Thriving Together, Collapsing Apart: Multinational Bank Resolution and the Legal Separateness Illusion

Since the late 19th century, multinational groups have played an increasingly prominent role in global business, including in the banking sector (Mevorach, 2009). As these enterprises have expanded across borders, the potential impact of them becoming insolvent also looms larger. Although formally structured as separate legal entities, multinational banks function as integrated economic, financial and administrative systems in practice. However, when financial distress occurs, resolving their crisis in a coordinated manner across jurisdictions remains exceptionally challenging.

This is partly because transnational insolvency frameworks for multinational financial institutions (MFIs) do not fully mirror the commercial reality of their integration. Regulatory frameworks still lack mechanisms to facilitate group-level crisis restructuring, which often leads to fragmented approaches that reduce the going-concern value of enterprises. Local authorities are thus incentivised to short-sightedly protect assets within their jurisdictions by ring-fencing deposits or prematurely liquidating entities to satisfy domestic creditors (Herring, 2014).

Given the undeniable global prominence of MFIs, why has it been so difficult to establish a comprehensive cross-border regulatory framework to manage their insolvency? In this blog post, I comment on one of the dimensions of this challenge, which is overcoming the long-standing principle of legal separateness as opposed to the more novel notion of group interest.

Group interest in insolvency frameworks

The entity-by-entity approach prevailing in cross-border insolvency procedures is rooted in the legal separateness principle. Global insolvency frameworks still tend to treat each legal entity in a multinational group independently, with no uniform recognition of the concept of “group interest” across jurisdictions (Kokorin, 2021).

At the EU level, significant progress has been made with the Banking Recovery and Resolution Directive (BRRD). This norm introduced guidance on group recovery plans, financial support agreements, and the internal distribution of loss-absorbing capacity across banking groups in relation to the risk of their individual entities. Nevertheless, the application of these measures remains constrained. Far from a fully integrated approach, ‘group resolution’ under the BRRD, by definition, can only mean either (i) resolution at the top (parent entity level) or (ii) coordinated but separate resolutions of the different entities in the group (BRRD, Article 2.1 (42)).

Furthermore, legal safeguards such as the no-creditor-worse-off (NCWO) principle reinforce this fragmented approach. Since the NCWO assessment is done entity by entity, even a resolution plan that maximises overall value could face challenges if it leaves any individual creditor worse off than under normal insolvency proceedings (Kokorin, 2021). This legal rigidity could also limit the effectiveness of cross-border solutions.

In the absence of a transnational authority to oversee cross-border insolvency, the entrenched entity-by-entity approach of current regulations may encourage national authorities to prioritise domestic interests at the expense of global financial stability. In response, international cooperation has relied on memorandums of understanding, cooperation agreements, and soft law frameworks (Davis et al., 2023). One key example is the UNIDROIT Model Law on Cross-Border Insolvency. However, this framework was not originally designed for MFIs and it leaves critical gaps, particularly regarding the choice of applicable law and the enforcement of foreign rulings (Mevorach, 2018).

Moving forward, further progress is being made by UNIDROIT’s working group on bank insolvency through the development of a Legislative Guide on Bank Liquidation. Although there is more to be done, this is another step towards a more comprehensive framework that better reflects the interconnectedness of multinational bank failures and addresses the limitations of the legal separateness principle.

Bibliography

Davis, R., Madaus, S., Marcucci, M., Mevorach, I., Mokal, R. J., Romaine, B., Sarra, J. P. & Tirado, I. (2023). Financial Institutions in Distress: Recovery, Resolution, and Recognition. Oxford University Press, Incorporated. https://doi.org/10.1093/oso/9780192882516.001.0001

Herring, R. (2014). The Challenge of Resolving Cross-Border Financial Institutions. Yale Journal on Regulation, 31(3), 853–881.

Kokorin, I. (2021). The Rise of ‘Group Solution’ in Insolvency Law and Bank Resolution. European Business Organization Law Review, 22(4), 781–811. https://doi.org/10.1007/s40804-021-00220-4

Mevorach, I. (2009). Insolvency within multinational enterprise groups. Oxford University Press.

Mevorach, I. (2018). The future of cross-border insolvency : overcoming biases and closing gaps (First edition.). Oxford University Press.