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WHO PAYS FOR BANK INSOLVENCY IN TRANSITION AND EMERGING ECONOMIES? David G Mayes Bank of Finland WHAT IS THE PROBLEM? Too Big to Fail - Too Many to Fail Too Big to Save Most countries do not have a credible scheme in place that would enable them to close either a large bank or a significant number of banks Many transition and emerging economies have problems detecting problems before they are large The problem is even less worked out for complex financial institutions and international banks If banks are foreign owned then host countries may have little control over what happens CONSEQUENCES Potential Moral Hazard banks may take on greater risks greater risk of crises Uneven playing field - restricts competition encourages MA, increasing the problem Unfair shift of burden onto taxpayers uninsured depositors some borrowers society at large Makes every case political THREE ISSUES Why does the problem exist? How can we assess the costs? How does our proposal address the problem? David Mayes, Liisa Halme, Aarno Liuksila Improving Banking Supervision Palgrave 2001 David Mayes and Aarno Liuksila Who Pays for Bank Insolvency? Palgrave 2003 THREE ISSUES - issue 1(1) Why does the problem exist? Legal issues practical issues economic issues (Not discussing Lender of Last Resort) THREE ISSUES - issue 1(2) Why does the problem exist? Legal issues Private law vs public law In most countries private law applies to insolvency so the state cannot decide - not US Need alignment of interest with deposit insurance (if any) who pays - taxpayer, other banks (customers/owners)? If use public law then in danger of being arbitrary Advancing the priority of the state - as in US Who has jurisdiction in international banks? Equal treatment of all creditors/depositors whatever their country Single entity vs grab for local assets Conflict of interest - subsidiary may be TBTF but not group THREE ISSUES - issue 1(3) Why does the problem exist? Legal issues Views differ on balance amo