Category Financial Sector Assessment

Administrative or Court-Based Special Bank Insolvency Regime

When a country seeks to address cases of bank insolvency through the corporate insol­vency framework (with appropriate modifications), insolvency proceedings are invariably conducted in the courts. By contrast, the adoption of a special bank insolvency regime

separate from corporate insolvency law offers two main possibilities: first, the insolvency proceedings may be initiated and conducted by a banking authority, or, second, the pro­ceedings may remain under the jurisdiction of the insolvency courts even if the banking supervisory authorities retain a number of key functions, which are, in most cases, related to the commencement and the supervision of certain key aspects of the proceedings.

In some jurisdictions, there would be significant opposition to the introduction of purely admi...

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Exchange Rate Risk

Exchange rate risk is the risk that exchange rate changes can affect the value of an institu­tion’s assets and liabilities, as well as its off-balance-sheet items. Exchange rate risk can be direct (a financial institution takes or holds a position in foreign currency) or indirect (a foreign exchange position taken by one of the financial institution’s borrowers or by coun­terparties may affect their creditworthiness). The most commonly used measure of foreign exchange exposure is an institution’s net open foreign exchange position. Under the Basel methodology, a bank’s net open position is calculated as the sum of the following items:8 the net spot position (i. e...

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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...

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Illustrative Data Questionnaires for Comprehensive Financial Sector Assessment

This appendix complements chapter 2 and provides some additional guidance on the sort of quantitative data that should be collected to facilitate the analysis of different aspects of financial stability and of financial structure and development. The precise scope and content of data needed will be country specific to reflect its structural and institutional circumstances. Nevertheless, the appendix seeks to present a generally useful set of indica­tors and tabular formats and to present the sort of additional indicators that could be use­ful to capture differences in financial structure and in the state of financial development. The sequence in which the questionnaire—or list of data needed—is presented reflects the organization and coverage of the Handbook...

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Case for the Fully Unified Model

The fully unified model is particularly relevant when regulated entities are increasingly consolidating their activities and turning into conglomerates with centralized risk man­agement. Several arguments might favor the creation of a single unified agency for pru­dential regulation and supervision. Those arguments are as follows:

There may be economies of scale within regulatory agencies (particularly with respect to skill requirements and recruitment of staff members with appropriate skills and qualifications). If so, the smaller the number of agencies, the lower the institutional costs should be. A single regulator might be more efficient because of shared resources and, in particular, shared information technology systems and support services...

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Government Guarantee Funds9

In several countries, government guarantee funds have been established to ensure DC private pension plans. The goal of such guarantees is to reduce an individual’s exposure to

investment and other risks associated with private plans and to diversify the risk of pen­sion fund failures among the general population of pension plans. In developing countries, especially in Latin America where they have sprouted, government guarantee schemes have helped to ease the transition from government sponsored DB plans to privately run DC plans. It is expected that guarantee funds will grow in importance as more countries shift to greater emphasis on private plans.

Government pension guarantees, as illustrated by the practices in the Latin American region, have commonly been of two forms:

• A guarant...

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