Systemic Financial Crises: Resolving Large Bank Insolvencies

Acknowledgments......Page 6
Preface......Page 8
Contents......Page 10
KEYNOTE ADDRESSES......Page 14
Being a Responsible Host: Supervising Foreign-Owned Banks Alan Bollard......Page 16
1. New Zealand’s Banking System is Dominated by Foreign Banks......Page 17
2. Differences in the Interests of Home and Host Supervisors......Page 18
3. The Need for Robust Host Supervision Arrangements......Page 20
4. Enhanced Cooperation and Coordination Between Home and Host Authorities......Page 25
5. Conclusion......Page 27
1. Contemplating a Systemic Failure......Page 30
2. Preventing Stress: The Role of Risk-Based Supervision......Page 32
3. Dealing with Stress......Page 35
4. Managing the Failure of Banking Institutions......Page 37
5. Conclusion......Page 39
Changes in the Structure of the U.S. Financial System and Implications for Systemic Risk Timothy F. Geithner......Page 42
1. Changing Market Structure......Page 43
2. Implications......Page 47
3. Conclusion......Page 50
FINANCIAL STABILITY — PROTECTING SOLVENCY......Page 52
1. Introduction......Page 54
2. Managing Systemic Banking Crises......Page 55
3. Crisis Containment......Page 56
4. Emergency Liquidity Assistance......Page 57
5. Blanket Guarantees......Page 59
6. Administrative Measures......Page 63
7. Bank Restructuring......Page 64
8. Asset Management and Corporate Debt Restructuring......Page 68
9. Conclusions......Page 69
References......Page 70
2. Deposit Insurance Systems......Page 72
4. How can a Deposit Insurer Help Mitigate the Risk of a Large Bank Failure?......Page 74
5. Early Warning and Prompt Corrective Action......Page 75
6. Failure Resolution......Page 76
7. The Need for Contingency Planning......Page 78
8. Legal and International Issues......Page 79
References......Page 80
The IMF–World Bank Financial Sector Assessment Program: A View from the Inside Paul Kupiec......Page 82
References......Page 93
1. Introduction......Page 96
2.1. From financial instability to the banking system......Page 98
2.2. From banking sector weakness to the macroeconomy......Page 101
3.1. The model by Chen......Page 104
3.2. From macro shocks to output loss via the financial sector......Page 105
3.3. From banking sector problems to output......Page 107
3.4. Discussion......Page 108
4.1. A taxonomy of instruments......Page 109
4.2. Methods of resolving a banking crisis......Page 111
5. A Framework for Assessing Public Intervention in Bank Resolution......Page 116
6.1. Judging “systemic”......Page 122
6.2. Dealing with large complex financial institutions (LCFIs)......Page 123
References......Page 124
1. Financial Stability versus Institution Stability......Page 128
2. Three Phases of Policymaker Effort......Page 130
3. Using the Framework in Practice......Page 131
4. Final Thoughts......Page 132
References......Page 133
THE COST OF INEFFICIENT RESOLUTION OF LARGE FINANCIAL INSTITUTIONS......Page 134
Impediments to Fair and Efficient Resolution of Large Banks and Banking Crises Edward J. Kane......Page 136
1. Bank Insolvency, Contracting Theory, and Safety Net Capital......Page 137
2. Benchmarking the Costs and Benefits of Egalitarian Crisis Resolution......Page 139
3. Mechanisms for Decreasing Public Loss Exposure: Standstills, Relicensing, and Haircuts......Page 141
4.1. Dimensions of a country’s contracting environment......Page 147
4.2. Effects of a country’s regulatory culture......Page 149
5. Summary Implications......Page 151
References......Page 152
Dealing with Financial Fragility in Transition Economies John P. Bonin and Paul Wachtel......Page 154
1. Banking in Transition Countries: The Birthing Process......Page 155
2. Resolving Bank Crises in Transition Countries......Page 157
3. Conclusion......Page 168
References......Page 169
1. Introduction......Page 172
2. Prevention......Page 173
3. Legal Structure......Page 174
4. Resolution......Page 175
5. The Role of the Fund......Page 177
6. Conclusions......Page 178
References......Page 179
Mistakes of Bank Crisis Response Randall S. Kroszner......Page 182
References......Page 184
KEY POLICY CHALLENGES IN FINANCIAL RESOLUTION: CROSS-BORDER ISSUES......Page 186
Breaking Up is Hard to Do: An Essay on Cross-Border Challenges in Resolving Financial Groups Thomas C. Baxter, Jr. and Joseph H. Sommer......Page 188
1. Basic Definitions......Page 189
2. Financial Entity Insolvency Law: A Primer......Page 190
3. The Complexities of a Cross-Border Financial Group Insolvency......Page 193
4. The Problems of Group Reorganization......Page 197
5. What to Do?......Page 199
References......Page 203
1. Challenges of Resolving an LCFI......Page 206
2. Refocusing Measures to Resolve Global Institutions — Function versus Institution-Based Approaches......Page 210
2.1. Identifying systemically relevant functions......Page 211
3. Insulating Systemically Relevant Functions......Page 214
3.1. Replacement......Page 215
3.2. Detachment......Page 217
3.3. Immunization......Page 220
4. Need to Refocus International Regulatory Initiatives......Page 222
5. Conclusions......Page 224
References......Page 226
Europe’s Universalist Approach to Cross-Border Bank Resolution Issues Christos Hadjiemmanuil......Page 230
1. Absence of Convergence in International Bank Insolvency Law......Page 231
2. The Main Policy Options in International Bank Insolvency......Page 232
3. Endorsement of Universalism in European Law: The Winding up Directive......Page 238
4. Some Open Questions of the European Bank Insolvency Regime......Page 244
References......Page 246
1. Introduction......Page 250
2.1. Separate entity doctrine......Page 252
2.2. Single entity doctrine......Page 254
2.3. No single set of insolvency arrangements......Page 255
3.1. Definition......Page 256
3.2. What should regulators look at?......Page 257
3.3. Why protect those systemically critical functions?......Page 258
3.5. The involvement of central banks......Page 259
4.2. LCFI insolvency affects investors’ behavior......Page 261
5. Conclusion......Page 262
KEY POLICY CHALLENGES IN FINANCIAL INSTITUTION RESOLUTION: ADDITIONAL COMPLEXITIES......Page 264
1. Multiple Regulators within a Single Country......Page 266
2. Crises with International Complications Involving Regulators in Several Countries......Page 275
References......Page 283
1. The Wider Context of Resolving Large Bank Insolvencies......Page 288
2. The International Dimension......Page 291
3. Too-Big-to-Save?......Page 293
4. Other Factors Affecting the Choice of Structure and Regulatory Location......Page 295
5. The Design of the Safety Net......Page 296
6. The Need for Action over Systemically Important Banks......Page 299
7. Trying to Minimize the Cost......Page 304
8. Judging When to Intervene and Assessing the Loss......Page 307
9. Equal Treatment and the Need for a Common Pool Approach......Page 310
10. The Need for a Resolution Agency......Page 311
Appendix: The Example of Nordea......Page 314
References......Page 317
Comments on Key Policy Challenges in Financial Institution Resolution: Additional Complexities Robert R. Bliss......Page 320
1. Barriers to Effective Supervision......Page 322
2. Barriers to Orderly Resolution......Page 325
3. Summary......Page 328
References......Page 329
LESSONS FROM CASE STUDIES OF LARGE INSOLVENCIES......Page 332
1. Introduction......Page 334
2. BCCI......Page 337
3. Barings......Page 346
4. Concluding Comment......Page 354
References......Page 356
Derivatives and Systemic Risk: What Role Can the Bankruptcy Code Play? Franklin R. Edwards and Edward R. Morrison......Page 360
1. Derivatives Contracts and the Bankruptcy Code......Page 362
2. Can the Bankruptcy Code Reduce Systemic Risk?......Page 365
3. Why Give Derivatives Counterparties Special Treatment?......Page 372
References......Page 375
1. Introduction......Page 378
2.1. The main objectives of banking crisis resolution......Page 379
2.2. Principles for effective banking crisis resolution......Page 382
2.3. Differences in constraints between developed and Latin American countries......Page 384
3. The Crises of Argentina and Uruguay in the Early 2000s: Similar Beginnings, Contrasting Outcomes......Page 385
3.1. Origins of the crises and constraints for crisis resolution......Page 386
3.2. Initial responses to the banking crises: Did they adhere to the principles?......Page 393
3.3. The implementation of the restructuring program in Uruguay and the (lack of) program in Argentina......Page 396
4. Concluding Remarks......Page 399
References......Page 401
Comments on Lessons from Case Studies of Large Insolvencies Paola Sapienza......Page 404
1. BCCI & Barings: Bank Resolutions Complicated by Fraud and Global Corporate Structure, by Richard J. Herring......Page 405
3. Argentina and Uruguay in the 2000s: Two Contrasting Experiences of Banking Crisis Resolution, by Liliana Rojas-Suarez......Page 406
References......Page 407
PLANNING FOR EFFICIENT RESOLUTION — WHERE TO FROM HERE?......Page 408
1. Introduction......Page 410
2. The BCR Option......Page 411
3. Developing the Option......Page 412
4.1. Imposition of statutory management and closure of the bank......Page 413
4.3. The failed bank reopens for core transactions business......Page 415
4.5. Decisions on future operations and restructuring path......Page 416
5. An Example of a BCR......Page 417
7. The Status of the BCR......Page 418
2. Resolutions of Large Financial Institutions......Page 420
4. Role of the Central Bank......Page 422
5. Current Framework for Resolution......Page 423
6. Toward more Efficient Resolution in the Future......Page 425
Resolving a Large Bank: The FDIC’s Perspective Arthur J. Murton......Page 428
1. Introduction......Page 434
2. Authorities Involved in Maintaining Financial Stability......Page 435
3. Information Exchange......Page 437
4. Decision-Making Process......Page 442
5. Financial Stability Issues in the European Union......Page 445
5.1. Deposit insurance in the EU......Page 447
5.2. Emergency liquidity assistance......Page 449
6. Conclusions......Page 450
References......Page 451
Constructive Commitments: Communicating Plans to Impose Losses on Large Bank Creditors Gary H. Stern and Ron J. Feldman......Page 454
1. The Expected Failure of Prior Reforms......Page 455
2. Communicating with Large Bank Creditors......Page 456
3. Addressing Some Challenges......Page 459
References......Page 460
Agenda......Page 462
Index......Page 468