The New Normal in Bank Insolvency Law

Financial law may not have been shaken, but it has certainly been seriously stirred over the last ten years. With some exaggeration, it might be contended that there has been no other area of law in which developments have been so numerous, or so fundamental. Moreover, financial law does not seem to have reached its final form, or even steered into smoother waters yet. Recent developments in the rules relating to bank insolvency represent only one illustration of this position. In an article titled ‘Three Paradigm Shifts in Recent Bank Insolvency Law’, forthcoming in the Journal of International Banking Law and Regulation, Matthias Haentjens and I identify three paradigm shifts underlying recent developments in bank insolvency law. The ‘new normal’ of bank insolvency law is characterised by public interest considerations taking precedence, by non-judicial control of bank resolution, and by a supra-national approach.

Traditionally, the legal regime governing a bank insolvency was generally aimed at the satisfaction of creditors’ interests, and courts were the main supervisors and referees of the bank’s resolution, their decisions being based mainly on national legislation. The last decade has seen paradigm shifts that seek to reach a balance between the various interests at stake, namely those of creditors, banks, and society at large. Regarding the shift from the primacy of individual interests, especially of creditors, to the public interest, we conclude that whereas, traditionally, insolvencies in many countries were supervised and controlled by courts, bank insolvencies under the new rules tend to be – often entirely – controlled by government authorities, either state owned or independent. We also conclude that while the development of bank insolvency law has not followed an identical path across the globe, it has accelerated European integration in the area of bank restructuring and insolvency law, but also, more generally, in the area of financial law. It is notable that the driver of this development of bank insolvency law is not a national jurisdiction, but a regional entity (the EU), which is determining the implementation of bank insolvency law at Member State level.

Overall, we conclude that the current status of bank insolvency law is an enhanced coordinated crisis management, which has proven to be inter- and infra-disciplinary, as well as inter- and supra-national. Standard setters, policy makers, and legislators all over the globe struggle with the same questions, albeit sometimes in different legal traditions and contexts. Moreover, the financial crisis has shown the international and supranational dimension of crisis management in the banking sector, so that new rules in this field should be enacted, analysed, and interpreted on the same international and supranational basis.

Today’s pertinent questions regarding bank insolvency law must also be answered using an infra-disciplinary approach, as this field is not restricted to one specific legal area, but relates to a wide area of legal matters which have been traditionally understood to belong to the realm of company law, (financial) regulatory law, private law, private international law (conflict of laws), as well as insolvency law. Moreover, economic analysis plays an important role in this field, and some of the remarkable characteristics of this new field of law are that it is not only infra-, but also inter-disciplinary, and that it includes – next to hard law – several forms of soft law, such as recommendations of international organisations, and cross-border information exchange between supervisors, which play an important role in daily practice.

In the last ten years, bank insolvency law has developed into a fully-fledged branch of law that overlaps other branches of law while grating against their system and challenging their fundamental values. The unfinished state of bank insolvency law will undoubtedly remain both challenging and inspirational for practitioners, as well as academics, for some time to come.

Bob Wessels is a Professor Emeritus of International Insolvency Law at the University of Leiden, in the Netherlands. He is also an External Scientific Fellow of the Max Planck Institute Luxembourg for International, European and Regulatory Procedural Law.