Bank crisis resolution and foreign-owned banks

Abstract

In many countries in recent years, failure to efficiently resolve large insolvent banks has come at a high cost both to taxpayers and to the countries’ aggregate income. The increasing entry of foreign banks has complicated the resolution process. ; This article explores some special problems in the efficient resolution of insolvent banks raised by cross border banking, particularly weighing the costs and benefits of foreign bank entry via branches versus subsidiary banks. These problems lie primarily in the cross country differences in both the closure rule and the deposit insurance structure. ; The authors propose a four-point program for resolving insolvent institutions efficiently but note that the presence of foreign-owned banks may make adhering to these principles difficult. To mitigate these problems, the authors propose several policies: central multinational deposit insurance, a single insolvency resolution agency, and common or harmonized laws regarding insolvency resolution and enforcement. ; In the absence of such policies, the authors suggest that entry by way of subsidiaries rather than branches presents the lesser set of problems for the host country. For all forms of entry, they conclude, resolution costs can be most effectively controlled through the universal adoption of well-designed and enforced prompt corrective action policies and legal closure rules based on market values of assets and liabilities.Bank failures