Business Law International - Essay Example

These measures were very useful in helping these economies to recover from the disastrous effects of the crisis. In dealing with the legal aspects associated with taking tough action against weak and insolvent banks based upon the precedents established during the Asian Financial Crisis, Head (1998) suggests a legal regime four specific measures. Firstly, there should be clear guidelines set out by the central bank in a particular country to identify when a bank is insolvent, for instance when it is unable to maintain adequate liquidity to meet the needs of depositors in a timely manner and/or when its liabilities exceed its assets.

Head suggests that setting out rigorous tests for determining potential insolvency is a vial first step. Secondly, there should be a legal provision in existence which clearly sets out that if a bank is found to be insolvent or approaching insolvency, the central bank will appoint an administrator or conservator, that could also be the central bank itself, to take over the control of the bank and carry out an assessment to determine the bank’s prospects.(Head 1998). On the basis of the assessment, the conservator would offer recommendations to (a) restore the bank to health (b) merge it with a stronger bank or (c) liquidate its assets and distribute proceeds among depositors.

Thirdly, if the bank is to be restored to a healthy form, the Conservator should be provided the powers under the law to carry out necessary procedures necessary to affect such a restoration. This could include measures such as powers to hire and fire bank staff, since inefficiency in bank operations is often the result of irresponsible or incompetent executives, as well as the power to change or modify the bank’s policies, close branches, change the bank’s charter or other operational measures that may be necessary to restore the financial health of the bank.

Fourthly, the law