《Financial Crisis Management and Bank Resolution》

CHAPTER 1. THE FINANCIAL TURMOIL OF 2007-20XX:CAUSES,CULPRITS AND CONSEQUENCES—G G Kaufman1

Introduction1

US culprits2

Central bankers3

Commercial banks3

Credit rating agencies4

Financial engineers4

Government5

Investors5

Mortgage borrowers6

Mortgage brokers6

Prudential bank regulators7

Conclusion10

CHAPTER 2. INTERNATIONAL RESPONSES TO THE GLOBAL FINANCIAL CRISIS—D W Arner and J J Norton11

Introduction11

ActⅠ:Building excesses12

ActⅡ:Initial phase14

ActⅢ:Systemic financial crisis16

Group of Seven18

Financial Stability Forum19

Act Ⅳ:Economic crisis19

Group of Twenty20

Group of Twenty （April 2009）21

Act Ⅴ:Return to a new normal?28

CHAPTER 3. REGULATING HEDGE FUNDS IN THE SHADOW OF THE RECENT FINANCIAL CRISIS:THE EU RESPONSE—HMcVea31

Introduction31

The defining characteristics of Hedge Funds32

The European Commission’s rationales for regulating Hedge Funds35

The European Commission’s draft directive on alternative investment fund managers41

Legal Context41

The Draft Directive’s scope42

Authorisation requirements43

Operational and transparency requirements44

Transparency requirements46

Promotional arrangements48

Analysis and criticisms of the Draft Directive49

Conclusion52

CHAPTER 4. TOWARDS A COHERENT CRISIS RESOLUTION MANDATE—G Wood53

Introduction53

What is a financial crisis?54

Was the Northern Rock episode a crisis?61

Lessons for regulation64

Regulatory behaviour64

Regulatory structure64

Asset prices once again72

Inevitable incompleteness73

Conclusion73

CHAPTER 5. TRANSPARENCY AND THE END OF DOING GOOD BY STEALTH—C Bamford75

Introduction75

The Governor’s analysis75

The regulatory structure before 198679

“Big bang” and the 1986 reforms82

European integration and globalisation83

Shareholder/creditor activism85

The Banking Act 200986

Conclusion88

CHAPTER 6. THE ROLE OF GOVERNMENT, CENTRAL BANKS AND REGULATORS IN MANAGING BANKING CRISIS—S Gleeson91

Introduction91

Responding to the immediate crisis91

The effect of rescue - moral hazard, the implicit government guarantee95

Can regulators affect systemic risk and how should they do so?-some concluding remarks99

CHAPTER 7. DEFINING THE PUBLIC INTEREST: PUBLIC LAW PERSPECTIVES ON REGULATING THE FINANCIAL CRISIS—J F McEldowney103

Introduction103

Banking regulation in a historical context104

Tripartite regulation109

The collapse of Northern Rock and the financial crisis114

Responses to Northern Rock:principles-based regulation in the post-Northern Rock era118

Public law, auditing and protecting the public interest - the way forward125

The role of the Treasury Committee125

The role of the National Audit Office and the Public Accounts Committee126

Proposals for public accountability and the protection of the public interest126

Conclusion128

CHAPTER 8. RETHINKING THE ROLE OF DEPOSIT INSURANCE:LESSONS FROM THE RECENT FINANCIAL CRISIS-J P Sabourin133

Introduction133

Background133

Lessons from the recent crisis134

Re-thinking the role of deposit insurance136

Conclusion137

CHAPTER 9. UNDERSTANDING, AWARENESS AND DEPOSIT INSURANCE—P Cartwright139

Introduction139

Consumer protection and the rationales for deposit insurance140

Information asymmetry, deposit insurance and the consumer141

Addressing information asymmetry directly through disclosure143

Information asymmetry and behavioural economics144

Information asymmetry, market discipline and externalities144

Other responses146

Prudential regulation146

Deposit insurance147

Deposit insurance and realistic incentives149

Protection150

Speed of response152

Awareness152

Conclusion154

CHAPTER 10. THE EUROPEAN DEPOSIT GUARANTEE DIRECTIVE:AN APPRAISAL OF THE REFORMS—D Singh and D Walker155

Introduction155

The rationale for deposit insurance155

The context of the EU reforms158

The key features of the 1994 Directive and the missing links160

The Amending Directive 2009166

Cross-border issues169

Conclusion173

CHAPTER 11. THE GLOBAL FINANCIAL CRISIS: LESSONS FOR DEPOSIT INSURANCE SYSTEMS IN DEVELOPING COUNTRIES—G A Ogunleye175

Introduction175

Nature, causes and impact of the crisis176

Reactions to the crisis from some jurisdictions178

Lessons for the DIS in developing countries180

Appreciation of the role of deposit insurance180

Emphasis of DIS public policy objective （PPO）181

Government intervention in a systemic crisis situation182

Co-insurance182

The need for effective public awareness183

The need to strengthen the regulatory/supervisory framework183

Need for close inter-agency cooperation and collaboration184

Encouraging sound corporate governance practices in insured institutions184

Summary and conclusion184

CHAPTER 12. BANK CRISIS RESOLUTION: THE BANKING ACT 2009—G A Walker187

Introduction187

Statutory policy188

Negotiation188

Special resolution regime190

Special resolution objectives190

Code of practice191

Exercise of powers191

Stabilisation options191

Transfers192

Effect192

Partial transfers193

Incidental and amendment powers194

Bank Insolvency Procedure （BIP）195

Bank Administration Procedure （BAP）196

Financial Services Compensation Schemes （FSCS）196

Inter-bank payment systems197

Scottish and Northern Irish banknotes198

Financial and ancillary provisions198

Financial stability objective199

Conclusion201

CHAPTER 13. PROTECTING CREDITORS OF INSOLVENT BANKS:HOW SHOULD THE RIGHTS OF DIFFERENT TYPES OF CREDITORS BE BEST MANAGED?—A Campbell203

Introduction203

Who are the creditors?204

Protecting depositors205

Formal （explicit） deposit insurance systems206

Deposit insurance - some issues207

Funding issues208

The role of the deposit insurance agency208

Other creditors208

Individual depositors above the deposit insurance level208

Customers with other products which do not come within the scope of deposit insurance209

Business customers210

Public bodies210

Other banks210

The deposit insurer-subrogated claim when a payout has been made211

The central bank-where a bank has borrowed via discount window or emergency liquidity assistance （lender of last resort）211

Legal status211

How to protect creditors?212

Bank insolvency law213

Conclusion214

CHAPTER 14. INTERNATIONAL EXPERIENCE AND POLICY ISSUES IN THE GROWING USE OF BRIDGE BANKS—J R LaBrosse217

Introduction217

The financial system safety net218

The rationale for a special resolution regime for banks219

Learning from the international experience with bridge banks221

The United States222

Mexico223

Korea224

The United Kingdom225

Canada227

Policy issues228

Conclusion232

CHAPTER 15. THE “FAILING FIRM DEFENCE” IN FAILING MARKETS:THE CASE FOR BANK MERGERS—I Kokkoris237

Introduction237

The failing firm defence239

Horizontal Merger Guidelines242

Assessment of the application of the failing firm defence in the presence of crises246

Anticipated acquisition by Lloyds TSB Group plc （Lloyds） of sole control of HBOS plc （HBOS）252

Failure or inevitable exit of HBOS252

Private sector solution:HBOS remaining independent without（HBOS-specific） government support253

Private sector solution:acquisition by a third party253

Public sector solution:（HBOS-specific） government support and intervention“StageⅠ”counterfactual253

Public sector solution following（HBOS-specific） government support and intervention “Stage Ⅱ” counterfactual253

Conclusion254

CHAPTER 16. MITIGATING MORAL HAZARD IN DEALING WITH PROBLEM FINANCIAL INSTITUTIONS:TOO BIG TO FAIL? TOO COMPLEX TO FAIL?TOO INTERCONNECTED TO FAIL?—M D Knight257

Introduction257

Lesson Ⅰ:There must be a Special Resolution Regime（SRR） for banks and other financial institutions that has different objectives from,and is separate from, the Standard Bankruptcy Law applicable to non-financial corporations258

Lesson Ⅱ:In each jurisdiction the Special Resolution Regime must be able to deal effectively with all systemically-important entities in the financial system,not just deposit banks260

Lesson Ⅲ:The objectives of the Special Resolution Regime must be clear,consistent and transparent so that they are directed at maintaining the overall stability of the financial system.By contrast, the authorities should maintain “Constructive Ambiguity”, ex ante,on the question of which specific institutions they would not allow to fail and what their required conditions of support would be263

Lesson Ⅳ:The Special Resolution Regime for large multi-national financial institutions requires close international cooperation between the institution’s home jurisdiction and its host jurisdictions, both in establishing the basic rules of the regime and in the “burden sharing” arrangements for resolving troubled institutions265

Conclusion267

CHAPTER 17. CROSS-BORDER INSOLVENCY:THE CASE OF FINANCIAL CONGLOMERATES—R M Lastra and R Olivares-Caminal269

Introduction269

Internation financial conglomerates:what are they and how do they operate?269

The particular nature of international financial conglomerates273

Pre-credit crunch episodes and the lessons learnt274

Bankhaus I.D. Herstatt（Herstatt）275

Drexel Burnham Lambert Group（DBLG）275

Bank of Credit and Commerce International（BCCI）277

Barings Plc（Barings）278

Long Term Capital Management（LTCM）280