Main Restructuring Techniques and Basic Applicable Principles
The guidelines include the appropriate treatment of the legal issues involved in different bank restructuring techniques, such as mergers or acquisitions, good-bank and bad-bank separation, bridge banks, and purchase-and-assumptions transactions. Key legal issues include the following:
• Need for supervisory approval of the restructuring
• Mechanisms to protect property rights and dilute shareholders’ rights
• Rules for negotiations with prospective investors
• Rules affecting the transfer of assets and liabilities
• Rules on the use of a bank’s proprietary information
The key principles to govern the legal and regulatory framework for bank restructuring are as follows:
• The agency responsible for bank resolution should be clearly identified. The rights and responsibilities should be clearly described.
• The treatment of shareholders must be clearly laid out in the law. In principle, shareholders who do not participate in the recapitalization of the bank should lose their investment in the bank. Shareholders participating in the bank’s recapitalization must first be judged to be “fit and proper.”
• Actions that can be taken in bank resolution must be described in the law and could include bank mergers, sale of the bank, and purchase and assumption of bank assets (which may include a branch network) by another bank.
• If the authorities wish to establish an asset management company to manage some portion of the nonperforming loans of problem banks, explicit legal authority must be established, including how the assets will be transferred, what the valuation is of transferred assets, what the problem bank will receive in exchange, and what the methods are for asset workout.
• If an agreement is reached with a majority of the creditors of the bank to share in the restructuring and recapitalization costs, a minority of creditors should not have the ability either to prevent such actions or to avoid participating (there should be a “cram down” provision.)