1Although funding and liquidity problems can be triggers or proximate causes, a broader perspective shows that banking crises often relate to problems in asset markets. Banking crises may appear to originate from the liability side, but they typically reflect solvency issues. Banks often run into problems when many of their loans go sour or when securities quickly lose their value. This happened in crises as diverse as the Nordic banking crises in the late 1980s, the crisis in Japan in the late 1990s, and the recent crises in Europe. In all of these episodes, there were actually no large-scale deposit runs on banks, but large-scale problems arising from real estate loans made many banks undercapitalized and required support of governments. Problems in asset markets, such as those related to the subprime and other mortgage loans, also played a major role part during the recent crisis. These types of problems in asset markets can go undetected for some time, and a banking crisis often comes into the open through the emergence of funding difficulties among a large fraction of banks.

2.Since the late 1970s bank insolvencies have become increasingly common. Where thesefailures are systemic, they can drain a country's financial, institutional, and policyresources— resulting in large losses, misallocated resources, and slower growth.

3The foregoing patchwork framework is further complicated by the fact that, in the unusual case that an insolvent foreign bank has a branch or agency licensed or chartered in one state and assets in another state in which it has no branch or agency, it is unclear what insolvency law would govern the liquidation of assets in that other state (Mattingly et al., 1999:274)

4insolvency procedures are typically nationally based, entity-centric and sector specific. The demise of national frontiers in today's global financial markets shows the limitations and inadequacies of these principles to deal with financial conglomerates, complex financial groups and international holding structures. These inadequacies are particularly evident in the case of cross-border bank insolvency. They are also manifested in the host-home country divide and in the treatment of systemic risk and systemically significant financial institutions. Institutions may claim to be global when they are alive (as in the case of Lehman Brothers); they become national when they are dead.

5Roling and incompletely resolved crises in other countries prior to 197 taughtsophisticated Asian depositors and taxpayers at least hre lesons. First, the frequencyand geographic extent of banking crises convincingly demonstrated that, around theworld, numerous banks had found it reasonable to bok potentialy ruinous risks.Loking at he period 197-195, Caprio and Klingebiel (196) cite 58 countries inwhich the net worth of the banking system was almost or entirely eliminated. Second, incountry after country, domestic (and sometimes foreign) taxpayers had ben biled to bailout banks, depositors, and deposit-insurance funds. Caprio and Klingebiel report hattaxpayers' bil for making god on implicit and explicit guarantes typicaly ran betwen1 and 10 percent of GDP. The size of these bailouts established that bankers had oftenmanaged to shift asubstantial amount of bank risk to taxpayers. Finaly, authoritesdeserved substantial blame for the size of the bils taxpayers had ben asked to pay.

Oficials actively encouraged los-causing paterns of credit alocation and compoundedthe damage from credit loses by not resolving individual-bank insolvencies until theirsituations had deteriorated disastrously.

6Solvency vs. Liquidity. A distinction is conventionally made between the solvency and liquidity of a bank. This distinction is more difficult to make in practice than in theory. Northern Rock remained legally solvent and yet was dependent on Bank of England funding because it could not fund its operations in the markets. However, there is a question about this concept of solvency when applied to a bank which: (1) has serious funding problems in the open market, (2) where the cost of funding exceeds the average rate of interest on the bank’s assets, and (3) when it is dependent on support from the Bank of England. The distinction between illiquidity and insolvency is, therefore, not always clear cut and, under some circumstances, illiquidity can force a solvent institution to become insolvent. Furthermore, if depositors know that the bank is illiquid they may be induced to withdraw deposits, which, in turn, forces the bank to sell assets at a discount in order to pay out depositors. Given that banks operate with a relatively low equity capital ratio, the fire-sale discount does not need to be very large to exhaust the bank’s capital and force it into legal insolvency

7Bank insolvency law, bank restructuring and the recapitalization of banks are not only legal or administrative issues but are of preeminent economic importance. To highlight the economic perspective, the OeNB hosted a two-day workshop on September 16 and 17, 2010, that was organized jointly by the OeNB’s Economic Studies Division and the Bonn-based Max Planck Institute for Research on Collective Goods. Controversial and intense discussions proved that there are many innovative ideas to tackle the problems but that there is also a great need for economic policy discussion.

8The Legal Aspects of Bank Insolvency compares the legal framework for dealing with insolvent banks in Western Europe, the United States and Canada, identifying the distinctive features of each regime and discussing the main issues and choices in dealing with failing banks. It also examines the implications of a cross-border bank insolvency, and considers different approaches to the problems it raises, including the supranational approach of the proposed European Directive on the Reorganization and Winding-up of Credit Institutions

9This paper investigates the impact of various macroeconomic and bank-speciÖcvariables on bank insolvency risk in 7 CEE countries from 1996 to 2006. Estimatingseparate pooled regression for each country we provide an empirical evidence thatbank stability decreases in credit growth, ináation and banking sector concentration.Bank insolvency risk is measured by z-score, our distance-to-insolvency indicator.Beside actual z, we construct conditional z-scores that directly link bank insolvencyrisk with bank-speciÖc and macroeconomic indicators. Employed insolvency riskmeasures suggest the rise of bank stability in all CEE countries under consideration

10newThe economic perspective of bank bankruptcy lawMATEJ MARINȆ& RAZVAN VLAHU‡http://www.clevelandfed.org/research/conferences/2011/4-14-2011/marinc_vlahu.pdf

We first synthesize various rationales for the existence of general bankruptcy law given in the economic literature. The main purpose of bankruptcy law is to prevent coordination problems among creditors. It also needs to promote efficiency in the relationship between a debtor and creditors in the ex-ante sense when the debtor is solvent, and in the ex-post sense when the debtor is already insolvent.

The need for bankruptcy law is most evident in the case of a corporation borrowing from several creditors. Without bankruptcy law in place, coordination problems between creditors may trigger bankruptcy prematurely (Jackson, 1986; White, 2005). Even upon a slight perceived problem with a corporation, each creditor may try to be on the safe side and sue the corporation first in order to be repaid before other creditors. Creditors would then race to collect their debt in a rushsimilar to a run on a bank. Secured creditors could cash in the collateral. Short-term creditors could decide not to roll over their loans. This would force the premature liquidation of acorporation that may be worth more as a going concern

11newBANK INSOLVENCY LAW NOW THATIT MATTPERS AGAINPETER P. SWIREthttp://scholarship.law.duke.edu/cgi/viewcontent.cgi?article=3206&context=dlj

a bankruptcy trustee or debtor, subject to the court’s approval, has broad powers to repudiate executor contracts or unexpired leases. This power prevents “sweetheart” contracts that llow insiers to get higher priority thn other claints. The baning agencies have essentially the same power as the trustee, but with two material additions.