‘Twilight zone’ shift won’t save banks

Lehman Brothers

‘Twilight zone’ will not prevent another collapse. Lehman Brothers pictured

Leading administrators have said proposals to ease insolvency rules for the
directors of banks will not prevent another run on a bank in the event of a
future investment banking crisis.

The Treasury’s report on preventing widespread fallout from banking crises
suggests banks should go into administration much earlier and this could be
encouraged by easing the penalty regime for directors which aims to keep a firm
out of administration for as long as possible.

Insolvency practitioners, including one working on the administration of
Lehmans, said shortening the time between a bank hitting financial difficulty
and actually entering administration ­ known as the ‘twilight zone’ ­ would not
head off a run.

Steve Pearson, Lehman Brothers Europe joint administrator, said: ‘The level
of director contributions to company assets is negligible. The only way a run on
an investment bank will be avoided is if a moratorium is in place for an interim
period, allowing outstanding trades to be settled, and the liquidity is also

This week the government released a 70-page document asking for views on a
raft of changes to insolvency rules. The Insolvency Act says directors can be
held liable for certain losses and face disqualification if they fail to take
every possible step to minimise loss to creditors when insolvency is inevitable.

Nick Hood, of insolvency specialists Begbies Traynor, said: ‘Bringing in an
administrator earlier would not prevent the risk of the actual collapse you’re
trying to avoid. The reputational damage would be the same.’

A Treasury spokesman said: ‘We are just asking for initial views. But as
we’ve said in regards to these suggestions any such amendments would need to be
considered carefully, and would need to be limited in scope.’

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