Dealing with parties at fault in a bank failure and fraud in deposit insurance

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This guidance on dealing with parties at fault in a bank failure is provided by the Key Attributes of Effective Resolution Regimes for Financial Institutions issued by the Financial Stability Board and the IADI Revised Core Principles for Effective Deposit Insurance Systems. To be in compliance with Core Principle 12, which states that “The deposit insurer, or other relevant authority, should be provided with the power to seek legal redress against those parties at fault in a bank failure”, this IADI Guidance Paper sets out additional guidance, such as:

Every jurisdiction should have legislation and other regulations that govern investigation and liability of persons at fault in a bank failure; the legislation/regulations should clearly specify the areas of responsibility, powers and obligations of relevant government and non-government agencies with regard to conducting investigations and bringing legal actions against parties at fault in a bank failure, as well as the sources of funding for such actions; a deposit insurer that is involved in bank liquidation proceedings should have the ability to influence the course of the investigation and bring legal actions against potentially culpable persons, as well as follow up the effectiveness of court and out-of-court prosecution and recoveries from such legal actions; if the deposit insurer acts in the capacity of a resolution authority, it should have internal rules and processes that govern the investigation of bank failures and their causes, and the initiation of legal actions against responsible persons; it is recommended to have criteria for evaluating the feasibility of investigating and initiating legal actions (both in and out of court) against potentially culpable persons; in those jurisdictions where senior officials of depository institutions are obligated to have insurance policies that cover liability of directors and officers for their wrongful acts, the deposit insurer or other agency responsible for investigating bank failures should pay due attention to this potentially important source of recovery of damages; it is good practice to publicize instances where persons at fault in a bank failure or losses/damage to the bank or its creditors have been held to account; the deposit insurer should have internal procedures for the timely identification of fraudulent claims, the right to refuse insurance payouts when claims result from fraud and to bring legal actions against fraudulent persons for committing fraud and/or participating in such fraudulent actions.