Bank Resolution Regimes: Balancing Prudential Regulation and Shareholder Rights

Abstract

A bank resolution regime requires regulators to have the authority and instruments to restructure a bank's operations if its failure threatens the stability of the financial system or undermines other regulatory objectives, such as depositor confidence. Such regulatory action, however, may affect shareholder rights in the restructured bank and possibly reduce the economic value of their ownership interests. The credit crisis of 2007–09 has demonstrated the importance of having a resolution regime that balances the rights of shareholders against the objectives of prudential regulation and crisis management. The constraints of corporate insolvency regimes can be too cumbersome for effective resolution of a banking enterprise, especially during a financial crisis when a failing bank not yet insolvent needs to maintain open lines of credit with other financial institutions and to manage its balance sheet while achieving regulatory objectives. Bank resolution regimes must be designed not only to protect shareholders and creditors, but also to achieve other regulatory objectives that are vital for the efficient operation of the economy. Although the UK Banking Act 2009 provides a comprehensive framework for bank corporate restructuring and insolvency, it creates a mechanism to suspend corporate governance rules pre-insolvency and thus interferes with shareholder rights. This raises important issues under EU company law and the European Convention on Human Rights regarding the protection of property interests in a restructured bank. The article examines the special resolution regime of the UK Banking Act 2009, analyses the relevant issues of EU Company Law and related human rights law and suggests some legal principles to be applied in developing a special resolution regime.