Research On Legal Issues Regarding Cross-border Bank Bail-in Mechanism

Bail-in is an emerging financial risk management tool on the international stage.The Financial Stability Law(Draft),which is on China’s legislative agenda in 2022,included bail-in into the risk resolution "toolbox" and attached the importance of cross-border cooperation in resolution.With financial globalization,the interconnectivity between the financial markets of various countries is steadily increasing and bank resolution involves not only domestic but also foreign creditors.Therefore,using bail-in to resolve global financial risks and maintain financial security through cross-border cooperation has become a crucial and practical issue in the field of foreign-related rule of law.Coordinating domestic rule of law and foreignrelated rule of law can provide analytical guidance on this matter.Bail-in is a resolution tool in the resolution phase of the financial stability legal framework.Its definition has been extended across borders with financial globalization.Its legislative development has gone through the path of international financial soft law to regional international law and the hard law of various countries and regions.Instead of bankruptcy proceedings,bail-in disposes of the property rights and interests of shareholders and specific creditors through measures such as writtenoff equity,written-down liability,and debt-to-equity conversions.This approach ensures that losses are borne by the bank’s shareholders and specific creditors,avoiding the three major drawbacks of bailout: high resolution costs borne by taxpayers,fostering moral hazard,and disrupting market order.Compared with bankruptcy proceeding,the cross-border bank bail-in mechanism has the advantages of higher efficiency,less occupation of judicial resources,and greater professionalism.Furthermore,this mechanism ensures that critical functions of banks can continue to operate,embodying the jurisprudential principle of safeguarding global public interests.However,in the application of cross-border bank resolution,the cross-border cooperation dilemma,represented as ring-fence,arising from conflicts between bail-in mechanism in the home country and the host country’s financial sovereignty,poses negative impacts on cross-border banking groups,host countries,and the global financial stability.The resolution of the ring-fence requires a global cross-border resolution mechanism based on enforceable burden-sharing arrangements,transparent and effective information sharing and cooperation mechanisms,and complete bail-in legislative and institutional frameworks.To minimize the impact of the ring-fence,the Financial Stability Board has proposed two major strategies of resolution for addressing the cross-border bank resolution cooperation dilemma,namely the Single Point of Entry and Multiple Point of Entry approaches.The Single Point of Entry approach effectively transfers the losses of cross-border banking groups’ subsidiaries in host countries to the top-tier holding companies in the home country through the subordination of group debt,avoiding the cross-border bail-in challenges caused by host countries’ exercise of financial sovereignty.The Multiple Point of Entry approach decomposes cross-border bank groups into two or more parts,with different parts being subject to different national resolution authorities that work collaboratively to implement bail-in measures.These two approaches mitigate the effect of ring-fence to some extent,but ultimately depend on the host country’s cooperation with cross-border bail-in.Therefore,the legal mechanism of bank crossborder bail-in becomes the focus of this paper.Given this,this paper discusses the key elements of domestic legislation,linkage arrangements,and international cooperation and coordination mechanisms necessary for cross-border application of bank bail-in from the perspective of coordinating domestic and international law to address cooperation dilemma.Regarding the key elements of domestic legislation,this paper analyzes the prudential trigger conditions for bail-in debt,the scope and order of bail-in,and diversified relief systems based on relevant provisions of the EU Bank Recovery and Resolution Directive,the UK Financial Services(Banking Reform)Act,and the Financial Institutions(Resolution)Ordinance in Hong Kong,China.Regarding linkage arrangements,attention should also be paid to the linkage between cross-border bank bail-in mechanisms and the commercial laws of host countries,as well as the role of financial market infrastructure construction in cross-border bank bail-in.In terms of international cooperation and coordination,cooperative organizations represented by the Crisis Management Group and the EU Resolution Group serve as communication platforms to prevent cross-border banking risks,facilitate management,and promote crossborder crisis management.As for the cooperation path of cross-border bail-in,there are currently three paths: treaty,model law,and cross-border resolution cooperation agreement.Due to the high sovereignty cost of treaties and the slow progress of model laws,the cross-border resolution cooperation agreement based on cooperation between host and home countries may be a realistic path to promote cross-border bank bail-in cooperation.In addition,attention should also be paid to the content of information sharing,the construction of information sharing mechanisms,and related recognition arrangements.Against the backdrop of the inclusion of the statutory bail-in as a resolution measure in the Financial Stability Law(Draft),it is also important to apply a coordination approach to improving China’s cross-border bank bail-in mechanism to cope with cooperation dilemma.At the domestic legislative and linkage levels,it is necessary for China to refine the trigger conditions,scope,valuation,and relief arrangements of bail-in related to the Financial Stability Law(Draft),and to ensure coordination between the cross-border bank bail-in mechanism and China’s commercial law,represented by the Company Law and the Securities Law as well as clarify the supporting role of financial market infrastructure in cross-border bank bailin.At the international law level,China and Chinese transnational banks should differentiate the Single Point of Entry approach and the Multiple Point Entry approach based on the ability of national banks to control their overseas branches and the degree of cooperation with different host countries.Looking ahead to the construction of cross-border bail-in cooperation mechanisms,China should endeavor to promote the process of Model Law on Cross-border Resolution,adopt cross-border resolution cooperation agreements in practice,and reach consensus with foreign resolution authorities as much as possible in advance.At the same time,based on the information required to be shared for cross-border bail-in,China should establish a transparent and smooth information sharing mechanism,ensure that cooperation entities are mutually aware of information regarding resolution,strengthen the protection of confidential information,and continuously improve the system construction for the cross-border bank bail-in mechanism based on a recognition framework with limitation.