Appropriate Institutional and Legal Framework to Deal with Bank Insolvency

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Appropriate Institutional and Legal Framework to
Deal with Bank Insolvency

• V. Sundararajan-IMF
• June 5, 2003

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Outline

• Why focus on bank insolvency
• Relevance to Financial Stability
• Role of FSAPs and BCP Assessments
• Findings from FSAPs
• Objectives of Working Groups

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Why Focus on Bank Insolvency

• Banks are fragile with potentially systemic
  effects
• There are major differences between bank
  insolvency and corporate insolvency
• Need for special insolvency regime

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Relevance to Financial Stability

• An effective bank insolvency regime
• Is crucial for effective banking supervision
  (Basel Core Principles (BCP) includes this as a
  precondition for effective supervision also
  covered in Core Principle 22)
• Crucial to avoid impediments to competition and
  prevent distortions
• Serves to contain bank losses and contingent
  liabilities for the government
• Promotes market discipline

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Role of FSAPs and BCP Assessments

• Virtually all assessments of compliance with BCPs
  are conducted in the context of FSAPs and some as
  part of OFC assessments
• To date, compliance assessments conducted in
  approximately 60 countries
• Some of these results, and lessons of experience
  have been presented in a recent paper to Bank and
  Fund Boards (SM/02/310) http//www.imf.org/externa
  l/np/mae/bcore/ 2002/092302.htm

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Example 1, CP1.1Objectives of the Supervisory
Agency
There is a high correlation between countries
level of development and clarity of the
objectives of the Supervisory Agency
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Example 2, CP1.5Legal Protection of Supervisors
The legal protection of supervisors is an area
that needs substantial improvement in a large
number of member countries
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Example 3, CP22Implementation of Bank
Resolution Measures
The implementation of bank resolution mechanisms
is rather weak, a large proportion of countries
was found materially non-compliant
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Objectives of Working Groups

• List strengths and weaknesses of the bank
  insolvency framework in your respective countries
• Identify the sources of the strengths and
  weaknesses, and discuss areas of reform
• Distribution of roles and responsibilities
• Clear triggers, criteria, and rules for the
  insolvency phase
• Legal protection/operational autonomy
• Prepare a list with the issues identified, their
  causes, and major areas of reform.