A Cross-Country Analysis of Bank Bankruptcy Regimes

Abstract

This article analyzes bank bankruptcy regimes across 142 countries. By employing factor analysis, we identify five main dimensions of bank bankruptcy frameworks: (1) Difficulty of forbearance & ease of court appeal, (2) Availability of supervisory tools, (3) Court involvement, (4) Supervisory powers with respect to managers, and (5) Supervisory powers with respect to shareholders & preinsolvency phase. We use cluster analysis to identify and group countries according to two prevalent types of bank bankruptcy frameworks: a court-led and administrative bank bankruptcy regime. Administrative bank bankruptcy regimes are associated with less court involvement in the resolution process, less likely forbearance, a higher possibility of court appeal, greater availability of supervisory tools, weaker supervisory powers with respect to managers and stronger supervisory powers with respect to shareholders, and a preinsolvency phase as opposed to the court-led bank bankruptcy regimes. Administrative bank bankruptcy regimes are also associated with fewer creditor rights, less government effectiveness, and lower institutional quality than court-led bank bankruptcy regimes. We find some evidence that the type and main dimensions of a bank bankruptcy regime are related to the occurrence and severity of the global financial crisis.

Keywords: bank bankruptcy law, bank insolvency regimes, bank failures, optimal resolution, financial crisis

JEL Classification: G20, G21, G28, G33, E58, K23