## Executive Summary — IMF staff paper (_061110) ## Source details **Canonical URL:** [Executive Summary — IMF staff paper (_061110)](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2010/_061110.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2010/_061110.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2010/_061110.pdf.json) --- ### Key findings and problem statement - The recent financial crisis increased urgency for resolution systems that both safeguard financial stability and limit moral hazard. - Many systemically important financial groups operate globally; uncoordinated national resolution actions impede: - securing continuity of essential functions (thereby limiting contagion), and - ensuring shareholders and creditors bear the financial burden of the resolution process. - Two far-reaching but problematic approaches: - An international treaty obligating countries to defer to the resolution decisions of the jurisdiction where the financial institution or group has its main activities—would require a considerable sacrifice of national sovereignty and is unlikely to be feasible in the near term (the only exception may be on a regional basis amongst closely-integrated groups of countries). - “De-globalizing” financial institutions so they fit into national resolution frameworks—would cause significant efficiency losses and could undermine emerging market access to capital markets and international trade. ### Policy recommendation: Pragmatic enhanced coordination framework - Advocate establishment of a pragmatic framework for enhanced coordination, evidenced by a non-binding understanding among participating national authorities, comprising four elements: - Amend national laws to require national authorities to coordinate resolution efforts with counterparts in other jurisdictions to the maximum extent consistent with the interests of creditors and domestic financial stability, while preserving discretion to act independently where warranted. - Apply the framework only among countries that meet “core-coordination standards” relating to design and application of resolution systems (including implementation of the Basel Committee’s Concordat on supervision). - Specify principles to guide burden sharing among cooperating authorities where public funding is needed, at least temporarily. - Agree to coordination procedures designed to enable resolution actions in a crisis to be taken as quickly as possible and to have cross-border effect (a significant departure from current practice). - Near-term implementation: a limited group of countries that already meet the standards could begin to cooperate; the cooperation circle would expand as other countries adhere. ### Intended outcomes - Facilitate rapid and preemptive action to preserve business continuity while restructuring an institution so losses are promptly allocated to shareholders and creditors, consistent with financial stability objectives. - Align resolution and supervisory incentives through coordination standards and requiring effective supervisory frameworks as a condition for cooperation. --- ### Coordination Standards (Box 1) — operational and legal framework elements - Harmonization of National Resolution Rules: common rules on: - Non-discrimination against Foreign Creditors - Appropriate Intervention Tools - Appropriate Creditor Safeguards - Robust Rules on Depositor Priority - Robust Supervision: - Home country consolidated supervision sufficient to convince host countries to accept home-country leadership in designing and implementing resolution strategies. - Institutional Capacity: - Home country resolution authority must have sufficient resources and infrastructure to implement an international solution for host countries to rely on its leadership. --- ### Introduction: objectives, mandates, and scope ### Mandate and context - Paper responds to G-20 calls at the London Summit in April 2009 and the Pittsburgh Summit in October 2009 to develop an international framework for cross-border bank resolution arrangements and to develop resolution tools and frameworks. - Builds on the Basel Committee’s Cross-Border Bank Resolution Group (Report and Recommendations of the Cross-border Bank Resolution Group, March 2010). ### Central considerations - Effective resolution framework is essential to secure financial stability and limit moral hazard; current systems force authorities to choose between bail-outs or reliance on insolvency regimes ill-equipped to restructure financial institutions while preserving value and safeguarding stability. - A resolution framework will be ineffective without robust cross-border coordination because large, complex financial institutions operate globally while resolution remains subject to national legal frameworks. - A multilateral treaty imposing deference to a single jurisdiction’s resolution decisions is unlikely in the foreseeable future; enhancing coordination among national authorities is the most realistic medium-term approach. - Effective supervision is critical for prevention but not a substitute for credible resolution mechanisms; supervisory coordination is treated as a key element of the enhanced resolution coordination framework. --- ### Part I: The Globalization of Financial Institutions — status quo and costs ### Observations on globalization and structure - Expansion of cross-border banking and international financial groups; reliance on global networks of branches and subsidiaries and centralized funding under a global strategic plan. - Activities expanded into non-bank financial activities: securities and insurance brokerage, fund and asset management. - Large institutions operate across borders, currencies and time zones as systemically-important nodes. ### Drivers of globalization (explicit list) - Financial liberalization - Risk diversification - Servicing key corporate clients - Brand value in emerging markets ### Organizational factors affecting separability - Commercial/operational efficiency (matrix management, centralized capital/liquidity, subsidiaries with little de facto independence). - Separability/location of assets: home-country funding may support foreign expansion (examples cited in the paper: Swedish deposits funding Baltic expansion; Dexia’s lending funded using Belgian deposits). - Regulatory and tax influences. ### Interconnectedness and single-entity effects (paragraphs 12 et seq.) - Guarantees by parent can make the group function as a single entity; weaknesses in one legal entity can affect the entire group. - Centralized liquidity: downgrades or insolvency of central entity can cause immediate illiquidity of other entities. - Cross-default or cross-guarantee triggers can propagate distress. - Footnote reference: 7 — “The knock-on effects on subsidiaries of Lehman Brothers, is perhaps the clearest illustration of this problem in the context of non-bank financial institutions.” ### Systemic importance and host-country vulnerabilities - Scale of activity may create systemic risks for home or host jurisdiction. - Some branches/subsidiaries may be economically insignificant to the group yet critical to host country financial systems. - Parent bank may be able to ‘walk away’ legally from a troubled subsidiary, with reputational risk. ### Localized resolution frameworks and legal impediments - Resolution frameworks are national and apply to parts of the group rather than the group as a whole. - Legal frameworks that facilitate cross-border finance in stable periods are typically more effective than cross-border resolution arrangements during distress. - Many national laws do not sufficiently empower supervisors or resolution authorities to share information with foreign counterparts. - Host jurisdiction ring-fencing of assets can undermine effective resolution; home administrators may face difficulties implementing recovery operations in host jurisdictions. - No universally-agreed approach to key insolvency questions; multiplicity of regulatory actors amplifies coordination difficulties. - Territorial approach: regulatory authorities prioritize local stakeholders, favoring ring-fencing local assets for local creditors to the detriment of stakeholders elsewhere (see Box 2). ### Territoriality versus universality (Box 2 summary) - Universality: home-country insolvency proceedings claim “universal reach”; effectiveness depends on host-country recognition. - Territoriality: host countries may initiate separate insolvency proceedings and ring-fence local assets; effectiveness depends on local assets and local supervisory rules. - Categories not absolute; examples: - USA: “universal” for locally domiciled banks but “territorial” for branches of foreign banks. - EU “Winding Up Directive” (Directive 2001/24/EC of the European Parliament and of the Council of 4 April 2001) follows an EU-wide “universal approach” for EU banks but allows member states to maintain “territorial” approaches to branches of extra-EU banks. ### Supervisory coordination limits (Box 3 summary) - Progress on international standards (e.g., BCBS Concordat) but supervisors cannot construct a complete consolidated risk map due to: - Legal constraints on information sharing. - Divergences in supervisory approaches. - Diverse reporting systems. - National supervisory mandates emphasize national financial stability, leading authorities to focus on domestic interests when a group is distressed. ### Examples of anticipatory national measures - Licensed branches of foreign banks in the United States required to deposit cash or eligible securities to satisfy a “capital equivalency requirement”. - Legal reference: section 3102 (j) of the International Banking Act of 1978 (12 U.S.C.) — requires any receiver of a federally licensed branch to take possession of all property and assets of the foreign bank located in the United States and to prioritize payment of claims arising out of transactions with a U.S. branch or agency of a foreign bank over distribution to the foreign bank directly or any foreign liquidator or receiver. ### Costs of the existing localized approach - Uncoordinated national actions may hasten failure and destroy value (host transfers could destabilize home bank). - Local liquidation proceedings may prevent recovery efforts that preserve continuity of critical functions (e.g., “purchase and assumption” transactions). - Uncertainty about coordination hampers quick, effective action to preserve value and limit contagion. - Moral hazard: uncoordinated national approaches can induce bail-outs without ensuring shareholders and unsecured creditors absorb losses; breaking up groups along national lines can destroy franchise value and increase required state financing. - Greater interconnectedness amplifies disruption and value destruction from uncoordinated local resolution actions. ### Case studies (Box 4 summary) - Fortis (recovery example): crisis in late 2008 resolved along national lines; Dutch and Belgian state interventions; prolonged completion nearly six months between December 2008 and May 2009 after Belgian shareholders challenged sales; illustrates national interests dominating cooperation and difficulty balancing shareholder rights with systemic stability. - Lehman (liquidation example): September 2008 bankruptcy in the United States with global operations; main proceedings in the United States and the United Kingdom; numerous other jurisdictions wound down international components with little coordination; complex intra-group arrangements impeded return of client property (e.g., UK client money deposited at German affiliate that entered insolvency). --- ### Part II: Possible Elements of Enhanced Coordination Framework ### Initiatives directed towards crisis prevention (Box 5) - Colleges of banking supervisors expanded to almost forty financial groups to enhance liaison on risk management, capital and liquidity. - FSB to identify jurisdictions failing to implement standards on international cooperation and information exchange and may impose counter-measures. - Proposals under consideration: - (a) discourage systemic-risk activities through a systemic risk charge on “systemically important” institutions; - (b) increase capital levels and buffers for large complex financial institutions; - (c) reduce complexity of large financial groups (“de-risking” and “subsidiarization”). - Crisis Management Groups (CMG) under the FSB Cross Border Crisis Management Working Group established for major international financial firms to develop recovery and resolution plans (RRPs). ### CBRG and alternative approaches - CBRG final Report and Recommendations on cross-border bank resolution published March 2010. - Alternative approaches identified: - Full ‘universality’ via a binding legal instrument (international treaty) — would need substantive obligations on lead authority selection and burden sharing. - De-globalization (uniformly ‘territorial’ approach) — stand-alone subsidiaries within each jurisdiction; resilience gains offset by reduced efficiencies and potential harm to emerging markets. - Middle-ground: enhanced coordination among resolution authorities to facilitate mutual recognition of crisis management and resolution proceedings and/or measures. ### Proposed enhanced coordination framework (middle-ground) - Nonbinding multilateral understanding among countries able to adhere to its elements; draws on UNCITRAL Model Law on Cross-border Insolvency procedural elements and requires “core coordination standards.” - Key elements: - Modify domestic laws to require national authorities to coordinate with foreign jurisdictions to the extent consistent with creditors’ interests and domestic financial stability. - Identify “core coordination standards” as eligibility for participation. - Establish principles guiding burden sharing when public funding may be needed. - Specify coordination procedures for participating countries. ### Facilitating coordination — legal and practical impediments - Members to ensure domestic legislation requires national authorities to coordinate resolution efforts with counterparts to the maximum extent consistent with creditors’ interests and financial stability. - Host jurisdiction to evaluate whether creditors to branches or subsidiaries would receive at least what they would receive under territorial liquidation. - Retain national discretion to act independently if necessary to protect creditors and financial stability. - Existing impediments: - Laws preventing information sharing with foreign authorities. - Local laws encouraging ring-fencing of branch assets. - Regulatory actions by host authorities that frustrate home jurisdiction recovery operations (e.g., P&A transactions). - Legislative developments noted: - Restoring American Financial Stability Act of 2010, §210(a)(1)(N), as passed by the Senate, May 20, 2010 — one version would require the FDIC to cooperate with foreign competent authorities to the maximum extent possible on liquidation of systemically important financial companies with assets or operations in any country other than the United States. - Wall Street Reform and Consumer Protection Act of 2010, §1609(a)(1)(L), as passed by the House of Representatives, December 11, 2009 — another version could potentially require the FDIC to coordinate with foreign competent authorities on dissolution of foreign subsidiaries of systemically important financial companies. ### Coordination Standards (principles for mutual confidence) - Countries will coordinate only if confident in counterparts; identify standards as conditions for cooperation. - Presumption that countries meeting standards will coordinate subject to rebuttal by national authority. - Standards include (elaborated elsewhere in text): - Minimum harmonization of national resolution rules, - Robust supervision and consolidated supervision, - Institutional capacity to implement international solutions. --- ### Minimum level of harmonization of national resolution rules (Part I, Section 1) ### Required legal and operational features - Host-country cooperation contingent on reasonable level of high quality convergence. - Legal frameworks involved in group-wide resolution need common features: - Non-discrimination against foreign creditors: host authorities must be satisfied home-country resolution procedures will not discriminate against local branch creditors, depositors, and DGS; domestic depositor preference by nationality or location inconsistent with this principle. - Effective intervention tools (special bank resolution regimes and official administration) with powers including: - Early intervention authority (common “triggers”). - Powers to unilaterally restructure claims (debt-for-equity conversions, reductions of unsecured creditors’ value). - Authority to conclude mergers and acquisitions without shareholder consent. - Unilateral power to transfer assets and liabilities, including to a bridge bank, without third-party consent. - Authority to provide bridge financing. - Ability to assume temporary public ownership once shareholders and unsecured creditors have absorbed necessary losses. - Temporary suspension of termination provisions in some financial contracts to limit contagion and preserve operations. - Appropriate creditor safeguards: judicial review and compensation so creditors are no worse off than in liquidation; protection of customer property rights, security interests, and netting rights. - For banks, robust harmonized priority rules recognizing host insured depositors and deposit guarantee schemes (DGS); lack of equal priority incentivizes host domestic solutions and may require broader harmonization of DGS features. ### Creditor safeguards (Box 7 summary) - Minimum protections to be available to all creditors irrespective of nationality: - Secured property is not transferred out of a failing bank without security moving with it. - Netting and financial collateral arrangements respected (subject to possible temporary suspension of close out netting rights for contracts transferred to a solvent third party). - No creditor is left worse off than in liquidation. - Foreign creditors are not discriminated against by nationality or location. - Safeguards prevent infringement of constitutional or human rights; UK secondary legislation cited as example. ### Robust supervision (paragraph 36) - Host authorities must have confidence in home-country prudential supervision quality and consolidated supervision. - International standards (Basel Core Principles, Basel Concordat) imply host countries should not grant market access if foreign banks are not well supervised. - Measures to improve convergence and capacity include supervisory colleges and FSB actions. - Risk note: supervisory colleges may engender “group think”; governance and public arrangements recommended. ### Institutional capacity (paragraph 37) - Home authorities must demonstrate organizational structure and staff capable of swift cross-border action; challenge when groups operate in more than 30 countries. - Supervisory colleges help build capacity and contacts. - Coordination criteria could be international standards countries choose to adhere to, signaling capability. ### Funding of cross-border resolution (Section D, paras. 38–42) - Objective: minimize public funding, though temporary public funding may be necessary. - Final cost should be borne by private stakeholders; Box 8 compares allocation in liquidation and recovery and shows imposing losses in liquidation is more straightforward than in recovery. - Recovery operations face difficulties imposing losses on existing creditors; design of recovery tools to allow legal haircuts is a key objective. - Reasons temporary public funding may be needed: - Legal frameworks often lack support for private “debtor-in-possession” financing of bank resolution. - Private providers often cannot organize urgent funding during systemic turmoil; up-front public funding by MOF or central bank (with protection against future losses by MOF) may be necessary. - A (partially) pre-funded “orderly resolution fund” or a deposit insurance fund may contribute. - Risk of recovery failure and national authorities facing losses can be addressed by a fund receiving ex ante or ex post contributions from the private sector. - Box 8 — Cost allocation summary: - Insolvency liquidation: losses borne consecutively by shareholders, subordinated creditors, and unsecured creditors; DGS losses only if available assets < insured deposits; central bank collateralized liquidity assistance may have priority claims on estate assets. - Recovery techniques and implications: - Capital increases: new capital providers condition investment on write-downs of pre-insolvency shareholders; newly issued preferred shares take priority over ordinary shares. - Issuance of new debt: new borrowing reduces net profits; pre-existing subordinated creditors inferior to new unsecured claims. - Reduction of liabilities: unsecured debt can be reduced by court-imposed haircuts, voluntary/forced conversion into equity, or “leave behind” via “purchase and assumption” transactions—these impose losses on pre-insolvency unsecured creditors and shareholders. - Host countries may need to contribute financing to keep an international group intact; host contributions may be required even with a national solution. - Financial burden sharing: ex ante agreement desirable on an institution-specific basis, supported by RRPs or “living wills”; framework should set criteria and parameters to guide burden-sharing such as: - (a) the relative systemic importance of the group across jurisdictions, - (b) the relative contribution from DGS and other resolution funds from different countries, - (c) the relative distribution of losses across jurisdictions. ### Establishment of coordination procedures (paragraph 43) - Even when standards are met, established procedures serving as a road map enhance rapid and effective coordination in a crisis. --- ### Leadership, communication, and procedural coordination (paras. 44–50) ### Leadership (paras. 44–47) - Framework objective: clarify who leads initiation and conduct of resolution proceedings and how leadership is exercised; applicable among jurisdictions adhering to framework elements. - Presumption: lead role appropriately played by home country authorities (para. 45), consistent with the Concordat and home jurisdiction as likely principal source of public funds; host jurisdictions retain right to act independently for domestic stability and creditors’ interests. - Modalities (para. 46): - Court-based proceedings: home authorities could have standing to launch proceedings in host courts directly or via host authorities. - Administrative proceedings: host legal frameworks could permit host authorities to act on home authorities’ guidance, or allow home authorities to act directly. - Home authority expected to design overall resolution strategy, decide type of proceeding, and play lead role—substantial departure from current practice. - Financial groups (para. 47): - Each country may designate a lead authority to initiate and conduct resolution proceedings for entities within its territory and serve as point of contact with lead authorities in other jurisdictions. - Requirement to coordinate actions to the maximum extent possible, with host lead authority consulting home lead authority before initiating proceedings against a local subsidiary. - Possible measures: consolidating court proceedings for group entities, coordinating asset protection, cooperating on intra-group claims and creditor dealings. ### Communication (paras. 48–50) - High level of communication and information sharing among supervisors and resolution authorities required. - Home authorities required to consult host authorities on key decisions and consider host impact. - Framework should require early-stage information sharing to address asymmetries (home authorities typically have more information). - Institution-specific standing agreements (protocols) recommended to facilitate rapid communication and consultation; such protocols could be part of RRPs. ### Conclusion and policy actions (paras. 51–52) - Urgent need to strengthen national resolution frameworks and international cooperation. - Incremental voluntary adherence approach: achievable in near future though issues remain (e.g., monitoring whether countries meet “core coordination standards”). - “Carrot”: more effective and value-preserving international resolution. - Near-term: a limited group of countries meeting standards could begin cooperating; inclusion of world’s principal financial centers would be a major step forward. - Expansion over time as other countries adhere, including developing countries and emerging markets. ### Questions for Directors (verbatim) - Do Directors agree with the elements of the approach outlined above? - Do directors agree that an agreement among the world’s principal financial centers on an enhanced coordination framework would represent a major step forward? Should this requirement be complemented with a time-bound specific action plan? - Do directors think that it is desirable/necessary for the enhanced co-ordination framework to identify in advance the criteria and range of parameters that would be used to important to guide the burden-sharing process --- ### Annex highlights — Basle Committee Recommendations and UNCITRAL Model Law ### Basle Committee selected recommendations (preserved wording) - Recommendation 1: Effective national resolution powers — authorities should have appropriate tools to deal with all types of financial institutions to achieve orderly resolution that maintains financial stability, minimizes systemic risk, protects consumers, limits moral hazard and promotes market efficiency. - Recommendation 2: Frameworks for a coordinated resolution of financial groups. - Recommendation 3: Convergence of national resolution measures toward those in Recommendations 1 and 2. - Recommendation 4: Consider developing procedures to facilitate mutual recognition of crisis management and resolution proceedings/measures. - Recommendation 5: Reduction of complexity and interconnectedness of group structures and operations. - Recommendation 6: Contingency planning in advance for orderly resolution proportionate to size and complexity. - Recommendation 7: Cross-border cooperation and information sharing. - Recommendation 8: Strengthening risk mitigation mechanisms (netting, collateralization, segregation of client positions, central counterparties, trade repositories). - Recommendation 9: Legal authority to temporarily delay immediate operation of contractual early termination clauses to complete transfers and preserve contractual rights. - Recommendation 10: Exit strategies and market discipline — clear options/principles for exit from public intervention. ### UNCITRAL Model Law and Legislative Guide (paras. 53–56) - Model Law on Cross-border Insolvency adopted in 1997; framework for fair and orderly management of insolvency of cross-border single entities; not intended for groups of legally distinct subsidiaries or entities with dedicated regimes (banks, insurance). - Recognition and relief: foreign insolvency representatives may apply for recognition in another jurisdiction; recognizing court has broad discretion to grant relief (e.g., stay on execution, entrusting administration of assets) while ensuring protection of local creditors; public policy exemption exists. - “Main” proceedings and COMI: recognition as a “main” proceeding imposes automatic stay; “main” proceedings located where the entity has its centre of main interests (COMI). - UNCITRAL’s Legislative Guide and Working Group V have developed draft recommendations on “enterprise groups” (domestic focus, with distinct challenges for international groups). - Domestic group approaches: per-entity solvency assessment versus consolidated economic-reality approach; Guide contemplates single joint application for multiple group companies meeting insolvency thresholds and procedural coordination (single insolvency representative in some cases). - International groups: cross-border group insolvency is harder; Guide recommends national laws authorize cooperation between courts and insolvency representatives, joint hearings, single representatives where feasible; recommendations less ambitious for cross-border groups given complexity and involvement of supervisors, central banks, DGS across jurisdictions. --- *Source: Executive Summary and selected sections from the IMF staff paper contained in the provided PDF content unit (_061110).* ### Executive Summary ...................................................................................................... ### Executive Summary ### Key findings and problem statement - The recent financial crisis increased urgency for resolution systems that both safeguard financial stability and limit moral hazard. - Many systemically important financial groups operate globally; uncoordinated national resolution actions impede: - securing continuity of essential functions (thereby limiting contagion), and - ensuring shareholders and creditors bear the financial burden of the resolution process. - Two far-reaching, but problematic, approaches: - An international treaty obligating countries to defer to the resolution decisions of the jurisdiction where the financial institution or group has its main activities—would require a considerable sacrifice of national sovereignty and is unlikely to be feasible in the near term (the only exception may be on a regional basis amongst closely-integrated groups of countries). - “De-globalizing” financial institutions so they fit into national resolution frameworks—would cause significant efficiency losses and could undermine emerging market access to capital markets and international trade. ### Policy recommendation: Pragmatic enhanced coordination framework - The paper advocates the establishment of a pragmatic framework for enhanced coordination, subscribed to by countries able to satisfy its elements. The framework would be evidenced by a non-binding understanding among participating national authorities and would comprise four elements: - First, countries would amend their laws so as to require national authorities to coordinate their resolution efforts with their counterparts in other jurisdictions to the maximum extent consistent with the interests of creditors and domestic financial stability. National authorities would continue to retain the discretion to act independently if, in their judgment, such action is more consistent with these objectives. - Second, the enhanced coordination framework would only be applicable to those countries that have in place “core-coordination standards” relating to the design and application of resolution systems (see Box 1). Implementation of the Basel Committee’s Concordat on supervision would also be a component of the core coordination standards. - Third, the framework would specify principles to guide burden sharing among cooperating authorities where public funding is needed, at least on a temporary basis. - Fourth, subscribing countries would agree to coordination procedures designed to enable resolution actions in the context of a crisis to be taken as quickly as possible and to have cross-border effect (which would entail a significant departure from current practice). - Near-term implementation: a limited group of countries that already meet the standards could begin to cooperate amongst themselves; as other countries adhere over time, the circle of cooperation would expand. ### Intended outcome of the framework - Facilitate rapid and preemptive action by authorities to preserve business continuity while restructuring an institution so that losses are allocated to shareholders and creditors promptly, consistent with financial stability objectives. - Align resolution and supervisory incentives through setting coordination standards and requiring effective supervisory frameworks as a condition for cooperation. ### Boxed guidance referenced - See “Coordination Standards” (Box 1) for the detailed elements of countries’ operational and legal frameworks required for cooperation. ### Important definitional and scope notes - The paper uses “resolution” broadly to refer to the full range of recovery and resolution activities that involve public intervention (whether privately or publicly funded), including mergers and acquisitions, equity recapitalization, debt for equity conversions, transfers of assets and liabilities, temporary administration, reorganization, and liquidation. - The issues addressed apply to the resolution of international financial groups, including banks and non-bank financial institutions; many relevant entities within a group will be regulated given their systemic importance. - Effective supervision is essential for crisis prevention but is not the primary focus of the paper; nonetheless, robust supervisory frameworks in potential partner countries are treated as a condition for cross-border resolution coordination. --- ### Coordination Standards (Box 1): operational and legal framework elements - Harmonization of National Resolution Rules: national legal frameworks of cooperating countries for recovery and resolution will need to have common rules on: - Non-discrimination against Foreign Creditors - Appropriate Intervention Tools - Appropriate Creditor Safeguards - Robust Rules on Depositor Priority - Robust Supervision: - The home country’s supervision will need to be sufficiently robust (including through consolidated supervision) to convince host countries to accept the leadership of the home country in designing and implementing resolution strategies. - Institutional Capacity to Implement an International Solution: - The home country resolution authority will need sufficient resources and infrastructure to implement an international solution for host countries to rely on its leadership. ### Burden sharing and procedural requirements (as part of the framework) - The framework includes specification of principles to guide burden sharing where public funding is needed, and establishment of coordination procedures addressing: - Leadership - Communication - Mechanisms to enable rapid, cross-border effect of resolution actions --- ### Introduction: objectives, mandates, and scope - Mandate and recent calls: - The paper responds to G-20 calls at the London Summit in April 2009 and the Pittsburgh Summit in October 2009 to develop an international framework for cross-border bank resolution arrangements and to develop resolution tools and frameworks for effective resolution of financial groups. - The paper builds on the Basel Committee’s Cross-Border Bank Resolution Group (Report and Recommendations of the Cross-border Bank Resolution Group, March 2010). - Two central considerations prompting the work: - Establishing an effective resolution framework is essential to secure financial stability and limit moral hazard; current systems may force authorities to choose between bail-outs that do not fully allocate losses to shareholders and creditors, or reliance on insolvency regimes ill-equipped to restructure financial institutions while preserving value and safeguarding stability. - A resolution framework will be ineffective without robust cross-border coordination because large, complex financial institutions operate globally while resolution remains subject to national legal frameworks. - Feasibility and realism: - A multilateral treaty imposing deference to a single jurisdiction’s resolution decisions is unlikely in the foreseeable future; hence, enhancing coordination among national authorities is the most realistic medium-term approach. - Relationship to supervision: - Effective supervision is a key component of crisis prevention but is not a substitute for credible resolution mechanisms; the paper treats effective supervisory coordination as a key element of the enhanced resolution coordination framework. --- ### Part I: The Globalization of Financial Institutions (summary of status quo and costs) ### Key observations on globalization and structure (paragraphs 9–11) - Financial globalization has led to a large number of international financial groups and rapid expansion of cross-border banking over the last decade. - Many large banks now rely on global networks of branches and subsidiaries, with centralized funding distributed within the financial group under a global strategic plan. - Activities of these groups have expanded beyond traditional deposit-taking and lending to include non-bank financial activities, such as securities and insurance brokerage and fund and asset management. - The international financial space is dominated by several large financial institutions that operate across borders, in multiple currencies and time zones, acting as systemically-important nodes within a globalized market for capital. ### Factors driving globalization (listed explicitly) - Financial liberalization: many countries have eliminated barriers to the entry of foreign financial institutions. - Risk diversification: expansion abroad allows institutions to diversify risk, reduce reliance on home markets and seek new business opportunities. - Servicing key corporate clients: banks follow corporations abroad to support and profit from their expansion. - Brand value in emerging markets: internationally-recognized brands with a local presence can rapidly gain market share abroad. ### Factors influencing legal form and organizational structure - Commercial factors/operational efficiency: groups may organize operations according to business lines using matrix management structures not reflecting legal entity relationships; centralized functions (capital and liquidity management, risk management, IT) may result in subsidiaries with little de facto independence. - Separability/location of assets: activities in a host jurisdiction may reflect decisions taken in a remote home state; home-country funding may support foreign expansion (examples cited in the paper: Swedish deposits funding Baltic expansion; Dexia’s lending funded using Belgian deposits). - Regulatory factors: formal requirements by home or host authorities may influence establishment and development of cross-border activities. - Tax treatment: structure and organization may be influenced by tax considerations. --- *Source: Executive Summary and selected sections from the IMF staff paper contained in the provided PDF content unit.* ### 12. In some circumstances, a financial group may effectively function as a single ### 12. In some circumstances, a financial group may effectively function as a single entity ### Interconnectedness and single-entity effects - A guarantee issued by the parent for components of the group can make the group function as a single entity; weaknesses in one legal entity can adversely affect the entire group. - In group structures with centralized liquidity, sudden and material downgrading of the central entity’s credit ratings or the opening of insolvency proceedings against it would lead to the immediate illiquidity of the other entities in the group. - The triggering of cross default or cross guarantee arrangements for funding purposes as a result of rating downgrades or otherwise may lead to financial distress in other parts of the group. - Footnote reference: 7 — “The knock-on effects on subsidiaries of Lehman Brothers, is perhaps the clearest illustration of this problem in the context of non-bank financial institutions.” ### Systemic importance and host-country vulnerabilities - The scale of activity or size of an international financial group may create systemic risks for either the home or the host jurisdiction when such groups enter into financial distress. - Certain branches or subsidiaries may be economically insignificant to the group yet be of critical importance to their host country’s financial system. - A parent bank may, as a legal matter, be able to ‘walk away’ from a troubled subsidiary, though doing so entails reputational risk and could be counterproductive for group stability. ### Localized resolution frameworks - Frameworks for addressing distress and failure are local and apply to distinct parts of the group rather than to the group as a whole. - Legal frameworks that facilitate cross-border finance during stable periods are typically more effective than cross-border resolution arrangements available in times of distress. - National law establishes resolution frameworks, and absent cooperation of other national authorities they are enforceable only vis-a-vis institutions or branches operating in that territory. (Footnote reference: 8) - In the absence of an international legal framework empowering a supra-national resolver, resolution of global institutions is subject to different national frameworks, making proactive coordination by national authorities necessary to avoid the significant costs of an uncoordinated approach. ### Legal and practical impediments to coordination - Many national legal frameworks do not sufficiently empower supervisors or resolution authorities to share information with foreign counterparts. - Ring-fencing of assets by host jurisdictions can undermine effective resolution; home country administrators may face difficulties implementing recovery operations (such as “purchase and assumption” transactions) in host jurisdictions of bank branches. - There is no universally-agreed approach to key insolvency questions (e.g., triggers for commencement of insolvency proceedings or powers available to supervisors to deal with an insolvent bank). - Multiplicity of regulatory actors and overlapping competencies amplify coordination difficulties in international financial groups with banking and non-banking activities. - When faced with distress or failure of an institution within their territory, regulatory authorities tend to prioritize local stakeholders (creditors to branches/subsidiaries, depositors, local taxpayers), translating into a “territorial” approach that favors ring-fencing local assets for local creditors to the detriment of stakeholders in other jurisdictions (see Box 2). (Footnote reference: 9) ### Territoriality versus universality (Box 2 summary) - Universality: Home-country insolvency proceedings purport to have “universal reach,” seeking control over all debtor assets and liabilities (including those in other countries) and paying domestic and foreign creditors according to ranking; effectiveness depends on host-country recognition. - Territoriality: Host countries may initiate separate insolvency proceedings and ring-fence assets/liabilities located in their territory to satisfy local creditors; effectiveness depends on sufficient local assets and may be buttressed by supervisory rules requiring local assets for local liabilities. - Categories are not absolute; some regimes have mixed features (example: USA is “universal” for locally domiciled banks but “territorial” for branches of foreign banks; EU “Winding Up Directive” follows an EU-wide “universal approach” for EU banks but allows member states to maintain “territorial” approaches to branches of extra-EU banks). - Directive referenced: “Winding Up Directive” (Directive 2001/24/EC of the European Parliament and of the Council of 4 April 2001 on the Reorganization and Winding up of credit Institutions). ### Supervisory coordination and its limits (Box 3 summary) - International standards and best practices (e.g., BCBS Concordat 1975 and subsequent statements) aim to promote consolidated supervision and cooperation among home and host supervisors. - Despite progress, supervisors are not yet able to construct a complete map of key risks on a consolidated basis due to: - Legal constraints and regulatory perimeter: lack of legal authority in some cases to share information with foreign counterparts. - Divergences between supervisory approaches: agreed standards may be applied differently by national supervisors. - Diverse reporting systems: different supervisory models lead to different reporting systems that hinder timely data compilation. - National supervisory mandates typically emphasize protection of national financial stability (with important exceptions such as EU framework), leading national supervisory authorities to focus on domestic interests when a group becomes distressed. ### Examples of national anticipatory measures - Implementation of supervisory frameworks in some jurisdictions anticipates ring-fencing during resolution. For example, licensed branches of foreign banks in the United States are required to deposit cash or eligible securities at approved depository banks to satisfy a “capital equivalency requirement” established by applicable law. - Specific legal reference: section 3102 (j) of the International Banking Act of 1978 (12 U.S.C.), which requires any receiver of a federally licensed branch to take possession of all property and assets of the foreign bank located in the United States and to prioritize payment of claims arising out of transactions with a U.S. branch or agency of a foreign bank over distribution of assets to the foreign bank directly or to any foreign liquidator or receiver. ### Costs of the existing localized approach - The absence of an effective cross-border resolution framework undermines financial stability: - Uncoordinated national actions may hasten failure and destroy value (e.g., host jurisdiction transfer of assets during stress could destabilize the home bank). (Footnote reference: 11) - Local liquidation proceedings may prevent recovery efforts that preserve continuity of critical functions (e.g., “purchase and assumption” transactions may be stymied if host authority refuses necessary transfers). - Uncertainty about how national authorities will coordinate makes it difficult to take quick, effective action to preserve value and limit contagion. - The existing framework exacerbates moral hazard: - Financial stability problems from uncoordinated national approaches can induce public bail-outs without ensuring shareholders and unsecured creditors absorb necessary losses first. - Uncoordinated national resolutions may not maximize the institution’s value, potentially increasing required state financing (e.g., breaking up a group along national lines can destroy franchise value and reduce attractiveness to private investors). - More interconnected and integrated international institutions increase the disruption and value destruction from uncoordinated local resolution actions. ### Case studies illustrating failures of coordination (Box 4 summary) - Fortis (recovery example): - Fortis Group fell into crisis in late 2008 and was resolved along national lines in a protracted process that failed to preserve franchise value. - Netherlands: Dutch state bought Fortis’ Dutch bank, insurance arm, and parts of ABN Amro that Fortis had acquired. - Belgium: Belgian government bought Fortis’ Belgian bank and agreed to sell a 75% stake in it to BNP Paribas; BNP also bought Fortis’ Belgian insurance operations and acquired a majority stake in Fortis’ Luxembourg subsidiary. - Completion of resolution delayed nearly six months between December 2008 and May 2009 after Belgian shareholders challenged the sale to BNP Paribas; shareholders subsequently voted against and later approved it after modifications. - Illustrates difficulty of balancing private shareholder rights with public interest in systemic stability and the tendency for national interests to dominate even among cooperating jurisdictions. - Lehman (liquidation example): - Lehman Brothers filed for bankruptcy protection in the United States in September 2008 with global operations involving dozens of group entities (branches and subsidiaries). - Main proceedings in the United States and the United Kingdom; insolvency officials in numerous other jurisdictions engaged in winding down international components with little or no coordination. - Complex intra-group arrangements impeded return of client property (e.g., client money segregated by Lehman’s UK broker-dealer had been deposited at a German affiliate which itself entered insolvency and a moratorium). *Source: _061110 - 12. In some circumstances, a financial group may effectively function as a single (PDF chapter/section).* ### Part II: Possible Elements of Enhanced Coordination Framework ### Part II: Possible Elements of Enhanced Coordination Framework ### Initiatives Directed Towards Crisis Prevention (Box 5) - Colleges of banking supervisors have been expanded now to almost forty financial groups. - Colleges aim to enhance direct and frequent liaison between home and host supervisors and banks on risk management, capital and liquidity, to enhance mutual trust; amendments to national legal frameworks may be necessary to authorize the sharing of critical information when financial conditions of banks are deteriorating. - The Financial Stability Board (FSB) will identify jurisdictions that fail to implement internationally agreed standards concerning international cooperation and information exchange, engage with such jurisdictions to bring them toward full compliance and, in some cases, may impose counter-measures. - Proposals under consideration include: - (a) discourage banks from engaging in activities that give rise to systemic risk through a systemic risk charge on “systemically important” institutions; - (b) make large complex financial institutions more resilient to shocks by increasing capital levels and buffers; - (c) reduce the complexity of large financial groups (i.e., “de-risking” of cross border firms and “subsidiarization”). - Crisis management groups (CMG), under the Cross Border Crisis Management Working Group of the FSB, have been established for major international financial firms and are tasked with developing recovery and resolution plans (RRPs). - RRPs can identify measures firms and/or authorities can undertake prior to a shock to facilitate effective and coordinated recovery or resolution (e.g., strengthen capital or liquidity, improve ability to provide detailed information quickly in a resolution). - RRPs may also identify measures authorities should undertake to strengthen resolution powers or incentivize structural changes in the firm. ### The Cross-Border Resolution Group (CBRG) and Recent Work - The Cross Border Bank Resolution Group (CBRG) of the Basel Committee on Banking Supervision (BCBS) published its final Report and Recommendations on cross-border bank resolution in March 2010. - Other regional initiatives include the European Commission’s consultations to improve the EU framework for cross-border bank crisis management. ### CBRG-Identified Alternative Approaches to Cross-Border Resolution - Full ‘universality’ via a binding legal instrument, such as an international treaty: - To be fully effective, such a treaty would need to include substantive obligations related to key issues such as selection of lead authority and burden sharing. - De-globalization of financial institutions (a uniformly ‘territorial’ approach): - Institutions would be separately structured for capital, liquidity, assets and operations within each jurisdiction via stand-alone subsidiaries. - Could contribute to resilience of host country operations but would reduce efficiencies and could undermine access to credit to emerging market economies. - A ‘middle ground’ approach: - Enhanced coordination among resolution authorities that steers a path between territoriality and universality. - Recommendation that national authorities develop procedures to facilitate mutual recognition of crisis management and resolution proceedings and/or measures. ### Considerations in Evaluating Universality vs Territoriality - Universality vs territoriality debate is somewhat theoretical and, in the short-term, unlikely that all key jurisdictions will agree to the surrender of national sovereignty necessary for full universality. - The debate applies exclusively to single entities (parent bank and its branches) and is not applicable to resolution of interconnected but separate legal entities within a group. - De-globalization is problematic: it reduces efficiencies and may undermine access to credit for emerging markets; presence of large international banks in emerging markets has sometimes strengthened resilience. - Evidence: financial support provided by parent banks to subsidiaries in Central and Eastern Europe played an important role in crisis resolution; this support has been buttressed by the European Bank Co-ordination Initiative (“Vienna Initiative”), launched in January 2009 as a public-private sector collective action platform. ### Proposed Enhanced Coordination Framework (middle-ground approach) - Framework would be put in place through a nonbinding multilateral understanding among countries able to adhere to its elements. - The approach draws on elements of the UNCITRAL Model Law on Cross-border Insolvency, recognizing: - Courts under UNCITRAL “recognize” insolvency proceedings in other jurisdictions but retain broad discretion as to the degree of deference. - UNCITRAL addresses procedural issues that can hamper coordination in practice. - Supplementing UNCITRAL-derived elements, the framework would identify certain “core coordination standards” countries need in order to be eligible to participate. - The proposed elements include: - First, modification of domestic laws to require national authorities to coordinate with foreign jurisdictions—but only to the extent that, in the judgment of the national authority in question, such coordination would be consistent with the interests of creditors and domestic financial stability. - Second, identification of “core coordination standards” to identify countries with whom more coordinated cross-border resolution is expected to take place. - Third, establishment of principles to set forth criteria and parameters to guide burden sharing among members when public funding in the resolution process may be needed. - Finally, specification of coordination procedures to be relied upon by countries that adhere to the enhanced coordination framework. ### Facilitating Coordination (domestic legal and practical impediments) - Members would ensure domestic legislation requires national authorities to coordinate resolution efforts with counterparts in other jurisdictions to the maximum extent consistent with the interests of creditors and domestic financial stability. - In assessing whether a coordinated approach is consistent with creditors’ interests, a host jurisdiction would evaluate whether creditors to branches or subsidiaries located on their territory would receive at least what they would receive had the branch or entity been liquidated on a territorial basis by the host jurisdiction. - National authorities retain discretion to act independently if they judge independent action is more consistent with the interests of creditors and financial stability. - Existing impediments to coordination include: - Laws that effectively prevent sharing of information with foreign competent authorities. - Local law that encourages ring-fencing of assets of a branch of a foreign bank for the benefit of creditors of the branch. - Regulatory actions by host authorities that can frustrate home jurisdiction attempts to continue critical operations via purchase and assumption (P&A) transactions. - Legislative developments noted: - One version of U.S. legislation pending would require the FDIC to cooperate with foreign competent authorities to the maximum extent possible on liquidation of systemically important financial companies with assets or operations in any country other than the United States (Restoring American Financial Stability Act of 2010, §210(a)(1)(N), as passed by the Senate, May 20, 2010). - Another version could potentially require the FDIC to coordinate with foreign competent authorities on dissolution of foreign subsidiaries of systemically important financial companies (Wall Street Reform and Consumer Protection Act of 2010, §1609(a)(1)(L), as passed by the House of Representatives, December 11, 2009). ### Coordination Standards (principles for mutual confidence) - National authorities will only be willing to coordinate if they have confidence in their counterparts; therefore, identify standards countries should adhere to as a condition for cooperation. - It would be presumed that countries meeting these standards would coordinate with each other in a resolution, subject to rebuttal by a national authority that independent action is necessary to protect financial stability or creditors’ interests. - The paper indicates the following standards as most relevant (elaboration of specific standards follows in the text beyond the provided excerpt). *Source: _061110 - Part II: Possible Elements of Enhanced Coordination Framework* ### 1. Minimum level of harmonization of national resolution rules ### 1. Minimum level of harmonization of national resolution rules ### Key features required for host–home cooperation - Host country authorities will only cooperate with home country authorities if national frameworks show a reasonable level of high quality convergence. - Legal frameworks involved in group-wide resolution need to share certain key features: - Non-discrimination against foreign creditors: - Authorities of host countries must be satisfied that other countries’ resolution procedures will not discriminate against creditors of the local branch including depositors and, by extension, deposit guarantee schemes (DGS), and governments. - Domestic depositor preference in the home country, based upon the nationality or location of the depositor, would be inconsistent with this principle. - Effective intervention tools (special bank resolution regimes and official administration procedures enabling rapid intervention while preserving critical functions and avoiding contagion). Among the intervention powers currently considered most critical are: - Early intervention authority, i.e., the existence of common “triggers” that allow the authorities to take action well before balance sheet insolvency. - Powers that enable authorities to unilaterally restructure various claims of an institution, e.g., debt-for-equity conversions or the reduction of the value of unsecured creditors. - Authority to conclude mergers and acquisitions without shareholder consent. - Unilateral power to transfer assets and liabilities to other institutions, including a bridge bank established for this purpose, without the need to obtain the consent of third parties. - Authority to provide bridge financing to facilitate the transactions described above. - Ability to assume public ownership of the institution on a temporary basis, once the shareholders and unsecured creditors have absorbed the necessary losses. - As a means of both limiting contagion and preserving critical operations, the temporary suspension of termination provisions contained in some financial contracts. - Appropriate creditor safeguards: - Rules on creditor safeguards and judicial review of supervisory and recovery/resolution action to ensure equitable treatment of creditors are essential. - Where a bank is resolved under a special resolution framework, compensation ought to be available to ensure creditors are left no worse off than in liquidation. - Resolution regimes must provide sufficient safeguards to stakeholders by protecting customer property rights, security interests and financial collateral arrangements in financial contracts (including netting rights). - For banks, sufficiently robust and harmonized rules on priority that recognize the interests of host country insured depositors and deposit guarantee schemes (DGS): - If home-country rules do not ensure equal priority for host-country insured depositors and DGS, host authorities will have a strong incentive to choose a domestic solution. - This may require broader harmonization of DGS features, including categories of insured depositors and amounts of protection. ### Box 7 — Creditor safeguards (summary of essential protections) - Resolution powers overrule ordinary private property and contractual rights for financial stability; strong safeguard mechanisms must ensure appropriate exercise of powers. - Minimum safeguard protections to be available to all creditors irrespective of nationality include: - secured property is not transferred out of a failing bank without the benefit of security moving with it; - other netting and financial collateral arrangements are respected (subject potentially to temporary suspension of close out netting rights for contracts transferred to a solvent third party); - no creditor (domestic or foreign) of a resolved bank is left any worse off as a consequence of the resolution action than they would have been had the bank failed and been liquidated; - foreign creditors are not discriminated against either based upon their nationality or location. - Safeguards are important to prevent infringement of constitutional or human rights relating to property and ownership; UK secondary legislation is cited as an example of safeguards providing legal certainty for netting and collateral rights and compliance with the European Convention on Human Rights. - Jurisdictions adopting special bank resolution regimes may face complex constitutional issues; absent appropriate safeguards, providing resolution authorities with such powers might be incompatible with constitutional limitations. ### Robust supervision (paragraph 36) - Host authorities must be satisfied that home-country prudential supervision is of sufficient quality and that supervisors engage in consolidated supervision (including insurance firms, securities firms). - Existing international standards (e.g., the Basel Core Principles on Effective Bank Supervision) and the Basel Concordat principle on market access indicate host countries should not grant market access if foreign banks are not well supervised in their home jurisdiction (and vice versa). - In light of the crisis, many supervisors feel standards have not sufficiently increased supervision quality or the willingness to intervene across jurisdictions. - Measures to improve convergence and capacity: - Establishment of colleges of banking supervisors. - Steps by the FSB to promote global adherence to international cooperation and information sharing standards. - Note on risk: supervisory colleges can engender “group think” and blur responsibilities; mitigation via effective governance arrangements made public is recommended. ### Institutional capacity to implement an international solution (paragraph 37) - Host authorities must be confident home authorities can effectively implement an international solution; this requires organizational structure and staff capable of acting swiftly across borders. - Challenge: several large financial groups are active in more than 30 countries, posing an enormous coordination challenge. - Supervisory colleges are a tool to build capacity and contacts with host authorities to facilitate cross-border cooperation. - The coordination criteria could take the form of international standards to which countries choose to adhere; adherence signals capability to implement an international resolution. ### The funding of cross-border resolution (Section D, paragraphs 38–42) - Objective: minimize need for public funding, but temporary public funding may be necessary. - Key points on cost allocation and funding: - Final cost of resolution should be borne by private stakeholders; Box 8 provides an overview of typical allocation in liquidation and recovery and shows it is more straightforward to impose losses through liquidation than recovery. - In recovery operations, imposing losses on existing creditors may be more difficult; designing recovery tools to allow for imposition of “haircuts” (including necessary legal basis) is a key objective. - Even if losses are imposed on creditors during recovery, temporary public funding may be needed because: - Most legal frameworks lack underpinnings for private-sector “debtor-in-possession” financing of bank resolution. - Private providers often cannot organize urgent funding during systemic turmoil; up front public funding by the Ministry of Finance or the central bank (with protection against future losses by the MOF) may be the only option. - A (partially) pre-funded “orderly resolution fund” (or a deposit insurance fund) may contribute to such funding. - Risk that recovery fails and national authorities face a loss can be addressed through a fund receiving ex ante (or ex post) contributions from the private sector. - Box 8 — Cost allocation summary: - Insolvency liquidation: losses borne consecutively by shareholders, subordinated creditors, and unsecured creditors; DGS losses only if available assets < insured deposits; central bank collateralized liquidity assistance may have priority claims on estate assets. - Recovery techniques and implications: - Capital Increases: new capital providers condition investment on write-downs of pre-insolvency shareholders; newly issued preferred shares take priority over ordinary shares; pre-insolvency unsecured creditors benefit from capitalization. - Issuance of New Debt: new borrowing reduces net profits (affecting shareholders); pre-existing subordinated creditors are inferior to new unsecured claims; pre-insolvency unsecured creditors not directly adversely affected unless new borrowing lacks accompanying capital increase. - Reduction of Liabilities: unsecured debt can be reduced by (i) court-imposed haircuts, (ii) voluntary or forced conversion into equity, or (iii) a “leave behind” through a “purchase and assumption” transaction—these operations impose losses on pre-insolvency unsecured creditors and shareholders. - Host countries may need to contribute financing to keep an international group intact; host contributions may be required even if a strictly national solution is pursued. - Financial burden sharing: - Some form of burden sharing may be necessary; reaching agreement ex ante (preferably on an institution-specific basis and supported by institution-specific recovery and resolution plans (RRPs) or “living wills”) is desirable. - The enhanced coordination framework should set out criteria and parameters to guide burden-sharing, for example: - (a) the relative systemic importance of the group across jurisdictions, - (b) the relative contribution from DGS and any other resolution funds (if available) from different countries, - (c) the relative distribution of losses across jurisdictions. ### Establishment of coordination procedures (paragraph 43) - Even where coordination standards are met, ability to coordinate rapidly and effectively is enhanced by an established set of procedures serving as a road map in a crisis. *Source: _061110 - 1. Minimum level of harmonization of national resolution rules* ### 44. Drawing on the corporate insolvency experience and, more specifically, the ### _061110 - 44. Drawing on the corporate insolvency experience and, more specifically, the ### Leadership (paras. 44–47) - Framework objective: ensure understanding of (a) who will take leadership in the initiation and conduct of resolution proceedings and how such leadership will be exercised, and (b) the modalities of communication and consultation that will take place during the process. - Applicability: between jurisdictions that adhere to the elements identified in the framework; guidance for resolution of a parent bank with foreign branches and of an international financial group involving bank and/or non-bank subsidiaries. - Presumption on leadership (para. 45): - It would appear appropriate for the lead role to be played by the home country authorities. - Rationale: consistent with the Concordat and the reality that the parent jurisdiction is likely to be principal source of public funds necessary to finance a restructuring. - Host jurisdiction reservation: host jurisdiction would reserve the right to act independently if it formed the judgment that independent action is more consistent with domestic financial stability and the interests of creditors. - Modalities (para. 46): - Court-based proceedings: home authorities could be given standing to launch proceedings in the host jurisdiction’s courts directly or through the host authorities acting on the guidance of the home authorities.28 - Administrative proceedings: host jurisdiction’s legal framework could permit host authorities to conduct proceedings on the basis of guidance provided by home authorities, or permit home authorities to do so directly.29 - Expected role of home authority: design overall resolution strategy; decide on the type of proceeding (e.g., restructuring vs. liquidation) to be launched in home and host jurisdictions; play the lead role in conduct of resolution proceedings (noted as a substantial departure from current practice). - Financial groups (para. 47): - Framework could identify modalities of leadership and coordination for resolution of financial groups, clarifying responsibility for resolution of each entity within the group. - Possible approach: each country designates a lead authority to initiate and conduct all resolution proceedings for bank and non-bank subsidiaries and branches within its territory, and to serve as point of contact with “lead” authorities in other jurisdictions. - Requirement to coordinate actions to the maximum extent possible. - Separate insolvency proceedings for each legal entity, but host “lead” authority required to consult with home “lead” authority before initiating resolution proceedings against a local subsidiary. - Possible coordination measures: consolidating court proceedings involving separate entities within a group (proceedings remain separate but adjudicated by a single court at the same time), coordinating actions to protect assets, cooperating on resolution of intra-group claims and with creditors. ### Communication (paras. 48–50) - Information-sharing imperative (para. 48): - Implementation requires a very high level of communication and sharing of information among supervisors and resolution authorities. - Home authorities required to consult with host authorities when taking key decisions and consider impact on host jurisdictions. - Relevant authorities and courts need arrangements for communication and consultation and statutory authority to share highly sensitive information. - Early-stage information sharing (para. 49): - Framework should require sharing of information at an early stage of a financial institution’s difficulties to address information asymmetries between home and host authorities. - Problem: home authorities invariably have more information; without trust and assurance of full information, host authorities have incentive not to cooperate and to ring-fence assets. - Institution-specific agreements (para. 50): - Consider establishment of institution-specific standing agreements (protocols) to facilitate communication and consultation. - Role model: UNCITRAL cross-border insolvency cooperation protocols developed in specific cases; here, protocols would need to be reached in advance of a crisis given need for rapid action. - Such standing protocols could form part of recovery and resolution plans that large financial groups will be required to establish.30 ### Conclusion and policy actions (paras. 51–52 and director questions) - Urgent need for action (para. 51): - Strengthen national resolution frameworks to ensure prompt dealing with ailing financial institutions and groups in a manner that protects financial system stability. - National action insufficient alone; effectiveness depends on facilitating effective cooperation between authorities at the international level. - Incremental, voluntary adherence approach (para. 52): - Proposed approach is achievable in near future; issues remain (e.g., mechanism to determine whether a country met the “core coordination standards” or how to monitor compliance). - Basis for incremental progress as more countries voluntarily adhere over time. - “Carrot”: possibility of more effective and value-preserving international resolution. - Near-term: a limited group of countries that already meet the standards could begin to cooperate amongst themselves; inclusion of the world’s principal financial centers would represent a major step forward. - Expansion: as other countries (e.g., developing countries and emerging markets) adhere, the circle of cooperation would expand. - Questions for Directors (verbatim): - Do Directors agree with the elements of the approach outlined above? - Do directors agree that an agreement among the world’s principal financial centers on an enhanced coordination framework would represent a major step forward? Should this requirement be complemented with a time-bound specific action plan? - Do directors think that it is desirable/necessary for the enhanced co-ordination framework to identify in advance the criteria and range of parameters that would be used to important to guide the burden-sharing process ### Annex I — Basle Committee Recommendations (selection and wording preserved) - Recommendation 1: Effective national resolution powers - National authorities1 should have appropriate tools to deal with all types of financial institutions in difficulties so that an orderly resolution can be achieved that helps maintain financial stability, minimize systemic risk, protect consumers, limit moral hazard and promote market efficiency. - Examples: powers to create bridge financial institutions, transfer assets, liabilities, and business operations to other institutions, and resolve claims. - Recommendation 2: Frameworks for a coordinated resolution of financial groups - Each jurisdiction should establish a national framework to coordinate the resolution of the legal entities of financial groups and financial conglomerates within its jurisdiction. - Recommendation 3: Convergence of national resolution measures - National authorities should seek convergence of national resolution tools and measures toward those identified in Recommendations 1 and 2. - Recommendation 4: Cross-border effects of national resolution measures - National authorities should consider developing procedures to facilitate the mutual recognition of crisis management and resolution proceedings and/or measures. - Recommendation 5: Reduction of complexity and interconnectedness of group structures and operations - Supervisors should work closely with relevant home and host resolution authorities to understand how group structures and components would be resolved in a crisis; consider imposing regulatory incentives to encourage simplification where structures are too complex. - Recommendation 6: Planning in advance for orderly resolution - Contingency plans of all systemically important cross-border financial institutions and groups should address severe distress and provide plans proportionate to size and complexity to preserve the firm as a going concern, promote resiliency of key functions and facilitate rapid resolution or wind-down. - Recommendation 7: Cross-border cooperation and information sharing - Key home and host authorities should agree, consistent with national law and policy, on arrangements to ensure timely production and sharing of needed information for contingency planning and crisis management. - Recommendation 8: Strengthening risk mitigation mechanisms - Promote use of risk mitigation techniques such as enforceable netting agreements, collateralization, segregation of client positions; encourage standardization and migration of contracts onto regulated exchanges, clearing through central counterparties, and greater transparency in reporting for OTC contracts through trade repositories. - Recommendation 9: Transfer of contractual relationships - National resolution authorities should have legal authority to temporarily delay immediate operation of contractual early termination clauses to complete transfer of certain financial market contracts to another sound institution, bridge institution or other public entity; preserve contractual rights where transfer not available. - Recommendation 10: Exit strategies and market discipline - National authorities should consider and incorporate clear options or principles for exit from public intervention to restore market discipline and promote efficient operation of financial markets. ### Annex II — The UNCITRAL Framework for Cross-Border Corporate Insolvency (paras. 53–55) - Model Law overview (para. 53): - The Model Law on Cross-border Insolvency was adopted in 1997. - Sets out a framework for managing insolvency of a cross-border firm in a fair and orderly manner. - Contemplates insolvency of single entities with establishments, assets or creditors in more than one jurisdiction. - Does not apply to groups comprised of legally distinct subsidiaries or affiliates and is not intended to apply to entities for which dedicated insolvency regimes may exist in national law (such as banks and insurance companies). - Recognition and relief (para. 54): - Model Law provides means for foreign insolvency representatives (liquidators, administrators etc.) to gain access to courts in another jurisdiction where important assets or creditors may be located. - Insolvency representative from Country A may apply to have its proceeding recognized in Country B. - Typically, unless contested on public policy grounds (Model Law includes a public policy exemption), obtaining recognition in Country B ought to be a mere formality. - Reciprocity or quality of Country A’s insolvency law not relevant to court in Country B when deciding recognition. - While application is pending, court in Country B may (but is not required to) grant forms of relief (e.g., stay on execution, entrusting administration or realization of assets to the applicant). - “Main” proceedings and COMI (para. 55): - If a foreign proceeding has been recognized as a “main” proceeding, the Model Law imposes an automatic stay on execution, freezing the assets of the insolvent entity. - “Main” proceedings are located in the jurisdiction where the insolvent entity has its centre of main interests (“COMI”). *Source: _061110 - 44. Drawing on the corporate insolvency experience and, more specifically, the — canonical URL: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2010/_061110.pdf* ### 56. When any proceeding is recognized (whether or not a main proceeding) the ### 56. When any proceeding is recognized (whether or not a main proceeding) the Model Law affords the recognizing court broad discretion in granting relief to the foreign representative ### Recognition and relief under the Model Law - The recognizing court has broad discretion to grant relief to a foreign representative. - The court may entrust the realization and distribution of assets located in its jurisdiction to the foreign representative, provided that the court is satisfied that the interests of creditors located in the court’s jurisdiction are adequately protected. - The equality of creditors in all jurisdictions is a basic principle underpinning the Model Law. - The Model Law provides legal authority for insolvency representatives in different jurisdictions to collaborate via direct communication and information sharing, and to coordinate concurrent insolvency proceedings. - Relief under the Model Law can include turnover of assets to a foreign insolvency representative. ### UNCITRAL progress on enterprise groups (domestic and international) - The Model Law addresses only single entities with a cross-border presence. - UNCITRAL’s Legislative Guide on Insolvency Law (the “Guide”) and Working Group V have developed draft recommendations relating to the insolvency of “enterprise groups” (i.e., two or more enterprises that are connected by control or significant ownership). - The Working Group’s focus has been on domestic groups, while recognizing distinct challenges for international groups. ### Domestic groups — approaches and procedural coordination - Two basic approaches to group insolvency: - Assess solvency on a per-entity basis, recognizing legal separateness (the internationally most prevalent approach). - Consider economic reality above legal form, enabling more coordinated and consolidated treatment. - The Guide envisages streamlining commencement by allowing all group companies that meet the insolvency threshold to make a single, joint application to commence insolvency proceedings, primarily to reduce costs and coordinate timing. - After commencement of multiple proceedings, the Guide contemplates coordination potentially under a single insolvency representative. - Procedural coordination might include information sharing between competent authorities, combined hearings, and other streamlining methods. - Under procedural coordination, assets and liabilities of separate insolvent entities remain distinct; substantive rights of claimants are unaffected. - The greatest scope for procedural coordination exists domestically, where all group companies are located in a single country. - The Guide contemplates extending stays of execution to solvent group companies in certain limited situations (for example, to protect an intra-group guarantee relying on the assets of the solvent company), but notes that extending stays may be impossible in some jurisdictions under property or constitutional law. - Post-insolvency group financing: - The Guide considers that both solvent and insolvent group companies (and non-group entities) should be able to contribute to post-commencement financing. - Appropriate protection should be established for providers of financing and parties whose rights may be affected by the financing. - The Guide acknowledges that provision of financing by a solvent member might not be possible under the laws of some jurisdictions. - Avoidance and related-party transactions: - Special considerations might apply to transactions between group members; some transactions that appear preferential or undervalued between immediate parties may be viewed differently in the broader group context. - Laws governing subordination of related party claims may result in intra-group claims being subordinated to external creditors. - Substantive consolidation: - The ‘single entity’ approach limits recovery to the assets of the specific debtor entity. - Extensions of liability, contribution orders, or ‘substantive consolidation’ measures may permit courts to disregard separate identities and treat assets and liabilities as one in limited circumstances. - Few jurisdictions permit substantive consolidation; where permitted it is used sparingly and in carefully prescribed circumstances. - Substantive consolidation is legally radical and at odds with separate legal identity but may be rational in egregious situations (e.g., a Ponzi fraud). ### International (cross-border) groups — cooperation, coordination, and limitations - Cross-border group insolvency is inherently more difficult than domestic group insolvency. - The Guide suggests national laws should authorize cooperation between courts and insolvency representatives overseeing insolvency of different group members in different jurisdictions. - The Guide advocates frameworks to promote coordination of different proceedings, including: - Joint hearings (subject to conditions and safeguards to protect substantive and procedural rights in each jurisdiction). - Potential appointment of a single insolvency representative responsible for multiple insolvencies, while acknowledging conflicts of interest may require separate representatives. - Problems in cross-border group insolvency that coordination aims to address include: - Piecemeal liquidations of separate group components. - Ring-fencing of assets. - Shifting of assets between jurisdictions. - Jurisdiction “shopping” to identify more favorable jurisdictions for recovery. - UNCITRAL’s Practice Guide on cross-border insolvency highlights the utility of cross-border insolvency agreements to facilitate coordination; the Legislative Guide recommends national insolvency laws permit use of such agreements, allowing insolvency representatives to enter coordination agreements and empowering courts to approve and implement them. - The Guide’s recommendations for cross-border group insolvency are less ambitious than for domestic groups, reflecting greater complexity and the Guide’s focus on ordinary corporate groups rather than cross-border financial groups that may involve supervisors, central banks, and deposit guarantee schemes in diverse jurisdictions. *Source: _061110 - 56. When any proceeding is recognized (whether or not a main proceeding) the* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2010/_061110.pdf_