Journal of Financial Regulation and Compliance

Special bank resolution and shareholders' rights: balancing competing interests : Table of Contents

Eva Hüpkes — Sun Jul 12 14:15:06 BST 2009

Abstract:
Purpose – An 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/approach – The 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. Findings – The 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 implications – The paper presents options on how to reform existing frameworks in order to facilitate bank restructurings in a crisis. Originality/value – The paper discusses key elements that policy makers need to consider in the design of a regulatory framework for early intervention and resolution.

Retail depositors, conduct of business and sanctioning : Table of Contents

Peter Cartwright — Sun Jul 12 14:15:06 BST 2009

Abstract:
Purpose – The purpose of this paper is to consider whether a move from self-regulation in the form of the Banking Code to statutory regulation by the Financial Services Authority (FSA) of retail banking conduct of business is to be supported. Design/methodology/approach – The paper begins by examining the nature of the self-regulatory process and then considers its strengths and weaknesses in the context of the Banking Code. It then looks at the changes proposed by the FSA. Focusing in particular on the issue of enforcement, the paper contrasts the powers of the Banking Code Standards Board and the FSA. Findings – The paper concludes that, while a move to statutory regulation is to be supported, there is concern about whether such a move will bring the benefits that might have been expected. Practical implications – More attention needs to be paid to the ways that different forms of regulation operate in practice, with empirical research particularly valuable. Originality/value – The paper adds to the (relatively brief?) literature on consumer protection in banking, and the even briefer body of research on self-regulation.

Ignoring the lessons for effective prudential supervision, failed bank resolution and depositor protection : Table of Contents

Gillian G.H. Garcia — Sun Jul 12 14:15:06 BST 2009

Abstract:
Purpose – The purpose of this paper is to establish three sets of principles – the first for effective prudential supervision of financial institutions; the second for the timely resolution of failed institutions and the management of financial crises; and the third for the successful protection of deposits. It also aims to show how these principles have been eschewed, especially in the USA and the UK. Design/methodology/approach – The first set of principles and examples of their violation are determined from material loss reviews conducted by agency inspectors general, government reports, and academic research. The second set of principles is derived from International Monetary Fund practice and research; violations are those reported in government reports, published research, and press articles. The third set of principles is chosen from those proposed by the Basel Committee on Banking Supervision and the International Association of Deposit Insurers. Violations are those reported in academic and practitioner research and the press. Findings – Many of the three sets of principles have been ignored in the current financial crisis. Research limitations/implications – Experience in previous crises has shown that eschewing these principles delays the resolution of individual failed institutions, increases resolutions costs, and delays the recover from the crisis. If the legal and regulatory system is to be reformed appropriately to prevent a recurrence, future research must discover the reasons why the principles have not been followed. Originality/value – The paper assembles three sets of principles and instances where they have been violated in order to help policymakers, practitioners and researchers to focus on where and what reforms are needed to prevent a recurrence of the current severe financial crisis.

Bankruptcy and reorganization procedures for cross-border banks in the EU: Towards an integrated approach to the reform of the EU safety net : Table of Contents

Gillian G.H. Garcia, Rosa M. Lastra, María J. Nieto — Sun Jul 12 14:15:06 BST 2009

Abstract:
Purpose – The purpose of this paper is to examine the complexities of reorganizing and/or liquidating troubled banks under the European Union's (EU) current institutional framework as it is defined by its directives and by national supervisory, remedial, and insolvency practices. Design/methodology/approach – The paper compares provisions of different EU directives that impact financial institutions and summarizes national remedial practices. Findings – The paper documents the diversity that currently exists among national supervisory, remedial and failure resolution practices for banks. It also assesses the economic efficiency of the institutional framework for resolving problem banks that is defined by the Reorganization and Winding-up Directive and identifies components of the directive that can hamper efficient cross-border resolutions. Research limitations/implications – There is a deficiency in publicly available information on EU member countries' practices for disciplining and resolving troubled banks. Practical implications – The paper assesses issues/conditions that can hamper efficient cross-border resolutions – issues on which policymakers should focus when they reform the current framework. It also explores areas of coordination with other EU directives that deal with financial crisis management that are relevant in the current financial crisis. Originality/value – The paper makes policy recommendations for reforming the EU's current institutional framework for resolving troubled banks.

A new standard for deposit insurance and government guarantees after the crisis : Table of Contents

Andrew Campbell, John Raymond LaBrosse, David G. Mayes, Dalvinder Singh — Sun Jul 12 14:15:06 BST 2009

Abstract:
Purpose – The purpose of this paper is to explore the arrangements that have been used in the present crisis and their relative success and to look to the post-crisis situation. Design/methodology/approach – The paper examines and explains the crisis and the roles of deposit insurance and government guarantees. It deals with coverage, funding, institutional structure, speed of payout, incentives, accountability and, in particular, considers how such systems should function in a world of cross-border institutions. Findings – The paper suggests how such principles and standards should be set either through International Association of Deposit Insurers or some more efficient means to complement an international approach to financial stability being addressed by the Basel institutions. Originality/value – There is no widely accepted standard over what the reformed financial system safety net should look like with respect to the protection of deposits and the wider guaranteeing of creditors and other stakeholders. This paper, therefore, makes an attempt to fill that gap.

Azerbaijan: deposit insurance system : Table of Contents

Afkan R. Isazade — Sun Jul 12 14:15:06 BST 2009

Abstract:
Purpose – The purpose of this paper is to investigate a deposit insurance program for household deposits, which is designed to act as safety net in order to minimize or eliminate the risk of loss of depositors' funds with banks represents a primary element of this reform. Design/methodology/approach – This research paper is scientific investigation aimed at discovering and interpreting facts related to deposit insurance system in Azeri context. The goal of the research process is to produce new knowledge, through the exploratory research, which structures and identifies new problems, and the constructive research, which develops solutions to a problem. Findings – The main finding is that the deposit insurance system in Azeri context as well everywhere provides for the security of funds in the event of bank failure and, thus, contributes substantially to the stability of the financial system in Azerbaijan. The deposit insurance system supports the smooth functioning of the payment system and the credit mechanisms and facilitates the exit of problem banks. Practical implications – As a result of this research paper some changes may be made in local legislation in order to defend the depositor's rights in the most effective way in the case of bank failures. Originality/value – The originality of this paper is that it for the first time describes the deposit insurance system of the Republic of Azerbaijan, its advantages and disadvantages. The paper is addressed to the international business community, particularly those involved in all aspects of banking and deposit insurance law.

FSA challenge in Court of Appeal to finding of Financial Services and Markets Tribunal on question of whether solicitors' firm had contravened financial promotion regime : Table of Contents

Joanna Gray — Sun Jul 12 14:15:06 BST 2009

Abstract:
Purpose – The purpose of this paper is to look at a recent Financial Services Authority (FSA) challenge in the Court of Appeal to finding of Financial Services and Markets Tribunal on question of whether solicitors' firm had contravened financial promotion regime (FSA v. Fox Hayes: Court of Appeal (civil division): Lord Justice Longmore, Lord Justice Wilson, Lord Justice Lawrence Collins). Design/methodology/approach – Examines the FSA's various grounds for appeal and what was an appropriate level of penalty. Findings – Provides the court of appeal's decisions on point of law in relation to three issues. Originality/value – This paper will be of interest to regulated firms who fear the consequences of regulatory liability for breaches of FSA rules.

The role of the Fannie Mae/Freddie Mac duopoly in the American housing market : Table of Contents

David Reiss — Sun Jul 12 14:15:06 BST 2009

Abstract:
Purpose – The purpose of this paper is to provide a brief introduction to the role of the Fannie Mae/ Freddie Mac duopoly in the American housing market. Design/methodology/approach – First, the paper defines the “government sponsored enterprise,” which is the type of hybrid public/private entity that Fannie and Freddie are and provides an introduction to the other significant government sponsored enterprises. It then explains what Fannie and Freddie do in the American mortgage market and provides a brief history of how the two companies developed. Finally, it evaluates the two companies as duopolists in the conforming mortgage market. Findings – The paper concludes by suggesting that the current financial crisis presents an opportunity to rethink whether the Fannie/Freddie duopoly continues to serve the public interest. Research limitations/implications – Because of its length, the paper does not review alternative approaches to the status quo that the US Government can take to ensure that it has a stable federal housing finance policy. Practical implications – The paper argues that the current financial crisis provides an opportunity to revisit the design of the structure of the US housing finance market. Originality/value – The paper sets forth the rationale and legal basis for characterizing Fannie Mae and Freddie Mac as duopolists.