1

Although funding and liquidity problems can be triggers or proximate causes, a broader
perspective shows that banking crises often relate to problems in asset markets. Banking
crises may appear to originate from the liability side, but they typically reflect solvency
issues. Banks often run into problems when many of their loans go sour or when securities
quickly lose their value. This happened in crises as diverse as the Nordic banking crises in
the late 1980s, the crisis in Japan in the late 1990s, and the recent crises in Europe. In all of
these episodes, there were actually no large-scale deposit runs on banks, but large-scale
problems arising from real estate loans made many banks undercapitalized and required
support of governments. Problems in asset markets, such as those related to the subprime and
other mortgage loans, also played a major role part during the recent crisis. These types of
problems in asset markets can go undetected for some time, and a banking crisis often comes
into the open through the emergence of funding difficulties among a large fraction of banks.

2.
Since the late 1970s bank insolvencies have become increasingly common. Where these
failures are systemic, they can drain a country's financial, institutional, and policy
resources resulting in large losses, misallocated resources, and slower growth.

3
The foregoing patchwork framework is further complicated by the fact that,
in the unusual case that an insolvent foreign bank has a branch or agency
licensed or chartered in one state and assets in another state in which it has no
branch or agency, it is unclear what insolvency law would govern the
liquidation of assets in that other state (Mattingly et al., 1999:274)

4
insolvency procedures are typically nationally based, entity-centric and sector specific. The demise of
national frontiers in today's global financial markets shows the limitations and inadequacies of these
principles to deal with financial conglomerates, complex financial groups and international holding
structures. These inadequacies are particularly evident in the case of cross-border bank insolvency. They
are also manifested in the host-home country divide and in the treatment of systemic risk and
systemically significant financial institutions. Institutions may claim to be global when they are alive (as
in the case of Lehman Brothers); they become national when they are dead.

5
Roling and incompletely resolved crises in other countries prior to 197 taught
sophisticated Asian depositors and taxpayers at least hre lesons. First, the frequency
and geographic extent of banking crises convincingly demonstrated that, around the
world, numerous banks had found it reasonable to bok potentialy ruinous risks.
Loking at he period 197-195, Caprio and Klingebiel (196) cite 58 countries in
which the net worth of the banking system was almost or entirely eliminated. Second, in
country after country, domestic (and sometimes foreign) taxpayers had ben biled to bail
out banks, depositors, and deposit-insurance funds. Caprio and Klingebiel report hat
taxpayers' bil for making god on implicit and explicit guarantes typicaly ran betwen
1 and 10 percent of GDP. The size of these bailouts established that bankers had often
managed to shift asubstantial amount of bank risk to taxpayers. Finaly, authorites
deserved substantial blame for the size of the bils taxpayers had ben asked to pay.
Oficials actively encouraged los-causing paterns of credit alocation and compounded
the damage from credit loses by not resolving individual-bank insolvencies until their
situations had deteriorated disastrously.

6
Solvency vs. Liquidity. A distinction is conventionally made between the
solvency and liquidity of a bank. This distinction is more difficult to make
in practice than in theory. Northern Rock remained legally solvent and yet
was dependent on Bank of England funding because it could not fund its
operations in the markets. However, there is a question about this concept of
solvency when applied to a bank which: (1) has serious funding problems in
the open market, (2) where the cost of funding exceeds the average rate of
interest on the banks assets, and (3) when it is dependent on support from
the Bank of England. The distinction between illiquidity and insolvency is,
therefore, not always clear cut and, under some circumstances, illiquidity can
force a solvent institution to become insolvent. Furthermore, if depositors
know that the bank is illiquid they may be induced to withdraw deposits,
which, in turn, forces the bank to sell assets at a discount in order to pay
out depositors. Given that banks operate with a relatively low equity capital
ratio, the fire-sale discount does not need to be very large to exhaust the
banks capital and force it into legal insolvency

7
Bank insolvency law, bank restructuring and the recapitalization of banks are not only legal or
administrative issues but are of preeminent economic importance. To highlight the economic
perspective, the OeNB hosted a two-day workshop on September 16 and 17, 2010, that was organized
jointly by the OeNBs Economic Studies Division and the Bonn-based Max Planck Institute for Research
on Collective Goods. Controversial and intense discussions proved that there are many innovative ideas
to tackle the problems but that there is also a great need for economic policy discussion.

8
The Legal Aspects of Bank Insolvency compares the legal framework for dealing with insolvent banks in
Western Europe, the United States and Canada, identifying the distinctive features of each regime and
discussing the main issues and choices in dealing with failing banks. It also examines the implications of
a cross-border bank insolvency, and considers different approaches to the problems it raises, including
the supranational approach of the proposed European Directive on the Reorganization and Winding-up
of Credit Institutions

9
This paper investigates the impact of various macroeconomic and bank-specic
variables on bank insolvency risk in 7 CEE countries from 1996 to 2006. Estimating
separate pooled regression for each country we provide an empirical evidence that
bank stability decreases in credit growth, ination and banking sector concentration.
Bank insolvency risk is measured by z-score, our distance-to-insolvency indicator.
Beside actual z, we construct conditional z-scores that directly link bank insolvency
risk with bank-specic and macroeconomic indicators. Employed insolvency risk
measures suggest the rise of bank stability in all CEE countries under consideration

10new
The economic perspective of bank bankruptcy law
MATEJ MARIN& RAZVAN VLAHU
http://www.clevelandfed.org/research/conferences/2011/4-14-2011/marinc_vlahu.pdf

We first synthesize various rationales for the existence of general bankruptcy law given in the
economic literature. The main purpose of bankruptcy law is to prevent coordination problems
among creditors. It also needs to promote efficiency in the relationship between a debtor and
creditors in the ex-ante sense when the debtor is solvent, and in the ex-post sense when the
debtor is already insolvent.

The need for bankruptcy law is most evident in the case of a corporation borrowing from several
creditors. Without bankruptcy law in place, coordination problems between creditors may trigger
bankruptcy prematurely (Jackson, 1986; White, 2005). Even upon a slight perceived problem
with a corporation, each creditor may try to be on the safe side and sue the corporation first in
order to be repaid before other creditors. Creditors would then race to collect their debt in a rush
similar to a run on a bank. Secured creditors could cash in the collateral. Short-term creditors
could decide not to roll over their loans. This would force the premature liquidation of a
corporation that may be worth more as a going concern

11new
BANK INSOLVENCY LAW NOW THAT
IT MATTPERS AGAIN
PETER P. SWIREt
http://scholarship.law.duke.edu/cgi/viewcontent.cgi?article=3206&context=dlj

a bankruptcy trustee or debtor, subject to the courts approval, has broad powers to repudiate executor
contracts or unexpired leases. This power prevents sweetheart contracts that llow insiers to get higher
priority thn other claints. The baning agencies have essentially the same power as the trustee, but with
two material additions.