Financial Sector Assessment

Administrative or Court-Based Special Bank Insolvency Regime

When a country seeks to address cases of bank insolvency through the corporate insol­vency framework (with appropriate modifications), insolvency proceedings are invariably conducted in the courts. By contrast, the adoption of a special bank insolvency regime

separate from corporate insolvency law offers two main possibilities: first, the insolvency proceedings may be initiated and conducted by a banking authority, or, second, the pro­ceedings may remain under the jurisdiction of the insolvency courts even if the banking supervisory authorities retain a number of key functions, which are, in most cases, related to the commencement and the supervision of certain key aspects of the proceedings.

In some jurisdictions, there would be significant opposition to the introduction of purely administrative proceedings. Constitutional principles may preclude any official action involving the removal or extinction of property rights, unless it is sanctioned by court order or accompanied by appropriate compensation. Where the supervisory author­ity is given the responsibility to declare insolvency and to control the administration or liquidation, the relevant administrative decisions are typically subject to judicial review by the administrative courts or an equivalent mechanism of control. Judicial review ensures the legality of the authorities’ actions and avoids unjustifiable interference with private interests.

Overall, the establishment of a special bank insolvency regime (in particular, an administrative one) can be designed to ensure speed and consistency between the super­visory and insolvency-related functions. However, the success of such a system depends on careful legislative drafting and implementation, so it can ensure the greatest possible compatibility with other branches of the law, avoid distortions and arbitrage arising from the uneven treatment of banks and non-bank financial institutions, and resolve the prob­lems of jurisdictional scope and institutional competence resulting from the emergence of financial conglomerates.

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Financial Sector Assessment

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