Bank liquidation is a process where a financial institution, such as a bank, is forced to close due to insolvency or other financial difficulties. The process involves selling off the bank’s assets to repay its creditors and depositors, and can occur when the bank is unable to pay its debts. Bank liquidation usually happens when a bank’s regulatory capital falls below the minimum required level, or when a financial regulator determines that the bank is no longer viable.
In the most simple way, the account balance at a bank is at risk when the bank fails and is unable to pay out deposits. This happens when the bank has insufficient funds to cover its liabilities and is unable to meet its obligations to depositors. Our detailed Introduction to Bank Liquidation provides further insights and allows account holders and other creditors to prepare for a soft landing.
Bank liquidation is conducted in accordance with the laws and regulations of the country in which the bank is located. Issues between home and host countries and correspondent banking are common when the bank operates in different countries or has cross-border activities. In general, the liquidator is appointed by the central bank of the country. Depending on the regulations of the country, the liquidator may or may not need permission from the court to sell any assets of the bank. A liquidator is also required to provide an audit report to the central bank and other stakeholders, as well as information to creditors and shareholders. Furthermore, the liquidator must ensure that any remaining assets are distributed according to local laws to creditors and shareholders.
An Important Distinction Between Insolvency and Liquidity Challenges
Liquidity issues become insolvency issues when a company is unable to pay its debts when they are due because of their lack of cash at hand. Insolvency is the inability of a bank to meet its financial obligations, usually due to an accumulation of debt or other liabilities. Liquidity challenges refer to the difficulty a bank has in meeting short-term obligations or making payments due to a lack of readily available funds. Insolvency is a more serious issue than liquidity challenges, as it can lead to a bank’s ultimate failure if not addressed.
Bank Liquidation in an International Setting
In the event of a bank liquidation, international account holders may be at risk of financial loss since the procedures often involve a freeze on their accounts. Thus, the funds in their accounts are not available for withdrawal, and in some cases, the accounts may be closed entirely. In addition, international account holders may be exposed to currency fluctuations and exchange rate risks, as liquidation procedures are generally conducted in the currency of the country in which the bank is located. The liquidation process can be lengthy, and the outcome is often uncertain, leaving customers with great uncertainty regarding their funds and investments.
The amount of money repaid in international bank liquidations can vary greatly depending on the size of the bank and the assets it holds. Generally, creditors can expect a write-down of their outstanding balance. Due to the differences in asset quality and the maturity and discount factor of long-term institutional investments, exact numbers are difficult to predict. Bank deposit insurance therefore plays an important and often critical role in the reimbursement of retail creditors in bank failure.