Vol 14 (2017) - Issue 5

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Restructuring Failing Banks for Economic Recovery: In Search of an International Insolvency Regime

1. Introduction
The 2008-09 global financial crisis showed the need for effective resolving procedures as fundamental pillar of a bank insolvency framework. The implementation of new regulatory tools involved the development of principles such as flexibility, coordination and depositor protection. It is generally considered that any banking crisis has at its root bad lending and investment decisions: the most important part of a bank's balance sheet is the quality of the asset portfolio. However, such quality remains difficult to assess at any given time. This complicates meaningful cross-border comparisons when it comes to resolution, stress tests or consolidated supervision. In the context of recovery and resolution plans and resolvability assessments, a common understanding of the hierarchy of debt instruments, in particular with regard to the concept of 'bail in', is increasingly being accepted. This article examines the current architecture of bank insolvency in light of the European regulatory developments, and considers the different approaches adopted by the supervisory authorities to deal with the restructuring of failing banks. The aim is to demonstrate the weaknesses of such approaches – in particular, the 'bail-in tool' and the 'public support option' – as there is no general agreement on which bank restructuring alternative is preferable.