How about a Global Bankruptcy Fund? Business Line 17th December 2008

A Global Bankruptcy Fund can be set up to rescue failed institutions by either taking on the bad assets or liabilities or providing a loan.
Contrary to the adage that a dead man tells no tales, every financial crisis provides lessons to be learnt. However, each one is different and the lessons appear to have more anecdotal value.
Two thoughts emerge from the analysis of the current global financial crisis. We need to first have better regulation and, second, create a system that can take care of these damages. Also, crises are bound to be engendered as innovation gains in prec edence; and while the Schumpeterian theory of creative destruction cannot be eschewed, the damages can be mitigated if these twin goals are pursued. At the same time, if risks are not taken, the financial world would be stagnant and will offer few choices. Need for a global regulator
The BIS has shown the way of how all banking systems in the world can come to terms with a single code of rectitude. The same needs to be replicated in the rest of the financial world, where prudential norms need to be established for hedge funds, investment banks, derivatives (securitisation) markets and other non-bank financial intermediaries. This would really mean regulators for all financial segments will ensure there are norms set for each and every financial player in any country. While this by itself cannot prevent a crisis, the magnitude of impact can be lessened. Therefore, just like how we have the RBI, the FMC, the SEBI, the NHB etc in India, there needs to be a regulator for every line of business. This will lead to greater transparency.Transparency in operations
But, given that crises are all-spreading, there is need for a global regulator too, which could be a single entity to oversee financial developments. Like the BIS, the regulator could actually set the rules in terms of leverage, capital adequacy, investment norms, and so on for financial markets that could be pursued in different countries. A simple example being no financial institution can take an exposure of more than ‘X’ per cent of its assets or income on any off-balance-sheet account. Or, all inter-financial sector lending should be ‘purpose-’ and ‘rating-’based; just like how a bank knows how the funds lent to a borrower are going to be deployed, the same should be known when Bank ‘X’ lends to, say, Lehman. The objective is to have a trail of all financial flows and transparency in operations so that all the intermediaries are aware of the quantum of risk being undertaken — with this level being monitored, though not necessarily fixed by the regulator or super-regulator.
The second thought arising from the series of financial crises is that we should think of creating a new organisation or fund, called, say, the Global Bankruptcy Fund (GBF), to tackle all these disturbances. Just like how central banks play the role of lender of last resort, there should be a global lender of last resort. The function of such a fund would be to rescue failed institutions by either taking on the bad assets or liabilities or providing a loan. To make this work, the following structure can be followed.Suggested structure
Analogous to the IMF, which was set up to help countries get out of balance of payments disequilibrium, the GBF would have the responsibility of bailing out institutions from a sticky state. The institutions would necessarily have to take membership of the fund and pay a subscription as well as an annual charge. These charges could be linked directly to the size of the institution or the risky assets carried on its books — both balance sheet and off-balance sheet items.
To ensure that there is fair play, the financial results would have to be audited by a panel (similar to the US GAAP followed by the banks). The fees collected would be invested by the GBF to earn revenue that would be used to maintain the organisation. The initial seed capital could be provided by various participating country governments. These funds would be used when required to aid the members in times of distress.
The creation of this fund would help alleviate the pain caused when there is a crisis, though the crisis cannot be averted. However, members would be better off, because the fact that they are members of the GBF will by itself ensure that they can borrow or deal in the markets on better terms as the comfort factor would be higher. Further, the rating agencies could always use this as a consideration when rating any financial entity.
Can the IMF be restructured to facilitate this operation? By taking on this role, the organisation can be made more relevant.