Rehabilitation of Banks as a Means of Protecting Cash Bank Deposits (A Comparative Study)

Abstract

 Banking institutions often face administrative and financial difficulties during the course of their operations, which may weaken their performance and consequently expose depositors’ funds to risk. With the increase of such problems and challenges that lead to the distress of banks, the need arises to rehabilitate them through developing policies and procedures that enable them to restore their ability to meet their obligations, especially toward depositors who constitute the fundamental pillar of trust in the banking system.

This research shows that the objective of the rehabilitation system is to revive the distressed institution and ensure its continuity in conducting its activities by a decision of the competent authority—usually the central bank. It also becomes clear that the success of the rehabilitation process is not limited to rescuing the bank itself, but extends to protecting bank deposits and maintaining the stability of the financial and banking system. Moreover, bank rehabilitation constitutes both a preventive and corrective tool that contributes to achieving a balance between protecting depositors’ funds and ensuring the stability of the banking sector, provided that it is implemented within a clear legal framework.

We reached these conclusions by explaining the concept of banking rehabilitation and the mechanisms for preparing a rehabilitation plan on the one hand, and on the other hand by presenting the means of bank rehabilitation, which include establishing a bridge bank, bank mergers, and financing through increasing the bank’s authorized capital. The research concludes that rehabilitation—also referred to as reorganization or restructuring—is a system that can be resorted to as a special support tool exclusively for distressed banks, unlike other financial and commercial institutions, through various methods that distinguish it from bankruptcy systems governed by bankruptcy and composition laws.

Finally, the research concludes that the Iraqi legislator must intervene by introducing specific provisions in the Iraqi Banking Law related to early intervention in banks’ conditions before appointing a conservator, especially when early signs of financial difficulty appear that may lead the bank to cease fulfilling its financial obligations