Special Banking Procedures in the New Legal Approach

• Author: Ianfred Silberstein
• Position: Director - Legal Division, National Bank of Romania; President - European Association for Banking and Financial Law - Romania.
• Pages: 1-9

1

SPECIAL BANKING PROCEDURES IN THE NEW LEGAL APPROACH

*

Dr. Ianfred Silberstein

**

Abstract

Ever since Law no. 58/1998 was adopted – hereinafter called the Banking Law – the

legislator contemplated introducing in the legal provisions some special procedures to

prevent banks’ entering into the judicial liquidation procedure.

Global financial Crises imposed finding adequate solutions in the field. Through

Government Emergency Ordinance no. 26/2010 was modified, in essence, the chapter

regarding special administration. Thus, increased and diversified the numbers of reasons

which determined the applicability of the procedure, and also the role of the authority of

the prudential supervision along the applicability of the procedure. The study analyzes

comparatively and relevant the legislative modifications from the perspective of the New

Normative Act.

Keywords: banking; liquidation; special supervision; winding-up; special administrator;

dissolution; procedures

I. Preliminary considerations

Ever since Law no. 58/1998 was adopted – hereinafter called the Banking Law – the

legislator contemplated introducing in the legal provisions some special procedures to

prevent banks’ entering into the judicial liquidation procedure. Considering the specific

of banking and the fact that a bank cannot have any other line of business than the one

instituted via the special law that regulates the field, the judicial liquidation procedure

applicable to other types of trading companies cannot be applicable to this category of

trading companies. Moreover, such considerations brought about the promulgation in the

law package in the matter of Law no. 83/1998 – the first law as regards the procedure of

banks’ bankruptcy. In the respective context, two legal institutions were created whose

purpose was to prevent a credit institution’s entering the winding up procedure.

Contemplating the specific of banking, involving the existence of an authority

competent as regards regulating and licensing and prudentially supervising this type of

institutions – which can generate considerable risk for more people than in the case of

other trading companies – it seems natural to mark the major role of this authority in

exercising the special procedures applicable to credit institutions which, during their

operating, are supervised by this authority. In practice, the two special procedures have

been applied to a series of banks, before their entering the winding up procedure. Practice

has also demonstrated that introducing a bank in one of the special procedures, if done

too late, then its introducing into the winding up procedure could not be avoided. At this

moment, the law court empowered with the judicial procedure and the banking authority

competent to resolve the situation work together. The special procedures include two

*

English version by Flavia Toader, PhD.

**

Director – Legal Division, National Bank o f Romania; President – European Association for Banking

and Financial Law – Romania.

2

different forms which can be chosen in the context applicable to the respective credit

institution, namely: special supervision and special administration. As their names show,

they are different procedures applicable differently.

II. Special Procedures in the New Economic Conditions

Special supervision as a form of banking supervision is conducted by the same

competent authority which carries out the ongoing prudential supervision of credit

institutions, Art. 237 par. (2) of the Emergency Government Ordinance no. 99/2006 on

credit institutions and capital adequacy setting forth expressis verbis that: “Special

supervision is assured by a commission created to this end, made up of maximum 7

experts from the National Bank of Romania”. The commission acts following the

decision to institute the special supervision measure ordered by the National Bank of

Romania Board which, for that matter, sets forth the commission’s powers that according

to Art. 239 par. (1) of the same emergency ordinance must submit periodically reports

about the credit institution to the body that appointed it, reports that can offer the National

Bank of Romania the grounds to decide regarding the continuation or the termination of

special supervision.

At its turn, special administration which as a special procedure, is instituted also by

the National Bank of Romania Board, under the terms set forth by Art. 240 par. (1) of the

same normative act, and, as regards the person of the special administrator, the act shows,

in conformity with Art. 240

5

par. (1) that he/she can be “one or more natural persons or a

legal person that can be the Bank Deposit Guarantee Fund”. Special administration

represents an essentially different procedure that involves replacing the credit institution’s

administrators chosen by the shareholders under the provisions of Law no. 31/1990 on

trading companies and changing the administration of the credit institution under the new

circumstances created. Under these circumstances, the attributions of the special

administrator, in conformity with Art. 240

11

, are set by the decision of the National Bank

of Romania and they can include “taking any redress measures serving the interests of

the credit institution’s depositors that are necessary to preserve the value of the credit

institution’s assets, eliminating the differences in its administration, the receivables

collection as well as any measures needed to restructure its activity”.

As one can infer from the law texts in the matter, the two procedures have different

characteristics which make that each one be approached separately, with its specific,

although the purpose, in conformity with the law, can have the same consequences.

After the triggering of the economic and financial & banking crisis at global level,

prudential supervisory authorities have imposed new legal provisions which would lead

to strengthening banking supervision and more accountability to prevent bank

bankruptcies or even the collapse of some national banking systems.

In this context, the Romanian legislator, under the impulse of some European and

international financial bodies, has amended the matter of special procedures in the

Government Emergency Ordinance no. 99/2006, having as aim to strengthen the role of

the National Bank of Romania as the authority competent in the matter to assure the

viability of the Romanian banking sector.

Thus, via the Government Emergency Ordinance no. 26/2010, published in the

Romanian Official Gazette no. 208 of 1 April 2010, essential amendments to these

procedures were made, particularly to special administration which, in the legislator’s

3

rationale, has become a procedure usable in principle. In this ratione, we should consider

the conditionality instituted via Art. 237 par. (1) of the emergency ordinance which sets

forth that “The National Bank of Romania can dispose instituting the special supervision

measure for a credit institution, a Romanian legal person ..., if the central bank does not

decide to institute special administration”.

Under these circumstances, the legislator, via the amendments mentioned in the

emergency ordinance, grants space and attention to the special administration procedure

as compared with special supervision.

III. A New Legislative Approach of the Special Banking Procedure

Regarding special supervision, besides the conditionality mentioned in the case of

deciding to institute this procedure or not, we can also see the amendment of the powers

of the special supervisory commission under Art. 238 par. (1) let. b) where, in the new

wording of the law text, its attributions set forth “the suspension of enforcing some

decisions of the bodies or persons having duties of administration and/or management of

the credit institution that are contrary to prudent and sound banking practice, to the

requirements of the law and of the regulations issued for their enforcement or if they lead

to the deterioration of the financial situation of the credit institution”. The need to

introduce this power is determined by the fact that under the conditions and

circumstances expressly set forth by the law text, the special supervisory commission –

which has the responsibility of the credit institution’s financial situation during the

procedure - must act in order to redress the business and the financial situation of the

credit institution and in this context, the commission must be empowered to suspend the

decisions it appreciates as being, because of those reasons, harmful for the business and

redress of the credit institution.

Being the procedure considered by the legislator as usable in principle in case of

finding a precarious financial situation in a credit institution, the special administration

procedure is granted special attention in the amendments set forth in the Government

Emergency Ordinance no. 26/2010.

We must mention from the very beginning that the new normative act increased the

number of cases when the National Bank of Romania is empowered to decide about

instituting special administration for a credit institution, Romanian legal person. The first

case set forth by the Government Emergency Ordinance no. 99/2006 was left in its initial

form – respectively instituting special supervision gave no results in period of up to 3

months, which proves that special administration as a measure is subsequent to special

supervision, because, as their name and regulation show, we can appreciate the profound

effect of an administrative action imposed and monitored by the competent authority

during its entire deployment. Special administration is entitled to offer more chances of

redress to a credit institution than special supervision, but, actually, it is deployed by the

same persons and bodies that made the bank be in the precarious situation (which

determined taking the measures of instituting a special procedure). The other cases

mentioned in the amendment of the emergency ordinance are concretely circumstantiated

by the legislator, involving an analysis and the considerations contemplated by the

prudential supervisory authority when appreciating the situation of the respective credit

institution. Thus, the competent authority is the body that finds or pins down that “a

significant deterioration of the prudential and financial performance is predictable,

4

deterioration that could jeopardize in the near future the credit institution’s capacity to

observe prudential requirements, while the shareholders have not taken the measures

necessary to remedy this situation” [Art. 240 alin. 1 let. b)] or “finds serious deficiencies

in the administering and/or management of the credit institution or serious and repeated

breaches of legal dispositions and/or regulations or other acts of a person when

enforcing them, which endangers seriously depositors’ interests” [let. c) Art. 240]. The

same competent authority is the one that can find that “the credit institution has not

assured the full implementation within the set delays of some or several of the measures

disposed for it, according to Art. 226 par. (2) let. a)-f) and h), situation that can

jeopardize the credit institution’s liquidity and/or the adequate level of own funds” [let.

d)] or that “the operations of the credit institution jeopardize the stability or level of its

own funds or the stability of the banking sector or the credit institution undergoes a

liquidity crisis that endangers the interests of depositors or of other creditors” [let. e)]. In

the same rationale, we could consider the case under let. f) of the same law text, defined

by the fact that “the credit institution has not submitted, in the delay set forth by the

National Bank of Romania, a redress plan, according to Art. 226 par. (2) let. i) or the

National Bank of Romania finds that the plan submitted is not feasible or that the credit

institution has not carried out, in the set delays, the commitments undertaken in this plan

or that the deficiencies found related to the liquidity or level of the credit institution’s

own funds cannot be removed via the redress plan”.

The legislator grants the possibility to the credit institution’s management, aware

about the situation, to ask for help, justifiably for that matter, to institute special

administration (let. g) which as action type offers sustainable ground for the supervisory

authority to take such a measure. Moreover, the legislator considers a decisive reason the

fact that “The National Bank of Romania has declared unavailable the credit institution’s

deposits, according to the provisions of the Government Ordinance no. 39/1996...” [the

case mentioned under let. h)].

If in the old wording in Art. 240 the measure of special administration could be

ordered in case “own funds stand at a level which does not exceed half of the minimum

capital requirements calculated according to the regulations issued for the enforcement

of Art. 126 and 148”, by the amendment brought via Government Emergency Ordinance

no.26/2010, the National Bank of Romania is no longer entitled to take the measure in

this case; rather, the National Bank of Romania is obliged to institute special

administration when “a credit institution’s own funds stand at a level which does not

exceed 75% of the minim level of capital requirements, calculated according to the

regulations issued for the enforcement of Art. 126”. The obligation of the National Bank

of Romania to institute special administration in this case (regulated by Art. 240 par. (2)

is excluded only in the situation when the central bank “decides to withdraw the license

and, as the case may be, notifies the competent law court to open the winding up

procedure”, which involves the next step determined by the appreciation of the

competent authority that instituting special administration would have no effect upon the

redress of the respective credit institution.

The need for firm and immediate action of the competent authority has determined

the introduction of par. (3) of the same article which sets forth expressly, that “in case of

instituting special administration, according to par. (1) and (2) and contemplating the

concrete circumstances which have brought about the adopting of this measure”, the

5

National Bank of Romania is obliged to “decide, as the case may be, on taking some

measures such as: 1- to withdraw the endorsement granted to the persons who have

duties in administering and/or managing the credit institution, in conformity with the

provisions of Art. 228 corroborated with those of Art. 229 of the same regulation; 2- to

withdraw the endorsement granted to the financial auditor of the credit institution,

according to Art. 157 and 3 – to suspend the voting rights of the shareholders holding

qualified equity participations in the credit institution. These actions must be considered

as absolutely necessary, taking into account that the bodies responsible for the business

of the credit institution could have acted to prevent the situation which occurred.

Art. 228 and 229 mentioned in the case of the managers and administrators of the

credit institution refer precisely to facts (concretely determined by the legislator) which

were perpetrated by them and to the sanction applicable defined by Art. 229 par. (1) let.

d). And mentioning the provisions of Art. 157 is justified by the fact that the National

Bank of Romania is empowered to withdraw the endorsement granted to a financial

auditor, when the latter “does not carry out in an appropriate manner the responsibilities

mentioned by law or does not observe the requirements pertaining to a specific ethical

and professional conduct”, or the competent authority is requested, when instituting the

special administration measure, to give an opinion about the decision to withdraw the

endorsement of the financial auditor – whose role was actually to prevent the situation

that imposed instituting special administration. The measure to suspend the voting rights

of the shareholders that hold qualified equity participations in the respective credit

institution is supported by what is set forth under par. (4) of the same law text, requesting

the National Bank of Romania to contemplate the fact that “the influence exercised by the

respective persons on the credit institution jeopardized the prudent administration of the

credit institution, considering, especially, the respondence to the recommendations made

according to Art. 168, to the measures disposed according to Art. 226 or, as the case may

be, to Art. 230

1

”.

An exceptional situation when special administration can be instituted is the one

described under Art. 240

2

, namely during the period when, in the credit institution, the

exercising of responsibilities to administer and/or manage is not provided any longer,

case when the legislator sets forth that “the main task of the special administrator is to

take the measures necessary for appointing the board and the directors of the credit

institution or, as the case may be, the members of the supervisory board and the

directorate”. That is why this measure – imposed by opportunity necessities and not at all

by the precarious financial situation of the credit institution – should not be included

among these situations, compared to the consequences implied by instituting special

administration for a credit institution, when the National Bank of Romania has the

obligation to publish an ad in the Romanian Official Gazette, Part IV and to notify the

other supervisory authorities in Romania in this respect.

In case the credit institution where special administration was instituted has branches

opened in other member states, the National Bank of Romania has also the obligation to

notify without any delay and by any means available (for celerity reasons) the competent

authorities in all host member states both as regards instituting the measure as well as

concerning the effects it can have. Considering precisely these effects and the need for

celerity, the legislator requests the National Bank of Romania to notify these authorities

“if possible before adopting the decision or shortly after”.

6

Concerning the period of instituting special administration, if until the amendment of

the Emergency Ordinance no. 99/2006 via Emergency Ordinance no. 26/2010, it was of

one year since the date of the decision of the National Bank of Romania – giving the

central bank the possibility in exceptional situations to prolong it by maximum 6 months,

currently, it is of 4 month since the same date, and the possibility of prolonging the period

is determined only by the situation “if such a prolongation is necessary to finalize the

restructuring measures for the credit institution”, meaning that no delay is set forth in

this respect, the legislator connecting the prolongation exclusively with the need to

finalize the respective measures.

As regards special administrator, if Art. 242 in the old form of the normative act

shows that this person “can be a natural or a legal person ... as well as the Bank Deposit

Guarantee Fund”, the text of the new Art. 240

5

sets forth that “to exercise the duties of

the special administrator, the National Bank of Romania can appoint one or several

natural persons or a legal person which can be the Bank Deposit Guarantee Fund”. The

new law article details other aspects pertaining to the special administrator, mentioning

that the National Bank of Romania’s decision must include besides naming the persons

appointed, the objectives and the specific duties, the special administrator’s remuneration,

the allowed level of expenses that can be incurred when carrying out his/her duties and

any other conditions considered important by the National Bank of Romania. Paragraph

(3) of Art. 240

5

sets the criteria which must be contemplated by the central bank when

appointing a person for this position.

The entire activity of the special administrator is deployed in conformity with the

provisions of the law and with the regulations applicable for direct subordination to the

National Bank of Romania. This is clearly inferred from the law texts in the matter, which

expressly show that the special administrator exercises his duties “observing the

instructions and dispositions given by the National Bank of Romania during special

administration and is liable only before the central bank for the carrying out of the duties

conferred to him in this capacity”.

As regards the expenditure related to special administration, in principle, it is borne

by the credit institution subject of this measure. As an exception, the law sets forth that

the National Bank of Romania bears certain expenses namely those related to

remunerating the persons appointed from among its staff and those related to defence in

case of litigation for the special administrator and for any person hired to support its

activity, if the exercising of duties was made in good faith and without negligence; in the

contrary case, these expenses are borne by the person who acted in bad faith or with gross

negligence.

The special administrator is authorized, in conformity with the provisions of Art.

240

6

to hire other persons, who can be auditors, lawyers, valuators, other independent

certified experts, who support him/her in the carrying out of his/her duties; he/she can

delegate them specific tasks, but only in conformity with the instructions given by the

National Bank of Romania, as the quoted article expressly sets forth.

The same National Bank of Romania is the one that can set certain limits or

conditions regarding the business and the administration of the respective credit

institution and can restrict, totally or partially, the credit institution’s providing certain

financial services. For these limitations, conditions or restrictions that the National Bank

of Romania communicated to the special administrator, the latter is held liable for their

7

observance, as during the special administration, the special administrator takes up fully

the duties of administrating and managing the credit institution, because the mandate of

the board and the directors or, as the case may be, of the supervisory board and of the

directorate ceases.

Regarding the deployment of the activity of the special administrator in the

respective institution, Art. 240

9

establishes concretely that, after taking over the credit

institution, the special administrator notifies immediately the departments and branches of

the institution, and its correspondent credit institutions, the Office of the Trade Register

and, as the case may be, the Bank Deposit Guarantee Fund regarding taking this measure.

About his/her statute in the credit institution, the law offers the special administrator

unrestricted access during the entire period of the special administration, to all the outlets

and locations of the credit institution and to all the assets, records, accounts and other

records, as he/she holds control over them. The imperative setting of this statute provides

the special administrator freedom of action in order to carry out all the tasks incumbent

on him/her in the capacity he/she was invested with by the National Bank of Romania and

which he/she must carry out. Moreover, he/she exercises his/her duties on the territory of

the host member states under the conditions mentioned in Art. 262 on the matter of credit

institutions’ liquidity and special administration as well, which empower him/her to

exercise on this territory all the competences he/she has according to the Romanian law,

including the appointment of other persons who would support or represent him/her on

the territory of these states.

The scope of the activities included in the duties of the special administrator is detailed

in the provisions of Art. 240

11

-240

14

of the current normative act amended. Thus, in

conformity with legal provisions, the National Bank of Romania establishes by the decision

given the special administrator’s duties which can include taking any redress measures,

observing the interest of the depositors of the respective credit institution, decisions which

are necessary for the conservation of the value of the credit institution’s assets, the

elimination of the deficiencies in its administration, collecting receivables, as well as any

measure necessary for the restructuring of its business. The legislator makes all these

measures conditional upon the provisions of respective normative act, setting them in the

economy of the law so that the special administrator knows them and carries them out. In

this respect, the law sets forth that in the shortest delay of time possible after his/her

appointment, the special administrator must assess the fulfilment prospects as well as the

approximate costs and benefits of the alternatives he/she has and which pertain to: 1 – the

redress of the credit institution; 2 – the restructuring of its business by implementing

appropriate measures mentioned by the legislator under Art. 240

12

par. (1); or 3 –

introducing the petition for the start of the winding up procedure for that credit institution.

Since the taking over of the credit institution, the special administrator takes

measures to assure keeping safely its assets and documents, the law text mentioning a

deadline – maximum one month since his/her appointment – for carrying out the

inventorying and assessment of the credit institution’s assets and liabilities and drawing

up the financial statements which will be submitted to the National Bank of Romania

together with the written report, in conformity with the law.

The redress measures that the special administrator can take are concretely listed in

the provisions of Art. 240

11

par. (5) and can include: 1 – negotiating the claims of the

credit institution and/or establishing new maturities for them; 2 – suspending raising

8

deposits and/or granting loans; 3 – downsizing or restructuring the non-profitable

business, including closing down branches; 4 – cutting costs, including by re-

dimensioning the staff scheme; 5 – improving the administrative framework, the

strategies, processes and mechanisms implemented across the credit institution; 6 – re-

assessing the provisions or the treatment of the credit institution’s exposures against the

taken risks; 7 – mitigating the risks underlying operations, products or systems of the

credit institution; 8 – any other measures which can be taken by the institution’s

management bodies; 9 – ceasing fraudulent activities and abuses of any nature of the

persons having a special relation with the credit institution; 10 – introducing actions to

cancel fraudulent acts concluded in the past by the credit institution, including the

contracts where the obligations undertaken by the credit institution are disproportionate

against the service the other party committed to; and 11 – notifying competent bodies, in

case there are indications about the perpetration of a crime.

As regards the restructuring measures empowered by the National Bank of Romania

to the special administrator to be implemented, Art. 240

12

in the normative act amended

mentions as follows:

a) increasing the share capital;

b) reducing the capital to cover losses;

c) asset sales;

d) deposit transfers;

e) selling asset and taking up liabilities, via another credit institution or financial

institution that acquires the assets of the credit institution under special administration

and take up its liabilities;

f) merger with other credit institutions;

g) total or partial spin off.

In this case as well, he/she must work in cooperation with the National Bank of

Romania, acting in conformity with its instructions, which can indicate, specifically or

generally, the manner of implementation.

The activity of the special administrator must be deployed with celerity, and that

makes the law institute a delay of maximum two months since his/her appointment, when

he/she must submit to the National Bank of Romania a written report that should include:

a) the measures taken since instituting special administration and their effects;

b) the assessment of the carrying out chances, of the approximate costs and benefits

of the alternatives for redress/restructuring or, as the case may be, for initiating the

winding up procedure for the credit institution, including determining the estimated value

which could be realized in case of liquidation;

c) the recommendations of the special administrator about the measures he/she

deems adequate function of his assessments, which can include an action plan submitted

for the endorsement of the National Bank of Romania, pertaining to the implementation

of any of the restructuring measures set forth by law or a combination of them, without

excluding the application or the continuation of applying the redress measures set forth

under Art. 240

11

par. (2).

The special administrator has the obligation to enclose in his report documents

regarding inventorying and assessing the credit institution’s assets and liabilities, the

situation of receivables’ work out, the cost of keeping the assets, the liabilities’ payment

and the financial standing, all drawn up observing the law.

9

Based on this report which must be sufficiently detailed in order to fundament the

recommendations made by the special administrator, the National Bank of Romania

decides, in a delay of 15 days from receiving the report, about the opportunity and the

period of maintaining special administration and about the recommendations formulated

by the special administrator and, as the case may be, approves – with or without

amendments – or rejects the proposed action plan.

Function of the concrete circumstances, if the National Bank of Romania considers that

there are no favourable conditions for the redress of the credit institution, the latter can

decide either to implement the restructuring measures in conformity with the approved

action plan or, in its absence – based on the assessments made observing the law and setting

a delay during which the special administrator should act in order to restructure its business

– to withdraw the credit institution’s license and notify the competent law court for the start

of the winding up procedure, or to withdraw the credit institution’s license followed by its

dissolution and liquidation, according to legal dispositions in force.

Considering the active role of the National Bank of Romania, as the legislator sees it,

the central bank can request the changing of the action plan approved or the central bank

can approve the amending of the plan proposed by the special administrator whenever it

deems necessary, before or during this plan’s implementation.

An imperative disposition of the law is set forth in Art. 240

17

par. (1), according to

which, in the same spirit, during the entire period of special administration, the special

administrator must report to the National Bank of Romania, in the delays established by

the central bank about the credit institution’s financial standing and the stage of the

measures implemented while he/she can propose the amending of these measures, and

moreover, because of the opposition of the shareholders’ general meeting to adopt the

necessary decisions or due to some objective circumstances which do not allow for the

implementation in due time of the adopted measures and in the absence of other viable

solutions, the special administrator is the one empowered by law to propose to the

National Bank of Romania to withdraw the license of the respective credit institution.

In addition, Art. 240

18

offers the National Bank of Romania the possibility to decide,

at any moment, based on the reports submitted by the special administrator, the cessation

of special administration and the resuming of the credit institution’s business under the

control of its statutory bodies, an idea developed in Art. 240

19

, which obliges the special

administrator to take the necessary measures to appoint new persons who should exercise

the duties of administering and managing the credit institution.

IV. Conclusions

As a conclusion, we can say that the amendments in the Government Emergency

Ordinance no. 99/2006, via the Government Emergency Ordinance no. 26/2010, aim at

strengthening the role of the authority competent in the matter of banking prudential

supervision during the entire period of special administration, period which was reduced

in order to resolve with celerity the situation of the respective credit institution.

The competent authority is the body which monitors, during the entire period of time,

the special administrator’s activity and, contemplating the latter’s reports, this body can

give an opinion about the special administrator’s measures, while acting for the major

interest that was contemplated when regulating this special procedure pertaining to credit

institutions’ business.