Principle 1 of the Basel Core Principles1 provides that “[a] suitable legal framework for banking supervision is…necessary, including…legal protection for supervisors.” The explanation of this provision is found in the commentary to Principle 1, which states that a suitable legal framework requires a number of components to be in place, including “protection (normally in law) from personal and institutional liability for supervisory actions taken in good faith in the course of performing supervisory duties….”
The need for such protection is based on the chilling effect that even the threat of litigation can have on the performance of a banking supervisor’s work. That threat tends to be greater when, as is the case today, banking systems are under stress. This threat tends to be particularly significant where large numbers of banking institutions are insolvent, resulting in more stringent enforcement and remedial measures, as well as revocation of banking licenses.
To address this problem, research was undertaken to determine current international practices and make recommendations to ensure that the widest possible coverage for banking supervisors is enacted into law wherever possible. The research consisted of a survey of statutory protections in 20 countries; from that survey, this paper presents (a) common elements, and (b) recommendations and conclusions. The appendix sets forth the text of relevant legal provisions of the 20 jurisdictions surveyed; a chart is attached summarizing the statutory protections of the jurisdictions whose laws are set forth herein.
The 20 countries2 are as follows: Australia, Canada, Denmark, Ecuador, Germany,3 Hong Kong, India, Ireland, Japan, Malaysia, New Zealand, Norway, Philippines, Singapore, South Africa, Spain, Sweden, Switzerland, United Kingdom (“U.K.”), and United States (“U.S.”).
In some cases, all government employees are protected by a generic provision, while in others banking supervisors are the subject of special protections. It should be noted that in some jurisdictions the banking regulator is a component of the central bank, whereas in others it is a separate and distinct agency.
For purposes of this paper:
There are a number of common elements in these legal protections (see attached chart for summary):
A number of issues should be addressed in drafting any law protecting bank supervisors:
U.S. law, because of its complexity and the ambiguity of language used, would not be a good model for most countries.
The Commonwealth approach is noteworthy for its conciseness of language and breadth of coverage. For example, U.K. law incorporates in a single sentence most of the key elements7 necessary to protect both the banking regulator and its employees.8
Irish law is noteworthy for its innovative language which provides (a) that the authorization of a banking license does not constitute a warranty as to a bank’s solvency, and, further, (b) that “neither the State nor the Bank shall be liable for any losses incurred through the insolvency, default or performance” of any bank.9
Consideration should also be given to whether the central bank, banking regulator, or deposit insurance agency should be subject to the protections of any such statute, as is provided in Australia,10 Canada,11 India, Malaysia, the Philippines,12 and the U.K. This should be strongly considered if there is a high level of litigation expected as a result of the activities of banking regulatory agencies during a banking crisis.
A related consideration is whether the government itself should be covered by these protections, as is provided in Canada, India, and Malaysia. However, this latter approach should be balanced against an injured party’s right to seek compensation for damages by bringing suit against the government, in conformity with the rule of law.
Finally, consideration should be given as to whether an explicit statutory indemnity for employees is needed in addition to statutory protections from suit, such as may be found in New Zealand or the Philippines. The main advantage of an indemnity is that it removes the financial burden and the chilling effect related thereto that the cost of defending any lawsuit may bring, even if the suit is ultimately dismissed or the employee is not found liable for damages.13 Unlike the laws of New Zealand and the Philippines, however, the terms of the indemnity need not be incorporated in a statute, but rather the statute may simply authorize the central bank or banking regulator to provide such an indemnity by adopting a regulation or administrative decree. In any event,
In conclusion, to the extent that there is a political consensus which often occurs during a banking crisis that banking laws should be amended to provide greater authority for central banks and regulatory agencies, there may also be an opportunity to include legal protections for banking supervisors as part of any such legislation. The rationale for the need for such protections may be found in the Basel Core Principles, which are a useful means of explaining any such legislative proposal to lawmakers. There are a number of models on which statutory protections for banking supervisors may be based, but care should be taken to ensure that the widest possible coverage for banking supervisors is enacted into law. Attachments:
In conclusion, to the extent that there is a political consensus which often occurs during a banking crisis that banking laws should be amended to provide greater authority for central banks and regulatory agencies, there may also be an opportunity to include legal protections for banking supervisors as part of any such legislation. The rationale for the need for such protections may be found in the Basel Core Principles, which are a useful means of explaining any such legislative proposal to lawmakers. There are a number of models on which statutory protections for banking supervisors may be based, but care should be taken to ensure that the widest possible coverage for banking supervisors is enacted into law.
1The Basel Core Principles comprise 25 internationally accepted principles necessary for a supervisory system to be effective.
2The statutory protections surveyed herein consist of all such laws that the author’s research has disclosed other than Austria, for which a translation was not available as of this writing.
3Note that Germany provides such protections in its constitution, and not a statute.
4In the case of Ecuador, certain officials of the Central Bank and Deposit Guaranty Agency are protected from civil and criminal liability through the use of specialized administrative procedures to screen accusations, and the process of bank interventions is protected by preventing any legal action brought by third parties from suspending the process until final judgment is rendered.
5With respect to New Zealand and Philippine law, it is the indemnity provisions that contain such limitations.
6Spanish law provides that government agencies may be sued for actions of employees, but does not explicitly protect employees themselves from civil suit.
7U.K. law does not cover agents.
8The most significant suit against the Bank of England in recent years was brought with respect to the deposits of B.C.C.I as a result of its 1991 failure but did not challenge the statutory immunity of the Bank directly; the suit was based on the common law tort of misfeasance in public office, as well as liability for breach of European Community law. See Three Rivers District Council v. The Governor and Company of the Bank of England (No. 3),  3 All E.R. 558, Q.B.D., Commercial Court. The action was dismissed by an order of the High Court on October 2, 1997 (not officially reported) and that order was upheld by the Court of Appeal in a judgment delivered on December 4, 1998 (only so far reported in the Times on December 10, 1998). The plaintiffs are appealing to the House of Lords.
9This language, insofar as it relates to any duty owed by a banking supervisor to a supervised entity, is consistent with the holding in Minories Finance Ltd v. Arthur Young  2 All E.R. 105, QBD.
10With respect to the Australian Prudential Regulation Authority.
11With respect to the Central Bank, the Office of Superintendent of Financial Institutions, and the Canada Deposit Insurance Corporation.
12With respect to the Philippine Deposit Insurance Corporation.
13Any suit brought against an employee may also have a chilling effect based on injury to reputation.
Special thanks to Larry Promisel and Margery Waxman, World Bank, Washington, DC and to Christopher Grierson, Lovell White Durrant, London
World Bank: Jose Antonio Alepuz, Nagavalli Annamalai, MacDonald Benjamin, Jerry Caprio, Augusto de la Torre, Carlos Escudero, Patrick Honohan, Vivien Richardson, Kazuhiro Sakamaki, Carlos Serrano
Copyright 2000, Financial Sector of the World Bank Group, All Rights Reserved.