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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. 

 

 

 

 

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