Comparative Legal Study On Workout And Prevention Of Bank's Non-performing Assets

Historical experiences tell us that Non-performing Assets (hereinafter referred as NPAs) of banks and financial crisis are closely related. Take the several bank crises in the late 1980s as an example, we can find that NPAs of banks and financial crisis are so closely associated that they could be analogized as"shadows"to each other, and the two are both the cause and the effect of the other's being. S &L Crisis of America in the late 1980s, Financial Crisis of Japan in 1990s, Asian Financial Crisis in 1997, and the U. S. Subprime Crisis in 2007, they are all closely related to NPAs of banks. Huge NPAs of banks do great harm to the liquidity of the banks, which could either be a trigger of financial crisis or a reason of tightening lending practice, and consequentially, the troubled or bad bank's assets would inevitably accumulate. The frequent occurred financial crises warned world governments to take measures to handle the NPAs problems of the banks, both national economic safety and political stability might be endangered.In this very transitional period, Chinese banks'have accumulated NPAs up to several thousand billion yuan, and the risks embedded in this huge sum of NPAs always make people feel uneasy. Luckily, the Chinese government looked far ahead and China has already set up four financial Capital Management Company (AMC) to dispose the NPAs , and to strengthen the enforcement of bank regulations and to implement the financial reforms. In the recent 10 years, the extent of NPAs in Chinese banks has greatly decreased through a series of efforts. However, we must know that to fight against NPAs will be a"protracted war"for banks, the rise of the ratio of NPAs is a signal for its restoration. Meanwhile, in the world-wide the trend of the financial globalization, the scope of the Chinese banks'off-balance business is continuously enlarging, and there are no ready-made experiences for risk control of off-balance sheet assets even in advanced countries. The U. S. Subprime Crisis in 2007 warned Chinese people, for the control and prevention of the NPAs, we must"walk on two legs", that is, giving attention to both on-balance sheet assets and off-balance sheet assets, otherwise, we might face a disastrous consequence.Therefore, the systematic study of NPAs of banks is of great importance to the economic and social development of China, and such a research is urgently needed. This dissertation starts with the logic of"What, Why and How"and makes a systematic research on the legal issues of NPAs with the point of view of comparative law. First of all, it is necessary to make sure what the NPAs is, which involves the definition of the concept and characteristic of NPAs. Then, it is required to explain how the NPAs are produced, that is to explain the cause of formation of NPAs. In the last, it is the question of resolving and replying the NPAs, which may be divided into two parts, on the one hand, the NPAs should be disposed through deposit asset, and on the other hand, the NPAs can be prevented and controlled through earned asset.The whole dissertation is divided into three major parts with a total of eight chapters: Part One involves the definition and cause of NPAs, which are analyzed in detail in Chapter One; Part Two illustrates the disposition of NPAs, which is set forth in Chapter Two,Chapter Three and Chapter Four; Part Three address the prevention and control of NPAs, which is discussed mainly from Chapter Five to Chapter Eight. The details of each chapter are as follows:Chapter One: The definition and cause of NPAs of bank from the point of view of comparative law. First, the dissertation defines the concept and characteristic of NPAs comparing with the concept of NPLs, NPCs as well as the Problem Loans and illustrates its relationship with the Subrogation Payment. Second, on the basis of comparing the crisis faced by the banks over of each county, the dissertation points out that the common problems produced by NPAs, namely, the relationship orientation between the government and bank, bursting of the assets bubbles, deregulation and forbearance of finance, information transparency and lax management on credit funds etc. The arose of NPAs in our country is as a result of the legal issues such as the failure in market discipline, weak protection on the banks'debts, absence of credit guarantee mechanism, inadequate bank regulation and supervision as well as the internal control. In the background of globalization, securitization and its derivatives have become the new approaches for the NPAs risks to contaminate, which call us to pay highly close attention.Chapter Two: The issues of subjects who dispose the NPAs of bank from the point of view of comparative laws. The central bank, government organizations and commercial banks all participate in disposing the NPAs, in the comparative laws however, it is common for each country to establish a special organ to concentrate on disposing the NPAs. AMC and RTC are both such kind of special organs with apparent differences on characters, subject matter, functions and quit mechanism, which can not be confused. On the basis of comparing experiences among the countries, the dissertation puts forward some constructive advice on the transformation of AMC in China and maintains that the AMC should be endowed some special power to facilitate its disposition on NPAs.Chapter Three: The legal issues on the acquisition of NPAs from the point of view of comparative laws. From the practice of each country, the acquisition of NPAs includes transfer of NPAs, trust and equity partnership etc. Hereinto, trust shall become the important approach in acquiring the NPAs in a country with integrated trust legal system due to its special virtues. In the practice of acquiring NPAs by foreign capital in our country, there exist legal barriers including industry policy restriction, state safety, assets appraisal and price determination as well as the acquisition of equity, stock and physical assets, which may affect the enthusiasm for the foreign capital to participate in NPAs disposal in China. In the perspective of foreign capital JV, in comparison with Korea, there exist corresponding problems in China involving JV target specification, market efficiency participation, management organs complication and financial JV legality.Chapter Four: The issues on recovery and transaction of NPAs from the point of view of comparative laws. There are two basic strategies on NPAs'transaction, namely the asset disposal strategies and debt restructuring strategies. The former includes loan collection, collateral foreclosure, loan sale and securitization etc. And the latter mainly involves debt-equity swaps and debt-for equity swaps. The dissertation analyzes in a practical way the legal nature of the flaw NPAs sales in China, torts determination and judicial remedy. At the same time, the dissertation suggests that the representations and warranties clause practiced by US shall be introduced to perfect the transaction model. In terms of the securitization of NPAs, the dissertation carries out discussion over the establishment and construction of SPV, assets true sales, risk-remote and credit enhancement combing our country's practice. In addition, the dissertation points out the existing problems in China and the corresponding improvement thoughts. Concerning the problem of debt-equity swaps, the dissertation illustrates difficulties faced by policy debt for equity swap and virtues of commercial debt for equity swap as well as the legal basis and questions over commercial debt for equity swap.Chapter Five: The issues on creditor protection and escaping debts prevention in the comparative laws. Escaping bank debts constitutes an important factor in producing bank NPAs in transitional countries. Therefore it is necessary to enhance the bank debts protection. Apart from the administrative and criminal remedies, the main protection instrument is the civil remedy. This dissertation explores the bank debts protection in each country and China in terms of the contract and assurance market transaction system, debtor bankruptcy liquidation and out-of-court procedures as well as the civil remedies system.Chapter Six: Bank supervision and NPAs prevention from the point of view of comparative laws. The practice of bank law in each country shows, mandatory subordinated debt and prompt corrective action have important values on improving capital adequacy supervision as well as NPAs control. Under the comparative laws, regulation of affiliates and insiders transactions serves as the strongest pertinent legal system in NPAs prevention. With regard to the problems of asset bubble and financial supportive excess, the dissertation analyzes the burst of US housing price bubble and its subprime mortgage crisis in 2007, pining out the existing problems in the supervision on finance support industry: (1)Securitization and its derivative transactions get through the Chinese wall between credit market and capital market, which leads to the mutual contamination of finance crisis;(2)Attitude and endeavor over housing credit supervision shows a sway character. The standards of loans are loose and effective measures are lag. (3)There are blanks and blind spots in the supervision on finance agencies. In the last, the dissertation introspects the status of our country's housing credit supervision with the view of housing function and supervision basis.Chapter Seven: Bank NPAs disposal and transparency under comparative laws. The system of provision for loan losses may urge the banks to strengthen assets quality control in order to lose the loss of loan provision. The dynamic provisioning in Spain gives us instructive inspiration. After checking the bank crisis of other countries, the weak banking corporation governance affect directly the control of NPAs. Basel Committee on Banking Supervision and the regulations of each country makes active exploration in banking corporation governance improvement. Among them, bank equity adjustment, director duties strengthening and mandatory subrogation debt are beneficial to the banking corporation governance in China. The NPAs transparency is remarkably helpful to enhance the banking market restriction. The Basle New Capital Agreement and the regulations of each country regard the information disclosure as the important instrument to improve NPAs status. The dissertation points out the problems existing in culture basis, authenticity, adequacy, ways and frequency as well as the exemption scope in banking information disclosure system in China.Chapter Eight: NPAs control and international coordinated system. In the background of globalization, with the view of supervision convergence and international finance coordination, the dissertation makes research on securitization investment failure and derivative finance transaction losses, which sever as new breeding resources of substantive NPAs of banks. The dissertation pins out that the regulations lack authority, which is a major weakness in current securitization and derivative finance international supervision coordination. At the same time, the dissertation put forward some constructive advice on improving finance supervision international coordination system in our country.