Report explores legal underpinnings of the international financial system

Differences in countries' legal arrangements for coping with distress in financial institutions create vulnerabilities in the international financial system, a report released today by several large central banks and international organisations shows.

The in-depth, cross-country report looks at approaches in various countries for dealing with distressed financial institutions. It concludes that significant efforts are being made on several fronts to formalise cooperation between countries and to reduce legal uncertainty in cross-border insolvencies. It also describes the important role of international judicial cooperation in facilitating the resolution of cross-border insolvencies. The report stresses that continued substantial efforts are needed to promote gains in legal certainty, efficiency and reduced systemic vulnerabilities for the international financial system.

The report by the Contact Group on the Legal and Institutional Underpinnings of the International Financial System is entitled Insolvency Arrangements and Contract Enforceability. The Contact Group involved legal and economic experts who noted that differences in the way national legal systems strike a balance among the three goals of systemic stability, equity and efficiency can complicate the resolution of globally active institutions.

A main purpose of the report is to stimulate discussion and to improve interaction between countries on insolvency legislation and procedures. Existing insolvency approaches often lag behind procedures needed to ensure prompt, fair and efficient resolution of large and complex financial institutions active in multiple jurisdictions, whereas markets increasingly require speedy resolution to preserve the remaining value in the financial institution. A common response is to "carve out" certain classes of financial transactions from general insolvency procedures and make them subject to special laws or arrangements. Differences in these "carve-outs" between jurisdictions are an important area of current and prospective efforts to increase legal certainty.

A second purpose is to draw attention to new, less costly, and accelerated procedures. The report describes some of these procedures, including some implemented in law, some working their way into insolvency practice, and some proposed by academics.

The report is now available on the websites of the BIS and other participants.

As the report is exploratory in nature, comments are welcome. Please send them to g10@bis.org by 30 April 2003.

Note to editors

The Contact Group on the Legal and Institutional Underpinnings of the International Financial System was established in the summer of 2000. Participants include central bank representatives from Italy, Japan, the Netherlands, the United Kingdom and the United States, as well as the BIS, ECB, IMF, OECD and World Bank.