Bank Insolvency: China and Europe compared
In a unique global research project, the China University of Political Science and Law (CUPL, Beijing, China) and Leiden Law School’s Hazelhoff Centre for Financial Law are finalising and comparing new bank insolvency laws for China and Europe.
A joint global research project, which started in 2014, is now nearing its completion. The China University of Political Science and Law (CUPL, Beijing, China) and Leiden Law School’s Hazelhoff Centre for Financial Law are finalising an innovative joint research project on ‘New Bank Insolvency Law for China and Europe’. This project is partly funded by a grant from the Royal Netherlands Academy of Science (KNAW) and the Ministry of Education of the People’s Republic of China. Last week, in Beijing, a third and final conference was held.
The core of the project is the Chinese and European legislative effort of the last eight years, to establish measures to prevent and overcome bank insolvency law, which is unequivocally a subject of major economic, social and political relevance. A team of some ten researchers from both universities have been taking part in the project, led by Professor Matthias Haentjens (Hazelhoff Centre), Professor Qingjiang Kong (CUPL) and myself.
In March 2015, during a conference in Beijing, the first two reports were discussed. These reports set out the current and future state of, in short, bank insolvency law in China and Europe. Both reports followed a similar structure and discussed some ten topics, including regulatory initiatives, resolution measures, judicial review, deposit guarantee schemes, and a detailed account of relevant contract law, corporate law and (international) insolvency law. As a result of that conference, certain topics were selected for further investigation in a second report. This report was the focal point at a workshop that took place in Leiden in November 2015. It covered financial transactions entered into by a failing bank, judicial redress, deposit guarantee schemes, bail-in and the recognition of resolution measures of, and in, third countries. Revised versions of these reports will soon be published. The project will conclude with a comparative report evaluating the most salient topics.
As to my personal involvement, I have studied the effects of resolution tools outside the territory where they have been taken. In 2011, the Financial Stability Board (FSB) published Key Attributes of Effective Resolution Regimes (‘Key Attributes’), with updates published later. These covered a coordination framework for monitoring the implementation of agreed G20/FSB financial reforms. The present text of FSB Key Attribute 7.5 reads: ‘Jurisdictions should provide for transparent and expedited processes to give effect to foreign resolution measures, either by way of a mutual recognition process or by taking measures under the domestic resolution regime that support and are consistent with the resolution measures taken by the foreign home resolution authority.’ At a European level, this Key Attribute is reflected in the Bank Recovery and Resolution Directive (BRRD) applicable throughout the EU, with a specific but rather limited system for recognition and enforcement; and for the Eurozone in the Single Resolution Mechanism Regulation (SRMR). Where this system leaves uncertainties, or certain matters unresolved, I would suggest that not every jurisdiction should create its own additions, but rather that – limited to the EU – the EU itself should establish a complementary regime. With these Key Attributes, the FSB is aiming for rules to be implemented through which ‘… authorities [can] resolve financial institutions in an orderly manner without taxpayer exposure to loss from solvency support, while maintaining continuity of their vital economic functions.’ Instead of national ‘authorities’, a uniform system should be set up throughout the EU, to guarantee that the vital economic functioning of financial institutions is uninterrupted in the entirety of the EU, and to ensure that the costs for taxpayers are minimised in all Member States in an equal way. This will enhance the proper functioning of the internal European market, and – for third countries - will support a unified external ‘trade’ policy. On the basis of the UNCITRAL Model Law on Cross-border Insolvency, a Model Law for Recovery, Resolution and Insolvency of financial institutions should be developed and laid down in a Regulation, as an EU complementary regime. A few specific themes should be added: rules for ex ante coordination and particular rules which reflect the way in which the demise of Lehman Brothers was rather successfully handled (via a ‘global protocol’).
Back to the reports. These have resulted in advice for practitioners and regulators, as well as reflecting the long-standing academic cooperation between CUPL and Leiden Law School, which has proven to be an excellent foundation for a joint research project that addresses the main question: how to best achieve a modernised bank insolvency regime for China and the EU.