Resolving Cross-Border Bank
Problems: East Asian Case
Bank Indonesia’s Annual
Bank Indonesia’s Annual
International Seminar 2009
Case study: Lehman's insolvency
• Context- the use of bankruptcy in the resolution of financial institutions distress: Prospects of illiquidity and potential insolvency are becoming more
likely around the world. This makes the effectiveness of bankruptcy regimes an important concern for policymakers, but there are no standards.
• When a large company with global operations seeks Chapter 11 protection, it can spawn numerous legal proceedings with different rules in other countries.
• Administrators for Lehman's U.S. estate plan to ask a federal judge to approve an international framework for coordinating bankruptcy
proceedings among subsidiaries spread across the globe.
• Administrators in Hong Kong, Singapore, Germany, Luxembourg and Australia have signed on to the protocol. But….
• A global protocol is "unnecessary, insufficiently tailored and • A global protocol is "unnecessary, insufficiently tailored and
unacceptably burdensome" for Lehman's U.K. estate and its creditors, said Tony Lomas, a PricewaterhouseCoopers partner and
administrator of the London estate.
• "There need to be international standards when dealing with a global company that collapses," said Bryan Marsal, Lehman's chief
restructuring officer and co-CEO of turnaround firm Alvarez & Marsal LLC. "Otherwise, every country acts like 'Every man for themselves.' “ • "With the increased internationalization of bankruptcy, it's more and more
important for the different jurisdictions to come to an informal agreement," said Edward Altman, a New York University business professor who focuses on bankruptcies. "There is no official code that brings them together."
Reforms? What reforms?
• Finance Reforms Pared Back: The Obama
administration is backing away from seeking a
major reduction in the number of agencies
overseeing financial markets. WSJ June 9, 2009
• EU Bank Revamp Spurs U.K. Resistance to
• EU Bank Revamp Spurs U.K. Resistance to
Ceding Power Bloomberg , April 4 2009
• German Finance Minister Peer Steinbrueck
voiced skepticism today on U.S.-style stress
tests to check the health of individual banks,
dismissing an IMF recommendation, AFP
The State of the International Architecture- not clear?
FATF
London Club FATF
G7-G10-G20-G30-G24-G77
The State of the International and National
Architecture- clearer?
• Basel Committee- BIS-
FSF-IMF-OECD-WTO-WB-RDBs-UN-UNDP
• Paris Club- London Club
• G7-G10-G20-G24-G77
The Joint Forum
• IASB-IOSCO-IAIS-IADI-
The Joint Forum
• FATF- Interpol
• ASEAN- Chang Mai - Apec –SEACEN
• MLAT’s-Swaps-MOU’s-COSRA-FSF “colleges”
The New Financial Stability Board offers
guidance on cross-border insolvency
• The Financial Stability Board (FSB) has been
established to address vulnerabilities and to develop and implement strong regulatory, supervisory and other
policies in the interest of financial stability.
• FSB consists of a Chairperson, a Steering Committee, the Plenary with member countries, SSBs and
international financial institutions, and a Secretariat. the Plenary with member countries, SSBs and
international financial institutions, and a Secretariat. • A full-time Secretary General and an enlarged
Secretariat based in Basel support the FSB.
FSB Principles for Cross-Border Crisis
Management
In it’s April 2009, the Financial Stability Forum (FSF) issued a report addressing: “Principles for
Cross-border Cooperation on Crisis Management” It states that “In financial crisis management, national
authorities will, as far as possible” :
1. Maintain incentives for financial institutions to behave prudently .. The Bank-Support Measures Implemented in US, Europe
‐
prudently .. The Bank-Support Measures Implemented in US, Europe as well as Asia‐Pacific do not provide incentives to behave prudently
2. Promote private sector solutions and intervene only to preserve financial stability
3. Maintain a level playing field internationally in the spirit of the Basel Accord the capital requirements
produced two market responses: risk weights designed for evasion and avoidance -the “shadow” banking
Cooperation for Cross-Border Crisis
Management
3. Develop common support tools to manage cross-border
crisis
4. Meet annually (??), coordinated by home authorities 5. Home authorities to keep all countries informed of
arrangements
6. Share minimum information- at this stage it does not
appear that European countries share information appear that European countries share information
7. Ensure firms can supply required information
8. Encourage firms to maintain contingency plans for wind-down
9. Ensure firms have robust funding plans
During crisis, national authorities commit to:
11. Find internationally coordinated solutions- what are
they?
12. Share national assessments of systemic implications, using agreed framework
13. Share information as early as possible
14. If fully coordinated solution is not possible, discuss as promptly as possible possible national solutions
promptly as possible possible national solutions
15. Share plans for public communications for clarity and coordination”
• The FSB’s broad set of principles is just that broad principles” that a) do not have concrete solution b) a clear road map to to
implementation.
Without a Global roadmap, oversight and
implementation is is left to Home and Host Regulators
1. Can regulation be effective through a “Westphalian”
voluntary cooperative “memorandum of understanding”?
2. Unique issues in emerging markets- what is not
systemic in a mature market can be highly systemic in an emerging market- e.g., capital flows reversals,
sudden stops.
3. What was thought to be non-systemic can rapidly
10
3. What was thought to be non-systemic can rapidly evolve to become highly systemic- “subprime is a
small part of a small part..” .
4. The present memorandums of understanding do not have sufficient legal standing or powers of mediation in the event of disagreements between home and host regulators. Frequently the case. witness Lehman
Presenting for Andrew Sheng: The real issues are
(a) No common processes for resolution --who determines who pulls
the plug?
(b) If info is shared with college of supervisors, the smallest/least
affected can pull plug to protect domestic interests and damage all the other efforts, or leaks of info will result in collapse of
negotiations. Therefore the prospects for sharing of information are dim
(c) No common laws - each regulator must comply with local law and protect local interests. E.g., American Security was ring fenced during BCCI by the US
(d) No dispute resolution between different regulators on different (d) No dispute resolution between different regulators on different
views
(e) No international court to resolve how to allocate priority in payment.
Therefore, if domestic laws prevail and domestic protection prevails, international bankruptcy of Large Complex Financial Institutions (LCFI) will be fragmented & uncoordinated and go to lowest
common denominator, leading to large losses.
They are all Too Interconnected TO FAIL, not Too Big to Fail . Hence, the question is at what price of National Treatment (NTA)
Conclusion – the present voluntary
cooperative efforts are not effective
• The Westphalian principles governing international financial oversight (sovereignty of states; the
fundamental right of political self determination; equality between states; and consultation but non-intervention of one state in the internal affairs of another state) are not adequate to address the global financial system
• The intl’ financial authorities need to make progress with • The intl’ financial authorities need to make progress with
a binding post-Westphalian global financial order. • The prospects for such an accord are dim.
• The World Bank’s Global Bank Insolvency initiative did
not go anywhere .
info.worldbank.org/etools/library/latestversion.asp?83870
In the absence of resolution processes a variety of ad-hoc Bank-Support Measures Implemented in US, Europe as well as Asia‐Pacific
Guarantees for banks’ existing and/or newly issued obligations Potential direct capital support Removal of and guarantees for bad assets Direct liquidity support Blanket deposit guarantees Forbearance
Asia Australia Korea New Zealand Hong Kong India Japan Singapore South Korea Japan (?) South Korea South Korea Australia Hong Kong Malaysia New Zealand, Singapore Taiwan India North America
U.S., Canada U.S. U.S. U.S. U.S. - deposit insurance
U.S. – revisions to mark to market
America insurance
raised
to mark to market
Europe Austria Denmark Finland France - Dexia S.A Germany - NORD/LB. Greece Ireland Italy The Netherlands Portugal Spain Sweden. UK
UK Germany Germany UK Switzerland
Domestic Infrastructure Global
What is the solution?
• Shouldn’t wait for dramatic changes at the global level
• The development of vigorous regional financial and monetary institutions is an essential objective
• Better promise and prospects by investing in the domestic and regional building blocks, to complement and lead to an eventual global financial stability order
Domestic Infrastructure Regional
3 examples of domestic steps
• Domestic Prudential Regulation : Ring-fence affiliates of foreign banks in
subsidiaries subject to local prudential regulatory measures
– Guillermo Ortiz is a wise man. Concerned since early 2000 re domestic affiliates foreign banks, and explored "ring fencing".
– Ring fencing with the affiliate treated with the full local prudential norms, including some additional, such as
• prudential limits on the ratio of foreign liabilities/foreign assets (to prevent either flight or inflow for arbitrage) is the best solution. • Period.
• Financial institutions insolvency. The use of bankruptcy in the resolution
of financial institutions distress. Prospects of illiquidity and potential insolvency are becoming more likely around the world. This makes the insolvency are becoming more likely around the world. This makes the effectiveness of bankruptcy regimes an important concern for
policymakers.
• Strengthen domestic institutions. Singh, Raju; Kpodar, Kangni; Ghura,
Dhaneshwar IMF Working Paper No. 09/113: Financial Deepening in the
CFA Franc Zone: The Role of Institutions. The results indicate that the gap
in financial development between the CFA franc zone countries and the rest of SSA can be explained by differences in institutional quality (e.g.,
availability of credit information, and strength and enforcement of property rights), variables that policy makers can influence.
International steps:
• International steps: The burden is left on
home and host regulators to establish a
sound foundation.
• Forge better regional exchange of
information, harmonization of regulations
information, harmonization of regulations
and standards, develop capacity,
institutional capacity , organization
• A possible example is the Committee of
European Banking Supervisors
– Exchange of information is limited, but
Committee of European Banking Supervisors
http://www.c-ebs.org/
• The Committee of European Banking Supervisors
(CEBS) is composed of high level representatives from the banking supervisory authorities and central banks of the European Union. Their role is to:
– CEBS gives advice to the European Commission on banking
policy issues and promotes cooperation and convergence
of supervisory practice across the European Union. The
Committee will also foster and review common implementation and consistent application of Community legislation
and consistent application of Community legislation
– Advise the Commission, either at the Commission's request, within a time limit which the Commission may lay down
according to the urgency of the matter, or on the Committee's own initiative, in particular as regards the preparation of draft implementing measures in the field of banking activities.
– Contribute to the consistent implementation of Community Directives and to the convergence of Member States'
supervisory practices throughout the Community
– Enhance supervisory co-operation, including the exchange of information.
Marek Belka, Director of the IMF`s European Department, commented in an editorial in the FT lamenting the risks to Europe`s 52-year quest for a single financial market
“ While its rationale remains compelling, this aspiration is under threat as the crisis has pushed national authorities to reassert control over their financial systems. Whether this setback is temporary depends critically on the outcome of the debate on
Europe`s cross-border financial stability arrangements. (.) A related debate is on the future of the "single passport."(.). The existing set-up, in which cross-border
operations are covered solely by the financial stability arrangements of the home country, is unsustainable. (.) A more general challenge is that of imposing discipline on those banks deemed "too big to fail". In such cases, the threat of bankruptcy is not credible: the private and social costs are simply too prohibitive.” "Increased host
country control over foreign branches, as some advocate, is not a comprehensive solution to these complex challenges. (.) What is needed is a dedicated EU level resolution framework that can credibly discipline Europe`s large cross-border banks resolution framework that can credibly discipline Europe`s large cross-border banks while offering depositors protection equivalent to national deposit guarantee
schemes. (.) Europe`s 50-100 largest banks, and smaller banks whose cross-border activities raise concerns, should migrate to this scheme on reasonable conditions. In return, they should benefit from an unrestricted single passport. (.) The single
passport has so far shown only glimpses of its potential. Realizing this potential requires that the proposed EU-level supervisory authorities establish trust between home and host countries. (.) In parallel, the EU should embark on an accelerated program to create a dedicated resolution framework for its cross-border banks. The potential gains are large. Settling for less-effective solutions risks entrenching the dynamic towards refragmentation of financial markets. Much depends on the choices that the European Council will make.
