BANK INSOLVENCY

STUDY LXXXIV – BANK INSOLVENCY

After the 2008 global financial crisis, the international community has developed a legal framework to manage the failure of “too big to fail” financial institutions in a way that preserves financial stability. Despite this significant progress, critical gaps remain. In particular, there is no international guidance on how to deal effectively with the failure of small and medium-sized banks. The design of bank liquidation laws is left purely to domestic legislation and differs substantially across the globe.

The UNIDROIT project on Bank Insolvency aims at addressing the current gap in the international legal architecture, by developing an international soft law instrument covering the key features of bank liquidation proceedings.

The preparation of a guidance document on Bank Insolvency is expected to take place over five sessions of the UNIDROIT Working Group on Bank Insolvency in 2021-2023, with a view to be adopted by 2024. The work is conducted in cooperation with and with the support of the BIS Financial Stability Institute.

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. The Governing Council, at its 98th session, agreed to recommend to the General Assembly to include the project in the Work  Programme with medium  priority. The assigned level of priority was merely formal. The Council asked the Secretariat to conduct further research and provide a more defined scope for the project, as well as further justification of its adequacy as work to be conducted by a global institution.

Pursuant to the Governing Council’s mandate, the Secretariat canvassed international support, conducted legal research, and organised an Exploratory Workshop on Bank Insolvency together with the BIS Financial Institute in June 2021 (see below). Drawing from the conclusions of the Exploratory Workshop and thorough additional research, at the Governing Council’s 100th session in September 2021, the Secretariat presented a document providing a detailed account of the feasibility analysis and exploratory work conducted for the project. On that occasion, the Council approved the proposed scope of the project, subject to existing regulatory standards and underlining its focus on smaller banks, agreed to recommend upgrading the project’s priority, and authorised the Secretariat to establish a Working Group.

The UNIDROIT Secretariat and the BIS Financial Stability Institute jointly organised an Exploratory Workshop on Bank Liquidation, which was held in a virtual format on 7 and 8 June 2021, prior to the second meeting of the Governing Council at its 100th session.

The Exploratory workshop was attended by 40 leading international experts and stakeholders in the field of bank crisis management, insolvency law and deposit insurance with a view to (i) assessing the need of an international instrument in the area of bank insolvency; (ii) determining the most suitable form of such a document; and (iii) defining the scope of the project.

The two-day event, opened by UNIDROIT’s President, Professor Maria Chiara Malaguti, included introductory remarks by the Secretary-General of UNIDROIT, Professor Ignacio Tirado, and was followed by five sessions exploring different aspects of the topic:

  • Introduction to the project and institutional involvement, featuring an introduction by the Chair of the FSI, Dr. Fernando Restoy
  • The scope of the project
  • The institutional setting
  • The content of the system
  • Cross-border elements of bank insolvency

For more information, see the Summary Report of the Exploratory Workshop.

Drawing from the conclusions of the Exploratory Workshop and from the Secretariat’s own research, a document with the proposed scope of the project and a request to convene a Working Group was presented at the second meeting of the Governing Council at its 100th session, in September 2021. On that occasion, the Governing Council decided to recommend assigning a high priority status to the project and authorised the Secretariat to establish a Working Group.

As consistent with the Institute’s established working methodology, a Working Group has been established, composed of members selected for their expertise in the field of bank crisis management, insolvency law and deposit insurance. Experts participate in a personal capacity and represent different legal systems and geographical regions.

In addition, UNIDROIT has invited relevant international and transnational organisations, as well as a number of central banks, supervisors, resolution authorities and deposit insurance corporations to participate in the Working Group as observers.

 

1st Working Group Meeting

The first session of the Working Group took place in a hybrid manner on 13-14 December 2021, both days from 13:00-17:00 CET.

 

2nd Working Group Meeting

The second session of the Working Group will take place on 11-13 April 2022.