The Basel Committee on Banking Supervision may be most widely known as the originator of the “Basel Capital Standards,” “Basel II” and “Basel [III].” They provide guiding principles for capital for credit institutions (principally deposit-taking institutions) and related actors in the organized and regulated financial markets. The committee traces its origins largely to bank failures. The collapse of Bankhaus Herstatt and of Franklin National Bank and related entities in the 1970s provided important reasons for the formation of the committee. The later tremors from the failure of the Bank of Credit and Commerce International created new forces that further influenced the direction of the committee’s work, and the increasingly notable tension between “universalist” and “national” systems of resolving organizational insolvencies. The last round of shocks involving the insolvency of Fortis, Lehman Brothers, Dexia, Kapthing and other Icelandic banks, as well as challenges to many other banks including UBS, has carried the flows of changes in the committee’s work. Among the changes in current times, perhaps the best known has been the seeming redirection of attention to the changes in the form and scope of capital standards recommended by the committee.
Addressing, perhaps more directly, the forces revealed by recent insolvencies, rescues and resolutions of credit institutions that cover several jurisdictions, is the March 2010 report of the committee’s Cross-Border Bank Resolution Group. This report is a terminal, for now, of the group’s consideration of the problems of the insolvency of cross-border credit institutions (including banks), which was a process that began in earnest in 2008 and included the issuance of a consultative paper in 2009. It has proceeded in line with work of the Financial Stability Board (an entity that, like the Basel Committee, is hosted by the Bank for International Settlements and is a focus of the work of the G20 group of countries). The report notes the prior work of the Basel Committee in the area including the Concordat of 1978 (amended) and the work done after the failure of the Bank of Credit and Commerce International in the 1990s.
The format and the scope of the report take the now-familiar structure of work products of influential groups of principal actors in financial and regulatory areas, particularly when the sponsor (in this case the Basel Committee) does not have the direct capacity to compel compliance with its recommended standards. Other familiar forms of similar approach are the recommendations of the Financial Action Task Force (“FATF”) (money laundering and terrorist financing), the Egmont Group (also related to money laundering and illicit financing) and the Group of 30 recommendations (derivatives). This report formulates 10 recommendations in three principal categories: (1) regulatory and supervisory powers, (2) matters affecting the impact of individual institutions’ possible failures and (3) international cooperation and relations, where an institution’s operations cover more than one country. The recommendations could be grouped into three other categories: (1) regulatory powers, (2) actions related to crisis as to individual institutions and (3) reducing contagion (for present purposes, however, the first categories set out above will be used).
The first overarching point is that the group’s work again illuminates the tension between insolvency regimes that govern banks that operate (or that have subsidiaries that operate) in several countries. The policy interest in protecting depositors and in avoiding systemic crisis are special concerns in administering the insolvency of credit institutions, which must be added to the other insolvency concerns of general resolution of claims against an enterprise, providing a level of predictability of the order of claims and preserving distinctions between classes of claims, which characterize insolvency systems (however locally denominated). As to banks, this overlay of protection and system vigilance seems, in many jurisdictions, to have blunted the momentum of the UNCITRAL Model Law on Cross-Border Insolvency (a form of which exists in the U.K. as “The Cross-Border Insolvency Regulations 2006" and in the United States as "Chapter 15”). It is notable that, even though Model Law traces much of its structure to the EU regulation on insolvency (Council Regulation (EC) No. 1346/2000), that regulation is not the same as the UNCITRAL Model Law, since its language predates the choices made in the Model Law, and incorporates concepts of the significance of the choice of jurisdiction for formal incorporation that have, in enterprise law, been replaced by concepts that have removed much of the significance of the jurisdiction of organization, excepting taxation and labor rights.
The movement in the Model Law is driven by a strong commitment to “UNCITRAL” principles over “territorialist” principles. In banking, the tension between “universalist” and “territorialist” (or, in the language of bank regulators, “ring fencing”) approaches remains more significant, even though in practice the approaches seem to be less at odds than would appear in the abstract. The resilience of territorialist approaches for bank insolvency across borders bedevils many proposed reforms in the area, but it is neither shocking nor inappropriate. Indeed, the group’s report recommends an approach to regulation that incorporates and recognizes the ringfencing effect of “territorialist” principles, while urging increased cross-border cooperation among regulators. With that, and the recent bank failures as context, the group recommends the following:
1. Matters affecting regulatory and supervisory powers generally,
• Effective national resolution powers (including use or creation of tools such as bridge banks, asset transfer powers, and claims resolutions powers) (recommendation 1);
• Framework for coordinated resolution of financial groups (recognizing that different members of corporate groups that contain credit institutions may not all be financial institutions, there should be a legal framework to coordinate the resolution of all members of the group) (recommendation 2);
• Transfer of contractual relationships (focusing mainly on financial market contracts, recommended that the authorities be provided time in which to transfer the financial contract relationships to third parties, public or private, before termination rights of counterparties are exercised) (recommendation 9); and
• Exit strategy and market discipline (establishing clear principles to exit from public intervention) (recommendation 10).2. Matters affecting the impact of individual institutions’ possible failures,
• Reduction of complexity and inter-connectedness of group operations (in light of identity of group members, provide regulatory incentives for groups to simplify structure to permit effective resolution) (recommendation 5);
• Planning in advance for orderly liquidation (for systemically important cross-border institutions, provide plan for resolution) (recommendation 6); and
• Strengthening risk mitigation mechanisms (promoting techniques to reduce systemic risk, including netting, collateral, third-party clearing, segregation of client positions (recommendation 8).
3. International cooperation and relations,
• Convergence of national resolutions measures (coordination on adoption of resolution measures, to avoid significant inconsistencies (recommendation 3);
• Cross-border effects of resolution measures (develop procedures for mutual recognition of crisis management and resolution proceedings (recommendation 4); and
• Cross-border cooperation and information sharing (to address contingency planning and crisis resolution) (recommendation 7).
Some of these recommendations and the underlying recognition of a need for change have already found places in the U.S.’s recently adopted financial regulatory restructuring. Some can be observed in steps outlined as action items in the U.K. and in studies and legislative recommendations in the European Union. Some will continue to be resisted, delayed or modified in various environments and for any number of reasons. The UNCITRAL work on cross-border insolvencies provides some interesting points of comparison (but the report carefully steers away from endorsing its approach, noting some additional problems that the UNCITRAL Model Law approach causes for banks). As the work of the UNCITRAL committee proceeds in efforts to address the issues of insolvencies in corporate groups, the group’s observations and work on “financial groups” may well be instructive in the wider area of cross-border insolvency. In the line of development in Basel Committee pronouncements on cross border insolvency (starting in 1978, and modified in the 1990s), this report promises a basis to address the area in light of the most recently revealed results of bank crises.