Resolution Regime Research Articles

(Reforming Financial Resolution Regime for Financial Stability)

Korean Abstract: 금융의 글로벌화로 금융기관간 상호연계성이 확대되어 과거와는 달리 금융불안정은 특정 금융부문이나 특정 국가의 문제에 그치지 않고 순식간에 전세계 금융시장 및 실물경제로 전파되는 속성을 드러내었다. 이에 반해 기존의 금융정책체계는 글로벌 금융불안정에 대응하기 위한 국제적 기준이나 협조체제가 잘 갖추어지지 않았고, 대형화된 복합금융그룹의 부실시 순차적인 정리제도가 미흡하여 금융안정을 확보하는 데 한계가 있다. 따라서 시스템 리스크를 야기할 수 있는 금융기관의 부실화에 대한 금융규제감독 및 공적 금융안전망 체계를 새로이 정립할 필요성이 절실하게 대두되었다. 우리나라의 경우 이번 글로벌 금융위기 과정에서 상대적으로 금융기관의 부실 발생도 적었고 금융위기도 빠르게 극복하고 있으나, 금융안정을 유지하고 향후 시스템 리스크를 예방하기 위해 금융기관 부실정리제도를 정비할 필요성이 높아지고 있다. 이에 본고는 국경간 정리제도 정비, 복합금융그룹의 부실시 정리방안 마련, 금융위기시 한시적 예금보호 확대 등에 대한 제도적 검토와 함께, 예금보험공사의 부실금융기관 정리비용 개선을 위한 정보공유의 확대 및 정보수집 능력 강화, 적기시정조치 참여, 정리절차 개선 등에 관한 개선방안을 제시하고 이를 논의한다. English Abstract: Due to rapid financial globalization and deepening interconnectedness among financial institutions, the insolvencies of large complex financial institutions(LCFIs) operating globally can threaten global financial markets and the real economy by creating a rapid contagion of negative impacts. The effects of the large bank failures were so huge that the current financial regulatory and supervisory regime was unable to secure the financial stability by regulating the financial institutions properly during the recent crisis. It was apparent that effective global standards and orderly resolution procedure for insolvent LCFIs must be established and that the financial regulatory and supervisory framework and the financial safety net need an overhaul to stabilize insolvent financial institutions which may trigger a systemic crisis. This paper aims to review the current resolution regime of the Korean financial market and make some suggestions to improve its effectiveness. Though there were no severe insolvencies in the Korean financial market during the crisis, the need to improve the effectiveness of the resolution regime for the financial institutions in order to prevent any financial instability and systemic crisis became apparent after the collapse of global LCFIs, such as Lehman Brothers, Northern Rock Bank, etc. This paper covers the following topics that are separate but closely related for the financial stability in Korea; cross-border resolution regime, resolving insolvencies of LCFIs, adopting a blanket guarantee scheme for deposit insurance during a financial crisis, reinforcing the role of the KDIC to maximize the efficiency in resolution by improving information sharing and collection, prompt corrective action, and resolution procedure.

Crisis Regulation Demand

This paper argues and identifies in its previous part the main hallmarks of the crisis as too-big-to-fail institutions that took on too much risk, insolvency resulting from contagion and counterparty risk, the lack of regulatory and supervisory integration, and the lack of efficient resolution regimes. Then this article looks at how the Basel III proposals address these issues, helping to reduce the chance of another crisis like the current one. The Basel III capital proposals have some very useful elements, notably a leverage ratio, a capital buffer and the proposal to deal with pro-cyclicality through dynamic provisioning based on expected losses. However, this article also identifies some major concerns.

Cross-Border Resolution of Failed Banks in the EU: Search for the Second-Best Policies

The response to failures of transnational banks within the European Union (EU) has been distinctly national. The EU institutional framework for cross-border bank resolution proved too weak to sustain coordination and prevent open intergovernmental conflicts. This paper summarizes reasons for this failure and reviews structural, political and legal constraints restraining acceptability of various reform alternatives within the EU. The first-best solution would be either a development of an EU-level bank resolution regime for cross-border banks or turning the transnational banks into a string of independent national subsidiaries backed by national resolution regimes. However, both of these alternatives would require amendments of fundamental EU treaties and they face strong opposition from various stakeholders so they are unlikely to be acceptable in the Council and European Parliament. Ultimately, the introduction of a new governance mechanism is the most likely EU response to the failure of the cross-border resolution regime. The emerging governance arrangements rest on newly created European System of Financial Supervisors and ex ante burden sharing arrangements prepared by the new colleges of supervisors overseeing about 40 of the systemically important financial groups in the EU. The banks are likely to be drawn into the new framework by an obligation to prepare ex ante resolution plans ('living wills'). The new governance arrangements represent a politically feasible second-best solution, as they increase the likelihood that the cooperation will be sustained in crisis, while not impinging on the fiscal sovereignty of member states or restraining the internal market freedoms.

Powder diffraction by fixed incident angle reflection using a curved position-sensitive detector

As curved position-sensitive detectors improve in angular resolution, the effects that fixed incident angle reflection have on X-ray diffraction peaks become more apparent. In this study the effects of sample transparency, incident beam height, detector resolution and sample displacement on the intensity, location, width and shape of powder diffraction peaks were examined. The functions describing each of these phenomena are presented and were successfully used to quantitatively model the diffraction peaks collected in this geometry. Three distinct regimes of diffraction peak resolution were identified from the phenomena that limit the peak variance. Pertinent criteria based on experimental parameters have been outlined to classify fixed incident angle reflection experiments into each regime. Guidelines for improvement of experimental resolution and for conducting analysis of data acquired using fixed incident angle reflection geometry and curved position-sensitive detectors are also provided.

Supervisory Colleges: The Global Financial Crisis and Improving International Supervisory Coordination

The current financial crisis has caused many governments and international bodies to reconsider the tools governments have used to supervise financial institutions, particularly those systemically important institutions with cross-border operations. This article describes and analyzes one of those tools – the increased use of supervisory colleges in regulating international banks. The article begins with a brief review of the use of supervisory colleges in the 1980s and 1990s and particularly the failure of supervisors to cooperate in detecting the massive fraud committed by managers of BCCI resulting in the one of the largest international bank failures of the 20th century. The article then analyzes and describes in detail the use of colleges in the European Union. The development of EU law and EU-wide agencies is discussed, particularly the Lamfalussy committees, the recommendations of the Larosiere report and the financial services legislation proposed by the European Commission creating three European supervisory authorities. The article also discusses the standards issued by the Basel Committee on Banking Supervision regarding the operations of supervisory colleges and the more recent emphasis of the newly empowered G-20 on the use of colleges as a tool to both improve supervisory cooperation and improve surveillance of individual financial institutions. Finally, the article highlights the limitations of supervisory colleges as decision-making bodies. The author argues for the need of an international resolution regime for financial institutions that would buttress the use of colleges of supervisors as a micro-prudential supervisory tool. Until such a regime consisting of harmonized substantive law is in place, the benefit of supervisory colleges will generally be limited to the improved exchange of micro-prudential information.

The Governance of 'Too Big to Fail' Banks

This paper considers possible and proposed responses to the “To Big (complex, interconnected, important) To Fail (TBTF) Problem.” It argues that the corporate governance of large shareholder-owned deposit taking banks is particularly problematic because of the implicit insurance their shareholders and bondholders enjoy, at the taxpayers expense. This creates issues of moral hazard and also competitive inequality, because TBTF banks can raise funds more cheaply than non-TBTF banks. The US pre-funded deposit insurance scheme with risk-related premia does a pretty good job managing the moral hazard issues relating to non-TBTF banks. A parallel mechanism involving a special resolution regime for TBTF banks and the equivalent of deposit insurance with risk-related premia needs to be put in place. Whether the scheme should be pre-funded or operated on a ex post ‘polluter pays’ basis, and the associated tax regime for TBTF banks needs further consideration. Bondholders should not enjoy the current level of protection and Co-Co bonds may be part of the solution. Consumer Protection is a good idea and deposit taking banks should be regulated as other utilities are in the UK. The corporate governance problem would be simpler if all retail deposit taking banks were mutuals!

Rivalry in Resolution. How to reconcile local responsibilities and global interests?

This paper proposes a cooperative international framework for the resolution of large globally active financial institutions. The framework builds on and complements the principles of the Basel Concordat. It consists of three steps: (1) First, national authorities examine how responsibilities for supervision, regulation and resolution of the institution operating in their jurisdiction are allocated and whether or not relevant home/host jurisdictions have in place an effective resolution regime that meets internationally agreed minimum standards. Such minimum standards would relate to the existence of adequate early intervention and restructuring powers, robust and credible firm-specific recovery and resolution plans, and a transparent and predictable mechanism for the allocation of losses. (2) Second, national authorities evaluate the implications of the arrangements in different jurisdictions for financial stability in their own jurisdiction in the event of the failure and resolution of the institution. In doing so, they pay particular regard to whether creditors in their jurisdiction would be treated equitably and in line with “best interest” and “national treatment” principles, whether critical financial functions in their jurisdiction can be preserved and whether the costs of resolution and moral hazard are contained. (3) Third, on the basis of these assessments, national authorities determine whether further action is needed to reduce the probability and impact of failure. If such a determination was made, they would apply additional prudential or structural requirements for cross-border operations (e. g., require separate incorporation and stand-alone capacity; greater structural separation of activities, stricter intra-group exposure limits, higher capital and liquidity requirements).

Towards a Russian doll model of financial fragility and corporate governance

We show that the phenomenology of sources of financial instabilities can be traced back to the iteration of a single and conceptually simple step: the pooling of cash-flows priced at different levels of resolution of price-relevant information. We illustrate this with examples from bond rating, bond pricing, deposit insurance pricing, various kinds of regulatory arbitrage, risk-adjusted capital allocation, persistent mispricing of risk, the impact of accounting for Level-3 assets, the design problem for a special resolution regime and financial implications of the process of financial reform itself. We find that conflicts between the financial interests of various stakeholders can be viewed as examples of tranche wars from the point of view of abstract synthetic re-securitizations of pools of cash-flows.

The reform of UK financial regulation

Since the enactment of the new Banking Act in February 2009, with a new ‘Special Resolution Regime’ at its heart, the debate about how to reform the United Kingdom's financial regulatory and supervisory framework has intensified. A major catalyst for this was the publication of Lord Turner's ‘Review’ in March 2009, which was followed by the Government's White Paper on financial reform in July. The same month, the Conservative Party revealed its own White Paper on the subject, with both the Bank of England and the Financial Services Authority contributing to the debate at frequent intervals. The purpose of this article is to review and analyse these documents and viewpoints before coming to a conclusion about the most appropriate way forward on the domestic financial regulatory front.

‘Form Follows Function’ — A New Architecture for Regulating and Resolving Global Financial Institutions

The global financial crisis has revealed significant weaknesses in resolution regimes for large and internationally active financial institutions. The nub of the problem is the mismatch that exists between the way institutions are organised and operate, the way they are regulated and supervised and the way they are resolved in a crisis. The Lehman case illustrated that the greater the integration of individual entities into the operations of the wider group, the greater the challenges in achieving an orderly resolution. In a crisis it is legal entities rather than business lines that fail, and it is the legal entities that will be liquidated in separate and territorially-based proceedings. It is unrealistic to expect the creation of a global regulatory authority or an overarching international insolvency framework for cross-border financial groups in the foreseeable future. In light of the quasi-insurmountable obstacles to achieving a framework that adapts legal and regulatory frameworks to the economic reality of complex group structures and allows for a coordinated (or even consolidated) resolution of global financial institutions, this paper proposes an alternative approach. In order to reduce the complexities in resolution it suggests changes to the way in which financial groups structure themselves and conduct their operations.

Early Intervention and Prompt Corrective Action in Europe

The present crisis has revealed that, as expected, much of the safety net for handling failures in the banking system is deficient, particularly for cross-border banks, and the present problems had to be handled by a range of ad hoc measures. The principal new measure that needs to be undertaken in most countries is the implementation of a satisfactory special resolution regime for banks. This paper, however, deals with two further steps that could assist the operation of the safety net. The first is to ensure earlier intervention so there is more time to put a satisfactory rescue or resolution in place. The second is to implement a regime of prompt corrective action (structured early intervention and resolution, SEIR) so that both supervisors and banks know that a regime of increasing intensity will take place according to a strict timetable that will end in the authorities stepping into the bank while it still has positive capital, if the earlier stages are not effective. The paper evaluates the means of doing this in a European environment making use of the experience in the United States. It concludes that, while a lot can be done even within the current framework of national supervision, particularly through pre-positioning, cross-border banks can be better treated either by revising the home-host responsibilities or by moving to a supranational level of responsibility for SEIR for those banks whose continued operation is considered necessary for financial stability in any member state.

The UK Special Resolution Regime for Failing Banks in an International Context

This paper seeks to place in an international context the UK Special Resolution Regime (SRR) for failing banks, which came into effect in February 2009 with the adoption of the Banking Act. The SRR’s key purpose is to enable an orderly resolution of a failing UK bank to be carried out in a manner preserving the public interest, particularly by maintaining financial stability, preserving confidence in the banking sector, and protecting both depositors and the taxpayer. The Northern Rock crisis in 2007 demonstrated clearly that the UK authorities lacked the powers necessary to achieve such a purpose at that time.

Special bank resolution and shareholders' rights: balancing competing interests

PurposeAn effective bank resolution regime requires taking action while the bank still has positive net worth and shareholder claims still have economic value. Such actions raise a number of legal issues with respect to the rights of shareholders. This paper aims to consider how to strike a balance between the need to protect the legitimate rights of shareholders and the need for a prompt and rapid action and a failure resolution mechanism that minimizes disruptions to the financial system and preserves market discipline.Design/methodology/approachThe paper examines the nature of the shareholders' rights and the legal protection afforded to them. In the European context, the relevant sources of law are the European Convention on Human Rights and the applicable community legislation. It considers different options for resolution within this framework ranging from a pre‐packaged resolution decided by the shareholders ex ante to the outright divestiture of the shareholders once certain regulatory thresholds are breached while the bank still has positive net worth.FindingsThe curtailment of shareholder rights should seek to generate appropriate incentives for shareholders and other stakeholder and achieve broad objectives of enhancing predictability and maintaining public goods, while at the same time providing for due process, proportionality and adequate compensation.Practical implicationsThe paper presents options on how to reform existing frameworks in order to facilitate bank restructurings in a crisis.Originality/valueThe paper discusses key elements that policy makers need to consider in the design of a regulatory framework for early intervention and resolution.

Central Bank’s Role and Involvement in Bank Regulation: Lender of Last Resort Arrangements and the Special Resolution Regime (SRR)

This paper considers developments which have necessitated greater involvement and a greater role for the central bank in financial regulation and supervision. The aftermath of the 2007/08 financial crisis has witnessed the enactment of legislation such as the Banking Act of 2009 which has not only introduced greater statutory powers for the central bank, but also the Special Resolution Regime. As well as a consideration of arguments which are in favour of the central bank’s role as supervisor and lender of last resort, the importance of central bank independence and safeguards which exist to ensure that sufficient accountability is fostered, will be considered. Safeguards and accountability mechanisms which are adequate, such that, whilst ensuring that the regulator is not susceptible to regulatory capture, do not impede the ability of such a regulator to obtain vital and necessary information from systemically important individual financial institutions. In its support of the view that central banks should assume a greater role in supervision, this paper not only seeks to justify why such a degree of involvement is vital to ensuring and maintaining stability in the financial system, but also those factors which are considered to be necessary if such a role is to be effective.

The Banking Act 2009

This article provides a general review of the Act; in particular, the Special Resolution Regime that it introduces, which will enable the UK authorities to deal with banks (and, indeed, building societies) that have failed. The regime includes three Stabilisation Options, by which the assets and liabilities of a bank, and its share capital and other securities that it has issued, may be transferred, in whole or in part, to other commercial entities or to a governmental or regulatory body. The regime also provides for two new insolvency procedures for banks. The powers that the Act confers upon the UK authorities are quite radical in their nature. They could well have adverse consequences for counterparties that have dealt with a bank.

DISPUTE RESOLUTION AND THE POSTDIVORCE FAMILY: IMPLICATIONS OF A PARADIGM SHIFT1

Over the past two decades, there has been a paradigm shift in the way the legal system handles most family disputes—particularly disputes involving children. This paradigm shift has replaced the conventional model of adjudication with a more collaborative, interdisciplinary, and forward‐looking family dispute resolution regime. It has also transformed the practice of family law and fundamentally altered the way in which disputing families interact with the legal system. This essay examines the elements of this paradigm shift in family dispute resolution and explores the opportunities and challenges it offers for families, children, and the legal system.

Bank Resolution Regimes: Balancing Prudential Regulation and Shareholder Rights

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.

Banking supervision and the special resolution regime of the Banking Act 2009: the unfinished reform

One of the fundamental rationales underpinning banking regulation and justifying the costs it entails is the prevention of banking failures and associated depositor runs. This is exactly what the UK regulators could not prevent during the Northern Rock crisis. Apart from the much discussed regulatory failures, the Northern Rock crisis also exposed the absence of an effective legal system dealing with failing banks. The Banking Act 2009 introduces a number of important and far reaching reforms, including a Special Resolution Regime (SRR) for failing banks. The reforms address several of the identified regulatory loopholes. Thus, the Act constitutes a significant improvement over the previous regime. Yet the Act does not seek to reform banking supervision arrangements, even though these have become the subject of considerable criticism. This article argues that, in addition to other reasons, the effective operation of the SRR requires the reform of the institutional structures of the UK system of banking supervision. Otherwise the serious governance challenges and distributional issues the SRR creates may seriously undermine the standing of the SRR authorities, namely, the Treasury, the FSA, and the Bank of England, and have an adverse impact on the effectiveness of the new regime.

Theoretical Limits To Errors, Acquisition Rates, And Resolution In Microscopy Of Switchable Fluorophores: Replacing The Diffraction Limit With The Algorithm Limit

We calculate error rates, and their effects on imaging speed and resolution, in techniques that overcome the diffraction limit by using switchable fluorescent molecules. Recent experimental work has beaten the diffraction limit in fluorescence microcopy by activating and localizing subsets of the fluorescent molecules in the specimen, and repeating this process until all of the molecules have been imaged. Examples include PhotoActivation Localization Microscopy (PALM), STOchastic Reconstruction Microscopy (STORM), and microscopy of blinking quantum dots. In all these techniques there is a tradeoff between speed (activating more molecules per imaging cycle) and error rates (activating nearby molecules and producing overlapping images that hide information on molecular positions), and so intelligent image-processing approaches are needed to identify and reject bright spots containing multiple molecules. We show that there is a maximum acquisition rate determined by this trade-off, and that how closely one can approach this acquisition rate depends on the capabilities of the algorithm used to distinguish single-molecule spots from multi-molecule spots. In particular, we calculate the error rates of commonly-used algorithms that use the shape of the bright spot rather than the overall intensity. This technique is used in STORM because fluorescent dyes have fluorescence efficiencies that can be strongly affected by the local environment. We show that the capabilities of these algorithms, in combination with the target contrast between fluorophores and background, determine whether the resolution is limited by the capabilities of the algorithm or the number of photons collected, leading to photon-limited and algorithm-limited resolution regimes. Finally, we consider algorithms that can infer molecular positions from images of overlapping blurs, and derive the dependence of the minimimum acquisition time on algorithm performance for this class of algorithms.

The Need for Special Resolution Regimes for Financial Institutions - The Case of Theeuropean Union

The global financial crisis has demonstrated weaknesses in resolution regimes for financial institutions around the globe, including in the European Union (EU). This paper considers the principles underlying resolution regimes for financial institutions, and draws out how a well-designed resolution regime can expand the toolset available for crisis management. Introducing, or in some cases expanding the scope, of these regimes is pressing to achieve more effective responses to ongoing financial sector weaknesses across the EU.