Special bank resolution and shareholders' rights: balancing competing interests

Abstract

Purpose

An effective bank resolution regime requires taking action while the bank still has positive net worth and shareholder claims still have economic value. Such actions raise a number of legal issues with respect to the rights of shareholders. This paper aims to consider how to strike a balance between the need to protect the legitimate rights of shareholders and the need for a prompt and rapid action and a failure resolution mechanism that minimizes disruptions to the financial system and preserves market discipline.

Design/methodology/approach

The paper examines the nature of the shareholders' rights and the legal protection afforded to them. In the European context, the relevant sources of law are the European Convention on Human Rights and the applicable community legislation. It considers different options for resolution within this framework ranging from a pre‐packaged resolution decided by the shareholders ex ante to the outright divestiture of the shareholders once certain regulatory thresholds are breached while the bank still has positive net worth.

Findings

The curtailment of shareholder rights should seek to generate appropriate incentives for shareholders and other stakeholder and achieve broad objectives of enhancing predictability and maintaining public goods, while at the same time providing for due process, proportionality and adequate compensation.

Practical implications

The paper presents options on how to reform existing frameworks in order to facilitate bank restructurings in a crisis.

Originality/value

The paper discusses key elements that policy makers need to consider in the design of a regulatory framework for early intervention and resolution.

Citation

Hüpkes, E. (2009), "Special bank resolution and shareholders' rights: balancing competing interests", Journal of Financial Regulation and Compliance, Vol. 17 No. 3, pp. 277-301. https://doi.org/10.1108/13581980910972232