Insolvency – why a special regime for banks? by Eva Hupkes ... - IMF

agency had existed since 1863 in the form of the Office of the Comptroller of the Currency
(OCC). The Banking Act of 1933 created a new agency with supervisory powers, the Federal
Deposit Insurance Corporation (FDIC). In other countries, such as Italy and the Netherlands,
special banking legislation was adopted but the supervisory responsibilities remained with the
central bank. 5 In the United Kingdom, beginning in 1935, the Bank of England stepped up its
informal supervision of the main merchant banks (although it was not until 1979 that laws
were enacted which gave statutory backing to this function on the part of the Bank of
England).
Since the 1930’s, the responsibilities of bank supervisors have been expanding continuously,
often, however, in a reactive mode. 6 Technological developments, product innovation,
globalization and structural changes have brought about further regulatory demands, including
the protection of customers against improper business conduct and the protection of society at
large against money laundering and associated criminal activities.
Can the same arguments that led initially to the introduction of an ex ante regime to prevent
bank failures, that is a special entry regime and prudential regulation, also be mustered in
favor of a special regime for dealing with insolvent banks through reorganization or
liquidation? This article will review some of the common arguments put forward for and
against a special bank insolvency regime. It will also discuss the features that distinguish bank
insolvency rules from general insolvency rules. Finally, it will consider the areas in which
special rules appear most necessary.
The debate – a special regime for insolvent banks?
Why should banks be accorded special treatment in insolvency? The common answer is that
banks play a special role in a country‘s economy, 7 in that, collectively, their functions are so
2002, the new financial services authority (BAFin “Bundesanstalt für
Finanzdienstleistungsaufsicht“), created by a new law on a single financial services authority,
started operating.
5 The Bank of Italy acquired supervisory functions in 1936. In the Netherlands, the Dutch Act
on the Supervision of Credit Systems, which was first adopted in 1952, formalized the
supervisory tasks of De Nederlandsche Bank.
6 For instance, following the collapse of the German Herstatt Bank in 1974, the Basel
Committee on Banking Supervision was established. In 1975, the Basel Committee adopted
the Basel Concordat, which was revised in 1983, following another bank failure the effects of
which were felt in many jurisdictions, that of Banco Ambrosiano. The Basel Committee’s
Minimum standards for the supervision of international banking groups and their cross-border
establishments of July 1992, and the European Council Directive 92/30/EEC of 6 April 1992
on the supervision of credit institutions on a consolidated basis were adopted following the
BCCI failure.
7 See, e.g., Edward W. Kelley Jr., Are Banks still special?, in Banking Soundness and
Monetary Policy 263 (Charles Enoch, John H. Green, eds. 1997); E. Gerald Corrigan, Are
Banks special?, in Federal Reserve Bank of Minneapolis Annual Report 1982, 5-7 (1982),
also available via the Internet at http://minneapolisfed.org/pubs/ar/ar1982a.html.
2