The separate-entity doctrine is followed in the United States. Under this doctrine each branch or agency (branch) of a foreign bank operating in the United States is treated as a separately incorporated legal entity for some purposes. In the event of a liquidation of a foreign bank with a US branch, the branch would be liquidated separately from the entity as a whole. Creditors of a US branch would be paid from the assets of that branch and other assets of the bank in the jurisdiction. The US liquidator would marshal not only the assets of the branch worldwide but all assets of the bank in the United States. If the assets of the branch were insufficient, the creditors of that branch might be able to prove their claims in other jurisdictions. Creditors of other branches could not participate in the US liquidation.

By contrast, Luxembourg and the United Kingdom follow the single-entity doctrine. In these jurisdictions, banks are wound up as one legal entity and branches of foreign banks are treated only as offices of the larger corporate entity. All the worldwide creditors of the bank are entitled to prove in the liquidation. As a general rule, claims of creditors of a particular branch would not obtain priority over the claims of creditors of other branches in the liquidation. In theory, liquidators in single-entity jurisdictions are concerned with the collection and realisation of the worldwide assets of the company in liquidation. However, in practice, they are likely to obtain control only of assets located within their jurisdictions and foreign assets that are located in jurisdictions where they can obtain recognition. It is interesting to observe that, while the US liquidator is required to apply a separate-entity doctrine to the liquidation of US branches of foreign banks, the US liquidator of a US-chartered bank is required to liquidate that bank and all its foreign branches as a single entity.

In the United States, in conformity with the separate-entity doctrine, a branch of a foreign bank would be liquidated by the bank supervisor, state or federal, responsible for that branch in accordance with state or federal banking liquidation law, respectively. However, if the foreign bank had more than one US branch and one of the branches was a federally-chartered branch, the Comptroller of the Currency would liquidate all the branches, whether state or federally chartered. The general bankruptcy law does not apply to banks, including branches of foreign banks. The general US bankruptcy law would apply only to the assets in the United States of a foreign bank with no US branches. If the grounds for liquidation of a branch exist, the supervisor has no alternatives to liquidation, such as conservatorship or suspension of payments, as it might in respect of a domestically-chartered bank. Under state and federal banking law, creditors of the branch in liquidation have priority over all other creditors of the foreign bank in respect of assets of the branch and assets of the foreign bank in the United States. In fact, other creditors cannot prove in the liquidation, and claims by other branches and, in some cases, affiliates are not allowed. After priority creditors are paid, the excess, if any, is turned over to the domiciliary liquidator.

The laws of Luxembourg and the United Kingdom are different. These jurisdictions follow the single-entity doctrine and liquidate the branch in the same manner as the entity as a whole. Significantly, unlike the United States, the supervisor is not the liquidator. In general, the liquidation law applicable to commercial entities in the United Kingdom also applies to banks. In Luxembourg, the court will decide on a case-by-case basis whether the liquidation law applicable to commercial entities also applies to banks. In contrast to supervisors in the United Kingdom and the United States, the Luxembourg supervisor has more flexibility to take other actions, such as conservatorship or suspension of payments, in respect of a branch of a foreign bank. Unlike the creditors of a US branch, creditors of a Luxembourg or UK branch in liquidation have no priority with respect to assets of the branch. In the United Kingdom, for example, any creditor of any office of the bank can prove in the UK liquidation of the bank. There is a rule in effect, the "hotchpot" rule, which prevents any creditor from obtaining more than he would otherwise obtain in the UK liquidation, merely by claiming in more than one liquidation proceeding.

As discussed in Part II, these different regimes create issues for supervisors because a multinational bank is likely to have branches in some jurisdictions which follow the separate-entity approach and branches in other jurisdictions which follow the single-entity approach.

Set-off refers to a non-judicial process whereby mutual claims between parties, such as a loan and a deposit, are extinguished. There are substantial differences in the laws of set-off in an insolvency among the three jurisdictions studied. In general, each jurisdiction's approach to insolvency set-off is consistent with its application of the single-entity and separate-entity doctrines. In the United States, set-off is permitted between claims in the same currency that appear on the books of the same branch. Claims in different currencies and claims on different branches, such as a loan on the books of a US branch and a deposit that appears on the books of a foreign branch, cannot be set-off. In the United Kingdom, a broad right of set-off exists. There is no requirement that claims be in the same currency or that the claims be on the books of the same branch or in the same country. In Luxembourg, set-off may not be exercised after the date of a liquidation order (except where the credits and debts derive from a specific agreement relating to the relevant transaction), but claims that are fixed in amount, liquid and mature may be set-off before a liquidation order.

The criminal and civil law, especially US criminal law, imposes limitations on all the legal and supervisory principles outlined in this paper. A detailed discussion of these limitations is beyond the scope of the paper. Among the three jurisdictions studied, it is unique to US law that criminal proceedings can be commenced against a bank that has entered insolvency proceedings. In the United States, the Racketeer Influenced and Corrupt Organizations Act (RICO) is a powerful tool that can be brought to bear by law enforcement officials against a bank that has engaged in criminal activity. RICO permits prosecutorial authorities to seize and forfeit assets in pursuit of the fruits and proceeds of a crime. Assets can be traced into the hands of innocent parties, in effect upsetting expectations about the finality of transactions. Criminal forfeiture actions can take assets that would otherwise be distributed in accordance with the rules of law discussed in this paper. Significantly, supervisors have no part in the conduct of such criminal proceedings. Another issue, which the study group has identified but not analysed in detail, is the fact that, in certain jurisdictions, civil enforcement against a bank by a bank supervisor could result in a diminution of the amount of assets available for creditors and shareholders of the closed bank.