Vol 12 (2015) - Issue 1

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Bail-in or Bail-up? Reappraising Hong Kong’s Proposed Financial Institution Resolution Procedures

Introduction
The recent Global Financial Crisis (GFC) has had a lasting impact on the international financial sector. Emerging around mid-2007, the GFC was triggered by a series of adverse financial events, beginning with the Lehman Brothers bankruptcy, and saw sections of international financial markets come to an almost complete halt, creating fears about the stability of the global financial system. The reactions of governments and central banks around the world was unprecedented in scale and evoked drastic policy responses including, '[s]izeable fiscal stimulus, large reductions in policy interest rates, guarantees of bank deposits and bank debt issuance, and in some cases, sizeable government ownership of troubled financial institutions.' The crisis was so severe that it warranted international governmental coordination and a search for regulatory solutions. Davis writes that, 'The global nature of the crisis has seen an attempt at harmonized global regulatory responses overseen by the G20 and prompting some changes to the structure and responsibilities of international agencies to achieve that outcome.' At a national level, in the US and UK, near insolvent or rapidly failing financial institutions (FIs) were bailed-out by the respective governments, using trillions of taxpayer dollars to avoid a financial meltdown.
In the aftermath of the GFC, therefore, resolution regimes for FIs experiencing financial problems have been regarded by international monetary organisations such as the World Bank, the International Monetary Fund, the G10 and G20 and the European Central Bank (ECB), as viable alternatives to government bail outs, such as that undertaken by the United Kingdom (UK) government in relation to Northern Rock plc. Furthermore, the catastrophic economic effect upon domestic and international economic systems of financial failures and consequential insolvency procedures have served to underline the need for a more internationally integrated and, most importantly, more efficient and less disruptive method of recapitalising or liquidating failing FIs. In response to these issues, the Financial Stability Board (FSB) of the G20 developed a model regulatory regime for the resolution of non-viable FIs, commonly referred to as the 'Key Attributes.' Since the dissemination of the Key Attributes, a number of countries such as Canada, the United States, the UK, and the EU Parliament have introduced legislation and procedures for the implementation of resolution regimes based upon the Key Attribute recommendations.