{"id":271334,"date":"2010-01-28T15:45:44","date_gmt":"2010-01-28T20:45:44","guid":{"rendered":"tag:http:\/\/www.economist.com,2009:21004539"},"modified":"2010-01-28T15:45:44","modified_gmt":"2010-01-28T20:45:44","slug":"bail-in-roundtable-some-protections-needed","status":"publish","type":"post","link":"https:\/\/mereja.media\/index\/271334","title":{"rendered":"Bail-in roundtable: Some protections needed"},"content":{"rendered":"

Philip R Wood is the head of the Global Law Intelligence Unit at Allen & Overy. For an explanation of this roundtable, click here<\/a>.<\/em><\/p>\n

\"\"PAUL CALELLO and Wilson Ervin are spot-on in their ingenious and thoughtful analysis of what actually happens when a bank is about to fail and how little time there is to resolve the problem.<\/p>\n

One of the key issues they raise is whether, if a bank is in trouble, the authorities should be granted strong-arm powers more or less to do what they like with the bank by administrative diktat, e.g. sell-off bits of a bank, transfer sections to a bridge bank or coercively convert debt into equity.<\/p>\n

Effectively this is a nationalisation of bankruptcy law.  Apart from ideological issues about how dirigiste we think the state should be, if we go the coercive route, certain protections need to be included in the design of the sledgehammer law.<\/p>\n

The first is that there needs to be protection against the whistling away of assets from liabilities. For example, the authorities decree that the assets will be transferred to a bridge bank for nothing so that the creditors of the old bank are left with nothing. If this could happen (and it can under the tougher versions of strong-arm laws), it would be impossible to do a credit analysis of a bank.<\/p>\n

The second protection relates to the observance of the all-important bankruptcy ladder of priorities. Even the most cursory examination of bankruptcy internationally shows that the utopian principle that creditors should be paid equally is nowhere honoured. On the contrary creditors are paid according to a scale or ladder of priorities. Nowhere is there a flat field but rather an intricate series of steps as creditors scramble upwards, gasping for more air to escape the swirling tides of rising debt and to breathe in the squeezed bubble of oxygen at the top.<\/p>\n

This ladder is typically divided in to six main ranks or rungs but there are dozens of internal little highly-pitched mini-ladders. The main ladder ranges, for example, from (1) peak super-priority creditors, such as creditors with collateral, creditors entitled to net their exposures and clients able to claim back assets held in custodianship, through to (2) priority claimants such as (sometimes) retail depositors and employees, through to (3) ordinary creditors (typically other banks and bondholders) and through to (4) the claimants at the bottom of the ocean who get nothing, e.g. equity shareholders.<\/p>\n

The jurisdictions around the world have very different ideas about who should be high on this ladder (and therefore survives) and who gets drowned. But the fact is that this ladder is basic to the contract and property rights of participants and to their expectations of risk.  It is crucially important that a strong-arm statute should not permit arbitrary disruption of the local view of the ladder. The amounts involved are enormous so that, if a firm thinks it is top, but is forced to the depths, the sudden unexpected loss could have cascade consequence if the bank does ultimately fail. Working out exactly what the entitlements of the claimants are in the midst of the drama is not so easy, e.g. how much debt you have to convert forcibly into equity, because this depends upon valuations.<\/p>\n

Without entrenchment of this ladder, the government of the day might have very different ideas about who needs protection in the national interest, e.g. the depositors, as opposed to the interests of other banks and bondholders.<\/p>\n

The UK method in a 2009 law was to entrench the protection of some priorities in the ladder and to provide state compensation to other creditors injured by the strong-arm powers. This solution has other problems but is still worth considering.<\/p>\n

One related but intractable issue which is currently the subject of much controversy is how one deals with groups. Another is whether on the bankruptcy of banks we should go for the territorial approach, whereby the bank on bankruptcy is split up into little national cells locked up behind their highwire fences and available only to local creditors, or whether the home bankruptcy should be universal world-wide. I am a one planet guy and therefore believe broadly in the universalist approach on bankruptcy, but I suspect I am in a minority.<\/p>\n","protected":false},"excerpt":{"rendered":"

Philip R Wood is the head of the Global Law Intelligence Unit at Allen & Overy. For an explanation of this roundtable, click here. PAUL CALELLO and Wilson Ervin are spot-on in their ingenious and thoughtful analysis of what actually happens when a bank is about to fail and how little time there is to […]<\/p>\n","protected":false},"author":5148,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[7],"tags":[],"class_list":["post-271334","post","type-post","status-publish","format-standard","hentry","category-news"],"_links":{"self":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts\/271334","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/users\/5148"}],"replies":[{"embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/comments?post=271334"}],"version-history":[{"count":0,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts\/271334\/revisions"}],"wp:attachment":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/media?parent=271334"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/categories?post=271334"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/tags?post=271334"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}