A bank failure can have devastating consequences on society. The global financial crisis revealed the impact on various branches and sectors. Regulators try to avoid financial crises to maintain public confidence and stabilize the economy. Financial institutions play a pivotal role in society. Its disruption can trigger instability and chaos, resulting in a bank run. The consequence of a run on the bank is often a liquidity shortage. This liquidity shortage can create insolvency and thus the closure of the bank.
Offshore bank failures are hard to comprehend. The involvement of several counterparts, correspondent banks, international regulators and other stakeholders turns resolution and fund recovery into a lengthy process. Contrary to traditional commercial banks, offshore banks are often well-capitalized. The downside of this strategy is the limited scope of deposit insurance. In offshore financial centres, deposit insurance is mostly based on the protection of the domestic market. Non-resident deposits and offshore companies frequently hold substantial deposits in various foreign currency. This distinction proposes a restricted insured amount for all bank deposits. As such, many offshore companies seek the assistance of boutique banks in more advanced jurisdictions offering services to the offshore financial industry.
The first step in offshore bank failure is to identify the administrator and file a claim under the domestic deposit protection scheme. Following a successful claim, the liquidation proceedings can commence. Creditors with a prioritized claim or a fixed or floating charge, can receive payouts prior to the start of a liquidation. Alongside prioritized positions, qualifying creditors can propose and achieve a settlement in the pre-liquidation stage. During this stage, the doctrine of ‘pari passu’ is obsolete. More information about the liquidation of an offshore bank is available under the designated tab ‘liquidation’ on this website.
To limit negative consequences creditors should follow the exact procedures of recovery in offshore bank failure. Conflicts of interest consist, and a forced closure of a bank is seldom revised. Furthermore, the common law structure of the offshore financial industry creates ambiguity when it comes to creditor protection, self-interest and personal responsibility. Therefore, the choice of the most appropriate offshore bank goes much further than the recommendation of professional introducers, who in case of default have limited liability towards creditor losses.
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