The Choice between Judicial and Administrative Sanctioned Procedures to Manage Liquidation of Banks: A Transatlantic Perspective

Abstract

Preventing future bail-outs for large, systemically important banks while minimizing the repercussions of bank insolvencies on the stability of the financial system and the economy at large has become a key policy objective for international standard-setters as well as national and supranational policy-makers and regulators. 'Resolution' frameworks established a regime that should impose broadly similar economic consequences for bank owners, management, and major stakeholders while avoiding potential detrimental knock-on effects that could result from the application of the traditional procedures under insolvency law. However, the introduction of resolution tools has not removed the existing approaches and procedures for dealing with institutions of ‘no public interest’. Indeed, within Europe the BRRD expressly provides that where a failing bank’s outright liquidation under general insolvency laws would not give rise to concerns regarding public policy interests, ‘resolution’ under the BRRD should not be allowed and the relevant bank should be liquidated in ordinary insolvency (bankruptcy) proceedings instead. Against this backdrop, this paper analyses the EU and US approaches to bank insolvency and reflects on the effectiveness of insolvency procedures for banks (and their holding companies in the United States), as well as on the advantages and disadvantages of a dual system that includes an administrative authority and court-based procedures. The paper also analyses the need for coordination through harmonization in the EU, and especially in the euro area, and the need for enhanced substantive coordination with a view to development of the European Deposit Insurance System (EDIS).

Keywords: Bank Insolvency; Bank Resolution; Orderly Liquidation Authority; Banking Union; EDIS

JEL Classification: G21, G33, K20; K22; K23, K29