Basic Elements of the Official Administration Regime
The report describes sound practices in relation to triggers for official administration and for the phases of official administration, including diagnosis and restructuring of insolvent banks. The report also discusses basic legal features of official administration:
• Appointment, replacement, and discharge of the official administrator
• Temporary protection against creditors’ rights
• Protection of assets, containment of liabilities, and pursuit of claims
• Preparation of an inventory of assets and liabilities
• Decisions on restructuring or liquidation
• Cost of official administration
• Termination of official administration
Some of the principles to govern the framework for official administration are as follows:
• The law should identify which institution appoints a temporary administrator (for a limited time) and the rights and responsibilities of an administrator.
• The law should indicate the treatment of depositors during the temporary administration.
• The temporary administrator should have the authority to take over the day-to-day operations of the bank while the bank’s financial conditions are being evaluated. During temporary administration, shareholder rights should be suspended.
• The temporary administrator should have sufficient authority to prevent asset stripping, to reverse asset transfers that have taken place just prior to suspension of the shareholders, and, in general, to keep credit discipline. The temporary administrator may also have authority to halt certain actions against the bank, pending the completion of due process.
• Shareholders may be able to protest the actions of the temporary administrator through the court system, but any appeal should not halt the resolution activities of the administrator.
Bank restructuring is used in an economic sense to signify a set of actions designed to substantially modify the operations and financial structure of a banking institution. From a legal perspective, restructuring will, in some cases, result in the bank’s survival as a legal entity, whereas, in other cases, the bank’s legal personality will be dissolved—even if most of the bank’s economic operations will continue (as a consequence, for example, of a merger or of a purchase-and-assumption operation).