COMPARATIVE ANALYSIS OF BANK INSOLVENCY IN INDIA, UNITED STATES &

UNITED KINGDOM

INSOLVENCY &
BANKRUPTCY LAW
RESEARCH PAPER- COMPARATIVE ANALYSIS
OF BANK INSOLVENCY IN INDIA, UNITED
STATES & UNITED KINGDOM
FIRST INTERNAL ASSESMENT.

SUBMITTED BY-:
NAMAN KHANNA
17010125053
2017-22 B.A.LLB. & DIVISION A
17010125053@symlaw.ac.in
9877168366

1|Page
 COMPARATIVE ANALYSIS OF BANK INSOLVENCY IN INDIA, UNITED STATES &
UNITED KINGDOM

ABSTRACT.
This research study examines the consequences of bank insolvency on depositors' money in
India, the United States, and the United Kingdom. Today, there is a desire to not only create,
but also to put into effect, Bank Insolvency Acts, Laws, Rules, and Regulations. The bank
may fail for several reasons, but what happens to the depositors' money, which they have
deposited with the expectation of it being protected? Will the depositors' hard-earned money
go down the toilet or will they get it all back?

The regulations governing bank insolvency differ greatly. In many countries, bank
bankruptcy laws are distinct from those that regulate the insolvency of other businesses and
people. These bank insolvency rules and regulations outline a variety of approaches that are
utilised all around the world. The approach to bank bankruptcy in the United Kingdom is
based on standard insolvency rules for bank closure. The procedure is judicial in this case,
meaning that a judge decides whether a bank is bankrupt or not, and if insolvency is the sole
cause for the bank's closure. Similarly, the Bank Termination Procedure in the United States
is Administrative or Judicial in character and is based on the Banking Laws.

In this case, bank supervisors or bank managers determine insolvency and, in certain cases,
even close solvent banks for a variety of reasons. Bankruptcies become more prevalent in the
late twentieth century. While bank closures are often orderly, they can exhaust a country's
financial, institutional, and policy resources, resulting in significant losses, wasted resources,
and slower economic progress. The comparison and its analysis as well as recommendations
to improve are discussed in detail in this paper.

AIM AND OBJECTIVE OF THE STUDY.

The aim to conduct this research is to gain enhance knowledge of Bank Insolvency Laws and

the effect of the Bank Insolvency on Depositors Money.

The Objective of this research is as follows:

1. To analyse the Bank Insolvency laws of India, United States and United Kingdom.

2. To understand the impact of Bank Insolvency on the Financial Markets.

2|Page
 COMPARATIVE ANALYSIS OF BANK INSOLVENCY IN INDIA, UNITED STATES &
UNITED KINGDOM

RESEARCH QUESTIONS.
1. What is the comparison between bank Insolvency Laws prevailing in India, United States
and United Kingdom?

2. What are the procedures used to process Bank Insolvency?

3. How much money is a Depositor likely to get due to Banks going insolvent?

LITERATURE REVIEW AND RESEARCH METHODOLOGY.

For this study, the researcher consulted original materials such as statutory Acts, Laws,
Rules, Orders, and Bills, as well as secondary sources such as e-Law Journals, Research
Papers, News Articles, and Government Websites on the topic of Bank Insolvency. All of the
data and material was carefully evaluated and analysed with the goal of learning more about
bank insolvency and the study objectives in mind. This is a doctrinal research project. The
article is made up of descriptive and analytical research that demonstrates how different
nations' bank insolvency laws differ.

UNDERSTANDING BANK INSOLVENCY LAWS IN USA.

The world has witnessed how the US economy transformed in a matter of seconds as a result
of the "Great Depression." A lot of banks became insolvent at that moment, either owing to a
lack of liquidity or their inability to repay their loans. Insolvent banks are like "a leaky boat
with no escape for the people on board," and as a result, depositors, stockholders,
stakeholders, and the country's economy all perish together with the bank. The stock market
in the United States collapsed on October 29, 1929, and thus the Great Depression began in
1930, with over 10,000 banks failing. The 1933 Banking Act, enacted by the then-US
government, established the Federal Deposit Insurance Corporation in attempt to re-establish
American citizens' trust in the bank.1

The Federal Deposit Insurance Corporation was a short-lived federal agency established by
the 1935 Banking Act. It insured the deposits of industrial banks and savings institutions in
the United States. State Non-member Banks were regulated and supervised by it. Deposits in
financial institutions were insured up to $250,000 per type of account per bank by the Federal

1
History of Banking in the United States - https://www.infoplease.com/history/us/banking-in-the-united-states,
(last visited on 20th September, 2021)

3|Page
 COMPARATIVE ANALYSIS OF BANK INSOLVENCY IN INDIA, UNITED STATES &
UNITED KINGDOM

Deposit Insurance Corporation.2 When a bank's chartering authority, either a state banking
department or the United States Office of the Comptroller of the Currency, determines that it
is insolvent, the bank is closed and the Federal Deposit Insurance Corporation is appointed as
receiver. The Federal Deposit Insurance Corporation's job as receiver is to safeguard
depositors while also maximising recovery for the failed institution's creditors. The Federal
Deposit Insurance Corporation as receiver is legally and operationally distinct from the
Federal Deposit Insurance Corporation in its corporate capacity as a line of credit non-
depository financial institution. Courts have traditionally recognised these two capacities as
having different rights, responsibilities, and liabilities.

The following are the two most frequent methods for a corporation to reconcile a closed Bank
and fulfil its function as a receiver in the USA-:

Purchase and Assumption Agreement (P&A)- An open bank assumes the failing bank's
deposits or liabilities while also purchasing part or all of the faltering bank's debts or assets.
The assets of the bank that are transferred to the Federal Deposit Insurance Corporation as
receiver are resold and auctioned in a variety of methods, including online and via the use of
contractors.

Deposit Payoff: Nowadays, the Federal Deposit Insurance Corporation has been appointed as
receiver because the relevant chartering body has closed the bank or thrift. The Federal
Deposit Insurance Corporation, as an insurance company, compensates all of the customers
of the failed institution the full amount of their insured deposits with insured money.

The bank insolvency proceedings are carried out in accordance with US Chapter 11 3 of the
Bankruptcy Code, which governs the bankruptcy rules of any corporation incorporated in the
US. Furthermore, in the event of a bank's collapse, depositors are entitled to a maximum of
US$250,000 per kind of bank account per bank where the funds are deposited.

UNDERSTANDING BANK INSOLVENCY LAWS IN UK.

The collapse of the US financial market in the fall of 2007 triggered a crisis in worldwide
financial markets, causing the UK market, as well as other markets, to be affected. The
collapse of the then financial institution or other line of credit institutions had the possibility

2
FDIC (Federal Deposit Insurance Corporation), https://www.fdic.gov/, (last visited on 20th September, 2021)
3
Chapter 11 - Bankruptcy Basics, https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-
basics/chapter-11-bankruptcy-basics, (last visited on 20th September, 2021)

4|Page
 COMPARATIVE ANALYSIS OF BANK INSOLVENCY IN INDIA, UNITED STATES &
UNITED KINGDOM

to have a far-reaching influence on not just companies and customers, but also the state's
financial market. As a result, the Bank of England, the Treasury, and the Financial Services
Authority, together known as the Tripartite Authorities needed to be able to deal effectively
with the significant dangers posed to the stability of the UK financial markets by banking
crises, and to avoid such failures where conceivable.

The Northern Rock Bank's bankruptcy was the first banking collapse in the United Kingdom
in almost a century. The Bank of England's determination to save Northern Rock Bank with a
whopping 28 billion pound infusion was a watershed moment in the UK's financial institution
crisis.4 Northern Rock's bankruptcy opened the door for a larger legal framework to deal with
banks and other financial organisations.

The UK Banking Act of 2009 contains provisions that provide the Tripartite Authorities
permanent authority to deal with failing banks and to execute other relevant measures. 5 The
United Kingdom's approach to bank bankruptcy is based on the provisions of the Banking
Act 2009, as well as standard insolvency rules for bank closure. Insolvency proceedings may
be carried out by the Financial Services Compensation Scheme, or a court may rule if a Bank
is insolvent or otherwise, and whether insolvency is the only cause for the Bank's dissolution.

The Financial Services Compensation Scheme was established by the then-government of the
United Kingdom in the year 2001. The FSCS protects authorised banks and other financial
institutions in the United Kingdom. It safeguards depositors' funds in the event that the bank
becomes insolvent. It insures up to 85,000 pounds per depositor, with the amount of protected
money increasing to 1,70,000 pounds if the depositor has a joint bank account.6 The FSCS
will immediately repay depositors' funds if the bank becomes insolvent at any moment. As a
conclusion, in order to deal with bank bankruptcy challenges, the United Kingdom uses the
legal and judicial processes provided by law.

UNDERSTANDING BANK INSOLVENCY LAWS IN INDIA.

4
Patricia Anna Godfrey, The Evolution of Bank Insolvency Law UK, Eurofenix Spring, 20, (2011)
5
Ibid
6
Financial Services Compensation Scheme, https://www.fscs.org.uk/, (last visited on 20th September, 2021).

5|Page
 COMPARATIVE ANALYSIS OF BANK INSOLVENCY IN INDIA, UNITED STATES &
UNITED KINGDOM

The Insolvency and Bankruptcy Code 2016 (IBC 2016) in India addresses the Insolvency and
bankruptcy concerns involving:- 

 Companies formed under the Companies Act 2013.

 Firms that form partnerships.
 Individuals.

Although Banking Companies are formed under the Companies Act, the Banking Regulation
Act 1949 grants them the authority to operate as a bank. According to a recent NCLAT
decision, financial service providers are not covered by the IBC 2016. 7 As a result, the
Insolvency and Bankruptcy Code 2016 does not apply to banks as financial service providers.
In India, there are no rules governing bank insolvency, but there is a legislation governing
bank mergers and acquisitions entitled the Banking Companies (Acquisition and Transfer
Undertakings) Act, 1970. Smaller or weaker banks are merged with larger and stronger banks
as a result of this Act.

India, like the United States and the United Kingdom, has a Reserve Bank of India subsidiary
called the Deposit Insurance and Credit Guarantee Corporation (DICGC), which was founded
in 1978. The DICGC protects the money that depositors put in the bank. DICGC protects all
bank deposits, including savings, fixed, and current, up to a ceiling of Rs. 1,00,000 per
deposit.

Banks and other financial institutions can use any of the following techniques to address their
bankruptcy or other financial issues:

 By trying to transfer a bank's assets and obligations to another.

 Mergers, acquisitions, and amalgamations of two or more banks.
 By establishing an associate business to take over the properties, liabilities, and
administration of the insolvent bank.
 Liquidation with the National Company Law Tribunal's formal authorisation.

As a result, while there are no specific rules governing bank insolvency in India, there are
many ways for preventing a weak bank from going bankrupt. The sole disadvantage is that
the depositors' insurance cover of Rs. 1,00,000/- is inadequate; it has to be enhanced in light
of today's market conditions.
7
Apoorva Mandhani, Financial Service Providers Outside The Purview Of Insolvency And Bankruptcy Code:
NCLAT, Live Law, (23 Oct 2018), https://www.livelaw.in/financial-service-providers-outside-the-purview-of-
insolvency-and-bankruptcy-code-nclat-read-judgment/

6|Page
 COMPARATIVE ANALYSIS OF BANK INSOLVENCY IN INDIA, UNITED STATES &
UNITED KINGDOM

COMPARATIVE ANALYSIS OF THE BANK INSOLVENCY

LAWS AND PROCEDURES.
Particulars India United States United Kingdom
Specific Bank No specific law Provisions in 1935 The Banks (Former
Insolvency Laws. Banking Act and Authorised
Chapter 7 & 11 of Institution)
the United States (Insolvency) Order
2006
Insolvency Process No specific It follows either a It follows a Judicial
insolvency process Judicial or Process as provided
but follow Administrative in the Laws
procedures of process as befitting
mergers and to a case
acquisition and
amalgamation
Deposit Insurance Deposit Insurance Federal Deposit Financial Services
Agency and Credit Insurance Compensation
Guarantee Corporation Scheme (Statutory
Corporation (Statutory Agency) Agency)
(Statutory Body but
a subsidiary of RBI)
Deposit Insurance Rs. 1,00,000/- per US$250,000/- per 85,000 pounds per
Cover person per Bank type of account per person per Bank +
(except Joint bank + 170,000 pounds per
Account) in one US$250,000/- per joint account per
single Bank + Rs. coowner of joint bank
1,00,000/- for a Joint account
Account in a Bank

RECOMMENDATIONS OF THE RESEARCHER.

7|Page
 COMPARATIVE ANALYSIS OF BANK INSOLVENCY IN INDIA, UNITED STATES &
UNITED KINGDOM

Following an in-depth examination of the laws and processes governing bank insolvency, as
well as the Deposit Insurance Cover, the researcher believes that nations should focus more
on the laws governing bank insolvency and the Deposit Insurance Cover, for not only the
benefit of capital sector, but also for the benefit of depositors in general. In contrast to the
United States and the United Kingdom, India has no effective laws in place for bank
insolvency. Insolvency, bankruptcy, deposit insurance, financial markets, and other elements
of bank insolvency should be addressed by suitable and specialized regulations.

The International Association of Deposit Insurers (IADI) released its annual study in 2018,
highlighting the issue of India's poor deposit coverage in comparison to other nations.
According to the report, several nations cover 60-70 percent of all depositors' total deposits,
but India only covers about 30 percent of all depositors' total deposits. 8 As a result of this
survey, the Indian Legislative and Government should make appropriate adjustments in light
of the current market situation.

The United States likewise lacks explicit legislation for bank insolvency, instead relying on
provisions in the 1935 Banking Act to cope with insolvency as well as the administrative
procedure for bank liquidation under Chapters 7 and 11 of the US Code. As a result, even the
United States must reflect on the Great Depression and Recession of the 1930s and establish
particular rules governing bank insolvency. The United Kingdom can be used as a model for
developing Bank Insolvency Laws in all other nations, such as India and the United States.

CONCLUSION.
Since banks are quite often regarded as "distinguishable" and different from other corporate
entities in aspects of both their significance for the country's economy and their financial
instability and weakness, they are exempted from the overall commercial or organisational
insolvency and bankruptcy code and are subject to separate regulations.

The evidence clearly demonstrates that the banking industry's overall economic safety is
critical to the macroeconomy's successful outcomes. As a result, bank failures, particularly
large bank failures, are widely seen as being more detrimental to the economy than the
incapacity of other businesses of comparable size to generate significant negative
externalities. As a result, it is said that companies require distinctive processes in order to

8
IADI Annual Survey- 2018, https://www.iadi.org/en/research/data-warehouse/deposit-insurance-surveys/, (last
visited on 20th September, 2021).

8|Page
 COMPARATIVE ANALYSIS OF BANK INSOLVENCY IN INDIA, UNITED STATES &
UNITED KINGDOM

reduce the economic cost of insolvency. Bank failure disruptions can be reduced by
customizing the settlement process to the unique qualities that make their errors particularly
costly. In particular, bank insolvency procedures aim to reduce depositors' and other
investors' credit and liquidity costs by delegating broad authority to the recipient and
allowing the authorised government regulator to act promptly, quicker, and more decisively
when insolvency occurs.

Banks, being the largest shareholder in a country's financial sector, should be subject to
special rules. Moreover, with the Bank Insolvency Laws, the Deposit Insurance Coverage for
Bank Deposits must be modified based on the country's market condition.

The United Kingdom's bank insolvency laws are much superior to those of the United States
and India. Similarly, the United States' Deposit Insurance Coverage is far superior to that of
the United Kingdom and India. It should be emphasised that each nation should reform and
alter its laws over time and in response to better laws in other countries that are relevant to
them, so that not only their financial and economic markets, but also their resident’s benefit.

REFERENCES
1. Legislation & Statutes

➢ Insolvency & Bankruptcy Code, 2016

➢ Banking Companies (Acquisition and Transfer Undertakings) Act, 1970

➢ Chapter 11, Bankruptcy Laws, United States

➢ The Banks (Former Authorised Institution) (Insolvency) Order, 2006

➢ The Banks and Building Societies (Priorities on Insolvency) Order, 2018

➢ The Financial Regulation and Deposit Insurance Bill, 2017

2. Websites

➢ PRS India Website: www.prsindia.org

➢ United Kingdom Legislation: www.legislation.gov.uk

➢ JSTOR: www.jstor.org

9|Page
 COMPARATIVE ANALYSIS OF BANK INSOLVENCY IN INDIA, UNITED STATES &
UNITED KINGDOM

➢ Federal Deposit Insurance Corporation: www.fdic.gov

➢ Financial Services Compensation Scheme: www.fscs.org.uk

➢ Deposit Insurance and Credit Guarantee Corporation: www.dicgc.org.in

➢ International Association of Deposit Insurers: www.iadi.org

3. Research Papers/News Article

➢ Heidi Mandanis Schooner, Bank Insolvency Regimes in the United States and the

United Kingdom, 18 TRANSNAT’L LAW. 385 (2005).

➢ Peter P. Swiret, Bank Insolvency Law Now That It Matters Again, 42 Duke L.J. 471

(1992)

➢ Richard M. Hynes and Steven D. Walt, Why Banks are Not Allowed in Bankruptcy, 67

Wash. & Lee L.Rev. 985 (2010)

➢ Norman R. Nelson, Settlement Obligations and Bank Insolvency, 45 The Business

Lawyer 1473 (1990): https://www.jstor.org/stable/40687075

➢ Willis R. Buck Jr., Bank Insolvency and Depositor Setoff, 51 The University of

Chicago L.Rev. 188 (1984): https://www.jstor.org/stable/1599605

➢ Alistair Milne & Geoffrey Wood, Banking Solution Crisis Old and New, Federal Reserve
Bank of St. Louis Review 517 (2008)

➢ Patricia Godfrey, Evolution of Bank Insolvency Law UK, Eurofenix Spring 20 (2011)

10 | P a g e