Key Features of the Legal Framework in the Context of Systemic Crises [33] [34]

crisis management (e. g., bank restructuring agency), (b) the need for coordination and exchange of information among all government agencies (e. g., high-level financial stabil­ity policy committee), (c) clear legal authority to take the measures that may be required, (d) systemic bank restructuring, (e) asset management and resolution, (f) general condi­tions and key legal issues for the use of public funds, (g) financial instruments and tech­niques, (g) role of the central bank, (h) reestablishment of regulatory compliance after a crisis, and (i) treatment of depositors. However, changes to the institutional framework, which would be needed at times of crisis, should be temporary and should respect the basic institutional structure of the country’s governmental arrangements.

Notes [35]

Services Compensation Scheme, the system provides an effective insolvency regime. (See IMF Country Report No. 03/46 on UK).

8. Depending on whether the jurisdiction follows the court-based or the administrative approach, the supervisory authority will need to either petition the insolvency court or declare the insolvency itself in the form of an autonomous decision in public law.

9. In certain jurisdictions, however, the justification for automatic liquidation as a con­sequence of de-licensing will be precisely that banks are organized as special-purpose companies and would not constitutionally be able to continue operating as non-bank entities.

10. In countries in which banks are subject to special liquidation proceedings, logic requires that the automatic withdrawal of an institution’s banking authorization as a result of the commencement of liquidation proceedings should not affect its continu­ing characterization as a bank for the purposes of these proceedings.

11. In some cases, the supervisory authority retains the discretionary power to withdraw the license even after the commencement of insolvency proceedings. It would be clearly anomalous, however, if a supervisory authority were permitted to use this power to effectively veto a restructuring plan that it was unable to oppose successfully before the insolvency court.

12. In many cases, countries with a weak institutional environment have encountered serious problems in implementing any scheme of official administration whereby banks are kept open. In those cases, it may be desirable to implement the restructur­ing operations in an extremely quick manner to avoid loss of value of insolvent banks’ assets.

13. For example, in some cases with clear systemic implication, emergency assistance involving the use of public funds may be needed, and it may be unavoidable to go over the least-cost principle, especially when it has been formulated in a very rigid manner. Nevertheless, in those special cases, a decision-making process that ensures proper assessment of the systemic consequences involved and that properly limits the moral hazard effects is needed. For example, provisions requiring a previous joint pro­nouncement from the highest authorities involved could be necessary before any kind of exception to the general norms could be made.

14. One reason why publicly assisted restructuring may not be effectively carried out by means of voluntary transactions outside the formal bank insolvency framework is that once the shareholders become apprised of the likelihood of assistance, they will be unwilling to approve the dilution of their own interest in the bank and will hold out for some additional benefit.

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