FINANCE, COMPETITIVENESS & INNOVATION INSIGHT | LONG-TERM FINANCE Strengthening Safeguards in Bank Resolution Frameworks in Emerging and Developing Countries © 2020 The World Bank Group 1818 H Street NW Washington, DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org All rights reserved. This volume is a product of the staff and external authors of the World Bank Group. The World Bank Group refers to the member institutions of the World Bank Group: The World Bank (International Bank for Reconstruction and Development); International Finance Corporation (IFC); and Multilateral Investment Guarantee Agency (MIGA), which are separate and distinct legal entities each organized under its respective Articles of Agreement. We encourage use for educational and non-commercial purposes. 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Photo Credits: Shutterstock.com FINANCE, COMPETITIVENESS FINANCE, COMPETITIVENESS & INNOVATION & INNOVATION INSIGHT | FINANCIAL INSIGHT INCLUSION, INFRASTRUCTURE | LONG-TERM FINANCE & ACCESS TABLE OF CONTENTS ACKNOWLEDGEMENTS III INTRODUCTION 1 BUILDING EFFECTIVE BANK RESOLUTION REGIMES 3 Financial Stability Board: Key Attributes 3 Pre-conditions for Effective Resolution Regimes 4 The Rationale for the Significant Powers Contemplated in the KA and the Far-reaching Implications for Financial Market Players and the Need for Safeguards 5 SAFEGUARDS 9 Main Features of Safeguards 9 ANALYSIS OF CURRENT SAFEGUARDS IN EMERGING AND DEVELOPING COUNTRIES 19 Safeguarding the Operational Independence of the Resolution Authority 19 Clear Legal Protection of Resolution Authority and Its Staff 21 Safeguarding the Rights of Creditors in Resolution 22 Safeguarding Third Party Rights to Appeal the Resolution Authority’s Actions and Admitted Remedies 22 Freezing of Contractual Rights 23 IMPROVING THE DESIGN OF SAFEGUARDS IN BANK RESOLUTION FRAMEWORKS 25 Operational Independence 25 Creditor Claim Hierarchy 26 Pari Passu 27 NCWOL 28 Judicial Review 28 Freezing of Contractual Rights 30 KEY TAKE-AWAYS 33 REFERENCES 35 ANNEX 1: KEY ATTRIBUTES OF EFFECTIVE RESOLUTION REGIMES FOR FINANCIAL INSTITUTIONS 37 ANNEX 2: KEY ATTRIBUTES 5—SAFEGUARDS 39 ANNEX 3: MATRIX OF COUNTRY ANALYSIS 41 PRUDENTIAL REGULATORY AND SUPERVISORY PRACTICES FOR FINANCIAL TECHNOLOGY I SECTION TITLE II FINANCE, COMPETITIVENESS & INNOVATION INSIGHT FINANCE, COMPETITIVENESS | FINANCIAL & INNOVATION INCLUSION, INSIGHT INFRASTRUCTURE | LONG-TERM FINANCE & ACCESS ACKNOWLEDGEMENTS T his report highlights the importance of safeguards in building effective bank resolution regimes and the challenges faced by emerging and developing countries in implementing the same. It includes an assessment of the current state of safeguards in the bank resolution regimes of 12 countries across 6 regions namely: Ghana, Nigeria Indonesia, Singapore, Ukraine, Russia, Argentina, Colombia, Morocco, Tunisia, India and Sri Lanka. It was prepared to inform the design of World Bank technical assistance projects and to provide policy makers with some insights as to the key challenges and possible solutions in implementing reforms to strengthen bank resolution frameworks. This report was prepared by Barend Jansen The report benefited from comments from Julian (Assistant General Counsel, International Monetary Casal and Keith Ligon from the World Bank; and Fund), Marlon Rolston Rawlins (Financial Sector Jan Nolte, Marc Dobler and Mark Adams from the Specialist, World Bank Group) and Luisa Zanforlin International Monetary Fund. Aichin Lim Jones (Senior Economist, International Monetary Fund). and Amy Quach provided design and production Contributions were made by Laura Lorenzo, services. This report has been funded by the FIRST Consultant. Initiative1, a multi-donor trust fund administered by the World Bank. Guidance was provided by Yira Mascaro and Zafer Mustafaoglu, Finance, Competitiveness & Innovation (FCI), Practice Managers. The Financial Sector Reform and Strengthening Initiative, FIRST, is a multi-donor grant facility that provides short- to 1 medium-term technical assistance (TA) to promote sounder, more efficient, and inclusive financial systems. (www.firstinitiative.org) STRENGTHENING SAFEGUARDS IN BANK RESOLUTION FRAMEWORKS IN EMERGING AND DEVELOPING COUNTRIES III SECTION TITLE IV FINANCE, COMPETITIVENESS FINANCE, COMPETITIVENESS & INNOVATION & INNOVATION INSIGHT INSIGHT | FINANCIAL | LONG-TERM INCLUSION, FINANCE INFRASTRUCTURE & ACCESS INTRODUCTION A fter the global financial crisis of 2008 (GFC), there have been many efforts to improve global financial stability. Significant efforts have been made to strengthen and expand the range of crisis management and resolution tools. Effort was directed toward designing mechanisms that will ensure the efficient resolution of banks in order that potential spillover effects—and the costs they can incur to taxpayers and the rest of the financial system—may be minimized. Experiences in managing the GFC in a range of countries heightened awareness of the importance of the entire financial safety net2 and, within it, the bank resolution framework that plays a key role in maintaining depositor confidence and financial stability. In this spirit, the Key Attributes for Effective Resolution Regimes were drafted by the Financial Stability Board (FSB) to formalize a range of good practices for effective bank resolution frameworks. In the subsequent periods, across many countries, the resolution frameworks were evaluated against the proposed reforms and the assessed shortcomings. Some of the principles embodied in the Key Attributes have far reaching consequences for the financial market players. They encroach upon the rights of shareholders and creditors of failing financial institutions, (such as banks) and as such the Key Attributes also contain certain safeguards to provide these stakeholders with an adequate level of protection, while still enabling the resolution authority to swiftly resolve failing banks at an early stage. This paper will take a closer look at why safeguards emerging and developing countries to implement are needed in resolution frameworks and how the as the notion of a public interest in maintaining principles included in a subset of the Key Attributes financial stability may not be universally accepted are expected to protect third party rights. A great across countries’ jurisprudence, their constitutions deal has been written about the implementation themselves, and political systems. Through a of the Key Attributes in their generality without review of a set of issues encountered across a necessarily focusing on safeguards that are sample of emerging and developing countries, the fundamental to the effectiveness of the resolution Authors seek to highlight areas where safeguards framework. This paper considers “safeguards” (in may not easily be implemented, highlighting the the Key Attributes) as all those principles entailing potential need for legislative amendments, or a a balance between the powers of the resolution thorough review of administrative procedures, and authority and established third-party rights, or significant capacity development of the judicial generally private property rights. Therefore the profession. discussion in this paper will not be limited to the The paper will focus on the resolution frameworks safeguards as stated in Key Attribute 5, but will of a sample of 12 countries taken from 6 regions.3 more generally encompass the general principles The review of the sample countries is used to for establishing safeguards. In particular, it will also analyze issues that may be relevant for other include a discussion of how the principles included countries and to discuss potential challenges in Key Attributes 2, 4 and 5 are intended to serve faced in implementing effective safeguards. The as “safeguards”. Safeguards may be challenging for 2 Financial Safety nets typically include Bank supervision, Deposit Insurance Protection, Emergency Liquidity Assistance (ELA) and Bank Resolution Framework. 3 The countries also have instances of bank liquidations and or revocation of licenses as reported in the Bankers’ Almanac. STRENGTHENING SAFEGUARDS IN BANK RESOLUTION FRAMEWORKS IN EMERGING AND DEVELOPING COUNTRIES 1 remainder of the paper is organized as follows: potential areas where implementing effective Section II discusses the rationale for significant safeguards may require significant changes powers given to the resolution authority under the in various aspects of the local jurisprudence.4 Key Attributes and the far-reaching implications of Building upon the observations made in section IV, these powers. Section III offers a brief overview section V aims to provide guidance for designing of the safeguards that are incorporated in the Key sound safeguards in bank resolution frameworks of Attributes, describes the rationale and intent of each emerging and developing countries. The paper ends safeguard and how to implement them to support with a section highlighting the key take-aways. an efficient bank resolution framework. Section This paper is a research note reflecting the authors’ IV reviews the observed features of safeguards review work and experiences and does not reflect of current resolution regimes in 11 emerging in any way the views of the World Bank or IMF or and developing countries, and one country that their management or Boards. developed into an advanced economy, to identify 4 The review of the resolution regimes of these countries is done up to October 31, 2019. INTRODUCTION 2 FINANCE, COMPETITIVENESS & INNOVATION INSIGHT FINANCE, COMPETITIVENESS | FINANCIAL & INNOVATION INCLUSION, INSIGHT INFRASTRUCTURE | LONG-TERM FINANCE & ACCESS BUILDING EFFECTIVE BANK RESOLUTION REGIMES Financial Stability Board: Key Attributes A mong the initiatives to strengthen the global financial regulatory framework, specific tools were sought that would allow for global systemically important financial institutions (G-SIFIs) to be resolved in an effective way avoiding moral hazard and preserving financial stability. As a result,5 the Key Attributes (KA) were designed as a set of nonbinding principles that would allow the financial authorities to resolve financial institutions in an orderly manner, minimizing the risk of having to expose taxpayers to losses from extending solvency support, while maintaining continuity of their vital economic functions.6 According to the Key Attributes, each jurisdiction all the Key Attributes are necessary for resolving should allow for a resolution regime for banks that D-SIBS and non-systemic banks.8 Further, the would provide for an administrative authority (that KAs provide very useful guidance to emerging is, the resolution authority) with a broad range of and developing countries in strengthening their powers and options to resolve a bank that is no resolution regimes for banks and other financial longer viable and for which there is no reasonable institutions. prospect of becoming viable. The essence of a resolution regime for banks should be to provide As the characteristics of financial sectors in for timely and early entry into resolution, before a emerging and developing countries are different firm is balance-sheet insolvent and before all equity from those in developed countries, the design of has been fully wiped out.7 the resolution frameworks should also be different and should consider their specific characteristics.9 Although the Key Attributes are focused on resolving The challenge therefore lies in identifying those G-SIFIs, the principles provide good guidance for principles that are the most appropriate for a resolving financial institutions that pose systemic country and how to effectively integrate them in risks to domestic financial stability (D-SIBS), and the national resolution frameworks, considering can guide effective resolution regimes for smaller, the size and complexity of the financial sector. non-systemic, financial institutions. However, not However, when a country introduces far-reaching 5 In October 2011 the Key Attributes for Effective Resolution Regimes for Financial Institutions were adopted at the plenary meeting of the Financial Stability Board (FSB). The G20 leaders endorsed the Key Attributes as a new international standard for resolution regimes at the Cannes summit of November 2011. Three years later, in October 2014, they were supplemented with new annexes containing sector-specific guidance for insurers and financial market infrastructures. See http://www.fsb.org/ 6 See Foreword Key Attributes, 2014. 7 See Key Attribute 3.1. 8 See World Bank 2019. “Challenges for Resolution of Banks in Sub-Saharan Africa.” 9 Recent analytical work has discussed the basis for the proportional application of, for example, the Basel III standards, by BIS (FSI paper n.1 2017), the IMF (Ferreira, Jenkinson and Wilson 2019) and the WB (GCAP papers 2019 Brix Newbery and Izaguirre) among others, and currently focuses on designing recommendations for the proportional implementation of the Key Attributes. This paper does not seek to address such issues but rather highlights challenges and issues in the implementation of adequate safeguards in the existing legal frameworks and investigates potential avenues that would allow for their enactment. STRENGTHENING SAFEGUARDS IN BANK RESOLUTION FRAMEWORKS IN EMERGING AND DEVELOPING COUNTRIES 3 tools that impinge on the rights of shareholders a framework should identify, measure, monitor and creditors of failing institutions, safeguards and control systemic risk. In some countries, a should also be introduced to provide these parties financial stability council is established to play with an adequate level of legal protection. Every this role. jurisdiction has its own challenges for introducing 2. Effective system of supervision, regulation the Key Attributes and consequently the design and oversight of banks of the resolution regime will be different for each country. The art of the design is to equip every The supervisory framework is considered a first jurisdiction with the necessary instruments without line of defense and an important element of unnecessarily complicating the resolution regime. the financial safety net. It should be compliant with the Core Principles for Effective Banking Pre-conditions for Effective Supervision established by the Basel Committee Resolution Regimes on Banking Supervision (BCPs), and, should allow the supervisor to monitor changing risk It is important to note that for a resolution regime profiles of the banks on an ongoing and forward- to be effective, certain preconditions should be in looking basis; apply risk-based supervision place. These preconditions will likely fall outside and provide the supervisor with sufficient and the direct responsibilities of the resolution authority appropriate enforcement tools. and therefore require the involvement of the three state powers (executive, judiciary, legislature). 3. Effective protection schemes for depositors These state powers need to be fully committed and other protected clients or customers, and to support the efficient functioning of the bank clear rules on the treatment of client assets resolution regime and to the underlying principles. Jurisdictions should have effective depositor In particular, the judiciary plays an essential protection schemes that are compliant with the role in providing an adequate balance between International Association of Deposit Insurers safeguarding an effective resolution regime (IADI)11 core principles for effective deposit and protecting the interests of all stakeholders. insurance schemes. There should be close Furthermore, although pre-conditions are not part coordination and cooperation among all elements of Key Attributes themselves, they can be seen in of the safety net to support clear allocation of a broader sense as safeguards for all stakeholders responsibilities and accountability and effective involved in resolution actions and they are treated crisis management. as such in this paper.10 These preconditions are broadly summarized below. 4. Robust accounting, auditing and disclosure regime 1. A well-established framework for financial stability, surveillance and policy formulation Regimes should include comprehensive and well-defined accounting principles and rules that The real economy and the financial system are command wide international acceptance that interlinked and as such the performance of one enable clear interpretation of the institution’s will likely affect the other. It is therefore important financial position. for countries to have a framework for macro- prudential surveillance and for developing and 5. Well-developed legal framework and judicial implementing financial stability policies. Such system See FSB document on Key Attributes Assessments Methodology for the Banking Sector issued October 19, 2016. 10 The International Association of Deposit Insurers, IADI, have developed a set of global standards called the core principles 11 for depositors’ insurers. BUILDING EFFECTIVE BANK RESOLUTION REGIMES 4 A country’s legal corpus should include: ascertained that the institution will not be able to corporate, bankruptcy, contract, consumer honor its obligations.12 It thus becomes immediately protection, private property laws and conflict clear that this principle might affect the rights of of laws rules clearly and consistently enforced; shareholders and creditors that are embodied in and effective creditor rights systems consistent applicable domestic or international law, such as with the World Bank “Principles for Effective constitutional law, statutory law, common law, Insolvency and Creditor/Debtor Regimes”. In international treaties, and contract law. addition, the judiciary should be independent The rationale for Principle 3.1 to require a swift and there should be independent and qualified entry into resolution is based on the notion that professionals (for example, accountants, auditors, banks are special institutions, as they fulfill a public lawyers and insolvency practitioners), who are interest role in the safekeeping of the public’s subject to appropriate accreditation and oversight savings and in providing a means of payment for and adequately trained in bank restructuring and the economy to function. However, by nature of resolution and financial safety net issues. The their business, banks are unlikely to have enough legal system should be sufficiently developed liquidity to satisfy the claims of all their depositors to award the relevant authority the powers to at the same time. Thus, maintaining the trust of close institutions and the enforcement tools that depositors is fundamental to preserving systemic are necessary for it to carry out its functions. stability as failure to reimburse depositors’ claims at The legal system should clearly incorporate the any one bank could quickly undermine depositors’ notion that there is a public interest in preserving confidence in the whole system. In addition, as financial stability and the resolution authority is banks are also at the center of countries’ payment charged with such function independently. systems a failure has the potential to trigger additional defaults in the economy. When financial The Rationale for the Significant distress is spread across many banking institutions Powers Contemplated in the KA and in a country there may be detrimental effects on the Far-reaching Implications for the whole economy for extended periods of time, Financial Market Players and the thus ensuring continuity in payments provisions Need for Safeguards becomes a key objective of bank resolution regimes. One of the most fundamental principles of the Another reason for swift entry into resolution Key Attributes, Key Attribute 3.1, states that the is that based on the nature of banks’ assets they resolution regime should provide for timely and tend to deteriorate rapidly as compared to assets early entry into resolution before a firm is balance- held by non-financial institutions. In particular, sheet insolvent and before all equity has been fully borrowers will stop repayment of their loans as wiped out. Upon analysis, this implies that the soon as they become aware of distress in the bank resolution of a firm should be triggered based on and informational asymmetries prevalent in credit a set of quantitative and qualitative triggers (‘early markets make banks’ loans complex to value if entry into resolution triggers’), as laid down in the they can be liquidated at all13. Thus, swift entry supervisory and prudential regime, or when it is into resolution, prior to book insolvency, is a means 12 The World Bank publication on “Financial Safety Nets and Bank Resolution Frameworks in Southern Africa: Key Issues and Challenges” contains a table with indicative triggers and responses for a supervisory preventive and corrective action framework; World Bank Group 2019, Table 2, page 20. 13 In most emerging and developing countries, markets for loans tend to be very shallow if they exist at all. There are some jurisdictions where loans cannot be transferred, as bilateral contracts strictly pertain to the original two subscribing parties. In other instances, borrowers’ consent must be sought. (see WB “Doing Business Report”, various years). STRENGTHENING SAFEGUARDS IN BANK RESOLUTION FRAMEWORKS IN EMERGING AND DEVELOPING COUNTRIES 5 to ensure that the losses to the deposit insurance a shareholder to elect directors, to vote on specific fund are minimized while maximizing alternative issues, and to receive accurate financial information options to resolve the institution. of the firm. A creditor right to terminate a contract is also a control right. An economic right gives the Principle 3.1 for bank resolution regimes makes holder of the right a claim on a certain financial them very different from general bankruptcy interest. Examples of such rights are creditor rights proceedings. In most cases, bankruptcy will be to receive the value embedded in a contract and to triggered if a firm has ceased its payments and/ share in the liquidation value of a firm in order of or has negative capital, while a resolution regime their priority. These rights also include the rights for banks will be triggered before balance sheet of shareholders to receive dividends and to receive insolvency. In the event of bankruptcy, the legislator their part in the residual value of an insolvent firm. should aim at maximizing recoveries for creditors but in the event of resolution the legislator’s aim These control and economic rights of shareholders should be that of maintaining financial stability and and creditors are often vested in the constitution or to prevent social costs. principal codes and/or laws of a country, such as the right to “just” compensation and the principle that Should general bankruptcy proceedings be applied private contracts be respected. Some of these rights to banks substantial losses during liquidation can also be based on international treaties, such as are most likely to arise together with potential the right to due process, property rights and equal disruptions of the general payment system,14 which treatment, which are laid down in the European ultimately could undermine depositors’ confidence Convention on Human Rights. The aforementioned across the system. Resolution proceedings are rights of shareholders and creditors are therefore designed to enable, if necessary, the swift transfer fundamental rights anchored in the most important of deposits to a new solvent entity, including the laws, principles and/or case law of a country. power to proceed with payments, to provide the Infringements on these rights can only be justified depositors of the failed bank with the continuity of if it is necessary to maintain, achieve or restore service and prevent deterioration of the assets. higher order objectives for society. In other words, Thus, resolution procedures should be initiated prior these fundamental rights can only be affected in the to the moment in which all going concern value is public interest. lost and therefore shareholders still hold claims on As implied by the Key Attributes, the objectives the value of the institution. To ensure this is the of an effective resolution regime are objectives of case, the powers and tools the resolution authority a “higher order” of public interest. These powers has at its disposal, when a firm enters resolution are designed to ensure continuity of access to before balance sheet insolvency, are far-reaching critical functions and transfer of parts, or all the and intrusive. They include, among others, taking business, which might otherwise be lost in case control of and resolving the firm and overriding of bankruptcy proceedings. In other words, the the rights of the shareholders. In most jurisdictions need to preserve financial stability, avoiding a loss such a take-over of the firm infringes upon of depositor confidence and its broad, negative fundamental rights of shareholders and creditors, impact on a country’s economy should represent thus raising difficult legal issues. Such rights can the public interest notion prevailing the value or the be divided into control rights and economic rights. shareholders and creditor claims on an institution. A control right gives a holder of the right a say in To make the resolution of financial institutions determining how the corresponding property is feasible without severe systemic disruption and managed. Examples of such rights are the right of 14 This would occur because insolvency proceedings trigger an automatic stay on all transactions. BUILDING EFFECTIVE BANK RESOLUTION REGIMES 6 without exposing taxpayers to loss, mechanisms authorities must prove the resolution objectives can make it possible for shareholders and unsecured only be achieved using certain, specific resolution and uninsured creditors to absorb losses in a manner actions, and not by other measures such as a that respects the hierarchy of claims in liquidation.15 liquidation.16 Thus this could be seen as a public interest test. However, other jurisdictions do not In several jurisdictions, such as the European limit or may not want to limit resolution measures Union, resolution actions must satisfy the public to banks that pass such test, as this restricts their interest principle. The BRRD has determined that to flexibility and, in certain circumstances, may override the fundamental rights of shareholders and prevent the resolution authority from acting swiftly. creditors before entering a firm into resolution, the 15 See Preamble Key Attributes, 2014. 16 See Article 32, paragraphs 1c and 5 of the Bank Recovery and Resolution Directive (BRRD). In the UK see Sections 7, 8, and 9 of the Banking Act 2009. STRENGTHENING SAFEGUARDS IN BANK RESOLUTION FRAMEWORKS IN EMERGING AND DEVELOPING COUNTRIES 7 8 FINANCE, COMPETITIVENESS & INNOVATION INSIGHT FINANCE, COMPETITIVENESS | FINANCIAL & INNOVATION INCLUSION, INSIGHT INFRASTRUCTURE | LONG-TERM FINANCE & ACCESS SAFEGUARDS T he Key Attributes state that certain minimum conditions should be met while carrying out resolution procedures: these are the safeguards for protecting the interests of shareholders, creditors, counter parties, and other stakeholders. These safeguards are dispersed over different parts of the Key Attributes.17 Key Attribute 5, called ‘Safeguards,’ contains most of them including: the hierarchy of claims; the principle that no creditor be worse off than in a liquidation; the legal protection of staff of the firm in resolution; legal remedies; and judicial action. More safeguards are stated in Key Attribute 2.6, on legal protection of the staff of the resolution authority and in Key Attribute 4, on set-off, netting, collateralization and segregation of client assets. Key Attribute 2.5, which establishes the operational independence of the resolution authority, also establishes safeguards for such independence, and it represents a “condition sine qua non” for the effectiveness of all other principles, and the bank resolution framework in general. For the purposes of this paper the authors will focus on KA 5 which is explicitly dedicated to safeguards and others that are implicit in KA 2 and KA4. Annex 1: Safeguards in focus Safeguards Principle KA 2.5 Operational Independence of the Resolution Authority KA 2.6 Legal protection of the resolution authority staff KA 5.1 Creditor Claim Hierarchy KA 5.2 No creditor worse off than in liquidation KA 5.3 Protection of directors and officers of the firm KA 5.4 & KA 5.5 Judicial review KA 4.2 & KA 4.3 Freezing of contractual rights Main Features of Safeguards responsibilities, transparent processes, sound governance and adequate resources and be Operational Independence of the subject to rigorous evaluation and accountability Resolution Authority mechanisms to assess the effectiveness of any resolution measures.” Key Attribute 2.5 states: As is the case with all financial sector regulators “The resolution authority should have operational and supervisors, the general basis for conducting independence consistent with its statutory resolution proceedings is that they proceed 17 See FSB document on Key Attributes of Effective Resolution Regimes for Financial Institutions issued October 15, 2014. STRENGTHENING SAFEGUARDS IN BANK RESOLUTION FRAMEWORKS IN EMERGING AND DEVELOPING COUNTRIES 9 independently of political and business interference. A sound governance structure will safeguard the Key Attribute 2.5 requires operational independence resolution authority from undue political and of the resolution authority consistent with its business interference to ensure that all resolution statutory responsibilities, transparent processes, decisions are taken autonomously. In particular, sound governance and adequate resources. This the rules for the appointment of the head of the is to ensure resolution authorities can conduct resolution authority, the composition and decision- resolution proceedings in the most effective way, making structure of the board where a board is as stated in Key Attribute 5.4, which requires instituted—including a clear definition of decisions resolution authorities have the capacity to exercise requiring the consultation of a government the resolution powers with the necessary speed representative—are key factors for establishing a and flexibility. Safeguards are required to exercise sound governance framework. Another important such powers with respect to both attributes. In principle safeguarding the operational independence the case of Key Attribute 2.5, rigorous evaluation of the resolution authority while protecting third- and accountability mechanisms are demanded in party rights is embedded in Key Attribute 5.5, order to assess the effectiveness of any resolution which reads: “resolution regimes should not measures. Key Attribute 5.4 refers to the need to provide for judicial actions that could constrain ensure the existence of constitutionally protected the implementation of, or result in a reversal of, legal remedies and due process (see below.) measures taken by resolution authorities acting within their legal powers and in good faith.” This More specifically, in much the same way central Key Attribute is comparable to good international banks need to be independent from political practice that courts only investigate whether central interference to carry out effective monetary policy banks have acted unlawfully or arbitrarily, and not operations, supervisors need to be independent investigate the merits of their decisions. This Key to effectively conduct, oversee and enforce Attribute aims to ensure that the resolution authority prudential regulations. The resolution authority will not be overruled in decisions that can have a far- should therefore enjoy both political and economic reaching political impact, as is often the case when independence to implement resolution measures financial institutions are intervened. In addition, effectively. in case the resolution authority acted beyond its It would be important to note that independence powers or in bad faith, only compensation should should apply specifically to the function of be rewarded, if justified. resolution authority such that, when the resolution An adequate budgetary process and the requisite authority is housed in the same institution as the budgetary resources to hire and adequately supervisor, as is the case in many central banks, compensate staff will provide for financial the two functions should be both independent and independence. At the same time, it should be separated from each other. This implies adequate ensured, where the resolution authority is located firewalls and governance arrangements should be within the central bank, that its resources are not put in place to manage any conflicts of interest misused to finance resolution measures.18 between the two functions, while at the same time maintaining appropriate information channels Altogether, the requirements for independence between the two parts of the central bank. of the resolution authority as embedded in the Key Attributes are designed to be parallel to the 18 If public funds are necessary for the resolution of a systemic bank, it should in the end be the State that shoulders these costs, not the central bank. SAFEGUARDS 10 requirement of independence of the supervisory including actions in support of foreign resolution authority in the Basel Core Principles (BCPs).19 proceedings.” However, the BCPs do not specify additional A central component of operational independence elements of independence in the way the Key of the resolution authority is the legal protection Attributes do, with respect to the limited legal granted to staff undertaking sensitive activities review of to the actions of the resolution authority from frivolous lawsuits that might influence their (KA 5.5)20 and the legal protection of its staff decision-making process. The need for legal (KA 2.6) which should cover all actions except those protection of staff performing activities relating conducted in bad faith. The plausible justification to supervision and regulatory enforcement is for enhanced independence of the resolution also clearly recognized in BCP 2 which requires authority is that decisions taken with respect to the legal protection be awarded to supervisors when resolution of financial institutions often have far performing their duties. However, Key Attribute reaching, third-party implications, and therefore 2.6 goes further in making more explicit the type of that the resolution authority needs to be insulated in legal protection that is required. In this respect, as order to protect the public interest. all good faith actions are expected to be protected, Transparency and accountability requirements also the burden of proof of fraudulent intent sits with the safeguard operational and financial independence of one who sues. the resolution authority. They involve reporting on Many jurisdictions have some form of legal the resolution measures to the highest democratic protection for entities conducting prudential institution in a country, within a stated period. As supervision and bank resolution, to ensure it is the for financial independence, the resolution authority institution itself which is responsible for resolution should report on the cost of the resolution actions or enforcement measures, and usually also to limit taken and the cost of possible alternative actions, the area of responsibility to those acts that are to justify its course of action, efficient use of public taken with “gross negligence” or in an “arbitrary resources, and minimization of resolution costs. and capricious manner.” However, for resolution The safeguards regarding the power to take measures the Key Attributes require even stronger decisions that cannot be reversed by other public legal protection of staff, justified by the more entities, such as the government, or the judiciary, intrusive nature of resolution measures into third- will be discussed in greater detail below. party rights than regular supervisory decisions, and by the large sums of public money that may be Legal Protection of Resolution wasted if resolution activities are not taken in time. Authority Staff An important safeguard in the case of legal protection Key Attribute 2.6 reads as follows: is formulated in Key Attribute 2.6, which limits the legal protection to measures that have been taken in “The resolution authority and its staff should be good faith. This shifts the burden of proof to the one protected against liability for actions taken and who sues to prove the “fraudulent will” of the staff omissions made while discharging their duties in or the authority. The presumption of innocence is the exercise of resolution powers in good faith, also fundamental to the legal protection framework. 19 BCP Principle 2: “The supervisor possesses operational independence, transparent processes, sound governance, budgetary processes that do not undermine autonomy and adequate resources and is accountable for the discharge of its duties and use of its resources. The legal framework for banking supervision includes legal protection for the supervisor.” 20 Key Attribute 5.5: “The legislation establishing resolution regimes should not provide for judicial actions that could constrain the implementation of, or result in a reversal of, measures taken by resolution authorities acting within their legal powers and in good faith.” STRENGTHENING SAFEGUARDS IN BANK RESOLUTION FRAMEWORKS IN EMERGING AND DEVELOPING COUNTRIES 11 This concept includes that the resolution authority A clear creditor claim hierarchy is needed for must carry all costs of the legal proceedings against several reasons. First, to provide investors, creditors its staff until a final verdict is made. and depositors, with certainty about the ranking of their claims in the event of a bank’s insolvency. In general, legal protection should be designed For investors it should be stated that in the event to provide a balance between independence and of bank liquidation or resolution their claims are accountability. Providing immunity or limiting at the bottom of the creditor hierarchy thereby the liability of the resolution authority—including minimizing the risk of moral hazard. For depositors its decision-makers, staff, and others—while also it should ensure that they are at the higher level of providing indemnification for those cases where the hierarchy, which together with a sound deposit legal actions are made against the resolution insurance scheme, creates confidence in the financial authority, strengthens the sanction and autonomy system, minimizing the risk that broad runs on of the resolution authority. At the same time, banks will occur in the event of an impending bank restrictions on legal protection, such as liability in insolvency. In the case of the absence of a hierarchy specific cases, can define the resolution authority’s of claims, as determined by law, creditors must race duty to be held responsible for its actions. to seize the assets of a failing bank, in order not to be the last in line. Alternatively, creditors could Creditor Claim Hierarchy negotiate a priority in their contract with the bank, Key Attribute 5.1 states: but this will affect all other creditors and therefore would require negotiations with each of them, “Resolution powers should be exercised in a way which could lead to inconsistencies among priority that respects the hierarchy of claims while providing claims and likely challenges in court. This would flexibility to depart from the general principle of lead to litigation costs, and an unclear and uncertain equal (pari passu) treatment of creditors of the legal situation for creditors that would adversely same class, with transparency about the reasons affect the willingness to provide credit. In order to for such departures, if necessary to contain the avoid this situation, and all the costs associated with potential systemic impact of a firm’s failure or to it, most insolvency regimes (for banks and other maximise the value for the benefit of all creditors as legal persons) contain a set of standardized priority a whole. Equity should absorb losses first, and no rules and a hierarchy of claims, or priority regime. loss should be imposed on senior debt holders until The latter applies in liquidation for creditors and subordinated debt (including all regulatory capital others with an interest in a failing property, such instruments) has been written-off entirely (whether as secured creditors, tax authorities, and employees or not that loss-absorption through write-down is of a firm. In case of retail banking, where many accompanied by conversion to equity).” unsophisticated depositors entrust relatively small The language above makes it clear that as a main balances with a bank, there is even more cause to rule, the resolution authority must respect the protect these creditors. hierarchy of claims laid down in the applicable As Key Attribute 5.1 defines that these priority law, with equity absorbing losses first, followed rules for the liquidation of a bank should also apply by subordinated debt holders. However, the legal in the event of the resolution of a bank, it implicitly regime should provide the option for the resolution requires that the hierarchy of claims for a bank in authority to deviate from this rule, if necessary. liquidation must be the same for a bank in resolution. This may be done to (1) protect the stability of This is important to ensure that shareholders and the financial system by containing the potential creditors are treated the same in liquidation as in systemic impact of the bank’s failure; or (2) to resolution, thereby ensuring that creditors have maximise the value of the bank for the benefit of incentives to support the most efficient settlement all creditors. of a failing bank. SAFEGUARDS 12 Jurisdictions have developed their own corporate treatment of all depositors over senior unsecured insolvency regimes over the years, some favorable creditors has the advantage that it will reduce legal to debtors and others, creditors. Just as there exists challenges for the deposit insurer and the resolution no single universal insolvency code, there is also authority in cases when deposits are transferred to no universal creditor claim hierarchy. But it is fair another institution or other creditors are affected to say a general characteristic of creditor claim by bail-in measures.22 A depositor preference, in hierarchies is that equity and subordinated debt are whatever form, shifts the burden and the cost of at the bottom of the hierarchy where credit claims of liquidating or resolving a bank from the public to the liquidator and secured creditors are at the top of the private sector. This is an explicit objective of the the hierarchy. Tax claims and claims of employees Key Attributes, but the market will calculate these of a failing firm are often in the higher part as well, higher risks in their funding costs what might result at the expense of the unsecured creditors. in higher lending rates or less unsecured funding in wholesale markets. In addition to a general insolvency regime for companies, many countries have introduced a One of the issues that became apparent during the special insolvency regime for banks given liquid GFC is that cross-border differences in creditor liabilities as discussed above and the need to preserve claim hierarchies between different jurisdictions financial stability. For the same reasons this has hinder a successful resolution of branches of an resulted in modified creditor claim hierarchies for international bank. This is especially true if the failing banks in many countries where depositors hierarchy of claims of the home country is different (and often also deposit insurance schemes) have a to that of the host country. The differences could higher ranking than all other unsecured creditors, arise because of differences in depositor preference creating a so-called “depositor preference.” By or that the home country discriminates against providing depositors a higher claim in liquidation or foreign or nonresident creditors.23 resolution of a bank, not only are (small) depositors A fundamental rule of most corporate insolvency protected, but also reduced is the likelihood of bank regimes is that unsecured creditors (or classes of runs and attending contagion in the financial sector. unsecured creditors) are paid pro rata to the extent In those countries where the deposit insurance of their pre-insolvency claims. This is called the scheme is subrogated in the rights of depositors, the pari passu principle. The underlying reason for this deposit insurance is largely shielded from losses principle is to prevent equally ranked unsecured in liquidation or resolution of a bank. Depositor creditors from receiving more than others and to preference can be provided in different forms: 1) eliminate incentives for creditors to compete. It is by providing preferential treatment for insured a principle of fairness and equity and as such, a deposits (including the deposit insurance scheme), safeguard for creditors. while uninsured deposits are ranked equally with all other senior unsecured creditors; 2) by providing While Key Attribute 5.1 emphasizes that the a preference to all depositors (including the deposit hierarchy of claims should be respected, it also insurance scheme for insured deposits) over senior adds an exemption for the pari passu principle to unsecured creditors; and 3) by providing insured be applied flexibly, in the interest of the stability of deposits a preference over uninsured deposits and the financial system or to maximise the value for the in turn providing uninsured deposits a preference benefit of all creditors. In general, the Key Attributes over senior unsecured creditors (the so-called value financial stability and protection of the value “tiered depositor preference”).21 A clear preferential of the failing bank higher than the equity principle 21 See IMF Paper on Cross-border bank resolution: recent developments, page 16, issued June 2, 2014. 22 Idem. 23 Idem, page 14. STRENGTHENING SAFEGUARDS IN BANK RESOLUTION FRAMEWORKS IN EMERGING AND DEVELOPING COUNTRIES 13 that is embedded in the pari passu principle. principle. If there are sufficient financial resources However, departures from the pari passu creditor for the resolution of a failing bank, this means that safeguard in the interest of pursuing the resolution these creditors must be compensated; if limited objectives should be justified and clearly explained financial resources are available to provide such each time they occur. A good example of such an compensations, this means that the deviation of exception to the pari passu principle is when the the pari passu principle is checked. In principle,24 resolution authority concludes that the preferred this safeguard requires that two calculations be resolution measure is to transfer all deposits from a made and compared: an actual calculation of failing bank to a third party, such as a bridge bank or what creditors received under resolution and a a commercial buyer, if only the insured depositors hypothetical calculation of what creditors would have a priority right. In this case, when uninsured have received in liquidation at the time when depositors are ranked equally to other unsecured the resolution authority decided to apply the senior creditors in the creditor claim hierarchy, the resolution measures for each class of creditors (and uninsured depositors will retain their full rights at shareholders). The counterfactual hypothetical the detriment of the unsecured senior creditors. calculation is done ex-post and may take some time. The assets of the failing institution must be No Creditor Worse off than in Liquidation valuated at a gone-concern basis at the time that the (NCWOL) resolution decision was taken. In most cases this is not a straightforward exercise, as markets in such Key Attribute 5.2 reads: times are often in distress and market prices might “Creditors should have a right to compensation not be available. All reasonable costs related to the where they do not receive at a minimum what liquidation of the institution should be deducted they would have received in a liquidation of the from the resulting calculated cash flow from these firm under the applicable insolvency regime (“no assets. The result of these calculations must then be creditor worse off than in liquidation” safeguard).” compared with what each class of creditors received under the resolution regime. If the counterfactual This Key Attribute ensures that liquidating a failing calculation is higher than what the creditors bank is not a more advantageous option for creditors received under resolution, these creditors should than applying resolution measures. This not only be compensated for the difference. In most case the ensures creditors (including shareholders) receive losses for creditors under resolution will be lower a fair share of the value that remains in the failing than under liquidation, because under resolution as institution, but it also excludes the possibility that opposed to under liquidation, the franchise value of a disruptive incentive undermines the objectives of the failing institution is often preserved. resolution, namely that creditors have a financial incentive to prefer liquidation above resolution, as The legal framework for resolution of banks should with the creditor hierarchy safeguard. clarify how the right of compensation is exercised, for example by indicating which body is responsible The possibility that some creditors are better off for administering and paying the compensation, and in liquidation than in resolution occurs, among what the applicable procedures are for applying and other things, when deviating from the pari passu calculating the compensation.25 24 According to the US legal framework, consideration of the NCWOL safeguard is not required. Instead, the NCWOL safe- guard is only triggered upon the appointment of the Federal Deposit Insurance Corporation (“FDIC”) as receiver of a non-IDI financial company under Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) (“Title II”). However, it has to be noted that in the US banks are resolved in a “closed-bank scenario”, meaning in a liquidation scenario, and therefore there is nothing to compare. 25 See FSB Key Attributes, 2016, page 39. SAFEGUARDS 14 Cross-border differences in the implementation act and thus outside the initial purview of the of the NCWOL principle, adds challenges to the courts. In those jurisdictions where this attribute resolution of an international bank, as is also the is not internalized in the legislation, resolution case with cross-border differences in the creditor authorities will have to take this into account during claim hierarchy. their resolution planning process and seek to put in place special procedures to ensure a swift approval. Judicial Review This could be a footing for the legislator to clarify the basis on which the courts can pronounce when Key Attributes 5.4 and 5.5 read: a court order is required. However, the wording of 5.4 Key Attribute 5.4 is rather general and provides few specific requirements. “The resolution authority should have the capacity to exercise the resolution powers with the necessary Key Attribute 5.5 limits the application of Key speed and flexibility, subject to constitutionally Attribute 5.4 with respect to due process to the extent protected legal remedies and due process. In those that it determines that, whatever the legal remedies jurisdictions where a court order is still required are in a jurisdiction, these should not constrain or to apply resolution measures, resolution authorities reverse the measures of the resolution authority should take this into account in the resolution taken within its legal power and in good faith, planning process to ensure that the time required but that only compensation is (ex-post) rewarded, for court proceedings will not compromise the if justified. Such a requirement to limit the action effective implementation of resolution measures.” of judicial review can be very complex in certain jurisdictions (see below). Actions undertaken by 5.5 the resolution authority that are unlawful are not “The legislation establishing resolution regimes covered by the limitations of this Key Attribute should not provide for judicial actions that could and courts are able to issue various judicial constrain the implementation of, or result in a remedies.26 However, from a practical standpoint, reversal of, measures taken by resolution authorities it may be impossible to reverse resolution measures acting within their legal powers and in good faith. unlawfully taken by the resolution authority. Instead, it should provide for redress by awarding To understand the extent to which such prescribed compensation, if justified.” limitations interact with the existing jurisprudence Key Attribute 5.4 builds upon Key Attributes 2.1 doctrine across different jurisdictions, it is and 2.3 (the establishment of a resolution authority important to understand differences in the ways and its objectives) and Key attribute 3.1 (time and private citizens can appeal state body actions early entry into resolution) by indicating that the across countries. Key Attribute 5.5 specifically resolution authority should act swiftly and flexibly uses the term “judicial actions” (as opposed to but respecting the legal remedies stated by the the term “administrative actions”). However, constitution of each jurisdiction and subject to due across many countries, the procedures that govern process. It also indicates that the preferred option disputes between private citizens and the state are is that courts are not required to apply resolution established by Administrative Law. The implicit measures (“where a court order is still required”), assumption behind Key Attribute 5.5 seems to be suggesting that it would be preferable that the that countries would have in place a well-developed resolution process be executed as an administrative administrative legal framework where disputes are settled in courts or administrative tribunals.27 26 See Explanatory Note 5 (e) of the Key Attributes Assessment Methodology for the Banking Sector, October 19, 2016. 27 This is confirmed by Essential Criteria 5.6 of the Key Attributes Assessment Methodology for the Banking Sector, October 19, 2016, that refers to “tribunal” and thus to administrative legal frameworks. STRENGTHENING SAFEGUARDS IN BANK RESOLUTION FRAMEWORKS IN EMERGING AND DEVELOPING COUNTRIES 15 Secondly, Key Attribute 5.5 implies that the While in many countries it is indeed courts that administrative adjudication process is based on settle matters of administrative law and apply a process of “review”.28 In legal terminology the special administrative procedures, such as in the word “review” refers to a process whereby the USA and the UK, others will have a separate system courts establish the conformity of the state agency’s of tribunals, sometimes called administrative actions to its powers as established by Law and tribunals, and relative adjudication procedures assess the absence of “fraudulent or grossly including appealing procedures such as in France negligent” behavior on part of the state agency. and Italy. Other countries have specialized courts for An important implicit assumption in the wording administrative appeals after the process inside the of Key Attribute 5.5 is that the judicial review to normal courts has exhausted (Australia.) In many which administrative actions of the resolution jurisdictions civil court orders are still required to authority are to be subject, as part of the safeguards, start a resolution procedure (see Table 1, below). is a process that will not merit the state agency’s The principles of due process that apply to state decisions, as Key Attribute 5.5 refers to resolution agencies are also relevant for resolution authorities. measures taken by resolution authorities “within Among these are the right of the affected parties their legal powers and in good faith”. to be heard (depending on the urgency of the In those countries (such as USA and UK) where situation30) and the obligation of the resolution judicial review of administrative procedures prevails authority to provide adequate reasons for its as established in a long history of jurisprudence (APA decisions. 1946 and so on)29, and administrative adjudication, The starkest difference among the nature of these requirements may be easily included in the administrative adjudication across countries, special bank resolution legislation. Indeed, in wherever it takes place, is the extent to which many countries, jurisprudence has evolved in such the court or tribunal will enter in the merit of the a way that the court reviewing the administrative dispute and assess the facts anew or from the actions does not often enter the merit of the actions beginning. The stronger the control the legislator themselves, at least in the first round of adjudication contemplates upon the executive, the more the procedures, implicitly establishing authority of administrative process will entail a complete the executive in matters of its competence. The assessment of the legality of actions of the executive role of the judicial power is understood to be that against the existing legislation and, ultimately, the of establishing competence, constitutionality, Constitution. Historically, this has been the basis reviewing due process and ensuring good faith for the development of administrative tribunals (or lack of gross negligence or fraud). 28 See again Essential Criteria 5.6 of the Key Attributes Assessment Methodology for the Banking Sector, October 19, 2016 that uses this term. 29 As Gegenheimer (2004) explains: “The Us Administrative Procedure Act (“APA”) sets the basis for the standard or administrative procedures.3636 5 U.S.C. §§ 557 (2000). Decisions of public administrative bodies are entitled to great deference from the courts, there is a strong “presumption of correctness.” A reviewing court will not overturn the agency’s decision unless it determines that the decision was “arbitrary or capricious,” or amounted to an “abuse of discretion.” In addition, the court generally will not consider additional facts that were not before the agency’s decision-maker; the petitioner is not allowed to introduce facts in court that the agency did not consider. The court confines its review to the “administrative record,” the compilation of factual materials and legal analysis that culminate in the agency’s decision, unless it determines that the decision was “arbitrary or capricious,” or amounted to an “abuse of discretion.” When the correct interpretation of a statutory provision is unclear (that is, where the words in a statute can reasonably be interpreted in more than one way), the court does not substitute its own judgment for that of the regulatory agency.” 30 See the European Court of Human Rights decision of November 24, 2005, “Capital Bank AD versus Bulgaria” (application 49429/99, ECHR). The Court concluded that there was no indication that there was such an urgency that that any delay occasioned by some sort of formal procedure would have been unduly prejudicial. Therefore, the interference with the applicant bank’s possessions was not surrounded by sufficient guarantees against arbitrariness and was thus not lawful within the meaning of Article 1 of Protocol No. 1. SAFEGUARDS 16 in countries such as France and Austria (B. Sordi Thus, countries’ administrative processes (as well as 2010).31 This is important for the purposes of developed jurisprudence) are key to implementing establishing the powers of the resolution authority the principles embodied in Key Attribute 5.5 and because it will be considered a state agency and ensuring they are effectively enacted, significantly thus the embodiment of executive powers. In this beyond the mere legislative basis for the resolution respect, absent specific dedicated administrative framework. procedures, the general practice will likely be that of following standard administrative procedures for Freezing of contractual rights cases of appeals against state agency actions. Key Attribute 4.2 and 4.3 read33: The reasons for establishing specific administrative review procedures for state agency actions are 4.2 based on the determination that the nature of the “Subject to adequate safeguards, entry into administrative adjudication process will eventually resolution and the exercise of any resolution determine the extent of the judicial power. In some powers should not trigger statutory or contractual countries, where the Constitution is of relatively set-off rights or constitute an event that entitles any recent date, administrative jurisprudence may not counterparty of the firm in resolution to exercise have had time to fully develop in its arbiter role of contractual acceleration or early termination providing adequate checks and balances to the new rights provided the substantive obligations under political order and hence both the procedures and the contract continue to be performed.” the principles for doing so may still be unclear (see, for example, OECD 1997). 4.3 It is also important to note that in most cases where “Should contractual acceleration or early the administrative review process pertains to the termination rights nevertheless be exercisable, the legality of the state agency’s actions, if the acts of the resolution authority should have the power to stay executive are found to be “illegal”, that is, executed temporarily such rights where they arise by reason in contrast to existing legislation, the administrative only of entry into resolution or in connection process itself may be designed to annul the act of with the exercise of any resolution powers. The the state agency if the administrative tribunal’s stay should: (i) be strictly limited in time (for judgment finds it to be unlawful and if no specific example, for a period not exceeding 2 business powers are conferred with respect to remedial days); (ii) be subject to adequate safeguards that actions, state agency actions may be subject to protect the integrity of financial contracts and automatic reversal to allow for full reinstatement provide certainty to counterparties (see I-Annex 5 of third party rights32, what may not be practically on Conditions for a temporary stay); and (iii) not possible in the case of resolution measures. affect the exercise of early termination rights of a 31 “Revolution Rechstsstaat and the Rule of Law: historical reflections on the emergence of administrative law in Europe. in Comparative Administrative Law (2011). 32 Cane, Peter. “Judicial Review and Merits Review: Comparing Administrative Adjudication by Courts and Tribunals.” Comparative Administrative Law, 2011. https://doi.org/10.4337/9781849808101.00036. 33 Key Attribute 4 concerns the contractual rights of set-off, netting, collateralisation, and the segregation of client assets. In addition to the provisions 4.2 and 4.3 it states in provision 4.1 that these contractual rights should be clear, transparent and enforceable during resolution of firms and not hamper the effective implementation of resolution measures. Moreover, provision 4.4 states that the temporary stay on early termination rights should be applied in accordance with Annex IV of the Key Attributes to ensure that it does not compromise the safe and orderly operations of regulated exchanges and FMIs. STRENGTHENING SAFEGUARDS IN BANK RESOLUTION FRAMEWORKS IN EMERGING AND DEVELOPING COUNTRIES 17 counterparty against the firm being resolved in the Contrary to liquidation, when the license of a bank case of any event of default not related to entry into is withdrawn, in case of an open bank resolution the resolution or the exercise of the relevant resolution aim is to save the business, or part of the business, of power occurring before, during or after the period the bank under resolution. A stay on the enforcement of the stay (for example, failure to make a payment, of creditor rights, as is the case in liquidation, deliver or return collateral on a due date). The stay would disadvantage this aim, because third parties may be discretionary (imposed by the resolution would stop providing their services. Key Attribute authority) or automatic in its operation. In either 4 on Set-off, netting, collateralization, segregation case, jurisdictions should ensure that there is of client assets is aimed at balancing the interest clarity as to the beginning and the end of the stay.” of the bank in resolution with the interests of those third parties that continue to provide their services The Key Attributes are specifically meant for to the bank. resolving systemic banks, which are supposed to remain as a going concern during resolution, This balance is provided by Key Attribute 4.2, thereby protecting the vital economic functions of which states that entering resolution should not of an economy. This kind of resolution framework is itself trigger contractual set-off rights or contractual called an open bank resolution framework. The Key rights for early termination, notwithstanding that Attributes contain safeguards that are necessary to contracts can be ended if substantive provisions of protect the operation of the bank while in resolution, the contract are no longer being performed. In the while at the same time providing safeguards for event legal frameworks nevertheless permit such third parties who are providing services to the contractual rights to be exercised, the resolution failing bank. authority should have the power to temporarily stay such rights under the conditions stated in Key Attribute 4.3. SAFEGUARDS 18 FINANCE, COMPETITIVENESS FINANCE, COMPETITIVENESS & INNOVATION & INNOVATION INSIGHT INSIGHT | FINANCIAL | LONG-TERM INCLUSION, FINANCE INFRASTRUCTURE & ACCESS ANALYSIS OF CURRENT SAFEGUARDS IN EMERGING AND DEVELOPING COUNTRIES A n analysis of the existing safeguards in resolution regimes was conducted across 11 emerging and developing countries, and 1 country that developed into an advanced economy.34 An analysis of the surveyed countries highlights some key implementation challenges of the safeguards as presented in the Key Attributes. To ensure a certain level of diversity in our sample, two countries were selected from each of the six regions of the world.35 The countries selected were, Ghana and Nigeria from the African region, Indonesia and Singapore in East Asia and the Pacific, Ukraine and Russia in Europe and Central Asia, Argentina and Colombia in Latin America and the Caribbean, Morocco and Tunisia in the Middle East and North Africa, and India and Sri Lanka in South Asia. For each country the following legislation was reviewed: Constitution, Commercial Laws/ Codes (including Company Laws), Central Bank Laws, Banking Laws, Deposit Insurance Laws, Bankruptcy/Insolvency Laws, Codes of Procedure (Civil and Administrative). To a lesser extent and subject to availability, implementing decrees and regulations were also reviewed. It is important to note that the review of the countries was done in the fourth quarter of 2019 and was based on publicly available information. The findings are based upon a review of the laws and regulations in place at that time and did not consider active reforms then underway. As such, changes could have been made since this review was completed. It is important to underscore that the opinions expressed in the following paragraphs are those of the authors and do not represent the views of the IMF or the WB, their Executive Boards or their management. Safeguarding the Operational In Tunisia, a special Resolution Commission was Independence of the Resolution created and is responsible for initiating the resolution Authority proceeding of a failing financial institution and implementing the resolution measures. In particular, Across the twelve countries surveyed, in seven the composition of the Resolution Commission countries, the resolution function is carried contributes to its operational independence. The out by the central bank; in three countries, the Resolution Commission consists of the following deposit insurance agency; in one country, the members: the Governor of the Central Bank of bank supervisory agency and the other country Tunisia as President, a third-degree judge as a had a separate resolution authority. In Colombia, member, a representative of the Ministry in charge the resolution function is with the Financial of Finance with a rank of General Director as Superintendence of Colombia (SFC), a technical a member, the Director General of the Deposit entity attached to the Ministry of Finance and Guarantee Fund as a member, and the President Public Credit (MHCP). of the Financial Market Council as a member. The 34 Singapore. 35 The countries also have instances of bank liquidations and or revocation of licenses as reported in the Bankers’ Almanac. STRENGTHENING SAFEGUARDS IN BANK RESOLUTION FRAMEWORKS IN EMERGING AND DEVELOPING COUNTRIES 19 secretariat of the Resolution Commission resides its resolution activities without interference of in the part of the Central bank which is in charge Government agencies or the National Bank of of supervising banks and financial institutions, a Ukraine. It is accountable to the Verkhovna Rada situation which may potentially give rise to conflicts of Ukraine, the Cabinet of Ministers of Ukraine and of interest. the National Bank of Ukraine. However, to execute the resolution measures, the In general, when the central bank performs the Resolution Commission appoints an independent function of the resolution authority, the operational delegate, subject to fit and proper requirements independence of the resolution authority mainly established by law, which could aid in strengthening depends on two factors: (i) whether the central the operational independence of the resolution bank itself is operationally independent and (ii) commission. In the case of Ukraine, there is a whether the resolution function within the central separate legal framework supporting the operational bank operates independently of the other functions independence of the resolution authority which is of the central bank. In the case of Sri Lanka, the the Deposit Guarantee Fund (DGF). central bank law requires that some resolution decisions be approved by the minister of finance. The law provides for the institutional, financial and Similarly, in India, the central bank law explicitly functional autonomy of the DGF. Moreover, the authorizes the central government to decide on law provides for the right of the DGF to perform certain resolution measures. In both cases this Figure 1: Institutional Setup of Resolution Authorities DIS Central Bank Other Entity REVIEW OF CURRENT SAFEGUARDS IN EMERGING AND DEVELOPING COUNTRIES 20 requirement introduces some limitations to the Clear Legal Protection of Resolution general concept of operational independence of the Authority and Its Staff resolution authority. Most countries also safeguard the independence of In some countries, while the central bank law does the resolution authority by establishing clear legal not require approval of resolution decisions by protection of the resolution authority and its staff. other entities, there is no explicit mention in the Singapore, Ghana, and Sri Lanka provide for legal law that the resolution authority is operationally protection of the resolution authority and its staff; independent. In such cases, while the legal and grant the right to indemnification of legal costs framework may contain a general provision incurred in the defense of a legal action against granting independence to the central bank, there is its staff in connection with the discharge of their no provision allowing for the resolution function to duties. Nigeria, Tunisia and India provide for legal operate independently of the other functions. This protection of the resolution authority and its staff, but may need to be further clarified to become fully the law appears silent on the right to indemnification effective. In Indonesia and Nigeria, the resolution of legal costs incurred in the defense of a legal functions are performed by the deposit insurance action. In Colombia, the Superintendence and the corporations. In the case of Indonesia, when a Guarantee Fund for Financial Institutions appears systemic bank needs to be resolved, the Financial to have liability insurance for their staff that covers System Stability Committee takes a coordinating losses, damages and expenses in legal defense in role in the resolution process in addition to the role case of judicial or administrative proceedings of the Deposit Insurance. However, the relevant against them.37 This coverage, however, may not be part of the law leaves some ambiguity as to which sufficient to provide the legal protection necessary body has the final say on resolution matters. In the for staff to perform their functions free from undue case of Nigeria36, the legal framework requires the interference, as would be necessary (See discussion Nigerian Deposit Insurance Corporation to consult above). In Indonesia the newly enacted law appears with the central bank on the implementation of the to ensure legal protection for “misuse of authority” resolution measures. In this case, there may be a in situations of near-crisis or crisis. In this case, need to clarify what happens when the central bank the wording will be subject to the interpretation disagrees with the course of action as suggested by of the courts which will eventually determine the resolution authority. whether legal protection will be awarded to staff In Colombia, the resolution function is placed for all actions taken in “good faith”. In the case within the Financial Superintendence of Colombia of Ukraine, the legal framework provides that staff (SFC), which has operational autonomy. The legal of the resolution authority (the Deposit Guarantee framework provides for its administrative and Fund) is exempt from liability arising from any act financial autonomy and for the rules on appointment or omission in the performance of their functions38. of the Superintendent. However, the President In four countries, explicit provisions in the law for of the Republic has broad grounds to dismiss the legal protection of the resolution authority and the Superintendent, which, in addition to the its staff could not be found. requirement for SFC to get approval of the Ministry Resolution frameworks should not only establish of Finance and Public Credit to take possession of a legal protection for the agency but also those acting troubled institution, may expose the SFC to undue on its behalf, and with a clearly stated right to political interference. 36 Nigeria is in the process of reviewing its bank resolution framework. 37 The Monetary Authority of Singapore (MAS) has indicated in a publication that it has the flexibility to depart from the pari passu principle (see “MAS’ Approach to Resolution of Financial Institutions in Singapore”, 2017), but the Banking Act of Singapore in Article 62, 2 does not provide for deviation from the pari passu principle. 38 As per Article 16 The Law on Households Deposit Guarantee System. STRENGTHENING SAFEGUARDS IN BANK RESOLUTION FRAMEWORKS IN EMERGING AND DEVELOPING COUNTRIES 21 indemnification. Additionally, most of the sample The safeguard that creditors affected by resolution countries should consider allowing legal protection measures should not be worse off than they would for directors and officers of the firm under resolution be in liquidation (the NCWOL principle) appears to for actions taken to support the implementation of be a clear requirement only in the legal frameworks the decisions of the resolution authority. This is of Singapore and the Russian Federation. In critical, as a lack of legal protection of officers and Singapore, the legal framework contains detailed directors of the failing firm, may result in resistance provisions related to this principle. The legal to comply with the instructions of the resolution framework includes a definition of “worse off as a authority. In Singapore, Ghana, Colombia and Sri result of resolution” and instances where there is a Lanka such protection is explicitly provisioned in rebuttable presumption that a pre-resolution creditor the law. or pre-resolution shareholder is not worse-off as a result of resolution. The framework is completed Safeguarding the Rights of with provisions regarding the compensation of Creditors in Resolution creditors that are worse-off than in liquidation and the valuation to determine eligibility for In about 30 percent of countries surveyed, the compensation. In Russia, the NCWOL principle is requirement that banks’ shareholders should absorb only applied to individual depositors and is stated losses in the first instance, and no loss is imposed as follows “an individual depositor affected by on senior debt holders until subordinated debt has a purchase and assumption transaction will be been written-off, is established by specialized bank compensated by the Deposit Insurance Fund if he resolution laws and banking laws.39 In the case of receives less back than he would have received in Ukraine, such hierarchy is established in the Law the event of a counterfactual liquidation of that on Households Deposit Guarantee System for institution.” cases of liquidation. In most of the other countries, the creditor claim hierarchy is most commonly Safeguarding Third Party Rights to established either in the Civil Code or in a Appeal the Resolution Authority’s combination of laws.40 Actions and Admitted Remedies The possibility to depart from the pari passu principle in the interest of pursuing the objectives In three of the sample countries the scope of of the resolution framework is not often clearly judicial review of resolution measures is explicitly stated in the law or has to be interpreted by the limited to a review of procedures or incidences of local authorities. In Ghana, this flexibility to depart grave negligence or fraud (Singapore, Ghana and from the equal treatment of creditors is granted Argentina) and in all countries the remedies do not only, and specifically, in the case of restructuring exclude a reversal of the actions of the resolution of liabilities, where the Bank of Ghana may decide authority. In Singapore, courts will only review to exempt certain classes of senior unsecured debt whether the actions of the resolution authority where it finds them to be systemic or of strategic were within its ambit and abstain from a review importance. In general, our review revealed that of merit. However, there is the possibility that the there are no major legal obstacles to including this court reverses a resolution action in those cases exception to the pari passu principle in the legal where the resolution authority has acted outside of frameworks of the surveyed countries. its authority and in bad faith. In Ghana, the review Ghana, Argentina, Tunisia 39 In Singapore it is set out in the Banking Act and the Companies’ Act. In Indonesia, it is governed by the Code of Civil 40 Law within article 1131, 1132, 1134, 1135, 1139, and 1149, as well as Article 55 of Law Number 37 Year 2004 concerning Bankruptcy and Suspension of Debt Payment Obligations (“Bankruptcy Law”)For the banking sector, the hierarchy of claim for banks’ creditors is also governed in Article 54 of the IDIC Law. REVIEW OF CURRENT SAFEGUARDS IN EMERGING AND DEVELOPING COUNTRIES 22 of the resolution authority’s decisions is conducted the Central Bank arising from banking, foreign through arbitration procedures outside the formal exchange, coinage, legal tender, bills of exchange, courts to determine only if the act was unlawful, letters of credit, promissory notes and other fiscal arbitrary or capricious. However, the relief that measures; and arising from the operation of the can be granted is not limited to compensation. Companies Act or any other enactment replacing In Argentina, the legal framework provides that the Act or regulating the operation of companies only the opportunity, merit or convenience of the incorporated under the Companies Act. This decisions taken by the resolution authority can be appears to imply that the Federal High Court is thus reviewed in court. The Argentine legal doctrine authorized to make any changes to decisions of the seems to hold that judges have the power to reverse resolution authority that it deems necessary. administrative actions if such actions are found to In Indonesia, the Deposit Insurance Law provides be arbitrary or manifestly unreasonable. The case for specific cases of court involvement, while of Nigeria is noteworthy because the right to appeal the actual impact of the provisions on judicial against the resolution measures of the resolution review of resolution actions will have to been authority—and the provision for remedying determined by the courts. In Sri Lanka, while the unlawful measures taken by the resolution legal framework does not allow the review of an authority in the form of monetary compensation— order of the resolution authority to suspend the appears to have a constitutional basis. In particular, operations of a bank, the scope of judicial review the Constitution contains a “right to fair hearing” of specific resolution actions taken during the clause providing that “[i] the determination of his suspension period is not detailed. Also, in cases civil rights and obligations, including any question where an appeal to the court is permitted, the or determination by or against any government legal framework does not limit their scope. The or authority, a person shall be entitled to a fair following table shows that in a significant number hearing within a reasonable time by a court or of countries there is no separate resolution regime other tribunal established by law and constituted for the banking sector and civil courts therefore in such manner as to secure its independence and still play a fundamental role in reviewing the impartiality”. This clause is usually interpreted resolution process. to exclude the possibility of limiting the judicial review of the resolution authority’s measures to procedural issues or incidence of grave negligence Freezing of Contractual Rights or fraud only. This section, however, contains an The provisions on freezing of contractual rights exception under which a law conferring on any in the legal frameworks of the countries covered government or authority the power to ask questions by the survey differ considerably. In six of the arising in the administration of a law, which may sample countries, the legal framework does not affect the civil rights and obligations of a person, contain specific provisions on the exercise of will not be invalidated as long as it provides contractual rights when a failing bank is taken over for an opportunity for persons whose rights and by an administrative authority. Further there are obligations may be compromised to make a no temporary prohibition on rights to accelerate, statement to the administering authority before that early-termination or set-off and netting. The lack of authority makes the decision affecting that person, prohibition to temporarily exercise these rights may and contains no provision making the determination jeopardize the efficient resolution of a failing bank in of the administering authority final and conclusive. case the bank has entered into complicated financial Additionally, the Constitution provides that the contracts such as derivatives. In Nigeria the current Federal High Court shall have jurisdiction in civil legal framework also does not provide for explicit cases and matters related to banking, banks, other provisions regarding contractual rights. Thus, financial institutions, including any action between while in principle it would be possible to exercise one bank and another, any action by or against early termination rights, the legal framework STRENGTHENING SAFEGUARDS IN BANK RESOLUTION FRAMEWORKS IN EMERGING AND DEVELOPING COUNTRIES 23 prohibits the initiation of a lawsuit against a bank with the possibility of a one-month extension. whose control has been assumed by the resolution This is far longer than the ideal maximum of 2 authority, thereby suspending the exercise of the business days, thereby potentially undermining the contractual rights of creditors. In the five remaining contractual rights of third parties. countries the freezing of contractual rights when In Morocco the legal framework prohibits the a failing bank is put under administrative control exercise of contractual rights during the entire is explicitly covered in their legal frameworks. In period that a bank is put under administrative Singapore the legal framework does not allow the control, instead of only temporarily staying them. exercise of early termination rights in the case that a Therefore, the safeguards for contractual rights of failing bank enters into resolution or that resolution creditors are weak. In Ghana, the legal framework powers are exercised. The legal framework further states that a contract cannot be terminated, specifies that when certain resolution measures are accelerated, or modified solely by reason of entering taken the termination rights are suspended for a official administration. In the case of Argentina, period not to exceed two business days. In Ukraine placing a financial institution under administration the legal framework provides that commencement to restructure, usually entails the suspension of the of the provisional administration shall not be a affected institution’s operations. During this stay, sufficient ground to terminate, cancel or refuse to no enforcement measures can be ordered against perform service agreements that are required to the institution. However, the maximum time period ensure the banks’ operations, in particular lease, for freezing the contractual rights of parties of the utility services, communications and security financial institution is 30 days and can be extended service agreements. The netting of counterclaims for a maximum of 90 days. This is longer than the is prohibited for the duration of the provisional ideal maximum of 2 days and therefore potentially administration, which can be up to 3 months for weakens the safeguard for creditors. small banks and up to 6 months for systemic banks Table 1: Bank Regulation and Supervision Survey (2019) Separate Bank Resolution Require Court Order Made Cchanges Regime (Banking Law or to Initiate in the Resolution Other Legislation Insolvency Regime After GFC Total Countries 107 80 35 of which: Emerging Market and Low Inco 82 65 26 High Income Countries 25 15 9 memo: Total Survey Respondents 159 159 159 Source: World Bank (2019) REVIEW OF CURRENT SAFEGUARDS IN EMERGING AND DEVELOPING COUNTRIES 24 FINANCE, COMPETITIVENESS & INNOVATION INSIGHT FINANCE, COMPETITIVENESS | FINANCIAL & INNOVATION INCLUSION, INSIGHT INFRASTRUCTURE | LONG-TERM FINANCE & ACCESS IMPROVING THE DESIGN OF SAFEGUARDS IN BANK RESOLUTION FRAMEWORKS T his section will cover some of the implementation challenges of the key safeguards and provide some guidance for overcoming these challenges in developing countries. The authors recognize the need for designing safeguards according to the international standards but also recognize the need to tailor implementation to the realities and context of developing countries. Operational Independence resolution authority will likely not be utilized to capacity. Therefore, the pertinent question is how to One of the key design features of an effective achieve operational independence of the resolution resolution framework as per the Key Attributes, is authority in cases where it is housed within that the resolution authority should have operational another institution. independence. The Key Attributes do not demand that operational independence mean the resolution Firstly, operational independence should be explicitly authority should be housed in a separate institution. stated in the statute of the resolution authority. Therefore, an authority that carries out resolution Secondly, it is important to have operational functions may also carry out other functions, such as independence of the resolution authority at the supervision or deposit insurance. In such cases, these functional level within an institution charged with institutions should be protected from political and several key responsibilities. This means that there business interference and have adequate governance is a separation between the institution’s resolution arrangements to manage any perceived or actual function and other functions of the institution, such conflicts of interests that may arise from combining as the supervisory function. This should include those functions within a single institution. adequate organizational arrangements to avoid conflicts of interest between these functions. For In many developing countries there are both human staff, this implies that those who are performing and financial capacity constraints, and as such this resolution functions are subject to separate reporting problem can be partly ameliorated by housing lines and are structurally separated from staff the bank resolution function in the central bank, carrying out other functions within the institution. the deposit insurer or the bank supervisor. Of the This means that all decisions made by the resolution twelve countries surveyed, only one country has unit, including decisions in relation to resolution an entirely separate resolution authority. For seven plans, resolvability assessments, and the exercise of the countries, the resolution function is housed of its stabilization powers, are taken within the in the central bank one in the bank supervisor and resolution decision-making structures. In practice, for the remaining three countries it lies with the this means that the decision-making bodies within deposit insurance agency. In many countries, the a central bank (the governor or the executive board) central bank or the bank supervisory agency have will oversee and carry out all functions of the the operational and financial independence, staff central bank. skills, and prestige required for housing such a function. Indeed, in many countries there may be However, the reporting lines to the highest decision- limited skilled personnel to take on the resolution making body should be separate. The reporting lines function and limited financial resources to fully may join at a certain level of management, possibly staff a separate institution. And even in cases where the level immediately below the highest decision- such resources may exist, given the small size of the making body, depending on the structure and financial sector and small number of banks, the bank internal organization of the authority. In practical STRENGTHENING SAFEGUARDS IN BANK RESOLUTION FRAMEWORKS IN EMERGING AND DEVELOPING COUNTRIES 25 terms, this could mean separation at the level of the hierarchy of claims in liquidation are quite diverse, deputy governors within a central bank. In this way, though in most cases shareholders and subordinated the resolution authority would report to one deputy debt are at the bottom of the hierarchy. In some of governor while the prudential supervision report the reviewed countries the ranking of the insured to another deputy governor. In some cases where depositors and sometimes also that of the uninsured resources are severely constrained it may make depositors is high, but in other countries this is not sense to invest in building resolution capacity in the case. In some of the countries, the ranking of an adequate level of dedicated staff. The resolution creditors in liquidation is not clear in every case. In unit could then be staffed-up ahead of resolution most countries the creditor hierarchy is contained action by seconding staff from other departments in the Banking Act, but in some countries, it is laid to work on resolution. The availability of qualified down in the deposit insurance law, the central bank staff and experts in this complex area is a key factor law, the banking law, the Civil code, or in more in the proper discharge of the resolution authority’s than one of these laws. Sometimes the relevant mandate. This may even mean that professional provisions are spread over several laws thus making service providers are hired to assist with certain it less clear how these will be applied in cases of tasks such as legal and valuation activities. bank resolution. Notwithstanding the above-mentioned separation As stated in Section III a clear creditor claim hierarchy of functions, it is important to maintain close will contribute to a more efficient functioning of the cooperation within an institution between the micro financial markets in a country. It is essential that and macro prudential supervision and the resolution the ranking of creditors’ claims in liquidation is function. However, there should be clarity on the the same as in resolution, a situation that was not what, the when, the how of information sharing evident in all the countries surveyed. If not, the and the whom of information sharing. Information incentives to choose the most efficient solution for should flow both ways between the supervisory and a bank’s failure, in the interest of the stability of the the resolution parts of an institution, particularly financial sector and society, may be jeopardized. For when a bank is nearing the stage of resolution. the sake of legal certainty, the provisions regarding the hierarchy of creditors’ claims for banks and Thirdly, when a separate resolution authority is other financial institutions should preferably established, operational independence can best be be incorporated in the same law, such as the obtained by putting it in the law, thereby providing banking act. a sound legal basis for independence. In some countries, such as India and Colombia, the statute The review of legislation shows that the preferred requires approval from the minister in charge for position of depositors can be improved in some of certain resolution and enforcement actions. In the emerging and developing countries surveyed. such cases the operational independence of the It is recommended that insured creditors be in the resolution authority is compromised and allows for top tier of the creditor’s claim hierarchy (insured political interference. depositor preference). In some jurisdictions, there is depositor preference so uninsured depositors are Creditor Claim Hierarchy ranked above other unsecured creditors. The deposit insurance schemes are then subrogated in the rights of As stated in Section III there is no universal the depositors. This not only strengthens depositor’s creditor hierarchy. Nor is there an international rights, but the stability of the financial system. standard for hierarchy of claims in liquidation or It also simplifies the task of the resolution authority resolution. This is also one of the conclusions that in taking resolution measures, such as purchase and can be drawn from the review of the relevant pieces assumption transactions and reduces the number of legislation of the emerging and developing of lawsuits. countries, as conducted in the previous section. The IMPROVING THE DESIGN OF SAFEGUARDS IN BANK RESOLUTION FRAMEWORKS 26 The ranking of claims of unpaid staff of a failing principle to ensure that none of the creditors is worse institution and claims of the State, (for example, off than they would have been in liquidation.41 unpaid taxes) varies by country, partly for historical However, the pari passu principle is deeply rooted reasons, and partly because of the socio-economic in many corporate insolvency laws around the structure of a country. In some countries the State world. It is precisely this deep-rooted nature of the is given preference over private claims. In others, pari passu principle in ancient legal traditions that claims from staff take precedence over claims of complicates deviations from it. other creditors. With reference to tax claims, it makes little sense to provide them a high priority In fact, most countries surveyed have not included in the restructuring of a systemic institution as the flexibility in their primary legislation to depart the State will likely fill the financing gap in the from the pari passu principle. Ghana, within its legal end. That is why it is better and more efficient to framework, offers the possibility for the resolution spend in advance all available financial resources authority to deviate from the pari passu principle. in applying the most efficient resolution measures. However, even here there are some limitations: the There is no good practice for ranking personnel Banks and Specialised Deposit-Taking Institutions claims, but rather a political choice, since the size Act of 2016 grants flexibility to depart from of these claims is often small compared to that of equal treatment of creditors only in the case of other claims. restructuring liabilities, in case the Bank of Ghana determines that certain classes of senior unsecured Pari Passu debt are of systemic or strategic importance justifying a differential treatment in relation to While the Key Attributes call for the exercise of other senior unsecured debt holders.42 However, resolution powers in a manner that respects the while the provision limits deviation from the pari hierarchy of claims, they envision the flexibility passu principle only to the mandatory restructuring of the resolution authority to depart from the of liabilities, and not to other resolution tools43, principle of equal treatment of unsecured creditors the wording that defines deviation from the pari (or unsecured creditors of the same class) in the passu principle is at the same time so broad and interest of protecting the stability of the financial vague that it opens the door to potential litigation. sector or the overall value of the failing bank. As In Singapore, the MAS published a document to noted in Chapter III, although financial stability clarify it has such power. concerns override the fairness principle embedded in the equal treatment of unsecured creditors, the The possibility to deviate from the pari passu Key Attributes provide that exceptions to this pari principle advocated by the Key Attributes is passu principle must clearly justified and explained for many jurisdictions a new phenomenon that by the resolution authority on a case by case basis. challenges ancient legal traditions. For this reason, At the same time departures from the pari passu it is important that such power, when introduced, safeguard for creditors are checked by the NCWOL be clearly defined and to give certainty to potential 41 As stated in the Key Attributes Assessment Methodology for the Banking Sector, if a resolution action entails a departure from the principle of equal treatment of creditors of the same class, and no creditors are worse off than they would have been in liquidation and some creditors are better off than they would have been in liquidation, the creditors as a whole should be deemed to benefit from that departure. 42 Section 118 of the Banks and Specialised Deposit-Taking Institutions Act, 2016 (Act 930) 43 This is also the solution provided by one of the most advanced resolution frameworks, the BRRD, which constrains the flexibility to depart from the pari passu principle only to the application of the bail-in tool. International good practices indicate, however, that such ability and the application of any other safeguards should be explicitly available to the resolution authority when applying all resolution tools. STRENGTHENING SAFEGUARDS IN BANK RESOLUTION FRAMEWORKS IN EMERGING AND DEVELOPING COUNTRIES 27 foreign creditors. In general, maximize the Therefore, the path to implement such a principle is effectiveness of a resolution framework, countries particularly complex in these countries and efforts are well advised to allow the deviation from the to address these should begin on a multiplicity of pari passu principle under certain, well-defined fronts. In the first place, more robust information circumstances and subject to safeguards that protect systems should be built, which are able to support the creditors that are left out. the resolution framework, and which should be part of the standard reporting framework. Accounting NCWOL principles should be harmonized and developed to address the specific challenges posed by valuations The no creditor worse off than in liquidation of financial assets in the countries with shallow principle is introduced by the Key Attributes and is markets. Further, specific capacity building efforts thus for most countries a new principle to be applied should be directed at developing expertise in in restructuring measures.44 Therefore, it is not evaluating alternative bank resolution options. surprising that most of the countries surveyed have While international expertise can be hired to fill not fully, and explicitly included most aspects of the gap, they will likely not be fully informed of such principle in their bank resolution frameworks. the country-specific issues. It is therefore important The NCWOL is a logical element to include as in such cases that local and international auditors it provides a floor for the claims of the general work hand in hand to establish efficient valuation creditors45, which, as explained above, avoids the procedures and guidelines. In this way, it will be circumstance in which creditors are faced with more likely that the losses during resolution will incentives to choose liquidation over the resolution be minimized. of a systemic bank. When appropriately enacted, a NCWOL resolution action will reduce incentives Judicial Review for proceeding lawsuits, making restructurings of The courts’ role in resolution proceedings will failing banks more efficient and less costly. generally be that of overseeing that the correct However, experience has shown that there are some balance has been struck between the powers of practical obstacles to introducing this principle in the resolution authority to act swiftly and the legal emerging and developing countries; in particular, remedies available to those affected. In this respect, the valuation of a failing bank before and after conforming domestic legislation to Key Attribute resolution actions can be particularly challenging 5.5 will imply ensuring the judicial procedures are in environments where historical data and well such that this balance will be struck. understood accounting principles are lacking or From the analysis of the surveyed countries two absent altogether. To further complicate matters, things stand out with respect to existing features of such countries tend to have: less liquid asset judicial review. Firstly, in a minority of countries markets, which might serve as benchmarks; a lack surveyed, the scope of the judicial adjudication with of accurate information to undertake the evaluations respect to the resolution authority actions is limited (that is, due to underdeveloped information to reviewing whether the resolution authority acted systems); and limited capacity in the form of trained within its powers or whether there were incidences evaluators and auditors versed in the specificities of of grave negligence or fraud. Secondly, in all of the financial institutions. surveyed cases there is a possibility that the remedies 44 The Key Attributes are inspired by the US insolvency practice, where the possibility to deviate from the pari passu principle has long existed. 45 Although an important safeguard for creditors, in most cases the liquidation of a failing bank leaves nothing for ordinary unsecured creditors because they are at the lower end of the creditor claim hierarchy. IMPROVING THE DESIGN OF SAFEGUARDS IN BANK RESOLUTION FRAMEWORKS 28 include reversing the actions of the resolution domestic legislation that are relevant to ensuring a authority. Such strong powers awarded to courts limited review of state agency actions for cases of are bestowed by the legal framework irrespective of bank resolution. Most likely, administrative laws the legal tradition or of the administrative regime of and procedures will have to include exceptions the countries, in that it does not depend on whether for cases of bank insolvency. In those cases—that the adjudication occurs via administrative tribunals is, where the public interest principle is absent (Argentina Colombia) or in civil courts (India, in existing legislation—it would be helpful for Indonesia, Morocco, Nigeria, Russia, Singapore, Sri resolution cases to be established in jurisprudence. Lanka and Ukraine). Ghana is a case where national A mandate under the aegis of public interest would authorities have extensive powers to intervene thus justify the infringement of third-party rights. in banks without court involvement by pursuing There also may be cases (Ukraine is an example) solely administrative procedures. This is indicative where even a public interest principle might not of how in emerging and developing countries the be sufficient to limit third party property rights legal framework and jurisprudence appears to have on account of executive actions and that the evolved in a way where the judicial power provides established administrative procedures provide for a for an effective limitation to the powers of the full review of the legality of the merit of the state executive branch and protect property rights. agency actions. In such cases, the constitution of In addition, in some sample countries the the country itself may need to be modified to Constitution grants to all citizens the right to a allow for limited judicial review of the resolution fair trial (such as in Nigeria), and on this basis authority’s actions.46,47 all administrative acts may be disputed in civil There are similar issues regarding the Key Attribute courts. In such cases, not even an amendment to requirement of limiting compensation for actions administrative procedures will likely suffice to of the resolution authority that have been found limit the extent of judicial review. Because civil to infringe the law to monetary damages. In courts typically apply the principles governing those cases—where the courts’ pronouncement standard insolvency procedures (such that third- will pertain to the legitimacy of the state-agency party property rights will thus have priority over actions (for example in Colombia and Russia)—an state agency actions, unless a public interest case administrative action that is found to be illegitimate is explicitly made) there will have to be clear will typically be subject to annulment or voiding, alternative procedure mandated for cases pertaining and thus also subject to reversal.48 While in the to bank resolution, which will likely have to be duly cases of bank resolution it is essential to ensure justified according to principles of public interest. business continuity of the financial institution Thus, as can be inferred from the above discussion, under resolution to preserve financial stability the essence of the requirement of Key Attribute and thus public interest would require resolution 5.5 cannot be achieved simply by enacting authority actions should not be subject to reversal, special legislation for bank resolution. A thorough such limitation may thus be very complex to understanding of the adjudication procedures achieve legally in such jurisdictions, even if the applicable to litigations between private citizens and institution under resolution no longer exists as state agencies is necessary to address all parts of the such.49 In these jurisdictions, it may be necessary 46 See Gegenheimer (2004) for the case of Kyrgyzstan. 47 See Fenton (2011) “Where too little judicial deference can impair the administrative process: the case of Ukraine” in 43 Comparative Administrative Law. 48 See “Voidness and voidability of unilateral administrative acts in the Western tradition” G. Bosksand-Hola in Comparative Administrative Law. STRENGTHENING SAFEGUARDS IN BANK RESOLUTION FRAMEWORKS IN EMERGING AND DEVELOPING COUNTRIES 29 to amend existing legislation to acknowledge the review the actions of public entities under civil fact that from a practical prospective the resolution code procedures (OECD 1997).52 action cannot be reversed. In these cases, the In emerging and developing countries, there may process of establishing a resolution authority’s not be an institutional equivalent of the European regime compliant with Key Attribute 5.5 must be Court of Justice or where there is a High Court, subject to an extensive revision of adjacent laws local jurisprudence may not have had a clear and legislative approval. This should be included pronouncement on matters of bank resolution, such in the special administrative procedures or a special that the implementation of Key Attribute 5.5 may amendment to the administrative procedures prove challenging even where there is a will. that pertain to the “public interest principle” in resolution actions.50 Freezing of Contractual Rights To summarize, countervailing provisions included in a country’s constitution, international law, or Half of the countries in the sample have no specific domestic administrative law may render moot provisions in their legal framework dealing with the limitations to the powers of the courts when included exercise of contractual rights when a failing bank in a law establishing bank resolution procedures as is taken over by an administrative authority. This provided for in Key Attribute 5.5. If the constitution becomes relevant when legislative amendments are of a country does not explicitly award the duty introduced to resolve systemic banks. In particular, of protecting the public interest to a state agency only triggering the resolution of a failing systemic (for example the government or central bank), or bank (while the substantive obligations under the if local jurisprudence has not clearly established contract continue to be performed) should not a public interest principle as the justification for accelerate contractual rights that would jeopardize the state agency’s actions, it is doubtful whether the aim of resolving that bank, such as protecting the measures taken by the resolution authority critical economic functions in a country. In case the will be upheld in court (given their infringement legal framework nevertheless permits such rights upon private property rights).51 In those countries to be exercised when a systemic bank is put in with less developed bodies of administrative law resolution, the resolution authority should have the and procedure, the civil courts will likely have a rights to stay these rights for a short period. This broader mandate to apply existing legislation and becomes the more important if the failing bank 49 For cases of reversal of resolution decisions, see cases in Kyrgyzstan, Russia and Ukraine. 50 For example, the 2016 Russia FSSA recommended that the legal framework for bank resolution be reformed to avoid rever- sals of resolution actions. Such reform would likely entail drafting substantial exceptions for bank resolution actions in at least the administrative adjudication procedure and the civil procedural code to ensure standard bankruptcy procedures are not applied to banks. 51 Examples of this can be found in the discussions of the IMF’s Financial Stability Reports for Russia and Ukraine and in Gegenheimer (2004). 52 In the case of the EU, similar issues arose as the drafting began on the Bank Resolution and Recovery Directive, which has specific drafting to limit the extent of judicial review. As Lintner et al. (2018) point out: “In the BRRD and the Key attributes, it is implicit, not necessarily stated that, if any court is involved [in bank resolution procedures], it is usually an administrative court... [and] ...as a consequence both of limitations imposed by BRRD itself and of the nature of European administrative review, the administrative court can play only a limited role.” However, they note also that “the prescriptions of the BRRD had to be ratified by the Court of Justice of the European Union (CJEU), which, for instance, has held that: “The review by the European Union judicature (…) is necessarily limited and confined to verifying whether the rules on procedure and on the statement of reasons have been complied with, whether the facts have been accurately stated and whether there has been any manifest error of assessment or misuse of powers”. It is important to note that the pronouncements of the European Court of Justice have been essential for the implementation of the BRRD across the EU jurisdictions. IMPROVING THE DESIGN OF SAFEGUARDS IN BANK RESOLUTION FRAMEWORKS 30 has entered in sophisticated financial contracts. effectiveness of the resolution framework. The The survey also shows that in some of the sample rapid emergence of domestic systemic banks and countries the time period to stay these rights is too large international banking groups in emerging and long for an open bank resolution framework; this developing countries makes it necessary for these creates uncertainty in the market for contractual countries to have a bank resolution framework that third parties that can ultimately influence the is aligned with Key Attribute 4. STRENGTHENING SAFEGUARDS IN BANK RESOLUTION FRAMEWORKS IN EMERGING AND DEVELOPING COUNTRIES 31 ENDNOTES 32 FINANCE, COMPETITIVENESS & INNOVATION INSIGHT FINANCE, COMPETITIVENESS | FINANCIAL & INNOVATION INCLUSION, INSIGHT INFRASTRUCTURE | LONG-TERM FINANCE & ACCESS KEY TAKE-AWAYS E xperiences in the management of financial crises have evidenced how important effective bank resolution regimes are in preserving financial stability. However, effective bank resolution frameworks, which are set up in alignment with the principles expressed in the Key Attributes, require strong safeguards to ensure both public interest and third-party rights are adequately protected during resolution actions. Where safeguards for creditors are too weak, private sector interest in financial activity may be eroded, where safeguards for creditors are too strong financial stability may be compromised when unviable financial institutions cannot swiftly be resolved. Thus, the safeguards of the Key Attributes not only relate to safeguards for the rights of shareholders and creditors of a failing bank, but also serve to ensure financial stability through the soundness and effectiveness of a bank resolution framework. After a detailed analysis of the specific requirements countries considering the introduction of a resolution of each of the safeguards necessary for resolution framework for banks, should pay attention not frameworks, this paper surveyed the main features only to the safeguards as stated in Key Attribute of existing safeguards across a sample of countries 5, also take into account the need for operational that have undergone bank resolution actions. All independence of the resolution authority, the legal the countries surveyed have their own specific protection of its staff and the staff of the bank under bank resolution framework. However, the presence resolution, and the adequacy of the judicial review of the safeguards in each jurisdiction must be framework for administrative actions, to be able to determined by reviewing multiple laws, as is for strike an appropriate balance between resolution instance the case with the creditor claim hierarchy objectives and contractual rights. and the judicial review safeguard, which serves to Our survey of country cases has highlighted how complicate the implementation of a sound bank this balance still poses challenges across many resolution framework. While the notion that the jurisdictions. While a creditor hierarchy is present resolution authority needs to have some level of in most countries, these regimes do not appear to legal protection in order to be independent seems to prioritize the depositors or the depositor insurance be well established within the countries surveyed, fund in a way that makes the resolution process the extent of protection of shareholders’ and more efficient, while supporting financial stability. creditors’ rights appears to vary widely. Based on In addition, countries with exceptions to the pari the survey results, it appears that the general interest passu principle are rare, risking that the outcome principle, as a justification for taking extraordinary of some resolution tool, such as purchase and measures by the resolution authority, is not widely assumptions, will be sub-optimal. Furthermore, accepted across emerging and developing countries. adjudication procedures for appeals against actions Therefore, significant work is still necessary in of the resolution authority typically strongly protect many countries to introduce an efficient legal shareholder rights against state-agency actions. All framework for bank resolution. these considerations suggest that, inherently, rights This paper highlights how implementing an of creditors and owners appear to be more strongly efficient resolution framework for banks requires protected with respect to those of depositors and, taking a broader perspective when introducing the more generally, the public interest in financial safeguards. In this respect, emerging and developing stability across emerging and developing countries. STRENGTHENING SAFEGUARDS IN BANK RESOLUTION FRAMEWORKS IN EMERGING AND DEVELOPING COUNTRIES 33 Thus, it becomes clear that the introduction technical accounting bodies. Extensive review of the of effective safeguards goes significantly civil code and of civil and administrative procedures beyond enacting one specific bank resolution may be necessary, to introduce specific legislation legislation, as this matter tends to interact with for bank resolution purposes. As has been the case other laws and regulations and might infringe for some of those countries, where a resolution upon established local doctrines and third-party regime was successfully implemented,53 a clarifying rights. Therefore, applying the safeguards to legal interpretation of public interest principles by emerging and developing countries might require the highest juridical courts of a country, such as a more fundamental and extensive legal drafting High Court or the Court in charge of Constitutional than is often conceived, as well as the active pronouncements, may be necessary. involvement of the juridical profession and For example, in the US, current bank resolution procedure follows proceedings established for actions of administrative 53 agencies and were sanctioned by the Supreme Court. (Merrill “The origins of American-style judicial review” in Comparative Administrative Law 2011.) For EU countries, as mentioned above, the High Court of Justice pronounced. KEY TAKE-AWAYS 34 FINANCE, COMPETITIVENESS & INNOVATION INSIGHT FINANCE, COMPETITIVENESS | FINANCIAL & INNOVATION INCLUSION, INSIGHT INFRASTRUCTURE | LONG-TERM FINANCE & ACCESS REFERENCES BCBS (2011) “Resolution Policies and Frameworks—progress so far” Bank for International Settlements. Čihák M. and E. Nier (2009) “The Need for Special Resolution Regimes for Financial Institutions— The Case of the European Union. IMF WP/09/200. Fenton H.N. (2011) “Where too little judicial deference can impair the administrative process: the case of Ukraine” in Comparative Administrative Law Elgar. FSB (2014) First Thematic Review on Resolution Regimes—Peer Review Report. FSB (2016) Second Thematic Review on Resolution Regimes—Peer Review Report Gegenheimer, Gary A (2004) “Judicial review of Bank Supervisory Decisions in the Former Soviet Republics: the case of Kyrgyzstan.” Annual Review of Banking & Financial Law. Vol. 25: 1. 2004. IMF (2017) “Russia—Financial Sector Stability Assessment”. IMF (2014) “Ukraine—Financial Sector Stability Assessment”. Lintner, Pamela et al. (2018) “Understanding Bank Recovery and Resolution in the EU: A Guidebook to the BRDD” World Bank Finsac Vienna Rose-Ackerman, Susan and Peter L. Lindseth, 2011. Comparative Administrative Law Cheltenham: Edward Elgar Publishing. Rose-Ackerman, Susan Peter L. Lindseth and Blake Emerson, 2017. Comparative Administrative Law Cheltenham: Edward Elgar Publishing. Perlingeiro, R. (2016) “Contemporary Challenges in Latin American Administrative Justice” in BRICs Law Journal Volume III Issue 2. OECD (1997) “Administrative procedures and the supervision of administration in Hungary, Poland, Bulgaria, Estonia and Albania” SIGMA PAPERS: No. 17 Ross Leckow, Alessandro Gullo, Ender Emre, “Bank Resolution Frameworks: Key Legal Design Issues”, in Simon Brodie (ed), “Bank Resolution, Key Issues and Local Perspectives”, INSOL International (2019). Geoffrey Davies and Marc Dobler, “Bank resolution and safeguarding the creditors left behind”, Bank of England, Quarterly Bulletin 2011 Q3. STRENGTHENING SAFEGUARDS IN BANK RESOLUTION FRAMEWORKS IN EMERGING AND DEVELOPING COUNTRIES 35 BIBLIOGRAPHY 36 FINANCE, COMPETITIVENESS FINANCE, COMPETITIVENESS & INNOVATION & INNOVATION INSIGHT INSIGHT | FINANCIAL | LONG-TERM INCLUSION, FINANCE INFRASTRUCTURE & ACCESS ANNEX 1: KEY ATTRIBUTES OF EFFECTIVE RESOLUTION REGIMES FOR FINANCIAL INSTITUTIONS Table 2: Key Attributes of Effective Resolution Regimes for Financial Institutions Scope 1 2 Resolution Authority 3 Resolution Powers 4 Set-off, Netting, Collateralisation, Segregation of Client Assets 5 Safeguards 6 Funding of Firms in Resolution Legal Framework Conditions for Cross-border Cooperation 7 8 Crisis Management Groups (CMGs) Institution-specific Cross-border Cooperation Agreements 9 10 Resolvability Assessments Recovery and Resolution Planning 11 12 Access to Information and Information Sharing STRENGTHENING SAFEGUARDS IN BANK RESOLUTION FRAMEWORKS IN EMERGING AND DEVELOPING COUNTRIES 37 2. Resolution authority 2.5 The resolution authority should have operational independence consistent with its statutory responsibilities, transparent processes, sound governance and adequate resources and be subject to rigorous evaluation and accountability mechanisms to assess the effectiveness of any resolution measures. It should have the expertise, resources and the operational capacity to implement resolution measures with respect to large and complex firms. 2.6 The resolution authority and its staff should be protected against liability for actions taken and omissions made while discharging their duties in the exercise of resolution powers in good faith, including actions in support of foreign resolution proceedings. 5. Safeguards Respect of creditor hierarchy and “no creditors worse off” principle 5.1 Resolution powers should be exercised in a way that respects the hierarchy of claims while providing flexibility to depart from the general principle of equal (pari passu) treatment of creditors of the same class, with transparency about the reasons for such departures, if necessary to contain the potential systemic impact of a firm’s failure or to maximise the value for the benefit of all creditors as a whole. In particular, equity should absorb losses first, and no loss should be imposed on senior debt holders until subordinated debt (including all regulatory capital instruments) has been written-off entirely (whether or not that loss-absorption through write-down is accompanied by conversion to equity). 5.2 Creditors should have a right to compensation where they do not receive at a minimum what they would have received in a liquidation of the firm under the applicable insolvency regime (“no creditor worse off than in liquidation” safeguard). 5.3 Directors and officers of the firm under resolution should be protected in law (for example, from law suits by shareholders or creditors) for actions taken when complying with decisions of the resolution authority. ANNEX 1: KEY ATTRIBUTES OF EFFECTIVE RESOLUTION REGIMES FOR FINANCIAL INSTITUTIONS 38 FINANCE, COMPETITIVENESS & INNOVATION INSIGHT FINANCE, COMPETITIVENESS | FINANCIAL & INNOVATION INCLUSION, INSIGHT INFRASTRUCTURE | LONG-TERM FINANCE & ACCESS ANNEX 2: KEY ATTRIBUTES 5—SAFEGUARDS Legal remedies and judicial action 5.4 The resolution authority should have the capacity to exercise the resolution powers with the necessary speed and flexibility, subject to constitutionally protected legal remedies and due process. In those jurisdictions where a court order is still required to apply resolution measures, resolution authorities should take this into account in the resolution planning process so as to ensure that the time required for court proceedings will not compromise the effective implementation of resolution measures. 5.5 The legislation establishing resolution regimes should not provide for judicial actions 12 that could constrain the implementation of, or result in a reversal of, measures taken by resolution authorities acting within their legal powers and in good faith. Instead, it should provide for redress by awarding compensation, if justified. 5.6 In order to preserve market confidence, jurisdictions should provide for flexibility to allow temporary exemptions from disclosure requirements or a postponement of disclosures required by the firm, for example, under market reporting, takeover provisions and listing rules, where the disclosure by the firm could affect the successful implementation of resolution measures. 4. Set-off, netting, collateralisation, segregation of client assets 4.2 Subject to adequate safeguards, entry into resolution and the exercise of any resolution powers should not trigger statutory or contractual set-off rights, or constitute an event that entitles any counterparty of the firm in resolution to exercise contractual acceleration or early termination rights provided the substantive obligations under the contract continue to be performed. 4.3 Should contractual acceleration or early termination rights nevertheless be exercisable; the resolution authority should have the power to stay temporarily such rights where they arise by reason only of entry into resolution or in connection with the exercise of any resolution powers. The stay should: (i) be strictly limited in time (for example, for a period not exceeding 2 business days); (ii) be subject to adequate safeguards that protect the integrity of financial contracts and provide certainty to counterparties; and (iii) not affect the exercise of early termination rights of a counterparty against the firm being resolved in the case of any event of default not related to entry into resolution or the exercise of the relevant resolution power occurring before, during or after the period of the stay (for example, failure to make a payment, deliver or return collateral on a due date). The stay may be discretionary (imposed by the resolution authority) or automatic in its operation. In either case, jurisdictions should ensure that there is clarity as to the beginning and the end of the stay STRENGTHENING SAFEGUARDS IN BANK RESOLUTION FRAMEWORKS IN EMERGING AND DEVELOPING COUNTRIES 39 REFERENCES 40 FINANCE, COMPETITIVENESS & INNOVATION INSIGHT FINANCE, COMPETITIVENESS | FINANCIAL & INNOVATION INCLUSION, INSIGHT INFRASTRUCTURE | LONG-TERM FINANCE & ACCESS ANNEX 3: MATRIX OF COUNTRY ANALYSIS54 East Asia & Pacific Indonesia Resolution Procedural Safeguard Legal Basis Legal Provisions Authority Basis Deposit Independence of Resolution Deposit Insurance Indonesia Deposit Insurance Insurance Authority Law Corporation Law, No. 24 2004 Scheme (Article 2) Prevention and Mitigation of Financial System Crisis Law, No 9 2016 (Article 4) Hierarchy of claims & ability to Deposit Insurance Indonesia Deposit Insurance depart from pari passu principle Law Corporation Law, No. 24 2004 (Articles 29, 36, 41, 54) Judicial Review Deposit Insurance Civil Procedure Law Indonesia Deposit Insurance Law Corporation Law, No. 24 2004 (Articles 20 and 50) Legal Protection of Staff of RA Crisis Management Prevention and Mitigation of and of directors and officers of Law Financial Systems Crisis Law, firm under resolution No. 9 2016 (Article 48) No Creditor Worse-off Other Safeguards: Automatic Stay; Moratorium; Freeze on Netting Singapore Central Bank Independence of Resolution Central Bank Law MAS ACT PART IVB “Resolution Authority of Financial Institutions” (Sections 57; 66; 69; 72) Hierarchy of claims & ability to Central Bank Law MAS Act (Sections 57, 66;69; depart from pari passu principle Banking Law 72) and Banking Act sections 61 and 62 Judicial Review Rules of Court, Supreme Court of Judicature Act (Chapter 322, Section 80) Order 53 Legal Protection of Staff of RA Central Bank Law MAS Act (Sections 22, 22A and of directors and officers of and 124) firm under resolution No Creditor Worse-off Central Bank Law MAS Act, Part IVB, Division C Other Safeguards: Automatic Central Bank Law MAS Act (Sections 83-85) ‘5C’ Stay; Moratorium; Freeze on Netting 54 Analysis based on review of the following existing laws as at October 31, 2019: Constitution, Commercial Laws/Codes (including Company Laws), Central Bank Laws, Banking Laws, Deposit Insurance Laws, Bankruptcy/Insolvency Laws, Codes of Procedure (Civil and Administrative). STRENGTHENING SAFEGUARDS IN BANK RESOLUTION FRAMEWORKS IN EMERGING AND DEVELOPING COUNTRIES 41 Africa Ghana Resolution Procedural Safeguard Legal Basis Legal Provisions Authority Basis Central Bank Independence of Resolution Central Bank Law Bank of Ghana (BoG) Act 2002 Authority (Act 612) Section 4 Hierarchy of claims & ability to Banking Law Banks and Specialised Deposit- depart from pari passu principle Taking Institutions Act, 2016 (Act 930) Sections 118 and 135 Judicial Review Banking Law Alternative Dispute Banks and Specialised Resolution Centre Deposit-Taking Institutions Act established under 2016 (Act 930) Sections 141-2 the Alternative Alternative Dispute Resolution Dispute Resolution Centre established under the (ADR) Act, 2010 Alternative Dispute Resolution (Act 798). (ADR) Act, 2010 (Act 798). Section 50 Legal Protection of Staff of RA Central Bank Law Bank of Ghana (BoG) Act and of directors and officers of Banking Law 2002 (Act 612) Section 26 firm under resolution Banks and Specialised Deposit- Taking Institutions Act, 2016 (Act 930) Section 150 No Creditor Worse-off Banking Law Banks and Specialised Deposit- Taking Institutions Act, 2016 (Act 930) Other Safeguards: Automatic Banking Law Banks and Specialised Deposit- Stay; Moratorium; Freeze on Taking Institutions Act, 2016 Netting (Act 930) Section112 Nigeria Deposit Independence of Resolution Deposit Insurance Nigerian Deposit Insurance Insurance Authority Law Corporation Act of 2006 (NDIC Scheme Act) Sections 37-8 Hierarchy of claims & ability to Banking Law Banks and Other Financial depart from pari passu principle Company Law Institutions Act 1991 (as Deposit Insurance amended in 1997, 1998, 1999 Law and 2002) (BOFIA) Sections 54- 5 Companies and Allied Matters Act, 1990 (CAMA) Section 493 Nigerian Deposit Insurance Corporation Act of 2006 (NDIC Act) Section 21 Judicial Review Constitution Constitution of the Federal Republic of Nigeria 1999 Sections 36 and 251 Legal Protection of Staff of RA Banking Law Deposit Banks and Other Financial and of directors and officers of Insurance Law Institutions Act 1991 (as firm under resolution amended in 1997, 1998, 1999 and 2002) (BOFIA) Section 53 Nigerian Deposit Insurance Corporation Act of 2006 (NDIC Act) Section 55 No Creditor Worse-off Other Safeguards: Automatic Stay; Moratorium; Freeze on Netting ANNEX 3: MATRIX OF COUNTRY ANALYSIS 42 Latin America & Caribbean Argentina Resolution Procedural Safeguard Legal Basis Legal Provisions Authority Basis Central Bank Independence of Resolution Central Bank Law Charter of the Central Bank of Authority the Argentine Republic (Articles 4, 7 and 9) Hierarchy of claims & ability to Banking Law Law on Financial Institutions depart from pari passu principle (Articles 35 bis, 49) Judicial Review Banking Law Law on Financial Institutions (Articles 35 bis, ter) Legal Protection of Staff of RA and of directors and officers of firm under resolution No Creditor Worse-off Other Safeguards: Automatic Central Bank Law Charter of the Central Bank of Stay; Moratorium; Freeze on the Argentine Republic Netting (Article 49 of the BCRA) Colombia Technical Independence of Resolution Banking Law Organic Statute of the Entity attached Authority Financial System (Article 115) to MoF Decree 4327 of 2005 Decree 1817 of 2015 Hierarchy of claims & ability to Banking Law Organic Statute of the Financial depart from pari passu principle System (Articles 295 and 299), Commercial Code (Articles 1154 and 1399)and Decree 2555 (Article 9.1.3.2.4) Judicial Review Administrative Administrative Procedures Procedures Code Code, Law 1437 of 2011 (Articles 138, 162-167) Legal Protection of Staff of RA Commercial Code (Article 200) and of directors and officers of firm under resolution No Creditor Worse-off Other Safeguards: Automatic Stay; Moratorium; Freeze on Netting STRENGTHENING SAFEGUARDS IN BANK RESOLUTION FRAMEWORKS IN EMERGING AND DEVELOPING COUNTRIES 43 MENA Morocco Resolution Procedural Safeguard Legal Basis Legal Provisions Authority Basis Central Bank Independence of Resolution Central Bank Law BAM Statute Authority Hierarchy of claims & ability to Banking Law Credit Institutions Law No.103- depart from pari passu principle 12 of 2014 (Articles 139, 145) Legal Protection of Staff of RA Banking Law Credit Institutions Law and of directors and officers of Obligations and No.103-12 of 2014 (Article 80) firm under resolution Contracts Law Code of Obligations and Contracts (Article 85) No Creditor Worse-off Other Safeguards: Automatic Banking Law Credit Institutions Law No.103- Stay; Moratorium; Freeze on 12 of 2014 (Article 122) Netting Tunisia Resolution Independence of Resolution Banking Law Law on Banks and Financial Commission Authority Institutions (Articles 113-4) Hierarchy of claims & ability to Banking Law Law on Banks and Financial depart from pari passu principle Institutions (Articles 115 and 146) Judicial Review Banking Law Administrative Law on Banks and Financial Procedure Code Institutions (Article 121) Civil and Administrative Procedure Code (Article 819) Legal Protection of Staff of RA Banking Law Law on Banks and Financial and of directors and officers of Institutions (Article 120) firm under resolution No Creditor Worse-off Other Safeguards: Automatic Stay; Moratorium; Freeze on Netting ANNEX 3: MATRIX OF COUNTRY ANALYSIS 44 South Asia Sri Lanka Resolution Procedural Safeguard Legal Basis Legal Provisions Authority Basis Central Bank Independence of Resolution Central Bank Law Monetary Law Act (updated to Authority June 30, 2014) (Section 32c) Banking Act No. 30 of 1988 (updated to Dec 31, 2006) (Sections 12 and 19) Hierarchy of claims & ability to Banking Law Banking Act No. 30 of 1988 depart from pari passu principle (updated to Dec 31, 2006) (Section 66) Judicial Review Central Bank Law Civil Procedure Monetary Law Act (updated to Code June 30, 2014) (Section 30) Legal Protection of Staff of RA Central Bank Law Monetary Law Act (updated to and of directors and officers of Banking Law June 30, 2014) (Section 47) firm under resolution Banking Act No. 30 of 1988 (updated to Dec 31, 2006) (Section 78) No Creditor Worse-off Other Safeguards: Automatic Stay; Moratorium; Freeze on Netting India Central Bank Independence of Resolution Central Bank Law RBI Act (Sections 7 and 30) Authority Hierarchy of claims & ability to Banking Law Banking Regulation Act, 1949 depart from pari passu principle Companies Law as amended by the Banking Regulation (Amendment) Act, 2017 (Sections 36AG, 43A) Companies Act, 2013 (Section 327) Judicial Review Banking Law Code of Civil Banking Regulation Act, 1949 Procedure as amended by the Banking Regulation (Amendment) Act (Sections 36AH and 36AI) Legal Protection of Staff of RA Banking Law Banking Regulation Act, 1949 and of directors and officers of as amended by the Banking firm under resolution Regulation (Amendment) Act (Section 54) No Creditor Worse-off Other Safeguards: Automatic Stay; Moratorium; Freeze on Netting STRENGTHENING SAFEGUARDS IN BANK RESOLUTION FRAMEWORKS IN EMERGING AND DEVELOPING COUNTRIES 45 Europe and Central Asia Ukraine Resolution Procedural Safeguard Legal Basis Legal Provisions Authority Basis Deposit Independence of Resolution Deposit Insurance Law on Households Deposit Insurance Authority Law Guarantee System (Article 5) Scheme Hierarchy of claims & ability to Deposit Insurance Law on Households Deposit depart from pari passu principle Law Guarantee System (Articles 40, 42, 52) Judicial Review Deposit Insurance Law on Households Deposit Law Guarantee System (Article 54) Legal Protection of Staff of RA Deposit Insurance Law on Households Deposit and of directors and officers of Law Guarantee System (Article 16) firm under resolution No Creditor Worse-off Other Safeguards: Automatic Deposit Insurance Law on Households Deposit Stay; Moratorium; Freeze on Law Guarantee System (Article 36) Netting Russia Central Bank Independence of Resolution Central Bank Law Law on the Central Bank of the Authority Russian Federation (Articles 1, 21) Hierarchy of claims & ability to Bankruptcy Law Federal law #127-FZ, dated depart from pari passu principle 26.10.2002 On Insolvency (Bankruptcy) (Article Article 189.92) Judicial Review Banking Law Federal law #395-1, dated Constitution 02.12.1990 “On Banks and Banking” (Article 21) Legal Protection of Staff of RA and of directors and officers of firm under resolution No Creditor Worse-off Deposit Insurance Federal law #177-FZ dated Law 12.23.2003 “On insurance of household deposits in banks of the Russian Federation” Other Safeguards: Automatic Stay; Moratorium; Freeze on Netting ANNEX 3: MATRIX OF COUNTRY ANALYSIS 46