Bank liquidation can be a complicated and distressing process, especially for foreign account holders who may be unfamiliar with the intricacies of the German financial system. Corporate liquidation involves the winding up of a company’s affairs, the sale of its assets, and the distribution of proceeds to its creditors and shareholders. Bank liquidation, on the other hand, is a specialized process due to the critical role banks play in the economy and the need to protect depositors’ interests.
An Introduction to Bank Liquidation
Rationale: As comprehensively explained in our article ‘an introduction to bank liquidation‘, bank liquidation is typically initiated when a bank is unable to meet its obligations, is deemed insolvent, or poses a significant risk to financial stability. Liquidation serves to protect depositors, maintain trust in the financial system, and prevent contagion effects on other institutions. However, it may also lead to job losses, reduced credit availability, and economic slowdown.
Reasons to liquidate: The decision to liquidate a bank or impose penalties depends on the severity of the bank’s problems, its systemic importance, and the potential impact on financial stability. While penalties may be sufficient for less severe cases, liquidation may be necessary when the bank’s continued operation poses a significant risk.
German Banking Laws: The primary legal framework for bank liquidation in Germany is the German Banking Act (Kreditwesengesetz or KWG) and the German Insolvency Code (Insolvenzordnung or InsO). Additionally, the European Union’s Bank Recovery and Resolution Directive (BRRD) and the Single Resolution Mechanism (SRM) provide guidelines for bank resolution and liquidation.
Procedures prior to liquidation: Before liquidation, regulators assess the bank’s financial situation, explore recovery options, and determine if resolution or liquidation is necessary. The competent authority may appoint a temporary administrator to oversee the bank’s operations and prepare it for liquidation.
Bank Liquidation procedures in Germany
Valuation of assets and potential write-downs: An independent valuer is appointed to assess the distressed bank’s assets, including loans, investments, and real estate. Asset values may be written down to reflect their true market value, leading to potential losses for creditors.
Collecting foreign assets: Collecting assets held abroad and other foreign assets may be challenging due to differences in legal systems, regulatory requirements, and currency fluctuations. This may result in delays and reduced repayment percentages for creditors.
Appointment of a liquidator: The competent authority appoints a liquidator to manage the bank’s liquidation process, including the sale of assets, settlement of claims, and distribution of proceeds to creditors.
Distribution of assets to creditors: Assets are distributed to creditors in accordance with the priority of claims and creditor hierarchy stipulated in the German Insolvency Code (InsO).
Proof of debt submission: Creditors must submit a proof of debt to the liquidator, detailing the nature and amount of their claim. The liquidator will verify the claim and notify the creditor of its acceptance or rejection. The submission process usually involves completing a specific form and providing supporting documentation, such as contracts, invoices, or account statements. The deadline for submitting proofs of debt will be communicated by the liquidator, and it is crucial for creditors to adhere to this timeframe to ensure their claims are considered.
Applicable priority of claims and creditor hierarchy: The German Insolvency Code (InsO) outlines the priority of claims and creditor hierarchy as follows:
- Secured creditors, such as those holding collateral or mortgage-backed securities, have priority over the underlying assets.
- Preferential creditors, including employees and tax authorities, come next in the hierarchy.
- Unsecured creditors, such as trade creditors and bondholders, rank below secured and preferential creditors.
- Shareholders come last in the order of priority.
Treatment of secured and unsecured creditors in the distribution of assets: Secured creditors are repaid from the proceeds of the sale of the assets they hold as collateral, up to the value of their claim. Unsecured creditors share the remaining proceeds on a pro-rata basis, according to their claim amounts. Due to their lower priority, unsecured creditors typically face higher losses in a liquidation process.
Anticipated duration of the liquidation process and payout expectations: The duration of the liquidation process depends on the complexity of the bank’s operations, the valuation of assets, and the resolution of claims. It can take several months to several years to complete. Creditors can expect to receive payouts as the liquidator gradually sells the bank’s assets and distributes the proceeds. However, the exact amount and timing of these payouts may be uncertain, and creditors should be prepared for the possibility of receiving less than their full claim amount.