OVERVIEW

LEGISLATIVE GUIDE ON BANK LIQUIDATION

Purpose

The UNIDROIT Legislative Guide on Bank Liquidation aims to support legislators and policymakers in developing effective legal frameworks for liquidating banks that do not have a systemic impact in failure. It helps reduce the economic and social costs of bank failure by promoting tools and mechanisms that preserve value and protect depositors. Recognising the diversity of banking sectors and legal frameworks, the Guide is designed to be adaptable across jurisdictions, offering guidance that can be tailored to local specificities.

Context

Following the global financial crisis that began in 2007, a key area of reform was the creation of frameworks for resolving banks whose failure could have systemic impact. This led to the development of the FSB Key Attributes of Effective Resolution Regimes for Financial Institutions, the international standard for bank resolution regimes. The UNIDROIT Legislative Guide complements these efforts by focusing on the orderly liquidation of banks that are not systemic at the point of failure, as well as the liquidation of specific parts of a bank during or after resolution. It also complements exiting international instruments in the area of insolvency law, as those were not designed to be applied to banks specifically.

Development

The Legislative Guide, which was adopted by the UNIDROIT Governing Council in May 2025, is the result of a project undertaken by UNIDROIT in partnership with the Financial Stability Institute (FSI) of the Bank for International Settlements on the proposals of the Bank of Italy and the European Banking Institute. The Guide was developed over a three-year period by a Working Group of international experts in the field of insolvency law and bank failure management, which included representatives of relevant international and regional bodies and organisations, as well as banking supervisors, deposit insurers, and bank resolution authorities from all over the world.

Structure and content

The Legislative Guide is structured into ten Chapters, each addressing a specific thematic area. Every Chapter contains an explanation of key issues and sets out Recommendations for legislators and policymakers. In total, the Guide contains 105 Recommendations, which serve as a practical checklist for designing an effective bank liquidation framework. While it does not prescribe the level at which these rules should be implemented, many would typically be included in primary legislation.

Chapter 1 introduces the Guide’s purpose and scope. It underscores the need for tailored bank liquidation regimes, as general insolvency laws are not designed for the unique features of banks and the public policy concerns their failure can raise. It also outlines different types of legal frameworks for bank failure management and defines key objectives of an effective bank liquidation framework: value preservation and maximisation, depositor protection, financial stability, avoiding loss of public funds, certainty and predictability.

Chapter 2 addresses institutional arrangements. Bank liquidation proceedings may be overseen by an administrative authority or a court. The Chapter identifies factors to consider when selecting the appropriate model and outlines the advantages of an administrative approach. It also offers guidance for primarily court-based systems, emphasising the need for banking authorities to play a central role—especially when deciding whether a bank is failing and which tools to apply.

Chapter 3 focuses on procedural aspects of liquidation. It covers the process from pre-liquidation duties of a failing bank; to the opening of proceedings; appointment, oversight, and accountability of the liquidator; and the eventual closure of the process. The Chapter calls for tailored creditor participation mechanisms to reflect the unique nature of banks and the urgency often required in decision-making.

Chapter 4 emphasises the importance of preparation and contingency planning. It highlights the need for early and close cooperation among all relevant stakeholders regardless of the institutional model in place.

Chapter 5 covers the grounds for initiating bank liquidation proceedings, recommending a broader approach than traditional insolvency standards. It advocates for forward-looking criteria, with the concept of non-viability or likely non-viability as a guiding principle to allow timely intervention. It also recommends clear coordination between licence revocation and liquidation, recommending coordination between resolution and liquidation conditions to prevent legal uncertainty.

Chapter 6 offers guidance on liquidation tools and powers. It places particular emphasis on the transfer of a failing bank’s assets and liabilities to another bank—or “sale as a going concern”—and outlines necessary adjustments to general business insolvency law to account for the specificities of banks also in the event of a “piecemeal liquidation”.

Chapter 7 discusses the role of deposit insurance funds, advocating for their use not only to pay out insured depositors, but also to support sales as a going concern. It stresses that public funds should not be used for the liquidation of non-systemic banks.

Chapter 8 covers creditor hierarchy. It discusses the ranking of depositor claims, including interbank deposits and related party deposits. It also addresses the subordination of certain claims, the ranking of resolution funding and post-liquidation financing, shareholder treatment, and secured claims.

Chapter 9 addresses the liquidation of banks that are part of a group. It explains how legal and operational obstacles can be avoided if only part of a group is being liquidated, and it promotes coordination between authorities and courts involved in liquidating different group entities.

Chapter 10 discusses cross-border bank liquidation. It provides guidance on international cooperation, the recognition of foreign proceedings and supportive measures, and safeguards to ensure a fair and effective cross-border process.