Key Objectives
The purpose of restructuring is to ensure the continuation of the bank’s business, in whole or in part, as an economic unit (“going concern”) on a financially sound basis. A country’s laws need to establish the objectives and basic principles to be followed by the authorities in restructuring a bank in the context of insolvency proceedings.
Drawing on international experience and practices, certain principles for bank restructuring are outlined in the following paragraphs.
G.5.3.1 Limit Moral Hazard
In a sound and efficient financial system, only well-administered institutions should remain in business. It is not the role of authorities to prevent bank failure; rather their role is to facilitate the rapid exit of insolvent institutions from the financial system. Exceptions to this principle should be allowed only on the basis of justifiable considerations directly related to the stability of the financial system.
G.5.3.2 Least Cost Solution
In choosing between alternative schemes, the authorities should engage in restructuring operations that minimize restructuring costs. Restructuring costs are defined as the cost of recapitalization and of other operations by the government, after deducting the subsequent proceeds from re-privatization and asset recovery.
G.5.3.3 Expeditious Bank Restructuring
Insolvent banks should be restructured quickly to minimize the eventual costs to depositors, creditors, and taxpayers. The longer a bank or banking asset is held by an administrator, the more value it is likely to lose. Experience has shown that, if left unchecked, the restructuring of insolvent banks may drag on for a long time (especially in the context of a weak institutional environment). In countries where an official administration scheme exists, the relevant provisions should limit the time a bank under official administration is kept operating when no resolution scheme can be arranged.12
