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

Contrary to the majority of European legislators that chose to apply ordinary insolvency rules
to banks, the United States Congress opted very early for a special bank insolvency regime.
Under the National Bank Act of 1864, it was the Comptroller of the Currency, rather than the
judiciary who was empowered to appoint a receiver for national banks. 31 Alongside federal
regulation, most American states established their own statutory regimes for supervising
banks and resolving bank insolvencies. The Bankruptcy Act of 1898 explicitly excluded
banks from its coverage and continues to do so. 32 At its creation, in 1933, the FDIC became
the exclusive receiver for failed national banks, as well as the receiver for state chartered
banks at the discretion of state authorities. The existence of deposit insurance created
additional reasons for special bank insolvency rules, such as saving the insurance fund and
deferring to FDIC expertise. 33
Should other countries do as the United States and adopt a separate body of rules for bank
insolvencies? Who should be in charge of the resolution of bank failures: the banking
supervisor or, as under general insolvency law, the courts, - or should there be some form of
division of labor between them?
Some maintain that bank supervisors should deal only with “living” banks, while “fatally ill”
or “dead” banks should be turned over to the “mortician”, the bankruptcy court. This
argument goes as follows: since an insolvent bank can no longer conduct the business of
banking, “it is no longer a bank” and thus should be treated just like any other bankrupt
corporation. 34 Yet, this argument holds only in part. Banks are already subject to special
regulation which determines the conditions of their operation, it is, therefore, only the bank
supervisor – and not a bankruptcy judge or a meeting of creditors - who is in a position to
determine whether a bank is viable. Thus, the bank supervisor must have a voice in the
insolvency procedure.
Should the bank supervisor be in charge of the entire insolvency procedure? Or, should the
procedure be turned over to a bankruptcy court? If so, at what stage in the process? While
insolvency regimes differ widely from country to country with respect to the extent to which
they rely on special procedures for resolving bank failures, there is a marked trend toward
31 See Peter P. Swire, Bank insolvency law now that it matters again, 42 Duke L.J. 469
(1992); also available via the Internet at http://www.acs.ohiostate.edu/units/law/swire1//psduke.htm.
32 11 U.S.C. § 109(b)(2), (3), available on the Internet at http://uscode.house.gov/usc.htm.
33 See Testimony of Chairman Alan Greenspan before the Committee on Banking, Housing,
and Urban Affairs, U.S. Senate, April 23, 2002, accessible via the Internet at
http://www.federalreserve.gov/boarddocs/testimony/2002/20020423/ .Mr. Greenspan
observes that deposit insurance weakened the market discipline to control risks that insured
depositors would otherwise have imposed on banks and thrifts and that the ensuing reduced
market discipline and increased moral hazard intensified the need for government supervision
to protect the interests of taxpayers and, in essence, substitute for the reduced market
discipline.
34 J. Ashmead, In re Colonial Realty Co, 60 Brooklyn Law Revue 517, 519 (1994)
(comparing the relevant rules under the Bankruptcy Code to the procedure under the Federal
Deposit Insurance Act governing bank insolvencies).
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