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2012 | OriginalPaper | Chapter

6. Current Bank Bankruptcy Regimes and Recent Developments

Authors : Matej Marinč, Razvan Vlahu

Published in: The Economics of Bank Bankruptcy Law

Publisher: Springer Berlin Heidelberg

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Abstract

We now review the general characteristics of bank bankruptcy laws around the world. Then we focus on selected bank bankruptcy laws in more detail. We analyze characteristics of the Swedish proposal towards the bank insolvency legal framework, the bank bankruptcy regimes in the European Union, Germany, and the U.S., including the provisions of Dodd-Frank Wall Street reform and the consumer protection act, and the recently implemented UK bank bankruptcy regime. Although it is beyond the scope of this study to provide a detailed cross-country legal analysis of bank resolution procedures, our aim is to review, compare, and evaluate the most economically significant characteristics of the selected bank bankruptcy laws.

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previous chapter General Issues on the Structure of Banking Industry

next chapter Optimal Design of Bank Bankruptcy Law and the Bank Failures from the 2007–2009 Financial Crisis

The final report of the banking law committee: Public administration of banks in distress (SOU 2000:66). See also Molin and Ingves (2008) and Viotti (2000).

See Englund (1999) and Ingves and Lind (1996) for a review of determinants of the crisis and a description of regulatory response.

Calomiris (1999) proposes that subordinated debt should be given to foreign banks, for which the government would have little incentive to bail them out.

See Dewatripont and Rochet (2009) for a discussion on why, in economically integrated areas such as the EU, there is a strong demand for the emergence of an independent European supervisor.

European Commission, 2009d, Communication 561/2009 on the EU Framework for Cross-Border Crisis Management in the Banking Sector, Brussels.

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European Commission, 2009c, Communication 501/2009 on Establishing a European System of Financial Supervisors.

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Aid-A comes from German Anstalt in der Anstalt ‘agency within agency’.

This is different from corporate bankruptcy law. In the U.S., corporate bankruptcy creditors can force the management to initiate bankruptcy only upon failure to meet debt payments. Subsequently, the management prepares the reorganization plan or the bankruptcy court appoints the trustee that liquidates the corporation.

In U.S. corporate bankruptcy, only the manager may initiate voluntary bankruptcy.

However, several empirical studies indicate that the impact of regulatory supervision, including PCA, on banks’ risk-taking is insignificant (Laeven and Levine 2009).

Whereas the FDIA prevented counterparties from terminating a derivative contract in the case of an appointment of the FDIC as a conservator, the FDICIA has somewhat amended this stance. The counterparty now has at least netting rights if not also closeout rights (Bergman et al. 2003).

The absolute priority rule may not be honored if the systemic risk exemption is evoked.

The collapse of Lehman Brothers (bankruptcy on 15 September) created severe strains on confidence in the banking system at large. An injection of public funds was necessary on 17 September to stabilize AIG. Washington Mutual was placed into the receivership of the FDIC on 25 September. Subsequently, the government widely intervened with the injection of TARP capital (i.e., capital provided through the Troubled Assets Relief Program).

Dodd-Frank Wall Street Reform and Consumer Protection Act (2010), available in the Library of Congress at http://thomas.loc.gov/cgi-bin/bdquery/z?d111:HR04173:@@@L&summ2=m&#major%20actions.

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Title II, Section 206 of the act.

Title II, section 210 of the act.

Title X, Subtitle A, Section 1011 of the act.

The Banking Act 2009 even grants the government power to modify legislation by order, and that the change can have retroactive effect.

Campbell (2008) argues that the FSA could petition the court for the appointment of administrator of the Northern Rock through the Insolvency Act 1986 in a similar way as in the case of Barings Bank in 1995. Campbell (2008) further argues that there is no evidence that an administrative process would be faster and more decisive than a judicial procedure (see also Walker 2008). However, Lastra (2008) argues that modification of corporate bankruptcy law would not be sufficient and the move towards a separate bank bankruptcy law is needed.

The Banking Act 2009, c 1, S 7, states the condition as: “the bank is failing, or is likely to fail, to satisfy the threshold conditions (within the meaning of section 41(1) of the Financial Services and Markets Act 2000 (permission to carry on regulated activities)).”

The Treasury may even bring the parent of the failing bank (i.e., a holding company) under temporary public ownership.

This is the usual situation; however, the FDIC can be appointed as a conservator and can chose to rehabilitate a failing bank without revoking its license. The FDIC can also provide unconditioned liquidity provision through assistance transactions if this is necessary due to systemic concerns.

For example, under the Dodd-Frank Act of U.S. bank bankruptcy law, the Fed needs the approval of two-thirds of the Council that the financial company poses a “grave threat” to financial stability.

Clearer triggers will be implemented through Basel III requirements on Minimum Common Equity Capital Ratio, Minimum Tier 1 Capital and Liquidity Coverage Ratio, http://www.bis.org/press/p100912.htm.

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Title: Current Bank Bankruptcy Regimes and Recent Developments
Authors: Matej Marinč
Razvan Vlahu
Publisher: Springer Berlin Heidelberg
Book: The Economics of Bank Bankruptcy Law
Print ISBN: 978-3-642-21806-4

Electronic ISBN: 978-3-642-21807-1

Copyright Year: 2012
DOI: https://doi.org/10.1007/978-3-642-21807-1_6