As the Governor noted in providing the Bank’s endorsement of the ILG’s initiative in October 2000, past experience suggests that a collective approach by the major creditors to a debtor company in financial difficulties can help to preserve value, to the benefit of the creditors as a whole and of others with an interest in the company. Although I know there have been tricky issues to resolve in the negotiations – notably those relating to the standstill, debt trading and the provision of new money – in the end, the Principles seem broadly consistent with the London Approach, based as they are on the enlightened self-interest of all the creditors. Ultimately, although some debt providers may be able to gain in individual cases by striking out on their own, in the long run a co-operative approach will ensure greater recoveries for creditors, including bondholders, in aggregate. Just as greater international co-operation can produce net gains at the workout stage, so that needs to be backed up by greater co-ordination in cross-border corporate insolvencies. That is why we welcome the UNCITRAL Model Law on cross-border insolvencies, which, as most of you will know, has been implemented into UK insolvency law. The Model Law is consistent with the UK insolvency regime and contains many helpful provisions relating to co-operation between insolvency courts in different jurisdictions, and to the granting of recognition to foreign insolvency practitioners. We would therefore urge other countries to enact the UML.
In this context, we also welcome the ongoing work by international organisations, including the IMF and World Bank, on the design of efficient and effective insolvency regimes worldwide. It is, of course, difficult to establish international standards in this area, because the approaches adopted by different countries reflect not only different legal traditions but also different policy choices, most especially on the extent to which the system should favour debtors or creditors. Indeed, this is a debate that is live in several countries, including the UK where new measures were announced last month in the Queen’s Speech, and I am sure is occupying minds at this Congress. But the IMF work argues, rightly in my view, that any insolvency regime, whether debtor- or creditor-oriented, will enhance financial stability effectively only if it protects value for the benefit of all interested parties and the economy in general; and this requires the allocation of risk among market participants to be done in a way that is predictable, equitable and transparent. Financial sector restructurings Let me turn now to my second area: financial sector restructurings, and I would like to start by noting the importance of confidence in the smooth running of a financial system. Confidence is important in most industries, but it is at the heart of the financial industry. It is confidence that permits banks to operate, as a matter of course, with gearing many times capital, and with a maturity mismatch between their assets and liabilities, often concentrated in short-term or sight deposits.