In the run-up to the drafting of a Work Programme for 2020-2022, the Secretariat received two separate proposals, one from the Bank of Italy, and one from the European Banking Institute (EBI), relating to the harmonisation of rules in cases of the insolvency of a bank. Following the 2008 global financial crisis, the international financial community joined forces to protect the banking and financial sectors from contagion and risk. These efforts had culminated in revamped legal infrastructure for the international banking system. However, the global banking regulatory architecture left a part untouched. Where financial distress concerned a bank which was too small to cause systemic damage, or an already insolvent financial institution, which needed to be liquidated without any additional resolution, there exists neither a set of international standards nor mechanisms for adequate coordination and cooperation. This last stage relating to bank liquidation is left purely to domestic legislation, which often differed substantially from country to country. This situation -it was argued-was creating problems in practice, had a potential for important financial disruption (mainly, but not only, at domestic level), and could be addressed by a global institution, which was not necessarily part of the global financial ecosystem, producing an international standard.
The Secretariat, in light of the above, considered that UNIDROIT was well positioned to undertake work and proposed that the Governing Council, at its 98th Session, approve the inclusion in the new Work Programme of legislative work on the subject matter, covering, at least, the following matters: (i) the most efficient institutional mechanism for bank liquidation (e.g. judicial system versus administrative model, or a hybrid system); (ii) the type of powers that ought to be assigned to the court/administrative authority; (iii) the entry gate to liquidation proceedings and its coordination with banking resolution systems; (iv) which rules of general corporate insolvency proceedings should apply to the liquidation of banks; and (v) the rules of coordination between national courts/administrative authorities in case of cross-border cases. Further, outside liquidation and from the standpoint of resolution measures, an international standard and coordination mechanisms could be envisaged concerning (a) the domestic system of priorities in insolvency and its relationship with bail-in rules (“no creditor worse off” principle and Total Loss Absorbing Capacity (TLAC) rules); (b) aspects of recognition of resolution measures; and (c) the mechanisms for recognition of contractual clauses that subject banks to resolution systems.
The Governing Council, at its 98th session agreed to recommend to the General Assembly to include the project in the Work Programme and to assign medium priority to this proposal pending further research and a more defined scope for the project, as well as further justification of its adequacy as work to be conducted by a global institution. At its 99th session the project was confirmed as medium priority allowing the Secretariat to conduct a feasibility study to be reported to the Governing Council at its 100th session.
The Secretariat is in holding conversations with several intergovernmental organizations in the international financial scene to arrange possible collaboration and coordination of work on the subject matter.