Conceptualising upcoming Chinese bank insolvency law: Cross‐border issues

• Published date: 01 March 2019
• Date: 01 March 2019
• DOI: http://doi.org/10.1002/iir.1328
• Author: Shuai Guo

RESEARCH ARTICLE

Conceptualising upcoming Chinese bank

insolvency law: Cross‐border issues

Shuai Guo

Leiden Law School, Leiden University,

Leiden, The Netherlands

Correspondence

Shuai Guo, PhD candidate, Leiden Law

School, Leiden University, Leiden, The

Netherlands.

Email: s.guo@law.leidenuniv.nl

Funding information

China Scholarship Council (CSC)

Abstract

This paper examines the cross‐border effectiveness of

bank resolution measures in the context of current

and soon‐to‐be revised Chinese bank insolvency legisla-

tion, that is, the Bank Resolution Regulation. The gen-

eral framework is regulated in the Chinese Enterprise

Bankruptcy Law. With regard to the outgoing effects

of Chinese bank resolution measures, the ultimate deci-

sion is in the hands of China's counterparts. However,

it is proposed that the contractual approach could be

a solution to enhance legal certainty. On the other

hand, the incoming effectiveness of foreign resolution

measures has to be firstly recognised in China. Three

major tests in terms of recognition and enforcement

are international agreement, reciprocity, and public

policy exception. These criteria should be interpreted

against the background of emerging international

regime for bank resolution and latest development in

the Chinese legal community.

1|INTRODUCTION

The 2007/2008 financial crisis witnessed the ineffectiveness of traditional corporate insolvency

regime for an orderly resolution of financial institutions. World leaders from G20 countries

called for the development of “resolution tools and frameworks for the effective resolution of

financial groups to help mitigate the disruption of financial institution failures and reduce

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This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and repro-

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© 2019 The Authors International Insolvency Review published by INSOL International and John Wiley & Sons Ltd

Received: 30 November 2017 Revised: 2 July 2018 Accepted: 5 February 2019

DOI: 10.1002/iir.1328

44 Int Insolv Rev. 2019;28:44–62.wileyonlinelibrary.com/journal/iir

moral hazard in future.”

1

Against this backdrop, administrative authorities (resolution author-

ities) are empowered to take administrative measures (resolution measures) to orderly resolve

ailing financial institutions. Three major paradigm shifts from bank insolvency to bank resolu-

tion were identified by Haentjens and Wessels, namely, from individual to public interest, from

judicial to government authorities control, and from national regulation to harmonisation and

unification.

2

Public interest is a major concern for resolution authorities to take resolution mea-

sures, that is, to avoid systemic risks and maintain financial stability. Apart from the traditional

judicial insolvency instruments, such as reorganisation or liquidation, resolution is now an

additional insolvency instrument conferring on administrative authorities to take action against

banks in distress.

At the international level, efforts have been made to harmonise national resolution laws and

to achieve an effective global resolution regime. A detailed proposal was formulated by the

Financial Stability Board (FSB) in 2011 as the Key Attributes of Effective Resolution Regimes

for Financial Institutions (Key Attributes, or KAs),

3

which was later updated in 2014.

4

Under

the new resolution regime, shareholders and creditors are supposed to absorb the losses first

instead of using taxpayers' money to bail out banks. Three types of resolution powers were sum-

marized by the International Monetary Fund (IMF):

(i) assumption of control, that is, to “replace management, clawback remuneration/bonuses”

and to “appoint an administrator to take control/manage the firm”;

(ii) resolution tools, that is, to “transfer assets, liabilities to an existing entity, a bridge bank or

an asset management company”;to“bail‐in creditors to recapitalize the failed bank or

successor”; and to “override stakeholders rights to approve merger, sale, capital injection

etc.”;

(iii) supportive measures, that is, to “suspend payments to unsecured creditors and stay cred-

itor actions”;to“temporarily stay early termination rights”; and to “oblige related group

entities to continue to provide essential services and functions.”

5

In accordance with the FSB resolution reform report as of May 2017,

6

many jurisdictions,

mostly Global Systemically Important Banks (G‐SIBs) home jurisdictions,

7

have implemented

1

G20, “Leaders' Statement The Pittsburgh Summit”(2009).

2

Matthias Haentjens and Bob Wessels, “Three Paradigm Shifts in Recent Bank Insolvency Law”(2016) 31 Journal of

International Banking Law and Regulation 396; Matthias Haentjens and Bob Wessels, “Conclusions”in Matthias

Haentjens and Bob Wessels (eds), Research Handbook on Crisis Management in the Banking Sector (Edward Elgar, 2015).

3

FSB, “Key Attributes of Effective Resolution Regimes for Financial Institutions”(2011).

4

FSB, “Key Attributes of Effective Resolution Regimes for Financial Institutions”(2014). On October 15, 2014, the FSB

adopted additional guidance that elaborates on specific Key Attributes relating to information sharing for resolution pur-

poses and sector‐specific guidance that sets out how the Key Attributes should be applied for insurers, financial market

infrastructure (FMIs) and the protection of client assets in resolution. No changes were made to the text of the 2011

twelve Key Attributes.

5

IMF, “The Key Attributes of Effective Resolution Regimes for Financial Institutions—Progress to Date and Next Steps”

(2012), 9.

6

FSB, “Ten Years On—Taking Stock of Post‐crisis Resolution Reforms: Sixth Report on the Implementation of Resolu-

tion Reforms”(2017).

7

G‐SIB home jurisdictions are Canada, China, France, Germany, Italy, Japan, the Netherlands, Spain, Sweden, Switzer-

land, the UK and the US. Regarding the 2017 G‐SIB list, see FSB, “FSB Publishes 2017 G‐SIB List”(21 November 2017),

available at: ‐publishes‐2017‐g‐sib‐list/>.

GUO 45