program should detail macroeconomic and financial policies and measures designed to contain the crisis and to restore viability to the banking system. It should accompany and be consistent with a credible macroeconomic stabilization program with comprehensive financial sector restructuring and reform strategies. A bank restructuring program should provide appropriate incentives to all economic agents concerned (depositors and other bank creditors, bank owners, borrowers, and bank administrators) in order to promote the restructuring process, to reduce moral hazard, and to minimize the cost of bank restructuring to the government. Adoption and execution of a bank restructuring program should be marked by prompt publication of the program and its revisions, and by frequent disclosure of all significant information concerning the restructuring process to interested parties, both at home and abroad.

Bank restructuring is nearly always required in order to avoid that insolvent institutions would continue to operate and thereby worsen the crisis by contributing to distortions in economic incentives and moral hazard. Taking control of insolvent banks is typically needed to facilitate debt workouts and the resumption of capital flows, and to minimize fiscal costs and monetary policy constraints. Structural reforms may be required to address public concerns that fundamental flaws in the banking system contributed to the crisis. Often reforms cannot be limited to the institutional, administrative, and legal framework in which banks conduct their activities, but must extend beyond the banking system to correct structural deficiencies in the corporate sector (Korea) or even the sociopolitical regime (Indonesia).

In the five countries most affected by the Asian crisis of 1997,415 extensive liquidity support was provided by the central bank. Such support must usually be sterilized by monetary policy operations, even though a central bank’s ability to engage in open-market operations may be constrained by the crisis. An added bonus of open-market operations is that they can help in redistributing liquidity from banks with increasing deposits to banks losing deposits and credit lines.416 In countries whose law excludes central bank liquidity support to banks that are deemed insolvent, financial assistance must be provided by the government.417

Among the most serious conditions accompanying a systemic banking crisis is the loss of confidence in the local economy on the part of foreign exchange traders and foreign financial institutions. Foreign exchange reserves and foreign trade credit lines must be protected. Foreign investors must be dissuaded from liquidating their local investments. Especially foreign banks must be persuaded to keep their local branch offices open, as the implicit home office guarantee of their liabilities may attract domestic deposits and thus exert a stabilizing influence on the deposit base.418 Foreign exchange speculators must be denied access to local currency loans and derivative instruments used for sales of the national currency in the foreign exchange markets. Therefore, capital outflows may have to be curtailed by capital controls419 and debt-rescheduling arrangements may have to be negotiated.

Many countries faced by a systemic banking crisis during the last two decennia have resorted to issuing a blanket guarantee protecting depositors and other creditors of banks.420 To be accepted by the public and to stem runs on the banks, a blanket government guarantee must be credible. The credibility of the guarantee can be enhanced by various measures. For instance, blanket government guarantees issued by Asian countries during the crisis of 1997 were strengthened by making the terms of the guarantee explicit, by issuing the guarantee in the form of a law or decree, and by making the guarantee part of a comprehensive restructuring strategy and the country’s macroeconomic program.421 The moral hazard inherent in such guarantees may be reduced by limiting the time during which the guarantee will be in effect, as well as by denying bank owners free ridership by closing insolvent banks and imposing guarantee fees on solvent banks, even though it is notoriously difficult to find a proper price for such guarantees.

In a systemic banking crisis, insolvent banks should be closed expeditiously. Among the advantages of closing insolvent banks are the elimination of further losses and moral hazard, and the termination of official liquidity support. However, the closure of a significant part of a national banking system carries major costs; these include the resulting systemic reduction in banking services, such as domestic credit lines and the intermediation of payments and securities transfers, as well as the risk that bank closings fuel panic runs on other banks, although this risk can be alleviated by a credible blanket guarantee from the government.422

If the closure of all insolvent banks would lead to the extinction of the banking system, for instance, because the country has only several large banks all of which are insolvent, other solutions must be found. These may consist of open-bank assistance by the monetary authorities, preferably under provisional administration including nationalization of the banks in whole or in part by the government (while any remaining part of the bank would be liquidated).423

The law may offer special instruments designed to combat a banking crisis. For instance, in Germany, the banking law authorizes the federal government by regulation to establish a moratorium for any bank when a banking crisis threatens, namely, if there is reason to fear that banks may encounter financial difficulties that warrant expectations of grave danger to the national economy and particularly to the orderly functioning of general payments; the law extends the protection of the moratorium beyond debt service to other transactions of the bank, and provides that no execution, attachment, or foreclosure can be carried out or completed concerning bank assets protected by the moratorium.424 As was suggested before,425 it is difficult to understand how banks placed under such a moratorium could continue their operations, and it must be considered doubtful whether a general suspension of payments can do much to maintain or to restore confidence in the banking system. For these reasons, during a banking system crisis, a moratorium, though useful for insolvent banks placed in receivership pending their liquidation or merger with another institution, might be counterproductive for banks that are still viable and that need to continue their operations as normally as possible in order to provide indispensable banking services. Compared with a moratorium, a blanket guarantee appears to be preferable because it is designed to promote confidence in the banking system by ensuring payment of bank liabilities and to support the national economy by ensuring the continued more or less normal operation of viable banks.

2. Institutional and Functional Features

Absent a banking crisis, the bank regulator is usually in charge of administering the corrective measures indicated when banks become illiquid or insolvent. Although staff and budgetary resources available to a bank-supervision agency are usually adequate to discharge this function on an incidental basis, they are rapidly overwhelmed by a full-blown systemic banking crisis, threatening its ability to continue prudential supervision of the banks that remained more or less healthy.426

Often, the financial structure of the bank regulator is ill-suited to carry out the task of reorganizing a significant part of a banking system. Usually, the regulator cannot bear the costs of such reorganization from its own resources, not even if it is the central bank. And, if the central bank is the bank regulator, it is often not authorized to extend financial assistance to banks that are insolvent, or to receive budgetary funds for its own account other than in the form of equity capital; moreover, it may well be regarded as improper for a central bank to do all the commercial activities required in a banking system reorganization for its own account and on its own books. If the regulator is constituted as a commission without legal personality, it may lack the legal and financial robustness required for the task and its funding.

In some countries, the deposit insurance agency is designated by law to take the lead role in the bank restructuring process.427 As was explained before,428 this role of the deposit insurance agency is bound to create conflicts between its interests as a major bank creditor and its fiduciary duties as an impartial administrator of bank resolution procedures. Another problem is that, usually, the funding of the deposit insurance agency is insufficient for the task; as is common for other types of insurance funds, deposit insurance is normally not funded to cover the risk of a universal disaster in the form of massive defaults on deposit liabilities of banks. Therefore, in most systemic banking crises where there is deposit insurance, the deposit insurance fund will have to be recapitalized, sometimes more than once, requiring significant fiscal outlays. It is the hope that such outlays can be curtailed and that the banking system can be stabilized with a minimum of demand on the deposit insurance fund that drives governments into issuing blanket guarantees to depositors and other bank creditors.

Typically, the reconstruction of a banking sector demands more than the closing and liquidation of insolvent banks. It requires the consolidation of insolvent banks or parts of such banks into viable institutions that can serve the banking system. This endeavor extends beyond the treatment of individual banks to the restructuring of the entire banking sector.

Therefore, often, systemic banking crises do not lend themselves to treatment in the general insolvency courts. If large numbers of bank failures are involved, the courts would be overwhelmed, especially when, as is often the case, the systemic banking crisis is accompanied by a general economic crisis causing massive failures in the corporate sector to be administered in the same insolvency courts. Also, a systemic and consolidated approach to bank restructuring cannot be reconciled with traditional judicial insolvency procedures designed to treat insolvent enterprises on an individual basis. This is an important reason for placing systemic bank restructuring outside the framework of general insolvency law. And, in a systemic banking crisis, the consideration that individual bank owners and creditors are thereby deprived of the protection afforded by a proper judicial insolvency proceeding is outweighed by the overriding national interest in restoring the banking system in the shortest possible time.

Bank Restructuring in Sweden

The successful strategy followed by Sweden during the banking crisis of the early 1990s may serve to illustrate the content and execution of a comprehensive bank restructuring program.429

One of the main components of the strategy was the blanket guarantee announced by the Swedish government in September 1992 to the effect that all bank commitments would be met on a timely basis and that no depositors, creditors, or other counterparties of banks would suffer any losses. The blanket guarantee received parliamentary ratification by the Bank Support Act of December 1992. Only share capital and perpetual debentures were excluded from the guarantee. The government was authorized to provide financial assistance in the form of loan guarantees, capital contributions, and other appropriate measures, without the constraint of an upper limit. The Bank Support Act of 1992 provided, inter alia, that support provided to banks in the form of payments should be recovered to the fullest extent possible, but that the government should not endeavor to assume ownership of banks. The blanket guarantee was considered to be exceptional and temporary; it was repealed by parliament and replaced by a limited deposit insurance scheme in July 1996. In May 1993, a Bank Support Authority was formally established as an independent agency to manage the government support system.430

Other principles underlying the success of Sweden’s bank restructuring strategy have been summarized as follows:431

The key element of the restructuring program was the formation of a broad political consensus. This consensus was supported by timely information to all domestic parties. Transparency and disclosure of information were crucial for regaining confidence domestically and abroad; the implications of support measures for depositors and investors were extensively reported.

It was decided that to place the lead restructuring agency within existing institutions, such as the Ministry of Finance or the Riksbank, might have interfered adversely with the roles of these institutions. Therefore, a separate institution—the Bank Support Authority—was created to implement the bank restructuring strategy. The formation of an institutional framework clarified the respective roles for the Ministry of Finance, the Riksbank, the Financial Supervisory Authority, and the Bank Support Authority. At the same time, there was a continuous exchange of information among the institutions.

Diagnosis was the first step in the restructuring exercise. A common yardstick—based on the capital adequacy ratio and other financial ratios—was designed to measure the degree of problems in banks. Initially the banks were divided into two main categories: those that were considered viable and those that were not. While banks in the first category received support, the ones in the second category were closed or merged, and the banks’ creditors were paid off.

Distorted incentives were minimized through the conditionality measures embedded in support agreements. The foremost conditions included changing management and upgrades of internal control and risk-management systems (which in most cases were found to be inadequate). The parliamentary guarantee did not cover owners’ capital; in case of financial support by the government, owners typically lost their equity stakes.

Structural reforms of the accounting, legal, and regulatory framework and of prudential supervision were enacted. Clear guidelines on asset classification and valuation of banks’ holdings of collateral (real estate and other assets) were set, with the Bank Support Authority monitoring compliance with these procedures.

The establishment of institutions for loan workout was given high priority. Problem assets were transferred, at an assumed market price,432 to a separate asset-management company. As with other types of support provided to the banks, strict conditionality was attached to these operations. This approach facilitated the orderly sale of assets and allowed problem banks to continue their usual business without having to handle a large volume of workout cases. The asset-management company could recruit the specific expertise needed for transforming the bad assets into salable assets. The Bank Support Authority funded the asset-management companies and was their sole owner.

Bank Restructuring Corporations

Several of the countries faced with a systemic banking crisis in recent years have established one or more separate state agencies to rehabilitate or to liquidate problem banks. The most common such agencies are bank restructuring corporations (BRCs).

The activities of a BRC should be defined and delineated in time and scope by the law establishing the BRC. For instance, a BRC may be created to handle a systemic crisis for a temporary period, typically five or more years. The law may prescribe a division of labor between the BRC and the deposit insurance agency based on the type of banking institution, or the nature of the task, i.e., bank restructuring versus asset management. In other cases, a BRC may be created to handle a more discrete problem, such as the restructuring and bank restructuring of insolvent state-owned banks.

The law establishing the BRC should specify the criteria to be used for identifying banks whose financial condition permits them to continue banking operations under the supervision of the bank regulator, banks that should be closed and liquidated outright, and banks whose financial condition or position in the banking system makes them eligible for bank restructuring. For the banks that fall in the last two categories, regulatory responsibility may be transferred from the bank regulator to the BRC. The law should provide that such a transfer must be publicly notified and has the effect of transferring complete control over the bank and its assets to the BRC.

The BRC will take immediate control of the banks transferred to it, and will secure their assets by removing them from the control of bank managers and owners. The banks to be liquidated will be wound up; those of their assets that cannot immediately be sold will be kept or transferred to another entity (hospital bank or asset management entity) for management and future disposal.

Preferably, the law should require the BRC to carry out its bank restructuring activities in accordance with detailed bank restructuring plans, one for each bank brought under the jurisdiction of the BRC. The plans are formulated on the basis of an assessment by the BRC of the financial condition of the bank and the chances that the bank can be successfully restructured. These plans may be agreed upon between the BRC, the bank regulator, and the monetary authorities, so as to ensure their consistency with the country’s overall bank restructuring program and budget constraints. They may periodically be revised and updated to reflect, inter alia, changes in the needs of the banking system and the condition of banks submitted to the bank restructuring process.

The goals of a BRC are to consolidate the banking system, to recapitalize viable banks, and to improve bank balance sheets by removing nonperforming assets. Consolidation may take a number of forms. Thus, BRCs typically restructure, liquidate, or sell problem banks, and manage, restructure, or sell assets of problem banks. They may use techniques for maximizing the going-concern value of banks—notably purchase and assumption transactions—that are similar to the resolution procedures used in a bank receivership. In one approach, two or more insolvent institutions under the BRCs jurisdiction are merged by the BRC into a new institution, which is then recapitalized with government funds. By so doing, larger and (at least in theory) more viable institutions are created that may later be reprivatized by selling stock back to the public. In a second approach, an insolvent bank is merged with a solvent bank that may be undercapitalized, which may then receive a capital infusion of government funds from the BRC. In either case, the BRC is sometimes able to recoup some of its costs from the sale of shares at a later date.

Recapitalization of an insolvent bank typically involves the infusion of new capital into the institution, with or without a merger or consolidation, with new management installed by the BRC running the bank until it may be reprivatized. Cleaning bank balance sheets may be accomplished by having the BRC or another entity purchase assets, hopefully at market values to avoid any subsidy that would result in a valuation based on book values; the assets may later be sold in a variety of transactions, including, but not limited to, bulk sales and asset securitization.

An often controversial policy issue is whether and how the BRC will provide financial assistance to acquirers of insolvent banks. In some cases, the BRC has the power to grant financial assistance to acquirers of banks, such as equity, loans, deposits, guarantees, or indemnities. It is often difficult to find acquirers of banks unless all nonperforming assets have been removed, and the balance sheet completely cleaned out. However, even in such cases, the threat of litigation from former owners, managers, and creditors can give rise to a contingent liability that acquirers will want to be protected against. In such cases, the ability of the BRC to provide a guarantee or indemnity may be a necessary aspect of the financial assistance that it can offer. The use of guarantees and indemnities may create contingent liabilities on the BRC’s balance sheet that may linger far beyond the agency’s role in the acquisition itself. The difficult question of who should bear the risk of loss may be resolved in different ways at different stages of a systemic crisis, depending on the demands of and the degree of competition between buyers of insolvent banks.

One of the thorniest problems encountered in a banking system crisis is that the establishment of reasonable values for many bank assets has become difficult. Nonperforming loan asset values are nearly impossible to assess as the impaired creditworthiness of many corporate borrowers rapidly deteriorates further. Collateral values are hard to determine as markets for those assets dry up. Valuations based on discounted present values become unreliable as the uncertainties concerning cash flows, interest rates, and other financial variables increase. Nevertheless, such valuations are usually necessary for banking institutions to asses their book value in order to determine whether they are insolvent and, if so, whether they meet the criteria for restructuring or outright liquidation. In addition, asset values drive choices between different restructuring strategies and ultimately help determine sales prices. A contributing problem is that this uncertain environment may produce dramatic differences in accounting results for similar asset classes, not only over time, but also simultaneously for different banks, as asset valuations increasingly come to depend on judgments that can honestly differ. Although this problem cannot be solved definitively, it can be reduced by establishing, by bank regulation, firm accounting rules, standards, and procedures that must be applied uniformly to all banks entering the restructuring process.433

Autonomy of BRCs

There is widespread agreement that, to be successful at these tasks, BRCs must have sufficient autonomy. The need for autonomy means mainly that the agencies should be created either as private corporations or as independent legal entities of the state, and that they should be operationally and financially separate and distinct from the political establishment and national monetary authorities, such as the central bank. Financial autonomy requires adequate funding of the agencies from reliable sources, such as the state budget, through loans from the deposit insurance agency, or from proceeds of sales of bank assets. Experience indicates that countries that have established an autonomous BRC generally have been more successful than those that have chosen not to endow it with sufficient independence.434

Among the reasons given why autonomy is a fundamental legal objective are the following. First, the cost of restructuring the banking sector during a time of financial crisis will be significant, necessitating direct appropriations as part of the budgetary process or funding from other sources, which requires the recipient BRC to have the corporate structure of an independent legal entity allowing it to receive, and to be independently accountable for the use of, such funds. Accordingly, systemic bank restructuring legislation typically establishes BRCs as independent legal bodies and makes explicit provision for funding that includes capitalization by the government and sometimes the authority to borrow from the central bank or the government, or to issue debt instruments that may or may not carry the full faith and credit of the state.

In addition, making a BRC part of, or effectively controlled by, the bank regulator, would give rise to real or perceived conflicts of interest based on differences in the roles played by the BRC and the regulator. The bank regulator should maintain an arm’s-length relationship with the BRC, which typically operates and owns stock in insolvent banks while those banks may continue to be supervised by the bank regulator. Moreover, the bank regulator is not well situated to make the operational decisions required in managing a bank, liquidating assets, or to decide on when and how to resolve a bank by sale, merger, or liquidation, or to issue stock to recapitalize or reprivatize a bank.

Finally, organizing a BRC as an autonomous entity helps to insulate and protect the rest of the government, including the central bank and the ministry of finance, from political shock waves that often follow the myriad difficult decisions that must be taken by the BRC. These include removing bank management, curtailing or overriding ownership interests, restructuring the bank’s assets and liabilities, and managing, collecting, and liquidating problem assets. At the same time, the independence of the agency helps to insulate and protect it from political interference, as bank owners, depositors, and other creditors and borrowers seek to influence or overturn BRC decisions. The use of an independent board of directors, a majority of whom are not government ministers, typically has the effect of promoting and reinforcing the autonomy of bank restructuring corporations, as do stringent restrictions on the removal of board members that protect them from the political fallout of unpopular decisions.

The foregoing consideration should not be taken to exclude the bank regulator entirely from the bank restructuring process. The bank regulator and the BRC should consult each other regularly with respect to banks undergoing restructuring in order to facilitate their eventual reentry into the economy. The bank regulator retains primary responsibility for determining for each bank whether that bank should be transferred to the BRC for restructuring or liquidation and, once the bank has been restructured by the BRC, whether control of the bank should be returned to its owners.

There are countries, however, that would not admit the degree of autonomy needed by a BRC and where, therefore, a BRC would not be the most suitable instrument to restructure a banking sector. For example, a country may determine that a centralized BRC could not be endowed with the requisite autonomy from the political establishment or could not be properly staffed with qualified personnel. Such countries may elect instead to pursue a banking system restructuring plan that relies on the banks themselves to reorganize their financial condition. This may be done in accordance with debt workout procedures established for the purpose that cover not only bank debt but also non-performing loan assets of banks; participation by the banks in the plan and their compliance with its requirements may be ensured by offering appropriate incentives to the banks, including financial support from the government.435 Alternatively, the threat that the bank regulator will use its statutory authority to deprive owners of undercapitalized banks of their equity interest may be sufficient incentive for such owners actively to pursue the recapitalization or merger of their banks.436

3. Legal Aspects

To be effective, BRCs must be grounded in strong and well-conceived legislation whose underpinnings rest on principles of administrative law, including in particular transparency and proportionality. Often, this will include special banking system restructuring legislation establishing BRCs, setting rules for the transfer of banks to their jurisdiction and for the exit of banks, and governing the administration and operation of the BRCs.

Transparency

During a banking crisis, full public disclosure of the objectives pursued in rehabilitating the banking system and of the applicable institutional arrangements and rules of law is a prerequisite for restoring public confidence in the banking system. Therefore, the law governing the BRC and its activities must use clear, comprehensive, and unambiguous language and must be comprehensible to bank owners and management, potential investors in, and buyers of, restructured banks and their assets, and the public at large. The need for transparency is especially important in defining the grounds and procedures for referral and transfer of a failing bank to the BRC; the legal effects of the transfer of a bank to the BRC on the powers and rights of bank owners and managers with respect to the bank; the content and scope of the powers of the BRC; and the circumstances under which banks referred to the BRC must be liquidated and their licenses must be revoked. Also, if the statute of a BRC grants rights, powers, and procedures that conflict with or override other laws, such as company law, bankruptcy law, securities law, real property law, and employment law, the hierarchy between the statute of the BRC and these other laws should be clearly stated in the organic law of the BRC.

Grounds for Referral of Banks

What grounds will be used by the bank regulator to refer a bank to the BRC? Typically, banks must be insolvent before they are referred to the BRC. The definition of insolvency should be clearly stated in the law, such as the failure of the bank to pay its obligations as they fall due. Balance sheet insolvency, based on liabilities being greater than assets, and regulatory insolvency, based on capital inadequacies, are also used. Additional criteria may be imposed, such as the size of a bank’s deposit liabilities or loan assets, in order to limit the number of banks that are referred to the BRC.

Legal Effects of Referral of Banks

Based on the fact that it concerns a quasi-insolvency process, the referral of a bank to the BRC should be ipso facto, and for the duration of the restructuring process, vest the powers of all corporate organs of the bank in the BRC, and place the bank in a debt-service moratorium where enforcement actions by creditors against the bank are suspended, except perhaps for foreclosure on collateral. The law must be clear that, when a bank comes under the jurisdiction of the BRC, the BRC becomes solely responsible for the management and operation of the bank.

Another policy issue involves the legal status of the bank: will a bank remain open (i.e., will its banking license still be in place) while it is under BRC administration, or will the bank be closed as part of the restructuring process? The answer will in part depend on the question whether the bank should be rescued for systemic reasons or not.

Powers of the BRC

In serving the goal of transparency of public administration and legal certainty, the powers of the BRC should be explicitly stated in the law, with more rather than fewer listed. These powers should be established by statute, and not by decree as the latter are easily changed, contributing to uncertainty about the law. For the BRC, these powers typically include three levels of authority, starting with the BRC’s authority as a juridical person, with all the powers flowing therefrom, such as the power to own and dispose of property, to sue and be sued, and to enter into and enforce contracts. The second level of BRC authority derives from the powers of the bank under administration, its owners and managers, such as the power to take deposits, to lend money, and to sell and restructure the bank and its assets and liabilities; it is based on a statutory provision that vests these powers in the BRC. The last level of authority is the so-called “superpowers” commonly granted to trustees or receivers under a bankruptcy regime, such as the power to stay litigation, to repudiate burdensome contracts, to transfer liabilities without creditor consent, and to reinstate contracts that have terminated based on a bankruptcy or insolvency clause.

An unusual power, which may be practically significant, that should be granted to the BRC is the power to charter new banks that could function as bridge banks in a purchase and assumption transaction or as permanent new banking institutions combining assets and liabilities of two or more closed banks.437

Proportionality

As the powers necessary for a successful banking system restructuring must typically be unusually extensive, care should be taken that the powers granted by law to the BRC are proportional to the agency’s tasks. Although the serious consequences of a systemic banking crisis justify unusual restrictions on property rights, this justification does not support measures that are clearly excessive. This means that the scope of the powers of the agency should not extend beyond what is strictly necessary to discharge its tasks. In particular, the law should not contain an open-ended grant of authority to the BRC permitting it to create additional powers for itself or to expand its statutory powers through the issuance of regulations, decrees, or orders.

There are unfortunate instances where the principle of proportionality is flouted and a BRC is given excessive powers. One of these concerns the Indonesian Bank Restructuring Agency (IBRA). During the Asian crisis of 1997, IBRA was established with extensive powers listed in the banking law of Indonesia.438 These powers were subsequently expanded by government regulation,439 well beyond the scope of what was provided in the banking law. In particular, the government regulation authorized IBRA to determine “the procedure needed to control, manage and undertake ownership measures concerning … assets under restructuring,” which were defined to include not only the assets owned by the insolvent banks administered by IBRA but also assets owned by the debtors of these banks.440 The stated intent of this authority was to permit IBRA to force debtors of the banks under its administration to negotiate with IBRA in good faith. The draconian result was that IBRA, established under the banking law for the resolution of banks entrusted to its administration, could effectively control not only the restructuring of those banks but also indirectly the restructuring of all corporations that had debts to such banks, by threatening seizure of the assets of “uncooperative” corporations. Thus, IBRA could exercise control over much of the corporate sector of Indonesia. These excessive powers did little to give IBRA domestic and international credibility.

Rights of Bank Owners

Banking system restructuring generally requires the transfer to a BRC of all rights of owners in banks submitted to BRC jurisdiction. To be effective and efficient, banking system restructuring must override the safeguards afforded by the company law to shareholders; this is fully justified by the severity of a systemic banking crisis. Also, as in any bank restructuring, free ridership of existing bank owners must be avoided.

In some countries, the transfer of bank ownership to a government agency, such as a BRC, may raise questions as to its constitutionality. Where possible, these should be addressed by the law so as to avoid taxing an already overburdened judiciary and regulatory system by unnecessary litigation. However, the risk of successful litigation on the part of owners or managers of a bank transferred to a BRC should not be exaggerated. Given that the insolvent bank’s share price at this point is usually at or around zero, and that the level of its capital is at zero or below, ownership interests, while legally valid, will have only a theoretical value in the marketplace. In other words, even if an owner could prove to a court that there has been a taking of property by the government in a manner contrary to law, the damages that could be proven and claimed would be de minimis.

Review of Administrative Acts

Normally, the agencies involved in banking system restructuring are government agencies and as such they and their acts are governed by administrative law, including procedures for administrative review. Because of the urgency and exceptional nature of a banking system restructuring, there is justification for curtailing the rights of interested parties to administrative review of such acts, at least to the extent necessary so as not to suspend the process of bank restructuring or liquidation of banks submitted to the bank restructuring regime. These restrictions on judicial authority should also apply to the civil courts, denying them the right to interfere in the bank restructuring process. In many countries, such restrictions are supported by the ability of interested parties to sue the bank restructuring agencies or the government for damages in civil court.

Exit and Sunset Provisions

Banking system restructuring legislation should prescribe precise criteria and procedures for the exit of rehabilitated banks from the jurisdiction of a BRC. Without these, the BRC might be subjected to unnecessary litigation by bank owners eager to regain control over their property. Even apart from the threat of litigation, exit criteria and procedures appear to be mandated by the goals of transparency and legal certainty.

The banking system restructuring law should have explicit sunset provisions that limit its life and that of the BRC to an expiration date, in order to avoid a situation in which this extraordinary regime would be used to restructure banks in circumstances unrelated to the banking crisis for which it was created. If necessary, the deadline can be extended by formal amendment of the legislation. These provisions should cover the transfer of any remaining assets and liabilities from the BRC and any associated asset management entity to the government.

However, there is an important disadvantage attached to such sunset provisions. Once the law has expired, its revival would require a full-fledged legislative procedure. In some countries, it takes a considerable period of time after a systemic banking crisis develops to draft and adopt suitable restructuring legislation, delaying restructuring of the banking system. Keeping restructuring legislation on the books would avoid such delays. This can be achieved, without risking that the restructuring law would be applied outside crisis situations, by limiting the effect of sunset provisions to a suspension of the law’s operation, and by providing in the restructuring law that the law may be reactivated only under certain conditions pursuant to a simplified legislative process, such as a parliamentary resolution or a governmental decree issued with the advice and consent of the legislature.

Principal Objectives To Be Pursued by Law

In banking crises where existing regulatory and judicial resources are not equipped to administer a large number of failing banks, banking system restructuring should be carried out by a legally independent bank restructuring corporation (BRC) endowed with sufficient operational autonomy and financial resources. BRCs should be granted powers commensurate with their tasks. These powers should be clearly specified in the law.

The law should prescribe precise grounds and procedures for transferring failing banks to the banking system restructuring process and should provide that, upon transfer, the rights of existing bank owners and managers are vested in the BRC for the duration of that process. The law should require a restructuring plan for the banking sector as a whole and individually for each bank subjected to the banking system restructuring regime.

The law should contain precise exit criteria for reconstructed banks and a suitable sunset provision for the law itself.

For the purposes of this book, a “bank” is deemed to be an undertaking whose business is to receive deposits or other repayable funds from the public and to grant credits for its own account, following Article 1 of the First European Council Directive of 12 December 1977 concerning credit institutions (77/780/EEC) (Official journal No. L 322/30 of 12/17/77) (hereinafter “First European Banking Directive”), reprinted in Current Legal issues Affecting Central Banks, ed. by Robert C. Effros, Vol. 2 (Washington: International Monetary Fund), 1994, at p. 251. In addition, the meaning of the term “bank” includes any other financial institution that is regulated similarly to banks.

See on that topic: Mario Giovanoli, and Gregor Heinrich, eds., International Bank Insolvencies: A Central Bank’s Perspective (The Hague: Kluwer Law International), 1999.

See Chapter XIII, below.

See Chapter XI, Section 4, below.

To avoid confusion, the term “rehabilitation” will generally not be applied to banks; instead, the term “bank restructuring” will be used throughout the book.

England provides an example; see Section 8 of the Insolvency Act 1986, as amended, and the Banks (Administration Proceedings) Order 1989, which makes Part II of the Insolvency Act 1986 generally applicable to banks.

The difficulties noted before in predicting whether the failure of a particular bank would or would not lead to systemic problems decrease as the time of prediction approaches the time of bank failure; here, the systemic effects of a bank failure are assessed when the bank failure occurs.

See Chapter VIII, Section 4, below, for a discussion of judicial administration. See Chapter VIII, Section 3 for a brief discussion of the role of deposit insurance agencies.

Bank restructuring corporations are public agencies entrusted with the restructuring and liquidation of insolvent banks during a systemic banking crisis. They are discussed in Chapter XIV, below.

Similar problems may arise when institutional and functional supervision are carried out by different regulators and some banking activities are regulated by regulators other than the bank regulator, unless the different areas of regulatory jurisdiction and responsibility are clearly delineated by the law.

In France, the Banking Commission provides an example of such an institutional arrangement—Article 38 of Law No. 84–46 of January 24, 1984, on the Activities and Supervision of Credit Institutions. The Commission’s membership includes the Governor of the central bank or his representative as chairman, the Director of the Treasury or his representative, a member of the Council of State, a judge of the Cour de Cassation (the highest civil court), and two other members selected on the basis of their expertise in banking and financial matters.

This risk occurs not only at the macroeconomic level—for instance, as a result of excessive regulation—but also with respect to the competitive relationships between individual banks—for instance, when a failing bank is the beneficiary of operational or financial assistance from the authorities without paying its cost and thereby enjoys a competitive advantage over other banks. As a result, banks that do comply with prudential standards are not penalized by unfair competition from banks that do not. Because such unfair competition produces harmful economic distortions, bank regulators generally try to maintain a level playing field for banks where the costs of prudential regulation apply equally and ratably to all banks.

Not only unsophisticated household depositors fall into this trap. Similar mistakes were repeatedly made by sophisticated international investors who were attracted by relatively high interest rates in countries that for some time had successfully maintained stable exchange rates for their currencies, with little or no regard to the fact that exchange stability was bought at the price of relatively high domestic interest rates, masking serious macroeconomic weaknesses.

Of course, deposit insurance may perversely cause complacency among household depositors about the financial condition of their banks, especially if the insurance cover is generous.

This assumes, of course, that the markets discover in one way or another the corrective activities of the regulator. In most developed markets, that assumption is not unreasonable.

The term “too big to fail” is imprecise. Meant are not only banks the size of whose business is so large that its failure would place the banking system at risk, but also inter alia smaller banks that have a key position in the banking system, and banks that are too large to wind down in an orderly fashion rather than too big to fail per se.

Richard J. Herring, “Banking Disasters: Causes and Preventive Measures, Lessons Derived from the U.S. Experience” in Preventing Bank Crises: Lessons from Recent Global Bank Failures, ed. by Caprio, Hunter, Kaufman, and Leipziger (Washington, World Bank), 1998, p. 209 at p. 224.

Section 2 of the Act; the other regulatory objective specified by the Act is the reduction of financial crime.

Sections 3 to 5 of the Financial Services and Markets Act 2000. Broadly speaking, with respect to banks, consumers are persons using banking services and persons having rights attributable to or adversely affected by the use of banking services by other persons—Section 138(7) of the Act. In considering what degree of consumer protection may be appropriate with respect to bank activities, the FSA must have regard to the differing degrees of risk involved in different kinds of investment or other transaction, the differing degrees of experience and expertise of different consumers in relation to different kinds of banking activity, the needs that consumers may have for advice and accurate information, and the general principle that consumers should take responsibility for their decisions—Section 5(2) of the Act.

Section 2(3) of the Financial Services and Markets Act 2000.

Liquid resources are understood to include not only cash and deposit balances payable on demand but also other assets that can be sold immediately for a reasonable price.

See Basle Committee on Banking Supervision, A Framework for Measuring and Managing Liquidity (Basel: Bank for International Settlements), September 1992.

E.g., Austria: Article 93a(6) of the Austrian Banking Act; Canada: Section 10(1) of the Canada Deposit Insurance Corporation Act; United States: 12 U.S.C. § 1823(c)(1).

See Chapter VI, below, for a discussion of exceptional financial support to insolvent banks.

Conversely, a bank is generally deemed insolvent when the value of its assets is less than the aggregate nominal amount of its liabilities. Often, the bank supervisor uses the concept of regulatory insolvency, which measures solvency in terms of the adequacy of a bank’s capital to meet prudential standards.

Indeed, experience teaches that banks that can no longer meet their liquidity needs through traditional channels of funding are usually not only illiquid but also insolvent.

See for this technique: Stefan Gannon, “The Use of Securitization to Mobilize Liquidity and in Particular the Use of Specialized Mortgage Corporations,” in International Bank Insolvencies: A Central Bank’s Perspective, ed. by Mario Giovanoli and Gregor Heinrich (The Hague: Kluwer Law International), 1999, p. 301 at p. 309.

See Chapter VII for a discussion of debt service moratoria.

See Chapter II, Section 1, below.

Weaknesses in the general corporate framework, e.g., in the company law, may be addressed and corrected for banks in the banking law.

Several countries place stock in the preventive force of civil or criminal penalties imposed by the bank regulator, or by a court upon the application of the regulator, and especially the embarrassment caused for a bank by their publication. See Belgium: Article 104 of the Law on the Statute and Supervision of Credit Institutions; England: Sections 44, 81, and 94 of the Banking Act 1987; France: Articles 75 ff. of Law No. 84–46 on the Activities and Supervision of Credit Institutions; Germany: Articles 54–59 of the Law on the Credit System.

This has consequences for financial system stability assessments carried out by the IMF. Surveillance of the financial sector of a country cannot be complete without surveillance of its legal framework. Surveillance of the legal framework of a country must focus not merely on the letter of the law but also and especially on the practice of the law and the degree to which it promotes the efficient discharge of financial obligations.

Under common law, a bill of lading is not a true negotiable instrument. E.g., in the United States, the Uniform Commercial Code restricts the use of the term “negotiable instrument” to orders and promises of payment of money; U.C.C. § 3–104(a). In common law, a bill of lading must be made negotiable by its terms—and it usually is—by providing that delivery of the goods is to the order of the consignee named in the bill.

Relatively recent examples are the standardized documentation for foreign exchange and derivatives transactions issued by the International Swap and Derivatives Association (ISDA) and the Uniform Customs and Practice for Documentary Credits issued by the International Chamber of Commerce.

This is supported by the fact that in many countries administrative law was born of an arduous and long-lasting struggle to curtail the powers of the sovereign.

See, for Canada, Deborah M. Duffy, “Canada,” in International Bank Insolvencies: A Central Bank’s Perspective,” ed. by Mario Giovanoli and Gregor Heinrich (The Hague: Kluwer Law International), 1999, at p. 44.

See Chapter III, Section 2, below, for a discussion of discretion of the bank regulator.

For example, the police should not use more force than is strictly necessary to maintain public order or to arrest a person.

The principle of proportionality is well known in Europe: Article 73(2) of the Treaty of the European Community of Coal and Steel; European Court of justice: decisions of November 29, 1956, case 8/55 (Fedechar), and July 14, 1972, case 48/69 (I.C.I.); England: Section 2(3)(c) of the Financial Services and Markets Act 2000 and H.W.R. Wade, Administrative law, fifth edition, Chapter 12; Netherlands: van Wijk en Konijnenbelt, Hoofdstukken van Administratief Recht, 1997, at 7:56. The principle of proportionality is also known in international law. See Art.29(2) of the United Nations Universal Declaration of Human Rights of 1948, providing that “[I]n the exercise of his rights and freedoms, everyone shall be subject only to such limitations as are determined by law solely for the purpose of … meeting the just requirements of morality, public order and the general welfare in a democratic society.” See also the phrase used in Articles 12(3), 18(3), 21 and 22(2) of the International Covenant on Civil and Political Rights of 1966 (999 UNTS 171), that the rights addressed by the provisions “shall not be subject to any restrictions except those that … are necessary to protect … (national security, public order, public health or morals) …”.

United States: K.C. Davis, Administrative Law Treatise, second edition, at 29:1–7. The prohibition of abuse of discretionary power implies the existence of a variable normative base line from which abuse is measured: what may constitute abuse of regulatory discretion in trivial circumstances may be reasonable in serious circumstances. The principle of proportionality requires that there be a reasonable relationship between the seriousness of the circumstances at issue and the severity of the regulatory response that these circumstances evoke.

Section 2(3)(c) of the Financial Services and Markets Act 2000.

Canada: Section 645(2) of the Bank Act; England: Section 13 of the Banking Act 1987; France: Article 42 of Law No. 84–46 on the Activities and Supervision of Credit Institutions; Spain: Article 33 of Law No. 22/1988 on Supervision and Intervention with respect to Credit Institutions; United States: 12 U.S.C. § 1818(b)(1).

Section 648(1.2) of the Bank Act; of Section 39.1 of the Canada Deposit Insurance Corporation Act for similar requirements when a procedure is begun to vest the shares of the bank in the CDIC or to appoint the CDIC as receiver of the bank.

In France, the Banking Commission is regarded as an administrative court when it takes decisions to impose certain disciplinary sanctions; see Article 48(1) of Law No. 84–46 on the Activities and Supervision of Credit Institutions.

England: Section 14(1) of the Banking Act 1987.

See, e.g., France: Article 48(2) of Law No. 84–46 on the Activities and Supervision of Credit Institutions; Spain: Article 33 of Law No. 22/1988 on Supervision and Intervention with respect to Credit Institutions, providing that no hearing is required if it would cause delays that would severely prejudice the effectiveness of the action taken or the economic interests at stake.

Section 14 of the Banking Act 1987.

Section 645(2) and (3) of the Bank Act.

12 U.S.C. § 1818(b).

12 U.S.C. § 1818(c)(1). Within ten days after service of the temporary order, the bank may apply to the court for an injunction setting aside, limiting, or suspending the enforcement, operation, or effectiveness of the temporary order pending the completion of the administrative proceedings pursuant to the notice of charges: 12 U.S.C. § 1818(c)(2).

Belgium: Article 57(1) of the Law on the Statute and Supervision of Credit Institutions; Canada: Sections 485(3)(a) juncto 648(1.1) of the Bank Act; France: Articles 43 juncto 45 of Law No. 84–46 on the Activities and Supervision of Credit Institutions; Germany: Section 45(2) of the Law on the Credit System; Luxembourg: Article 59(1) and (2) of the Law of 1993 on the Financial Sector; Netherlands: Article 28(2) and (3) of the Law on Supervision of the Credit System.

Compare 12 U.S.C. § 1818(b) for cease and desist orders with 12 U.S.C. § 191 for the appointment of a receiver and 12 U.S.C. § 203 for the appointment of a conservator.

Argentina: Article 34 of the Financial Institutions Law; Portugal: Article 141 sub(a) of the Legal Framework of Credit Institutions and Financial Companies, approved by Decree-Law No. 298/92; Japan; Article 26(1) of the Banking Law; United States: 12 U.S.C. § 1831o(e)(2).

See Chapter IV, Section 3, below.

The ex ante review addressed here requiring the prior approval of regulatory acts by a higher administrative authority or the judiciary should be distinguished from the ex post review of regulatory acts discussed below.

Austria: Article 20(6)3 of the Austrian Banking Act; France: Article 46–1 of Law No. 84–46 on the Activities and Supervision of Credit Institutions.

Germany: Section 46(1) of the Law on the Credit System; Italy: 70(2) of the Law of 1993 on Matters Concerning Banking and Credit, albeit as an effect of provisional administration ordered by the regulator; Luxembourg: Article 59(2) of the Law of 1993 on the Financial Sector; Netherlands: Article 28(3) of the Law on Supervision of the Credit System.

See Chapter III, Section 2, below, for a brief discussion of discretion of the bank regulator.

Germany: Section 49 of the Law on the Credit System; Luxembourg: Article 60(9) of the Law on the Financial Sector. In England, Section 27(5) of the Banking Act 1987 provides that the Banking Appeal Tribunal may suspend the operation of the decision under appeal, implying that otherwise the decision remains in effect pending appeal.

Belgium: Article 57(2) of the Law on the Statute and Supervision of Credit Institutions.

12 U.S.C §1818(h)(2).

Article 90 of the Law on Supervision of Credit Institutions.

Article 52b of the Consolidated Banking Law.

Section 27 of the Banking Act 1987; see below for a discussion.

Article 57(2) of the Law on the Statute and Supervision of Credit Institutions.

Article 2 of the Law 13/1994 (as amended) on the Autonomy of the Banco de España.

Article 9 of the Law of 1993 on Matters Concerning Banking and Credit.

Section 28 of the Banking Act 1987, and the Banking Appeal Tribunal Regulations issued pursuant to the Banking Act. Cf., Part IX of, and Schedule 13 to, the Financial Services and Markets Act 2000 for the Financial Services and Markets Tribunal, with similar jurisdiction.

Section 29 (1) of the Banking Act 1987. Cf., in contrast, Section 133(4) of the Financial Services and Markets Act 2000, which requires the Financial Services and Markets Tribunal to determine what (if any) is the appropriate action for the Financial Services Authority to take in relation to the matter referred to it.

Section 29 (2) and (3) of the Banking Act 1987.

Section 31(1) of the Banking Act 1987; subsection (3) excludes further appeal to the Court of Appeal except with the leave of that Court or of the court or judge from whose decision the appeal is brought.

In contrast, Section 137 of the Financial Services and Markets Act 2000 permits the civil courts on appeal to give a decision on the merits: if the court considers that a decision of the Financial Services and Markets Tribunal was wrong in law, it may not only remit the matter to the Tribunal for rehearing and determination but also itself make a determination.

E.g., Luxembourg: Article 60(9) of the Law of 1993 on the Financial Sector.

E.g., England: Section 11(6) of the Banking Act 1987, providing that the banking license of a bank must be revoked if a winding up order has been made against it in the United Kingdom, or a resolution for its voluntary winding up in the United Kingdom has been passed.

E.g., Canada: Section 39.13(6) of the Canada Deposit Insurance Corporation Act, which excludes any court review of vesting and receivership orders made by the Governor in Council; Germany. Section 46b of the Law on the Credit System, which excludes appeal against court decisions opening insolvency proceedings against a bank.

E.g., Article 6 of the European Convention on Human Rights, and accordingly Article 13 of the First European Banking Directive.

See also Section 2.3.3 of the Report of the G-22 Working Group on Strengthening Financial Systems. Protection for regulators from suit should not cover acts that are patently illegal or characterized as gross negligence or willful misconduct. See also Rene Smits and Ron Luberti, “Supervisory Liability: An Introduction to Several Legal Systems and a Case Study” in International Bank Insolvencies: A Central Bank’s Perspective,” ed. by Mario Giovanoli and Gregor Heinrich (The Hague: Kluwer Law International), 1999.

Christian Gavalda, and Jean Stoufflet, Droit Bancaire, fourth edition, at No. 145.

One of these countries is the United States. See for a discussion of U.S. law: Cynthia Crawford Lichtenstein, “Public Liability in U.S. Courts and Brasserie du Pêcheur and Factortane in the European Court” in Liber Amicorum for Cordon Slynn: Court Review in International Perspective (The Hague: Kluwer Law International), 2000.

See, e.g., France: Article 43 of Law No. 84–46 on the Activities and Supervision of Credit Institutions; Germany: Article 46(1) of the Law on the Credit System; Netherlands: Article 28(2) of the Law on Supervision of the Credit System; and United States: 12 U.S.C. § 1818(b)(1).

In United States practice, cease and desist orders often prescribe long and detailed corrective measures—12 U.S.C. § 1818(b)(1).

France: Article 42 of Law No. 84–46 on the Activities and Supervision of Credit Institutions.

See Section 4 in this chapter.

See Chapter II, Section 5, above, for a brief discussion of regulatory immunity from such claims.

Article 23ter(1) of the Federal Law on Banks and Savings Banks.

Section 11 (6)(a) of the Banking Act 1987.

See for a discussion of these procedures Chapter II, Section 4, above.

Belgium: Article 57(1) of the Law on the Statute and Supervision of Credit Institutions; Canada: Sections 485(3)(a) juncto 648(1.1) of the Bank Act; France: Articles 43 juncto 45 of Law No. 84–46 on the Activities and Supervision of Credit Institutions; Germany: Section 45(2) of the Law on the Credit System; Luxembourg: Article 59(1) and (2) of the Law of 1993 on the Financial Sector; Netherlands: Article 28(2) and (3) of the Law on Supervision of the Credit System.

See the provisions cited in footnote 91.

France: Article 46–3 of Law No. 84–46 on the Activities and Supervision of Credit Institutions; Netherlands: Article 70 of the Law on Supervision of the Credit System.

Germany: Section 46b of the Law on the Credit System.

Section 11CA(1) of the Banking Act 1959.

Article 43 of Law No. 84–46 on the Activities and Supervision of Credit Institutions. Failure to respond may lead to punishment of the bank with a disciplinary sanction pursuant to Article 45 of Law No. 84–46.

See, e.g., United States: 12 U.S.C. § 1831 p–1 and 12 C.F.R. 30, and Chapter IV, Section 2, below, for a brief discussion of this technique.

Netherlands: Article 14 of the Law on Supervision of the Credit System; Switzerland: Article 23ter (1) of the Federal Law on Banks and Savings Banks.

France: Article 45 of Law No. 84–46 on the Activities and Supervision of Credit Institutions.

Germany: Article 46(1) of the Law on the Credit System.

Section 11CA(2) of the Banking Act 1959.

12 U.S.C. § 1831o.

FDIC, History of the Eighties—Lessons for the Future, 1997, Vol. 1 at p. 51.

The latter is illustrated by the legislative history of the prompt corrective action law in the United States that was briefly described in the foregoing section.

See, e.g., United States: 12 U.S.C. § 1831 p-1 and 12 C.F.R. 30, and Chapter IV, Section 2, below, for a brief discussion of these provisions.

See also Section 2.3.3 of the Report of the G-22 Working Group on Strengthening Financial Systems.

In some countries with emerging market economies, the certainties provided by a mandatory regime with firm statutory rules would compensate for a lack of trained bank regulators. In such countries, a mandatory system could also help keep the judiciary from reviewing discretionary decisions of bank regulators as to their merits and overturning them.

E.g., Australia, Austria, Canada, Germany, Netherlands.

Recommendation in the G-22 Working Group Report on Strengthening Financial Systems, at page (vii) and section 2.3.3.

Belgium: Article 57(1) of the Law on the Statute and Supervision of Credit Institutions; Canada: Sections 485(3)(a) juncto 648(1.1) of the Bank Act; France: Articles 43 juncto 45 of Law No. 84–46 on the Activities and Supervision of Credit Institutions; Germany: Section 45(2) of the Law on the Credit System; Luxembourg: Article 59(1) and (2) of the Law of 1993 on the Financial Sector; Netherlands: Article 28(2) and (3) of the Law on Supervision of the Credit System. See also the discussion in Section 2, above.

Section 11CA(1) of the Banking Act 1959.

Section 11CA(2) of the Banking Act 1959.

Section 11CG of the Banking Act 1959.

Section 11CE(1) of the Banking Act 1959. Although publication is perhaps not a sanction in a formal sense, it may be practically more significant than the levy of penalties, because publication of a direction will often adversely affect the bank’s reputation and therefore increase its funding costs.

Section 13A(1) of the Banking Act 1959.

See for this case Germany, Article 46 of the Law on the Credit System.

12 U.S.C. § 1831o.

Australia: Section 13(3) of the Banking Act 1959.

Germany: Section 46b of the Law on the Credit System.

Section 3–1 (1) of the Law on Guarantee Schemes for Banks, 1996. The notification must contain information on the bank’s liquidity and capital condition and explain the reasons for the difficulties—Section 3–1(3).

See Chapter V, Section 3, below.

Canada: Section 654 of the Bank Act; Germany. Article 51(3) of the Law on the Credit System; Netherlands: Article 86 of the Law on Supervision of the Credit System.

Canada: Section 655 of the Bank Act.

See, for a discussion of this distinction. Chapter III, Section 2, above.

Switzerland: Article 23ter(2) of the Federal Law on Banks and Savings Banks.

Canada: Section 646 of the Bank Act.

Australia: Section 11CG of the Banking Act 1959; Belgium: Article 103 of the Law on the Statute and Supervision of Credit Institutions; England: Sections 44, 81, and 94 of the Banking Act 1987; France: Articles 75 ff, of Law No. 84–46 on the Activities and Supervision of Credit institutions; Germany. Articles 54–56 of the Law on the Credit System.

France: Article 45 of Law No. 84–46 on the Activities and Supervision of Credit Institutions.

See, e.g., Articles 10 and 11 of the Universal Declaration of Human Rights; and Article 6 of the European Convention for the Protection of Human Rights and Fundamental Freedoms.

Article 48 of Law No. 84–46 on the Activities and Supervision of Credit Institutions.

Belgium: Article 57 (1) of the Law on the Statute and Supervision of Credit Institutions.

Netherlands: Article 28 (1) of the Law on Supervision of the Credit System.

Section 11 (1)(e) of the Banking Act 1987. See further for the use of depositors’ interest as a ground for corrective action, Austria: Article 70(2) of the Banking Act; Canada: Section 648(1.1)(b), (c), and (e) of the Bank Act; Germany: Section 46(1) of the Law on the Credit System.

Austria: Article 70(2) of the Austrian Banking Act; Canada: Section 648(1.1)( (b), (c), and (e) of the Bank Act; Germany: Section 46(1) of the Law on the Credit System.

Section 645(1) of the Bank Act. Cf. France: Article 42 of Law No. 84–46 on the Activities and Supervision of Credit Institutions; United States: 12 U.S.C. § 1818(b)(1).

France: Article 45 of Law No. 84–46 on the Activities and Supervision of Credit Institutions.

Ireland: Section 21 (1) of the Central Bank Act; see also Australia: Section 9A(2)(b) of the Banking Act 1959 authorizing the revocation of the authority to carry on banking business in Australia if the regulator is satisfied that “it would be contrary to the national interest for the authority to remain in force.”

12 U.S.C § 1818(b)(1).

12 U.S.C § 1831p-1 and 12 C.F.R. 30.

Netherlands: Articles 20, 21, and 22 of the Law on Supervision of the Credit System.

United States: 12 U.S.C. § 1831o(e)(2). Although this is not required by law, it is common practice in the United States for the bank regulator to negotiate with banks in distress cease and desist orders containing detailed plans of corrective measures.

Argentina: Article 34 of the Financial Institutions Law; United States: 12 U.S.C. § 1831o(e)(2).

Sections 9(4) juncto Section 5 of the Banking Act 1959; it should be noted that Australian law does not expressly limit the exercise of this authority to situations where the bank concerned has violated the standards listed by the provision. Cf. England: Section 12(2) of the Banking Act 1987.

Section 11CA of the Banking Act 1959.

Canada: Section 645(1) of the Bank Act; England: Section 12(4)(a) of the Banking Act 1987; Netherlands: Article 28(2) of the Law on Supervision of the Credit System; Switzerland: Article 23ter(1) of the Federal Law on Banks and Savings Banks; United States: 12 U.S.C. § 1818(b) and (c).

Canada: Sections 480 and 485 of the Bank Act.

Australia: Section 11 CA(1)(b) and (2) of the Banking Act 1959; Luxembourg: Article 59(2) of the Law of 1993 on the Financial Sector; Portugal: Article 141 of the Legal Framework of Credit Institutions and Financial Companies, approved by Decree-Law No. 298/92.

Article 141 of the Legal Framework of Credit Institutions and Financial Companies, approved by Decree-Law No. 298/92.

Article 14 of the Law on Supervision of the Credit System.

Belgium: Article 57(1) of the Law on the Statute and Supervision of Credit Institutions; France: Article 43 of Law No. 84–46 on the Activities and Supervision of Credit Institution; Netherlands: Article 14 of the Law on Supervision of the Credit System; Portugal: Article 141 of the Legal Framework of Credit Institutions and Financial Companies, approved by Decree-Law No. 298/92.

Switzerland: Article 23ter(2) of the Federal Law on Banks and Savings Banks.

England: Section 12(2) of the Banking Act 1987; see also Australia: Section 9(4) of the Banking Act 1959.

Section 12(1) of the Banking Act 1987; the restrictions may consist of a time limit on the license of up to three years and conditions desirable for the protection of the bank’s present and future depositors—Sections 12(2) and (3).

This is the practice in the United States: 12 U.S.C. § 1818(b)(1); even though the law does not provide explicit authority, Section 1818(b)(1) implicitly grants the regulator the power to enter into such written agreements without consideration by providing that a cease and desist order may issue upon any violation of such agreement. See Macey and Miller, Banking Law and Regulation, second edition (New York: Aspen Law and Business), 1997, at pp. 575–76.

France: Articles 42 juncto 45 of Law No 84–46 on the Activities and Supervision of Credit Institutions.

France: Article 52 of Law No. 84–46 on the Activities and Supervision of Credit Institutions provides that, when justified by a bank’s condition, the Governor of the Bank of France, as chairman of the Banking Commission, calls upon the owners of the bank to provide the latter with the support it needs. The owners may refuse without liability; Christian Gavalda, and Jean Stoufflet, Droit Bancaire, fourth edition, at No.146; Sophie Grenouilloux, and Edouard Fernandez-Bollo, “France,” in International Bank Insolvencies: A Central Bank’s Perspective,” ed. by Mario Giovanoli and Gregor Heinrich (The Hague: Kluwer Law International), 1999, at p. 60.

Australia: Section 11 CA(2)(c)(i) of the Banking Act 1959; Belgium: Article 57(1)3 of the Law on the Statute and Supervision of Credit Institutions; England: Section 19(2)(e) of the Banking Act 1987; Germany: Section 35 of the Law on the Credit System.

Australia: Section 11 CA(2)(c)(ii) of the Banking Act 1959; Austria: Article 70(2)3 of the Austrian Banking Act; Germany. Section 46(1) of the Law on the Credit System; Luxembourg: Article 59(2)(a) of the Law on the Financial Sector.

Australia: Section 11 CA(2)(c)(iii) of the Banking Act 1959.

Belgium: Article 57(1)3 of the Law on the Statute and Supervision of Credit Institutions; Germany: Section 46(2) of the Law on the Credit System but only through a court order.

Australia: Section 11 CA(2)(j) of the Banking Act 1959; Austria: Article 70(2)1 of the Austrian Banking Act; Germany. Section 45(1) of the Law on the Credit System.

Norway: Section 32 of the Law on Commercial Banks.

Luxembourg: Article 59(2)(b) of the Law on the Financial Sector; Switzerland: Article 23ter(1 bis) of the Federal Law on Banks and Savings Banks.

Austria: Article 20(6)3 of the Austrian Banking Act; France: Article 46–1 of Law No. 84–46 on the Activities and Supervision of Credit Institutions.

France: Article 46–1 of Law No. 84–46 on the Activities and Supervision of Credit Institutions.

See Chapters IX and X below.

United States: 12 U.S.C. § 1821 (d)(2)(A); Netherlands: Article 72(1) of the Law on Supervision of the Credit System, but only for receivers.

Austria: Article 84(2) of the Austrian Banking Act under provisional administration; Portugal: Article 143(2)(a) of the Legal Framework of Credit Institutions and Financial Companies, approved by Decree-Law No. 298/92 under provisional administration.

Netherlands: Article 28(3)(a) of the Law on Supervision of the Credit System, under provisional administration.

Belgium: Article 57(1)(2) of the Law on the Statute and Supervision of Credit Institutions; Canada: Section 645(1)(a) of the Bank Act; United States: 12 U.S.C. § 1818(b)(1).

France: Article 43 of Law No. 84–46 on the Activities and Supervision of Credit Institutions; Netherlands: Articles 14 and 28(2) of the Law on Supervision of the Credit System; Switzerland: Article 23ter(1) of the Federal Law relating to Banks and Savings Banks.

Australia: Section 11 CA(k)-(n) of the Banking Act 1959; Austria: Article 70(2) of the Austrian Banking Act; France: Article 45 sub 3 of Law No. 84–46 on the Activities and Supervision of Credit Institutions; Germany: Sections 45(1) and 46(1) of the Law on the Credit System.

Belgium: Article 57(1)(2) of the Law on the Statute and Supervision of Credit Institutions.

Australia: Section 9(4) of the Banking Act 1959; England: Section 12(2) of the Banking Act 1987.

Section 11CA of the Banking Act 1959.

See Chapter XIII, Section 2, below, for a discussion of the need to protect payment and securities transfer systems.

As this report deals with banks in distress, it will not discuss the appointment of more or less permanent examiners to a bank as a function of the regular bank supervision process.

There are countries where this distinction is not clearly drawn by the law. E.g., in the Netherlands, Article 28 (3) of the Law on Supervision of the Credit System authorizes the regulator to notify a bank that its management may exercise its powers only after approval of one or more persons appointed by the regulator and in compliance with their instructions. In form, such appointment comes close to that of an inspector. In substance, however, the appointment means a de facto taking over of the management of the bank; therefore, in this report, it is treated as provisional administration.

Australia: Sections 13A-13B of the Banking Act 1959; Germany: Section 46(1) of the Law on the Credit System; Switzerland: Article 23quater of the Federal Law relating to Banks and Savings Banks.

In Germany, the consent of the inspector may be required for management and shareholder actions, but the failure to obtain such consent has no external legal effect; instead, fines may be imposed in case of noncompliance with the requirement; Reischauer/Kleinhans, Kreditwesengesetz-Kommentar, Article 46-para 9.

Belgium: Article 57(1)(1) of the Law on the Statute and Supervision of Credit Institutions.

Argentina: Article 34 of the Financial Institutions Law; Austria: Article 84(2) of the Banking Act.

Belgium: Article 57 (1)(1) of the Law on the Statute and Supervision of Credit Institutions.

See Chapter I, Section 5, above. In theory, exceptional financial support may also be required in cases where a bank is solvent but is unable to meet the collateral requirements for central bank credit; as such cases are relatively rare, they are ignored in this discussion.

See Chapter XI, below, for a discussion of official financial support provided in the context of bank resolution procedures involving transfers of banks in distress.

E.g., Norway: Section 2–12(1) of the Law on Guarantee Schemes for Banks of 1996; United States: 12 U.S.C. § 1823(c).

To that end, the deposit insurance agency may be authorized by law to extend guarantees. See, e.g., Norway: Section 2–12(1)(b) of the Law on Guarantee Schemes for Banks of 1996; United States. 12 U.S.C. § 1823(c)(2)(A)(iii), but only to facilitate the merger or consolidation of the bank with, the sale of assets of the bank to, or the assumption of liabilities or the acquisition of control of the bank by, another institution.

Claudia Dziobek, and Ceyla Pazarbaşioğlu, “Lessons from Systemic Bank Restructuring: A Survey of 24 Countries,” IMF Working Paper 97/171 (Washington: International Monetary fund), 1997, at pp. 15–16.

An example of such intermediary is the Reconstruction Finance Corporation of the United States, which between 1933 and 1953 provided equity capital to many banks in distress.

Norway: Section 2–12(1)(c) of the Law on Guarantee Schemes for Banks of 1996.

See Gillian Garcia, “Deposit Insurance and Crisis Management,” IMF Working Paper 00/57 (Washington: International Monetary Fund), 2000, at pp. 51–52.

United States: 12 U.S.C. § 1823(c).

See for this approach the United States: 12 U.S.C. § 1823(c)(4)(G) requiring a decision of the Secretary of the Treasury (in consultation with the U.S. President) pursuant to a written recommendation adopted by a two-thirds majority of both the Board of Directors of the FDIC and the Board of Governors of the Federal Reserve System, for the adoption of a bank resolution strategy other than the least-cost solution.

Dziobek, and Pazarbaşioğlu, “Lessons from Systemic Bank Restructuring,” at p. 15. See also Garcia, “Deposit Insurance and Crisis Management,” at p. 51.

A moratorium covering only part of a bank’s obligations may raise difficult questions of equity between creditors whose claims are suspended under the moratorium and creditors whose claims continue to be serviced by the bank.

This implies that the authorities would do whatever it takes to make the moratorium a success.

In Italy, it should help that the law specifies that a moratorium does not constitute a state of insolvency—Article 74(3) of the Law of 1993 on Matters Concerning Banking and Credit.

Articles 29–35 of the Federal Law on Banks and Savings Banks.

Austria: Article 83(1) of the Austrian Banking Act.

Articles 32(2) and (3) of the Federal Law on Banks and Savings Banks. Cf., Austria: Article 86 of the Austrian Banking Act.

Luxembourg: Article 60(2) of the Law of 1993 on the Financial Sector; Switzerland: Article 29(1) of the Federal Law on Banks and Savings Banks.

Luxembourg: Article 60(2) of the Law of 1993 on the Financial Sector.

France: Article 36 of Law No. 84–148 on the Prevention and Amicable Settlement of Difficulties of Enterprises.

Austria: Article 86 of the Austrian Banking Act.

See for a comparative analysis of these moratoria: Peter Merz, and Marc Raggenbass, “Switzerland,” in International Bank Insolvencies: A Central Bank’s Perspective,” ed. by Mario Giovanoli and Gregor Heinrich (The Hague: Kluwer Law International), 1999, at pp. 221–223; and Eva H.G. Hüpkes, The Legal Aspects of Bank Insolvency (The Hague: Kluwer Law International), 2000, at pp. 70–74.

Articles 29(1) and (2) of the Federal Law on Banks and Savings Banks.

Articles 293 ff. of the Debt Enforcement and Bankruptcy Law, and Article 37 of the Federal Law on Banks and Savings Banks.

Articles 25 ff. of the Federal Law on Banks and Savings Banks.

Article 60(1) of the Law of 1993 on the Financial Sector.

Note that in Austria, Article 83(1) of the Austrian Banking Act permits banks to apply for provisional administration, and the accompanying debt-service moratorium, only if their overindebtedness or insolvency is likely to be cured.

Luxembourg: Article 61(1)(a) of the Law of 1993 on the Financial Sector.

Switzerland: Article 35(2) of the Federal Law on Banks and Savings Banks. However, such a condition is specified by the law for granting an exceptional six-month extension of an existing moratorium—Article 35(1).

Luxembourg: Article 60(13) of the Law of 1993 on the Financial Sector.

Luxembourg: Article 60(12) of the Law of 1993 on the Financial Sector; Switzerland: Articles 29(1)bis and 30(1) of the Federal Law on Banks and Savings Banks.

Denmark: Article 46(1) of the Consolidated Law on Commercial Banks and Savings Banks; Germany. Article 46a(1)1 of the Law on the Credit System.

Italy: Article 74(1) of the Law of 1993 on Matters Concerning Banking and Credit.

No provisional administrator or receiver is required in Denmark or Germany, or for the rescheduling of debt-service payments in Switzerland.

Denmark: Section 46 of the Law on Commercial Banks and Savings Banks.

Germany: Article 46a(1) juncto Article 46(1) of the Law on the Credit System; Italy: Article 74 of the Law of 1993 on Matters Concerning Banking and Credit.

Italy: Ibid.

Germany: Section 46a(1) of the Law on the Credit System.

Germany: Section 46a(1)1 of the Law on the Credit System.

Germany: Section 47(1) of the Law on the Credit System.

Germany: Section 46a(1) of the Law on the Credit System, but only if and to the extent that the deposit guarantee agency provides the funds required for the purpose or undertakes to compensate the bank for any reduction in asset values resulting from these transactions required for the full compensation of the bank’s creditors. The regulator may authorize exceptions to the moratorium as required for the administration of the bank; Section 46a(1).

Germany: Section 46a(1) of the Law on the Credit System; Italy: Article 74(2) of the Law of 1993 on Matters Concerning Banking and Credit.

Articles 25 ff. of the Federal Law on Banks and Savings Banks. This instrument has not been used in Switzerland since the 1930s; it may nevertheless be a useful tool to combat systemic liquidity crises—Merz and Raggenbass, “Switzerland,” at p. 221.

See the discussion of effects of the opening of insolvency proceedings on payment systems in Chapter XIII, Section 2, below.

Austria: Article 90(2)1 of the Austrian Banking Act; Switzerland: Article 33(2) of the Federal Law on Banks and Savings Banks.

Luxembourg: Article 60(1) of the Law of 1993 on the Financial Sector; Switzerland: Article 35(2) of the Federal Law on Banks and Savings Banks.

Austria: one year with extension upon request by the bank regulator with the consent of the Minister of Justice—Article 90(2)2 of the Austrian Banking Act; Italy, up to one month with extension up to a further two months—Article 74(1) of the Law of 1993 on Matters Concerning Banking and Credit; Luxembourg: six months without extension-Article 60(8) of the Law of 1993 on the Financial Sector. In Switzerland, as a rule, moratoria are granted for one year with the possibility of one extension of another year—Article 29(2) of the Federal Law on Banks and Savings Banks; pursuant to Article 35(1) of that law, an exceptional extension of six months is permitted “if it becomes apparent during the moratorium that the bank can achieve an extrajudicial rehabilitation.”

E.g., Denmark: Article 47 of the Law on Commercial Banks and Savings Banks; Switzerland: Article 35(2) of the Federal Law on Banks and Savings Banks.

Examples are found in England: Part II of the Insolvency Act 1986, which is made applicable to banks by the Banks (Administration Proceedings) Order 1989; and France: Law No. 84–148 on the Prevention and Amicable Resolution of Difficulties of Enterprises, and Law No. 85–98 on the Judicial Rehabilitation and Liquidation of Enterprises that apply to banks.

Judicial insolvency procedures are discussed in Chapter XIII, below.

In Canada, banks and federally regulated trust and insurance companies are subject to a special insolvency law, the Winding-up and Restructuring Act. General federal insolvency law does not apply to banks; Duffy, “Canada,” at p. 36.

See Section 4, below, for a discussion of the advantages and disadvantages of judicial administration and the ex ante review that it offers.

Section 13A(1) of the Banking Act 1959.

Section 648(1) of the Bank Act; the section also provides that this power may not be exercised if the Minister of Finance (who presides over, and is responsible for, the office of the bank regulator) advises the regulator that the minister is of the opinion that it is not in the public interest to do so.

Section 649(3) of the Bank Act.

12 U.S.C. § 1821(c)(2)–(4).

See for judicial provisional administration, England: Section 8 of the Insolvency Act 1987; France: the rehabilitation provisions of Law No. 85–98 on the Judicial Rehabilitation and Liquidation of Enterprises, and Articles 34–36 of Law No. 84–148 on the Prevention and Amicable Resolution of Difficulties of Enterprises.

United States: 12 U.S.C. §§ 191 and 203(a).

Italy: Article 76(1) of the Law of 1993 on Matters Concerning Banking and Credit.

Australia: Section 13A(1) of the Banking Act 1959; Canada: Section 648(1) of the Bank Act.

Article 46–4 of Law No, 84–46 on the Activities and Supervision of Credit Institutions.

Section 15A(1) and (2) of the Banking Act 1959. The external appointment referred to could be made, e.g., under company law or general insolvency law.

Section 39.13(3)(a) of the Canada Deposit Insurance Corporation Act. Pursuant to Section 39.13(4)(a), the powers of the CDIC supersede the powers of a trustee in bankruptcy appointed under the Bankruptcy and Insolvency Act.

See Chapter XII, Section 3, below, for a brief discussion of the effects of the revocation of the banking license.

This occurred in the United States where the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) transferred the power of the courts to appoint receivers for banks to the FDIC.

In the absence of a formal deposit insurance system, Australia: Section 13A(3) of the Banking Act 1959, gives priority to payment of a bank’s deposit liabilities over all other liabilities of the bank; while Switzerland grants a special preference for household savings and alimony and pension deposits up to SwF 30,000—Article 37a of the Swiss Federal Law on Banks and Savings Banks. See also Article 49 of Law 21526 of Argentina. The United States,: 12 U.S.C. § 1821 (d)(11)(A) protects bank deposits with a high priority, notwithstanding deposit insurance. For the purposes of this discussion, statutory preferences protecting bank deposits are deemed to be included under the term “deposit insurance.”

Such an ex ante review should be distinguished from a review ex post in which decisions and actions of the receiver are subject to review after they have been taken, often at the request of an interested party.

See Chapter XI, Section 1, below, for a brief discussion of this case.

Austria: Articles 83–91 of the Austrian Banking Act.

This is the case in Switzerland: Articles 29 ff. of the Federal Law on Banks and Savings Banks.

12 U.S.C. § 1821(d)(2)(D).

E.g., Portugal: Article 152 of the Legal Framework of Credit Institutions and Financial Companies, approved by Decree-Law No. 298/92; Switzerland: Article 35(2) of the Federal Law on Banks and Savings Banks.

Austria: Article 83(1) of the Austrian Banking Act, A similar judgment is required in England: Section 8(3)(a) of the Insolvency Act 1986, as interpreted by the courts: In re Harris Simons Construction Ltd [1989] 1 WLR 368, per Hoffmann J,; although the English requirement applies to judicial bank rehabilitation under general insolvency law, its rationale would apply to regulatory provisional administration as well.

Switzerland: Article 29(2) of the Federal Law on Banks and Savings Banks.

Australia: Section 13C(1) of the Banking Act 1959. Cf. Canada: Sections 650–652 of the Bank Act; Portugal: Articles 146 and 152 of the Legal Framework of Credit Institutions and Financial Companies, approved by Decree-Law No. 298/92; Switzerland: Article 35(2) of the Federal Law on Banks and Savings Banks.

In the Netherlands: Article 28(3) of the Law on Supervision of the Credit System, this is the principal ground for appointing provisional administrators.

Austria, Belgium, Denmark, England, Germany, Norway, and Sweden.

FDIC, Managing the Crisis: the FDIC and RTC Experience 1980–94, August 1998, at p. 115.

Ibid., at pp. 117–18.

France: Article 44 of Law No. 84–46 on the Activities and Supervision of Credit Institutions; Italy: Article 71 (1) of the Law of 1993 on Matters Concerning Banking and Credit; Netherlands; Article 28(3) of the Law on Supervision of the Credit System; Portugal: Article 143(1) of the Legal Framework of Credit Institutions and Financial Companies, approved by Decree-Law No. 298/92; United States: 12 U.S.C. §§ 203(a) and 1821(c).

Australia: Section 13A(1) of the Banking Act 1959; Canada: Section 648(1) of the Bank Act.

Austria: Article 83(1) of the Austrian Banking Act; Switzerland: Articles 29(2) and 30(1) of the Federal Law on Banks and Savings Banks, in the framework of a judicial moratorium.

France: Article 44 of Law No. 84–46 on the Activities and Supervision of Credit Institutions.

Italy: Article 70(1) of the Law of 1993 on Matters Concerning Banking and Credit.

Australia: Section 13A(1)of the Banking Act 1959; Netherlands: Article 28(1) of the Law on Supervision of the Credit System; Spain: Article 31 of Law 26/1988 on the Supervision and Intervention of Credit Institutions.

Austria: Article 83(1) of the Austrian Banking Act.

Switzerland: Articles 29(1)bis and 30(1) of the Federal Law on Banks and Savings Banks.

France: Article 44 of Law No. 84–46 on the Activities and Supervision of Credit Institutions.

Canada: Section 648(1.1) of the Bank Act. See for a similar list of grounds Portugal: Article 143(1) of the Legal Framework of Credit Institutions and Financial Companies, approved by Decree-Law No, 298/92; and, for an even longer list, United States: 12 U.S.C. § 1821(c)(5), including additional items such as the willful violation of a cease and desist order and money laundering.

Netherlands: Article 28(3) of the Law on Supervision of the Credit System, although pursuant to para. (4) the regulator may in cases of urgency make the appointment without such notice and grace period.

Spain: Article 31(1) of Law No, 26/1988 on Supervision and Intervention with respect to Credit Institutions.

Austria: Article 83(1) of the Austrian Banking Act.

Australia: Sections 15(1) and 14A(1), respectively, of the Banking Act 1959; cf. Italy: Articles 70(1) and 71 of the Law of 1993 on Matters Concerning Banking and Credit where the bank’s management is dissolved by decree of the Ministry of the Treasury, while the administrator is appointed by the bank regulator.

France: Article 44 of Law No. 84–40 on the Activities and Supervision of Credit Institutions.

Untied States: 12 U.S.C. §§1821 (d)(2)(A)(I) and (B)(1).

Canada: Section 649 of the Bank Act.

Portugal: Articles 143(2) and (3) of the Legal Framework of Credit Institutions and Financial Companies, approved by Decree-Law No. 298/92.

Netherlands: Article 28(3)(a) of the Law on Supervision of the Credit System.

There are exceptions, however. See the exceptionally broad powers of the FDIC as conservator in the United States: 12 U.S.C. § 1821 (d). In Australia, a provisional administrator may sell or otherwise dispose of the whole or any part of the bank’s business, on any terms and conditions that the administrator considers appropriate—Section 14A(5) of the Banking Act 1959.

Australia: Section 15(3) of the Banking Act 1959.

See for a right of veto: Austria: Article 84(2) of the Law on the Banking System; and Portugal: Article 143(2)(a) of the Legal Framework of Credit Institutions and Financial Companies, approved by Decree-Law No. 298/92.

Netherlands: Article 28(3) of the Law on Supervision of the Credit System.

12 U.S.C. § 1821(d)(2)(A).

Article 70(2) of the Law of 1993 on Matters Concerning Banking and Credit.

Article 46–1 of Law No. 84–46 on the Activities and Supervision of Credit Institutions. See also Argentina: Article 35bis(I)(c) of the Financial Institutions Law.

E.g., Austria: Article 20(6) of the Austrian Banking Act; Switzerland: Article 23ter(1bis) of the Federal Law on Banks and Savings Banks; see for additional provisions the review of corrective measures affecting the rights of bank owners in Chapter V, Section 2, above.

See, for the countries of the European Union, the judgment of the European Court of justice of March 12, 1996 in Panagis Pafitis v. Trapeza Kentrikis Ellados, et al (C-441/93).

Article 46–1 of Law No. 84–46 on the Activities and Supervision of Credit institutions, assuming that this solution meets the standards of the judgment of the European Court in the Panagis Pafitis case.

See Chapter VII, above, for a discussion of other more general aspects of a moratorium.

Australia: Section 15B of the Banking Act 1959; Austria: Article 86(1) and (2) of the Austrian Banking Act; Portugal: Article 147 of the Legal Framework of Credit Institutions and Financial Companies, approved by Decree-Law No. 298/92. See also Chapter VII, above.

Section 15B of the Banking Act 1959.

Articles 86(1) and (2) of the Austrian Banking Act.

Switzerland: Articles 29(2) and 30(1) of the Federal Law on Banks and Savings Banks.

See the discussion of effects of the opening of insolvency proceedings on payment systems in Chapter XIII, Section 2, below.

Australia: Section 13C(1) of the Banking Act 1959; Canada: Sections 650–652 of the Bank Act; Norway: Sections 4–9 and 4–10 of the Law on Guarantee Schemes for Banks of 1996; Portugal: Article 152 of the Legal Framework of Credit Institutions and Financial Companies, approved by Decree-Law No. 298/92; Switzerland: Article 35(2) of the Federal Law on Banks and Savings Banks.

Austria: Article 90(2)1 of the Austrian Banking Act.

Austria: Article 90(1) of the Austrian Banking Act.

Austria: one year subject to extension by the regulator with the consent of the Federal Minister of Justice—Article 90(2) of the Austrian Banking Act; Italy: one year (or less if so specified in the decree ordering provisional administration) subject to extension up to six months in exceptional circumstances by the Minister of the Treasury at the proposal of the Bank of Italy, or an extension up to two months as required for closing the administration down—Articles 70(5) and (6) of the Law of 1993 on Banking and Credit Issues; Netherlands: up to two years subject to extensions of up to one year each—Article 28(5)(c) of the Law on Supervision of the Credit System; Norway: one year although the Ministry of Finance may stipulate a different period—Section 4–10(1) of the Law on Guarantee Schemes for Banks of 1996.

Section 652 of the Bank Act. The winding-up order is applied for under the Winding-up and Restructuring Act, a special insolvency law that is applicable to banks in lieu of general insolvency law.

In countries where provisional administration is regulatory in nature while receivership is a form of judicial administration (Luxembourg, Netherlands), there will be a trade off between regulatory control accompanied by limited powers and judicial control accompanied by extensive powers.

Here, banking law is understood to include deposit insurance legislation.

See for references to company law: Australia: Section 14F of the Banking Act 1959 referring to the Corporations Law of a State or internal Territory under which the bank is incorporated, which includes provisions of general insolvency law.

France: Articles 46 and 46–2 of Law No. 84–46 on the Activities and Supervision of Credit Institutions, and Grenouilloux and Fernandez-Bollo, “France,” at p. 58; Switzerland: Articles 23quinquies and 36 of the Federal Law on Banks and Savings Banks; and Merz and Raggenbass, “Switzerland,” at p. 220.

Netherlands: Articles 71 ff. of the Law on Supervision of the Credit System.

E.g., Italy: Article 80 of the Law of 1993 on Matters Concerning Banking and Credit; Luxembourg: Article 61 of the Law on the Financial Sector; Norway: Section 4–10(1) of the Law of 1996 on Guarantee Schemes for Banks. In Italy and Luxembourg, liquidation of banks under insolvency law is explicitly excluded, ibid.

See, e.g., the extensive liquidation provisions in the banking laws of Italy: Articles 80 ff. of the Law of 1993 on Matters Concerning Banking and Credit; Luxembourg: Article 60 of the Law on the Financial Sector; United States: 12 U.S.C. § 1821(d).

E.g., Norway: Section 4–10(2) of the Law of 1996 on Guarantee Schemes for Banks.

E.g., Netherlands: Articles 73–80 of the Law on Supervision of the Credit System.

Luxembourg: Article 61 of the Law on the Financial Sector; Netherlands: Article 71 of the Law on Supervision of the Credit System.

France: Article 46 of Law No. 84–46 on Activities and Supervision of Credit Institutions; United States: 12 U.S.C. §191.

Articles 80(1) and 81(1) of the Law of 1993 on Matters Concerning Banking and Credit; both the ministerial decree and the regulator’s decision must be published in the Official Gazette.

Section 4–7 of the Law on Guarantee Schemes for Banks of 1996.

Section 39.13(1)(b) of the Canada Deposit Insurance Corporation Act.

United States: 12 U.S.C. § 1821(c)(10) and 12 U.S.C. § 1821(c)(3), respectively.

England: Section 59(1)(a) of the Banking Act 1987; Norway: Section 4–5(1) of the Law on Guarantee Schemes for Banks of 1996.

Netherlands: Article 77 of the Law on Supervision of the Credit System, as bankruptcy ground for banks.

Norway: Section 4–5(1) of the Law on Guarantee Schemes for Banks of 1996; United States: 12 U.S.C. § 1831o(h)(3)(A) for the appointment of a receiver to a bank that is “critically undercapitalized,” which by Section 1831o(b)(1) is defined as failing to meet any of the capital adequacy levels specified by Section 1831o(c)(3)(A).

Canada: Section 39.1(1)(b) of the Canada Deposit Insurance Corporation Act.

Luxembourg: Article 61(1)(c) of the Law on the Financial Sector.

Delay in appointing a receiver to take control of a failing bank and to preserve its assets may cause a decline in value of the bank’s assets and franchise; in some jurisdictions, the resulting losses may expose the regulator to damage suits by bank creditors.

If the bank is insolvent, saving its business as a going concern would generally be justified only in exceptional circumstances, for instance, where the bank is deemed too big to fail.

Section 4–8 of the Law on Guarantee Schemes for Banks of 1996.

Netherlands: Article 72(1) of the Law on Supervision of the Credit System.

Canada: Section 39.14(1) of the Canada Deposit Guarantee Corporation Act; Norway: Article 4–6(1)(a) of the Law of 1996 on Guarantee Schemes for Banks.

Canada: Sections 39.13(2) and (3) and 39.2 of the Canada Deposit Insurance Corporation Act; Italy: Article 90 of the Law of 1993 on Matters Concerning Banking and Credit; Netherlands: Article 75 of the Law on Supervision of the Credit System; United States: 12 U.S.C. § 1821(e).

Italy: Article 90(2) of the Law of 1993 on Matters Concerning Banking and Credit; Netherlands: Article 75(1) of the Law on Supervision of the Credit System.

Italy: Article 80(5) of the Law of 1993 on Matters Concerning Banking and Credit; Norway. Section 4–6(1)(a) of the Law of 1996 on Guarantee Schemes for Banks.

Netherlands: Article 72(1) of the Law on Supervision of the Credit System.

12 U.S.C. § 1821(d)(2)(A).

Section 39.13(1)(a) of the Canada Deposit Insurance Corporation Act.

France: Article 46–1 of Law No. 84–46 on the Activities and Supervision of Credit Institutions. See also Argentina: Article 35bis(i)(c) of the Financial Institutions Law.

See Chapter VII, above, for a discussion of other more general aspects of a moratorium.

Canada: but under banking law only where the shares of a bank are vested in the CDIC or the CDIC is appointed as a receiver for a bank, Section 39.15(1) of the Canada Deposit Insurance Corporation Act; Italy: Article 83(1) of the Law of 1993 on Matters of Banking and Credit; Luxembourg: Article 61(4) of the Law of 1993 on the Financial Sector; Netherlands: Article 74(1) of the Law on Supervision of the Credit System; United States: 12 U.S.C. § 1821(d)(13)(C) and (D).

United States: 12 U.S.C. § 1821(d)(12); the court must grant the stay when properly requested.

Canada: Section 39.15(6) and (7) of the Canada Deposit Insurance Corporation Act; Netherlands: Article 74(2) of the Law on Supervision of the Credit System.

See the discussion of effects of the opening of insolvency proceedings on payment systems in Chapter XIII, Section 2, below.

Italy: Article 87 of the Law of 1993 on Matters Concerning Banking and Credit; United States: 12 U.S.C. § 1821(d)(6) and (7).

Grenouilloux and Fernandez-Bollo, “France,” at p. 58; see for the case where an insolvent bank loses its banking license: Article 46-2 of Law No. 84-46 on the Activities and Supervision of Credit Institutions.

Section 39.22 of the Canada Deposit Insurance Corporation Act, which also provides that the Governor in Council may extend the 60-day period up to a total period of 180 days.

There are exceptions. Bank resolutions may also be used to dispose of part of the business of a bank in distress so that a smaller bank that remains can be successfully rehabilitated. In such cases, bank resolution procedures may be used under provisional administration, although the limited powers of a provisional administrator may require that the procedures are approved by bank owners.

United States: 12 U.S.C. § 1823(c)(4).

See, e.g., the United States: 12 U.S.C. § 1823 (c)(4)(G) requiring a decision of the Secretary of the Treasury (in consultation with the U.S. President) pursuant to a written recommendation adopted by a two-thirds majority of both the Board of Directors of the FDIC and the Board of Governors of the Federal Reserve System.

E.g., United States: 12 U.S.C. § 1821(d)(2)A.

E.g., France: Article 46–1 of Law No. 84–46 on the Activities and Supervision of Credit Institutions.

E.g., Netherlands: Article 75 of the Law on Supervision of the Credit System.

Canada: Section 39.2 of the Canada Deposit Insurance Corporation Act; Italy: Article 90(2) of the Law of 1993 Matters Concerning Banking and Credit; Netherlands: Article 75(1) of the Law on Supervision of the Credit System; United States: 12 U.S.C. § 1821(d)(2)(G).

Netherlands: Articles 75(1), (4), and (5) of the Law on Supervision of the Credit System.

Canada: Section 39.2(1), (3), (5), and (6) of the Canada Deposit Insurance Corporation Act; Italy: Articles 90(2) and 58(2) and (4) of the Law of 1993 on Matters Concerning Banking and Credit.

United States: Section 12 U.S.C. § 1821(d)(2)(G).

12 U.S.C. §§ 1821(d)(2)(F)(ii) and 1821(n).

Voluntary bank liquidation is carried out by or at the request of the bank concerned, with the consent and usually under the supervision of the bank regulator. Consent will be denied if the bank is deemed insolvent. As it is mostly unrelated to the topic of this report, voluntary liquidation will not be further discussed.

Austria: Article 6(5) of the Austrian Banking Act.

E.g., in Canada, banks may be incorporated by letters patent issued by the Minister of Finance and come into existence on the date provided there for in its letters patent—Sections 22 and 32 of the Bank Act. Although an existing corporation may be continued as a bank through the issuance of letters patent to it, Section 36 of the Bank Act provides that such corporation becomes a bank as if it had been incorporated under the Bank Act and that the letters patent are deemed to be the incorporating instrument of the continued bank.

This question is briefly addressed infra, Section 3.

Belgium: Article 57(1)(4) of the Law on the Statute and Supervision of Credit Institutions.

England: Sections 11 and 12 of the Banking Act 1987.

France: Article 45 of Law No. 84–46 on the Activities and Supervision of Credit Institutions.

Italy: Article 80(1) of the Law of 1993 on Matters Concerning Banks and Credit.

England: Section 11(1)(e) of the Banking Act 1987, but only for interests of depositors and potential depositors; Germany: Section 35(2)(4) of the Law on the Credit System; Netherlands: Article 15(1)(d) juncto Article 9(1)(c), of the Law on Supervision of the Credit System.

Austria: Section 6(2) of the Austrian Banking Act.

Australia: Section 9A(2)(b) of the Banking Act 1959; Norway: Section 8 of the Act on Commercial Banks of 1961.

Article 35(2)(4) of the Law on the Credit System.

Austria: Section 70(4)3 of the Austrian Banking Act; Germany: Article 35(2)(4) of the Law on the Credit System.

E.g., Italy: Article 80(2) of the Law of 1993 on Matters Concerning Banks and Credit; Netherlands: Article 15(1)(a) of the Law on Supervision of the Credit System.

E.g., France: Article 19(1) of Law No. 84–46 on the Activities and Supervision of Credit Institutions.

In Australia, Section 9A(1) of the Banking Act 1959 requires that the bank regulator is satisfied that the revocation would not be contrary to the national interest and the interests of depositors of the bank.

An example is Italy, where banking licenses are revoked by the Minister of Finance, upon the recommendation of the Bank of Italy: Article 80(1) of the Law of 1993 on Matters of Banking and Credit.

Italy: Article 80(1) of the Law of 1993 in Matters of Banking and Credit.

Sections 11(6) and (9) of the Banking Act 1987. See for a similar provision European Union: Article 13(1) of the Amended Proposal for a Council Directive concerning the reorganization and the winding-up of credit institutions and deposit guarantee schemes (OJ No. C 36.8.2.1988, p. 1).

E.g., Section 11(7) and (8) of the Banking Act 1987.

E.g., in Switzerland: Merz and Raggenbass, “Switzerland,” at p. 220.

Denmark: Section 47(1) of the Law on Commercial Banks and Savings Banks; Italy: Article 80(1) of the Law of 1993 on Matters Concerning Banks and Credit; Japan: Article 40 of the Banking Law; Norway: Section 34 of the Law on Commercial Banks of 1961; Switzerland: Article 23quinquies of the Federal Law on Banks and Savings Banks.

E.g., Germany: Section 38(1) of the Law on the Credit System.

E.g., France: Article 19 of Law No. 84–46 on the Activities and Supervision of Credit Institutions; Netherlands: Article 15(5) of the Law on Supervision of the Credit System.

Australia: Section 14F(2) of the Banking Act 1959 referring to the Corporations Law of a State or internal Territory under which the bank is incorporated, which includes the applicable provisions of general insolvency law; Austria: Article 82 of the Austrian Banking Act; Belgium: Article 29 of the Law on the Statute and Supervision of Credit Institutions; England: Section 92 of the Banking Act 1987; France: Article 3 of Law No, 85–98 on Bank Restructuring and Judicial Liquidation of Enterprises and Court of Appeal of Paris, March 2, 1990; D. 1990.569, annotated by Vasseur; Germany: Section 46b of the Law on the Credit System; Netherlands: Article 77 of the Law on Supervision of the Credit System.

This treatment is distinguished from the cases where a more or less complete insolvency regime for banks is included in the banking law (United States), even though from a substantive point of view this distinction may appear somewhat artificial.

Duffy, “Canada,” at p. 36, footnote 10.

Section 8 of the Insolvency Act 1986.

Pursuant to Law No. 84–148 on the Prevention and Amicable Resolution of Difficulties of Enterprises, and Law No. 85–98 on the Judicial Rehabilitation and Liquidation of Enterprises; the advice of the regulator is required by Article 46–3 of Law No. 84–46 on the Activities and Supervision of Credit Institutions. In France, the banking law also authorizes provisional administration and receivership: Articles 44 and 46 of Law No. 84–46.

Articles 34–36 of Law No. 84–148 on the Prevention and Amicable Settlement of Difficulties of Enterprises; Grenouilloux and Fernandez-Bollo, “France,” at p. 57.

The somewhat unusual statement in the last part of this sentence can be found in the Netherlands: Article 77(d) of the Law on Supervision of the Credit System.

Switzerland: Articles 35(2) and (3) of the Federal Law on Banks and Savings Banks.

Section 15A(2) of the Banking Act 1959. The law also provides that the appointment of an external administrator of a bank is terminated when the bank regulator takes control of a bank’s business; Section 15A(1).

Article 29(1 ter) of the Federal Law on Banks and Savings Banks. See also Merz and Raggenbass, “Switzerland,” p. 213 at pp. 221–22.

See, e.g., England: Section 92 of the Banking Act 1987.

Denmark: Article 47d(1) of the Consolidated Law on Commercial Banks and Savings Banks; Germany: Section 46b of the Law on the Credit System. Cf. Austria: Article 82(3) of the Austrian Banking Act, which provides that “normally” only the bank regulator may file for the institution of bankruptcy proceedings against a bank.

Austria: Article 82(3) of the Austrian Banking Act; Switzerland: Article 35(2) of the Federal Law on Banks and Savings Banks, where the administrator brings the petition upon the instruction of the court.

Denmark: Article 47d(1) of the Consolidated Law on Commercial Banks and Savings Banks.

Switzerland: Article 35(2) of the Federal Law on Banks and Savings Banks.

Canada: Section 652 of the Bank Act and Section 39.22 of the Canada Deposit Insurance Corporation Act.

France: Article 46–3 of Law No. 84–46 on the Activities and Supervision of Credit Institutions; Netherlands: Article 70 of the Law on Supervision of the Credit System.

Denmark: Article 47d(2) and (3) of the Consolidated Commercial Bank and Savings Bank Act of 1991.

See for a discussion of this issue Chapter VIII, Section 4, above.

Austria: Article 2 of the Bankruptcy Code; and Thomas Wagner, and Birgit Sauerzopf, “Austria,” in International Bank Insolvencies: A Central Bank’s Perspective, ed. by Mario Giovanoli and Gregor Heinrich (The Hague: Kluwer Law International), 1999, at p. 23.

Articles 175(1) and 204(1) of the Federal Debt Enforcement and Bankruptcy Law.

See for a discussion of this technique Merz and Raggenbass, “Switzerland,” p. 213 at pp. 217–18.

Directive 98/26/EC of the European Parliament and of the Council of 19 May 1998, Official Journal L 166, November 6, 1998, p. 45.

The Directive is made effective at the national level by converting its rules into domestic law. As the text of the Directive is rather lengthy, some member states of the European Union have condensed it into shorter provisions of domestic law. However, statutory condensation is a hazardous enterprise. E.g., the statutory provisions adopted by France (Article 93–1 of Law No. 84–46 on the Activities and Supervision of Credit Institutions) and by the Netherlands (Article 71 (9) and (10) of the Law on Supervision of the Credit System, amended by Law of December 17, 1998) differ both materially from the text of the Directive, and from each other.

Austria: Article 82(1) of the Austrian Banking Act.

Italy: Articles 93 ff. of the Law of 1993 on Matters of Banking and Credit.

Article 36(2) of the Federal Law on Banks and Savings Banks. See also Merz and Raggenbass, “Switzerland,” p. 213 at p. 217.

The countries that have adopted such legislation include Australia, Austria, Belgium, Canada, France, Germany, Luxembourg, Norway, Switzerland and the United States. See the country reports in Giovanoli and Heinrich, eds., International Bank Insolvencies. See, for the United States, Joyce M. Hansen, and Nikki M. Poulos, “Treatment of Financial Contracts in Financial Institutions Insolvency,” in Bank Failures and Bank Insolvency Law in Economies in Transition, ed. by Rosa M. Lastra and Henry N. Schiffman (The Hague: Kluwer Law International), 1999, Chapter 6.

E.g., France: Article 93–2 of Law No. 84–46 on the Activities and Supervision of Credit Institutions.

E.g., Switzerland: Article 211 of the Federal Debt Enforcement and Bankruptcy Law.

E.g., Norway: Chapter 10 of the Securities Trading Act of 1997.

E.g., Australia: the Payment System and Netting Act 1998; Canada: the Payment Clearing and Settlement Act.

In this book, a systemic banking crisis means the insolvency or threatened insolvency of so many banks in a country that the country’s entire banking system, or an important sector of the banking system (savings and loan institutions), is threatened with collapse.

See for extensive discussions of this topic: Federal Deposit insurance Corporation, History of the Eighties, Lessons for the Future—An Examination of the Banking Crises of the 1980s and Early 1990s, FDIC, 1997. Also see the following published by the International Monetary Fund, Washington: Alicia García-Herrero, “Banking Crises in Latin America in the 1990s: Lessons from Argentina, Paraguay, and Venezuela,” IMF Working Paper 97/140, 1997; Claudia Dziobek, and Ceyla Pazarbaşoğliu, “Lessons from Systemic Bank Restructuring: A Survey of 24 Countries,” IMF Working Paper 97/161, 1997; Burkhard Drees, and Ceyla Pazarbaşoğliu, The Nordic Bonking Crises—Pitfalls in Financial Liberalization, IMF Occasional Paper No.161, 1998; Carl-Johan Lindgren, and others, Financial Sector Crisis and Restructuring—Lessons from Asia, IMF Occasional Paper No. 188, 1999; and Gillian Garcia, “Deposit Insurance and Crisis Management,” IMF Working Paper 00/57, 2000.

Good examples of successful comprehensive bank restructuring programs are found in Sweden, Argentina, and Korea; examples of countries where a less decisive and fragmented response created problems are Venezuela and Indonesia. See García-Herrero, “Banking Crises in Latin America in the 1990s,” at pp. 11–12, See in general for Sweden and the Asian countries, respectively: Drees and Pazarbaşioğlu, The Nordic Banking Crises, and Lindgren and others, Financial Sector Crisis and Restructuring.

Indonesia, Korea, Malaysia, the Philippines, and Thailand.

Lindberg and others, Financial Sector Crisis and Restructuring, at p. 18.

See Chapter VI, above.

This was the case, e.g., in Argentina and Paraguay: García-Herrero, “Banking Crises in Latin America in the 1990s,” at p. 10.

During the Asian crisis of 1997, Indonesia, Malaysia, the Philippines, and Thailand all imposed some capital restrictions on foreign residents; those imposed by Malaysia were the most extensive. See, for a description of the restrictions, Lindgren and others, Financial Sector Crisis and Restructuring, Box 6 at p. 20.

See, for an extensive analysis of the issuance of blanket guarantees for deposits and Other liabilities of banks during a systemic banking crisis, Garcia, “Deposit Insurance and Crisis Management,” at pp. 52–71. Blanket guarantees were issued by the governments of Finland, Indonesia, Jamaica, Japan, Korea, Kuwait, Malaysia, Mexico, Sweden, Thailand, and Turkey, ibid., at p. 67.

Lindgren, and others, Financial Sector Crisis and Restructuring, at p. 20.

See, for the experience in Asia, ibid., at pp. 21–23.

See, for the use of these strategies in Norway and Sweden, Drees and Pazarbaşioğlu, The Nordic Banking Crises, at pp. 26–31.

Germany: Section 47(1) of the Law on the Credit System.

See Chapter VII, above.

This need not be the case in countries with few banking institutions.

This is the case in the United States.

See Chapter VIII, Section 3, above, for a brief discussion of this issue.

See in general, Stefan Ingves, and Göran Lind, “The Management of the Bank Crisis in Retrospect,” Quarterly Review, Sveriges Riksbank, 1996, pp. 5–18; Drees and Pazarbaşioğlu, The Nordic Banking Crises, at p. 35.

Drees and Pazarbaşioğlu, The Nordic Banking Crises, at p. 29.

Ibid. at p. 35.

The key concern was to make sure that all potential losses were borne by banks rather than the asset-management companies.

See, for a description of the experience gained from the Asian crisis of 1997, Lindgren and others, Financial Sector Crisis and Restructuring, at pp. 31–32.

An example of successful autonomous bank restructuring corporations can be found in the United States, which organized the Resolution Trust Corporation (RTC) and the Federal Deposit Insurance Corporation (FDIC) as independent agencies of the government. These two institutions liquidated or sold over 2,000 banking institutions and more than $600 billion in assets during the period 1985–95 (the RTC was created in 1989).

This approach was followed successfully in Poland (1994–96) pursuant to the Law of February 2, 1993 on Financial Restructuring of Enterprises and Banks. An important advantage was that the banking system was dominated by a relatively small number of state and former state banks. See, in general, Monte-Negret, and Papi, The Polish Experience with Bank and Enterprise Restructuring, Policy Research Working Paper 1705 (Washington: World Bank), 1997.

This technique appears to have worked in Argentina; see Danny M, Leipziger, “The Argentine Banking Crisis: Observations and Lessons,” in Preventing Banking Crises: Lessons from Recent Global Bank Failures, ed. by Caprio, Hunter, Kaufman, and Leipziger, 1998 (Washington, World Bank), p. 35 at p. 41.

See, for an example, United States: 12 U.S.C. § 1821 (n).

Article 37A of Law No. 7/1992 on Banking, as amended by Law No. 10/1998 of November 10, 1998.

Government Regulation No. 17 of 1999 on the Indonesian Bank Restructuring Agency.

Articles 48 juncto 1 of Government Regulation 17 of 1999 and Article 7 of a Decree of the Chairman of IBRA issued on October 4, 1999.

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