Policy makers in Bangladesh don't want any financial institute to become bankrupt. The condition of a few crisis-hit banks is at the stage of bankruptcy, but the government has no plan to put those banks to bankruptcy process. The present interim government believes the ailing banks can stage a comeback if they get policy support from the Bangladesh Bank (BB).
BB has taken some commendable measures and reconstitutes the Board of Directors and removes some of the Chief Executives. BB had primarily decided not to provide liquidity support by printing money as before but facilitate them to avail themselves of such support through interbank money supplyand only acting as the guarantor of the ailing banks.BB asked sound banks with excess liquidity to lend to crisis-hit banks facing severe liquidity shortages, in the best interests of the country's banking sector.
Afterwards, BB backtracked from the stand and decided to print Tk22,500 crore in new notes to provide financial assistance to six ailing banks and safeguard their depositors. After few days, those banks again ask for more money.
BB needs some more action to safeguard greater interest in the economy and the depositors. Rather than relying on taxpayers to bail these banks out, a mechanism is needed to put an end to potential domino effects. BB needs authorityto take further action to rescue the banks. Protection of vulnerable depositors cannot be made to wait for years beforethey can access their savings. The insolvency law of the country is not suitable to apply to the financial institution and needs special treatment for resolution to make the bank viable again.Normal insolvency proceedings may require a freeze on payments and often require assets to be sold and their proceeds shared outamong creditors in a costly procedure which may last for months or even years.
A resolution proceeding may enable the deposits and payment operations of the bank to be swiftly transferred to a new solvent entity which can provide the former depositors of the failed bank with the continuity of service that they need.
A resolution regime gives the authorities a range of tools, including the power to transfer assets and liabilities of the bank either to another bank or to a "bridge institution" which may hold the assets long enough to optimise their eventual disposal.
At present, there is no legislation enabling them swiftly to resolve the position of a failing bank. A bank resolution shall empower the authority to take quick decision and action. A failing bank cannot go through normal insolvency proceedings without harming public interest and causing financial instability.The law gives special administrative powers that can be exercised by the authorities without,or alongside, normal insolvency proceedings.
In the event of bankruptcy, such law aims at maximizing recoveries for creditors but in the event of resolution the legislator's aim should be that of maintaining financial stability and to prevent social costs. In most cases, bankruptcy will be triggered if a company has ceased its payments and/ or has negative capital, while a resolution regime for banks will be triggered before balance sheet insolvency.
Resolution proceedings are designed to enable, if necessary, the swift transfer of deposits to a new solvent entity, including the power to proceed with payments, to provide the depositors of the failed bank with the continuity of service and prevent deterioration of the assets.To make the resolution of financial institutions feasible without severe systemic disruption and without exposing taxpayers to loss, mechanisms make it possible for shareholders and unsecured and uninsured creditors.
The objectives of the resolution are: (a) to ensure the continuity of critical functions of the financial institute; (b) to avoid significant adverse effects on financial stability, in particular by preventing contagion, including to market infrastructures, and by maintaining market discipline; (c) to protect public funds by minimising reliance on extraordinary public financial support; (d) to protect depositors ( e) to protect client funds and client assets.
To address the failure of banks in an orderly manner BB may use resolution tools to ensure continuity of the bank's critical functions, maintain financial stability, restore the viability of parts or all of the bank.
Bangladesh government drafted 'Bank Resolution ordinance - 2025' allowing the Bangladesh Bank to legally apply corrective measures like mergers and acquisitions, liquidation, re-capitalisation and consolidation of the crisis-ridden banks.
The ordinance shall empower BB with the regulation over shareholding and voting rights of shareholders; supervise the appointment of the boards and management; regulate the operations of banks; lay down instructions for audits; control moratorium, mergers and liquidation.It would be possible to make quick policy decisions for merger, acquisitions, liquidation or re-capitalisation of the ailing banks.
The draft ordinance needs some changes to give independence to resolution authority. Transparency and accountability requirements also safeguard operational and financial independence of the resolution authority. A perfect resolution involve reporting on the resolution measures to the highest democratic institution or Parliament of the country, within a stated period. As for financial independence, the resolution authority should report on the cost of the resolution actions taken and the cost of possible alternative actions, to justify its course of action, efficient use of public resources, and minimization of resolution costs.
The courts only investigate whether the resolution department have acted unlawfully or arbitrarily, and not investigate the merits of their decisions. But the draft ordinance has given some supervisory authority to BB, which may curtail the independence of resolution authority / department instead of full independence of the resolution authority. The resolution authority and its staff should be protected against liability for actions taken and omissions made while discharging their duties in the exercise of resolution powers in good faith.
The draft ordinance proposes to establish a department of BB and propose to give power to supervise the resolution department. It may curtail the independence of the authority / department.
The ownership of sick banks are also having financial, legislative and political power in Bangladesh. They will try to exercise their power to influence the decision of the regulatory authority. The resolution authority should therefore enjoy both political and economic independence to implement resolution measures effectively. The resolution authority need independence from central bank and the central bank needs independence from the government.
The draft ordinance may be revisited again to secure real and effective independence. Unfortunately, Bangladesh Bank is not yet independent and the resolution department to form under the proposed law may not enjoy independence. Bangladesh need structural reform in our entire financial sector.
The World Bank (WB), the International Monetary Fund (IMF) and an international expert have already reviewed the draft law and hope that the nation will get an efficient ordinance to address the crisis of sick banks.
The writer is a former Non-Government Adviser, Bangladesh Competition Commission and Legal Economist & CEO, Bangla Chemical
