Book Description

Although quot;bank restructuringquot; is a fairly common practice in a healthy banking system, this term usually refers to the failure of individual banks. When there is widespread evidence of banking failures that affect more than 20 percent of a banking system's total deposits, the package of institutional and regulatory programs used to resolve failed banks and return the banking sector to sustainable health is referred to as quot;systemic bank restructuring.quot; The range of programs employed by governments in systemic bank restructuring includes both macroeconomic diagnoses of the multiple underlying causes for the systemic problems as well as microeconomic efforts to improve banking supervision, correct weaknesses in the legal, accounting and regulatory framework, and rehabilitate or resolve individual insolvent banks. The success or failure of systemic bank restructuring depends to a great extent on designing a comprehensive strategy that addresses all of these problems. The legal work involved in systemic bank restructuring is an essential element of the government's microeconomic efforts. It requires the application of international quot;best practicesquot; for strengthening banking supervision and enforcement, incorporating international accounting and auditing standards, and rehabilitating or resolving insolvent institutions within the context of the overall legal and judicial structure. In particular, legal efforts focus on the statutory and regulatory authority for systemic bank restructuring - the laws and prudential regulations governing the licensing, supervision and closure of financial institutions; the capabilities and constraints of the deposit insurance system; the legal and judicial framework for restructuring financial institutions, reorganizing insolvent corporate borrowers and foreclosing on collateral; and the overall need for written procedures to be applied and enforced in a transparent, fair, and equitable manner. The purpose of this paper is to set out the legal framework used in systemic bank restructuring with reference to recent examples in developing and industrial countries. As background, the paper first describes government strategies in the early stages of a debt crisis, which, depending on their success, may reduce the need for more comprehensive bank restructuring or be incorporated in a program of systemic bank restructuring.