Financial Sector Assessment

General Issues in Bank Insolvency Proceedings

G.3.1 Choice of Bank Insolvency Regime

The choice of legal arrangement should be conducive to achieving financial stability while also preserving the value of bank assets.4 A primary choice must be made between a system based on the type of proceedings generally applicable to insolvent corporations, with any appropriate modifications,5 and a special regime that is designed exclusively for banks.6 A special regime for bank insolvency—or adequate modifications to the corporate insolvency regime—is needed because of (a) the potential systemic effects of bank fail­ures, (b) the objective of safeguarding financial stability in the course of bank insolvency, and (c) the special role of banking authorities in bank insolvency.

The choice between the two systems has implications for the institutional framework for bank insolvency. There is no dominant model; countries share features of both systems to varying degrees. Either system—dominant general insolvency model with adaptations to deal with banks or special regime for bank insolvency—can work effectively.7 A coun­try’s choice will depend on a variety of institutional, legal, and practical factors, including the quality and effectiveness of the country’s existing corporate insolvency legislation, the ability of the insolvency courts to reach decisions in the short timeframe necessary for bank restructuring, the skills and integrity of the judiciary in comparison with the banking authorities, and the quality of supporting professions such as accountants and lawyers.

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Financial Sector Assessment

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