A global cross-border insolvency framework for financial institutions

The recent financial crisis has shown that national frameworks have been insufficient to stem the cross-border effects of the failure of a systemically important financial institution. This paper refers to the challenges for governments, in the aftermath of the financial crisis starting in 2007/2008, to provide stability in financial markets and the role of financial institutions for national economies and on a global scale. It discusses the need for coordinated action to resolve SIFIs by evaluating the regional approaches in Europe and the US, as well as considering the recommendations of four international bodies on the insolvency of large and complex financial institutions: the Financial Stability Board, the United Nations Commission on International Trade Law, the International Monetary Fund and the Basel Committee on Banking Supervision. The paper argues that key implications need to be recognized in order to make a global cross-border insolvency framework work effectively to coordinate around another Lehman-like event. It concludes that much has been discussed and initiated in the last six years, however, many issues are still unsolved. While single measures with a regional character are fit and comprehensible as a starting point, the pursued goal should be a mandatory and internationally consistent, homogenous cross-border insolvency framework since the interconnectedness of global financial institutions and their importance for financial stability will make it very difficult to prevent the next crisis and its disruptive impact

Cross-Monitoring and Corporate Governance

We take the view that corporate governance must involve more than corporate law. Despite corporate scholars\u27 nearly exclusive focus on corporate law mechanisms for controlling managerial agency costs, shareholders are not the only constituency concerned with such costs. Given the thick web of firms\u27 contractual commitments, it should not be a surprise that other financial claimants may also attempt to control agency costs in their contracts with the firm. We hypothesize that this cross-monitoring by other claimants has value for shareholders. We examine bank loans for empirical evidence of the value of cross-monitoring. Our approach builds on prior empirical work on the value of good corporate governance, to which we add data on the presence of bank loans and their interactions with free cash flow, governance indices, and individual corporate governance provisions. To our knowledge, ours is the first study to measure the performance effects of bank debt as a device for reducing managerial agency costs, and the first study on the interaction of ongoing bank monitoring with corporate governance arrangements. We find strong evidence that bank monitoring adds value. In effect, bank monitoring can counteract somewhat the value-decreasing effects of managerial entrenchment. Bank monitoring may substitute for good corporate governance