The term bank failure defines the moment where financial institutions experience liquidity or solvency challenges and are unable to meet their obligations to creditors. For the purpose of this website on offshore bank failure, the consequences of a potential default of financial institutions and offshore banks is considered from a micro economic perspective and tailored towards individual creditors and bank depositors. Financial crises and bank failure are difficult to predict. Economic models and quantitative analysis provide forecasts but always leave flaws and uncertainty.
Global banking and finance is severely interconnected. Defaults in one country may lead to heavy losses elsewhere. The global financial crisis revealed a systemic, contagious and hazardous system that potentially influences all layers of society. Experienced investors, creditors and other stakeholders wish to avoid financial losses. Therefore they act when risk becomes unbearable. Systemic risk in bank failure therewith can have a downside multiplier effect that drives creditors to withdraw their investment or bank deposit. Early intervention by regulators aims to limit risk to society and creditors. To avoid panic and maintain financial stability and public confidence, intervention is kept quiet whilst resolution and recovery plans ensure swift solutions and limited risk to society.
Advanced capital and liquidity requirements reduce the likelihood and impact of bank failures. However, economic and monetary decay and market risk are just some of many reasons for bank failure. Conduct risk, where financial institutions or individual staff members take excessive risk at the expense of the corporation is covered under separate and distinct regulation. Losses for the financial institution have an impact on the creditors, including bank deposits, when the corporation fails or is likely to fail.
Supervisory authorities address financial difficulties in banks the moment they arise. Their role as a competent authority in society allows regulators and supervisors to adapt early intervention measures. A reserved and undisclosed recovery and resolution plan is implemented to maintain public confidence and avoid a system-wide financial and economic meltdown. Resolution plans and their implementation are surrounded by a layer of confidentiality whilst public notifications and explanations occur on a post hoc basis, after the resolution is completed. Resolution is mostly executed during public holidays or weekends to ensure sufficient time to restart operations without disruption of critical functions of the failing financial institution. The objective is to limit costs to taxpayers and minimize negative effects to the real economy.
Bank Risk Management
The main threat to the global financial system lies in the contagious effect of financial and economic devaluation. The underlying effect to society can be seen as a confidence crisis. Since the global economy and the financial system is based on trust and confidence, the hazards of a systemic crisis concern society as a whole. Appropriate bank risk management can therewith sustain public confidence and by the implementation of adequate capital cushions eventually prevent bank failures.
Uniformity is an important determinant in the international and public confidence of the financial system. To follow up on the expectations of society, several international organizations, including the Basel Committee on Banking Supervision prescribe constant financial and regulatory measures that contribute to standardization and stability. Financial institutions are under Basel III framework required to maintain the quality and level of capital, the enhancement of risk capital, the inclusion of a leverage ratio requirement, the introduction of capital buffers to mitigate distinct sources of systemic risk, the mitigation of liquidity risk through a liquidity coverage ratio and a net stable funding ratio, and enhancements to the securitization model.
From the perspective of regulators bank risk management seeks to avoid risk to society. Interconnectedness, spill over effects and consequently the contagious effect of the financial industry may trigger public and private losses and ultimately fund rescue missions with taxpayer input. Bank risk management addresses trends and hypothetical scenarios to estimate deprivation. Modelling has a focus on financial matters. Yet, excessive risk taking, and the ownership of risk remains difficult. In particular when it comes to conduct risk for regulatory breaches rather than financial issues.
Economic vs Regulatory Bank Failures
The financial industry is characterized by complexity, competitiveness, and short termism. Market players strive for efficiency and financial innovation to ensure above market returns. Investors engage in contractual agreements that are bound by bank secrecy and allege understanding and investor responsibility. Such responsibility is defined by the principle of caveat emptor, also referred to as buyer aware. This issue is important to address when bank failures occur for non-financial reasons.
Economic bank failures are a risk to society and taxpayers. Consequently, it is in the public interest to intervene, isolate and resolve the issue. Regulatory violations such as weak customer due diligence and the breaches of anti-money laundering policies have a different position in society. Financial crime furthers social disintegration, undermines government structures and violates community cohesion. It therewith attacks public confidence in the financial system and justifies an alternative approach towards bank failure, bank liquidation and further legal action.
In general, the failure of financial institutions that are caused by regulatory violations lead to dismantling of the legal person and enter into bank liquidation. This procedure sends a signal to society that wrongdoing is punished and that losses are covered by deposit protection schemes and traditional corporate liquidation. Losses come therewith at the expense of the creditors, instead of the tax payer. Regulatory bank failure as such happens in a vacuum.
Intervention and Resolution
Financial stability is critical for the economy and therefore bank failure may disrupt society. As such, early intervention is decisive to reduce the impact of the failure of a financial institution. It follows that regulators and supervisory authorities focus on prevention and adequate and efficient resolution.
Bank failures caused by economic reasons indicate shortages in the capital or liquidity position of the bank. When non-financial reasons and regulatory breaches lead to the failure and closure of financial institutions, distinct parameters apply. Systemically important financial institutions play such an important role in society and the global financial system that they must be protected at all times. These financial institutions are too big to fail. Financial institutions with little effect to system-wide contagion are not considered critical to society and the financial system. Therefore these smaller equivalents are isolated and resolved in a vacuum.
To maintain confidence in the financial system, swift action is taken. While the impact and feasibility of failure is studied, qualifying creditors get access to the domestic deposit protection scheme. If a restart is not possible, regulators and supervisory authorities may sell the viable and valuable business units of the bank to third parties. The remaining parts of the bank are then reserved for future bank liquidation. Winding down and corporate liquidation procedures then follow the local regime of bankruptcy and insolvency law, complemented by the novel bail-in tool.
The internal dynamics in financial institutions and outside pressure create a toxic and contagious environment when things go wrong. The global financial crisis, followed by severe challenges with European debt concretized the negative multiplier when Murphy’s law enters the financial system. In a free market where supply and demand easily finds each other, excessive risk taking, and moral hazard are closely connected. To avoid that misconduct and high risk acts ae left indifferent, contract law arranges possible losses for creditors.
Minimize Risk, Maximize Repayment
Creditors of financial institutions that are failing or likely to fail must protect their personal interest and create a priority position for themselves. The regulatory and legal framework provides for several preparative solutions that can help creditors to improve their position. Prior to the activation of the Deposit Guarantee Scheme, there are several administrative efforts creditors can take. Such efforts depend on the exact situation of the individual creditor and therefore are decided on a case-by-case basis.
Offshore bank failure is an initiative of Legal Floris LLC. Extensive experience in (offshore) bank failure and investment fraud, strengthened by a professional and academic background results in a structured recovery plan for creditors.
Reclaim Your Money:
The objective of asset and fund recovery for creditors in (offshore) bank failure is to minimize risk and maximize repayment. As such, we provide creditors with a sophisticated and tailor made recovery plan to safeguard their position and minimize risk while maximizing their potential repayment. Even though offshore bank liquidation is a lengthy process, our customers can rely on a staged and period repayment throughout the administrative and legal procedures.
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