Reviews
| Date | 01 November 2002 |
| Published date | 01 November 2002 |
| DOI | http://doi.org/10.1111/1468-2230.00418 |
REVIEWS
Tobias M. C. Asser,Legal Aspects of Regulatory Treatment of Banks in Distress,
Washington, DC: International Monetary Fund, 2001, 186 pp, pb US$22.00.
Asser provides a first class comparative treatment of pertinent legal issues affecting
banks in distress. The book builds on the G-22 Working Group Reports on the
International Financial Architecture, issued in October 1998, and another book,
Orderly and Effective Insolvency Procedures: Key Issues, prepared by the Legal
Department of the International Monetary Fund (IMF) and published in August 1999.
Asser is a former Assistant General Counsel of the IMF and his book is informed, in
part, by his vast experience in the field of bank regulation and bank insolvency law.
Over the last two decades, as Asser observes, the deregulation of domestic and
international banking transactions and the growth of national and international capital
markets have had profound effects on the business of banking. In many countries,
according to Asser, domestic capital markets have drawn both borrowers and deposi-
tors away from banks, forcing banks to replace traditional forms of relationship
banking with an array of financial services and to supplement their funding from
traditional forms of deposit with funding from financial markets. These developments
require a reappraisal of bank regulation and supervision to protect domestic financial
sectors from the new systemic risks that they pose. According to Asser, banks have
played a crucial international role in the unprecedented growth of cross-border capital
flows, especially to emerging markets. This development, Asser argues, has led to a
continuing financial integration of national economies, which has brought many
benefits, including dramatic increases in investment and consumption that have stimu-
lated global trade and prosperity. The downsides to this expansion of international
banking activities, in Asser’s view, are that it has facilitated the spread of domestic
financial problems throughout the international monetary system, and that it has made
banks conduits for the transmission of domestic economic problems around the globe.
There are three major conclusions that can be drawn from Asser’s work. The first is
that building and maintaining the confidence of domestic and foreign investors
requires a credible regulatory system that closely supervises banks, strictly enforces
banking law, helps restore ailing banking institutions to financial health, and
expeditiously expels insolvent banks from the financial system. Secondly, there is an
argument to the effect that creditor banks share in the blame for economic crises in
foreign debtor countries when their irresponsible lending practices contribute to the
build-up of excessive external debt. Finally, effective prudential regulation of banks
participating in an international monetary system of growing complexity requires
internationally uniform prudential standards that are strictly enforced by qualified
and autonomous bank regulators in close cooperation with their foreign counterparts.
In making a case in support of these conclusions, Asser distinguishes between
general insolvency law and bank insolvency law, noting that restructuring under
banking law is a broader concept than rehabilitation under general insolvency law.
Enterprise rehabilitation under general insolvency law, according to Asser, typically
commences only if the enterprise has been declared insolvent on the basis of strict
statutory standards, whereas the restructuring of a bank may begin at a much earlier
stage with corrective measures ordered by the bank regulator as soon as the bank
ßThe Modern Law Review Limited 2002 (MLR 65:6, November). Published by Blackwell Publishers,
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shows significant signs of non-compliance with prudential requirements. Asser
observes that, in many countries, bank restructuring is part of a continuum ranging
from regulatory enforcement of prudential law to receivership. He examines also the
issue of liquidity support provided by a central bank as ‘lender of last resort.’
Principles of administration procedure under insolvency law applicable to bank
insolvency are clarified, and Asser details some of the common issues pertaining to
regulatory intervention of banks and some corrective actions that can be undertaken
by bank regulators. The issue of revoking banking licences, for example, is examined
in detail, analysing the common grounds upon which a banking licence can be
revoked. The legal effects of revoking a banking licence are also examined, together
with the authority to revoke a banking licence. A short chapter, which appears to have
been written in a hurry, on the legal aspects of systemic bank restructuring, appears at
the end of the book.
Although a major milestone in its contribution to the body of literature on bank
insolvency law, and on general insolvency law as well, Asser’s book fails to provide
a valuable contribution on the implications of power-politics and culture when
dealing with banks in financial distress. The question of power-politics is particularly
rife in countries that have state banks and where politicians have a large percentage
of equity/debt interests or deposits in a financially troubled bank. Politically powerful
stakeholders do sometimes use all sorts of political pressure to circumvent the
corporate governance structure of institutions. Thus, no matter how good the legal
and regulatory framework, the effectiveness and efficiency of the enforcement arm
might be weakened where there is a politically powerful and coercive social class.
Generally, the experience of many countries regarding systemic bank restructuring
shows that banking practice has evolved along three main lines: first, in some
countries, banks have been set up by foreign multinational firms as conduits for
channelling in and out capital for these multinationals; secondly, banks have been set
up as parent or subsidiary companies under increasing levels of conglomeration;
finally, some other banks engage in universal banking, offering products such as
insurance policies, thus blurring the distinction between traditional banking practice
and what could be deemed as innovation in the field of banking. Each of these cases
requires a pragmatic approach when dealing with banks in financial distress. The
organisational structure and the layers of control all indicate what type of approach
would be suitable when undertaking the restructuring of an institution. Although it
refers to a few of these issues, Asser’s work would have been better had it examined
them more carefully.
In national cultures that accommodate high levels of corruption, as part of the day-
to-day norm of conducting business, the enforcement arm of the legal and regulatory
framework is often weak. Asser does not address fully the impact of cultural issues
such as corruption on the efficacy of the legal and regulatory framework. Law does
not operate in a vacuum: its overall importance must be viewed in proper political,
cultural, social and economic contexts. Clearly, an insightful and instructive analysis
on such issues would have strengthened Asser’s work. Notwithstanding these
criticisms, the book will prove valuable for scholars and practitioners both in bank
and general insolvency law.
Kenneth Kaoma Mwenda*
* World Bank, Washington DC, USA. The interpretations and conclusions expressed in this paper are
entirely those of the author. They do not necessarily represent the views of the World Bank, its executive
directors or the countries they represent.
November 2002] Reviews
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