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2012 | OriginalPaper | Chapter

7. Optimal Design of Bank Bankruptcy Law and the Bank Failures from the 2007–2009 Financial Crisis

Authors : Matej Marinč, Razvan Vlahu

Published in: The Economics of Bank Bankruptcy Law

Publisher: Springer Berlin Heidelberg

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Abstract

This chapter first gathers together our proposals for optimal bank bankruptcy law. Subsequently, it reviews several cases of bank failures from the 2007–2009 financial crisis. The cases demonstrate the need for bank bankruptcy law and give the first and admittedly imprecise evidence for the validity of the proposals that we make.

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previous chapter Current Bank Bankruptcy Regimes and Recent Developments
next chapter Conclusions
Footnotes
1
The De Larosiere report, 2009 and Reorganization and Winding-Up Directive, 2001/24/EC propose a three-step approach towards intervention by financial authorities that includes pre-insolvency intervention and a reorganization procedure (and consequent liquidation).
 
2
The history of the financial crisis is extensive and there is no indication that we have seen its end; see Reinhart and Rogoff (2008).
 
3
The regulator could use different quantifiable systemic risk measures. See Section 5.​1 and the discussion around Footnote 81.
 
4
For example, the Dodd-Frank Act requires a two-thirds majority vote of the Financial Stability Oversight Council when deciding that the financial company poses a “grave threat” to financial stability. Only then can the Fed take drastic measures such as restrictions on the ability to offer a financial product, terminate activities, sell assets, or transfer assets to unaffiliated entities.
 
5
However, regulators should evaluate the systemic effects of a failure of such a central clearing provider.
 
6
See Northern Rock Annual Reports for 1998 and 2007.
 
7
BBC News, 17 September 2007.
 
8
See Bank of England, Financial Stability Report, 22 October 2007, for a detailed timeline of the Northern Rock crisis.
 
9
See Lehman Annual Report for 2007.
 
10
Skeel (2009) provides a detailed discussion of the brokerage exclusion from Chapter 11.
 
11
Counterparties to repurchase transactions, credit default swaps, and other derivative contracts enjoy certain exemptions from the Bankruptcy Code provisions, such as the avoidance of an automatic stay.
 
12
See Fortune Global 500 (2007).
 
13
See Van der Staare and Meera (2008).
 
14
See Beck et al. (2010) and Dewatripont and Rochet (2009).
 
Literature
Admati, A. R., DeMarzo, P. M., Hellwig, M. F., & Pfeiderer P. C. (2010). Fallacies, irrelevant facts, and myths in the discussion of capital regulation: why bank equity is not expensive (Working Paper 86). Rock Center for Corporate Governance at Stanford University.
Avgouleas, E., Goodhart, C., & Schoenmaker, D. (2010). Living wills as a catalyst for action (Policy Paper Series, No.4). Duisenberg School of Finance.
Beck, T., Coyle, D., Dewatripont, M., Freixas, X., & Seabright, P. (2010). Bailing out the banks: Reconciling stability and competition. An analysis of state-support schemes for financial institutions (Working Paper). Tilburg: European Banking Center.
Cihak, M., & Nier, E. (2009). The need for special resolution regimes for financial institutions—The case of the European Union (IMF Working Paper 09/200).
Claessens, S., Herring, R. J., Schoenmaker, D., & Summe,K. A. (2010). A safer world financial system: Improving the resolution of systemic institutions. Geneva Report on the World Economy, 12.
Dewatripont, M., & Rochet, J. C. (2009). The treatment of distressed banks. Financial Stability Review, 13, 65–74.
Feldman, R. (2010). Forcing financial institution change through credible recovery/resolution plans: an alternative to plan–now/implement-later living wills (Economic Policy Paper 10-2). Federal Reserve Bank of Minneapolis.
Goldsmith-Pinkham, P., & Yorulmazer, T. (2010). Liquidity, bank runs, and bailouts: Spillover effects during the Northern Rock episode. Journal of Financial Services Research, 37, 83–89.CrossRef
Hupkes, E. H. G. (2003). Insolvency—Why a special regime for banks? Current developments in monetary and financial Law (Vol. 3). Washington D.C.: IMF.
Reinhart, C. M., & Rogoff, K. S. (2008). This time is different: A panoramic view of eight centuries of financial crises (NBER Working Paper 13882).
Shin, H. S. (2009). Reflections on Northern Rock: The Bank Run that Heralded the Global Financial Crisis, Journal of Economic Perspectives, 23(1), 101–119.
Skeel, D. A. (2009). Bankruptcy boundary games (Working Paper).
Sorkin, A. R. (2008, September 15). In Frantic Day, Wall Street Banks Teeter, New York Times.
Van der Staare, M., & Meera, L. (2008, September 29). Fortis gets EU 11.2 billion rescue from governments. Bloomberg.
Metadata
Title
Optimal Design of Bank Bankruptcy Law and the Bank Failures from the 2007–2009 Financial Crisis
Authors
Matej Marinč
Razvan Vlahu
Copyright Year
2012
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_7