A Study of Bank Failure Resolution
Indian Institute of Management, PGDM
October 22, 2011
Purpose: The purpose of this research paper is to analyze the legal powers given by countries to their regulators to carry out resolution of failed banks.
Methodology: The paper uses a World Bank database of bank regulation across 148 countries. The data is used to build indices of regulatory powers for failed bank resolution. The indices represent the powers given to regulators to intervene, restructure and liquidate failed banks. The immunity granted to regulators for actions taken to resolve failed banks is also measured through an index. Independent variables representing the occurrence of a systemic or non-systemic crisis; levels of creditors’ rights and law and order; per capita GNI and growth in GDP; and the level of bank deposits to GDP are used in a cross sectional regression to isolate determinants of regulatory powers of bank resolution.
Findings: The analysis finds that countries with weak creditors’ rights and those that have undergone systemic or non-systemic crises are more likely to grant powers of extra judicial liquidation to regulators. This is more likely to happen in countries with lower levels of GNI per capita. Countries that have undergone systemic crises are also more likely to grant judicial immunity to actions taken by their regulators. Judicial immunity is likely to be granted in countries with comparatively lower levels of GNI per capita but with healthier law and order environments. The occurrence of a systemic crisis does not significantly influence the powers given to regulators to intervene or restructure banks or restrict capital outgos to shareholders.
Implications: The results of the paper have important implications for design of bank resolution mechanisms. The results suggest that countries that have suffered a systemic crisis and with sub-optimum levels of creditors’ rights find value in providing their regulators with powers to liquidate failed banks. Such countries also find value in immunizing their regulators against legal action questioning their decisions.
Value: This is the first empirical analysis of bank failure resolution mechanisms. The study uses data on 91 countries.
Number of Pages in PDF File: 17
Keywords: Bank Regulation, Bank Failure Resolution, Liquidation, Restructuring, Intervention, Capitalization
JEL Classification: G21, G28, C21working papers series
Date posted: October 22, 2011 ; Last revised: November 6, 2011
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