Licensing Implication of Bank Insolvency

The law should clearly specify the relationship between the declaration of a bank’s insol­vency and its status as a licensed institution. In a number of countries, the withdrawal of an institution’s banking license automatically results in its placement in liquidation. Elsewhere, this approach is considered draconian and unwarranted to the extent that it could lead to the mandatory termination of institutions that are not marred by criminal­ity, that are otherwise solvent, and that could continue to operate as non-bank enter – prises.9 In some countries, it is the commencement of insolvency proceedings that triggers the automatic or discretionary withdrawal of the bank’s license. However, the automatic withdrawal of authorization is not advisable unless the bank has already been placed in liquidation.10 If liquidation proceedings have not been commenced and if an attempt is being made under official administration to restructure the bank, the loss of the bank’s license could rule out many forms of open-bank restructuring.

Finally, some jurisdictions with court-based bank insolvency systems dissociate the decisions concerning licensing from the insolvency process. There, the power of the supervisor to revoke a bank’s license operates in parallel to—and independently of—the procedure for declaring insolvency. Accordingly, the supervisory authority may seek to close an insolvent bank either by applying to the courts for its liquidation or by withdraw­ing its license.11

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