Fractional-reserve banking is the system of banking in all countries worldwide, under which banks that take deposits from the public keep only part of their deposit liabilities in liquid assets as a reserve, typically lending the remainder to borrowers. Bank reserves are held as cash in the bank or as balances in the bank's account at the central bank. Fractional-reserve banking differs from the hypothetical alternative model, full-reserve banking, in which banks would keep all depositor funds on hand as reserves.
A bank run or run on the bank occurs when many clients withdraw their money from a bank, because they believe the bank may fail in the near future. In other words, it is when, in a fractional-reserve banking system, numerous customers withdraw cash from deposit accounts with a financial institution at the same time because they believe that the financial institution is, or might become, insolvent. When they transfer funds to another institution, it may be characterized as a capital flight. As a bank run progresses, it may become a self-fulfilling prophecy: as more people withdraw cash, the likelihood of default increases, triggering further withdrawals. This can destabilize the bank to the point where it runs out of cash and thus faces sudden bankruptcy. To combat a bank run, a bank may acquire more cash from other banks or from the central bank, or limit the amount of cash customers may withdraw, either by imposing a hard limit or by scheduling quick deliveries of cash, encouraging high-return term deposits to reduce on-demand withdrawals or suspending withdrawals altogether.
Ultra vires is a Latin phrase used in law to describe an act that requires legal authority but is done without it. Its opposite, an act done under proper authority, is intra vires. Acts that are intra vires may equivalently be termed "valid", and those that are ultra vires termed "invalid".
A bailout is the provision of financial help to a corporation or country which otherwise would be on the brink of bankruptcy. A bailout differs from the term bail-in under which the bondholders or depositors of global systemically important financial institutions (G-SIFIs) are forced to participate in the recapitalization process but taxpayers are not. Some governments also have the power to participate in the insolvency process; for instance, the U.S. government intervened in the General Motors bailout of 2009–2013. A bailout can, but does not necessarily, avoid an insolvency process. The term bailout is maritime in origin and describes the act of removing water from a sinking vessel using a bucket.
Tracing is a legal process, not a remedy, by which a claimant demonstrates what has happened to his/her property, identifies its proceeds and those persons who have handled or received them, and asks the court to award a proprietary remedy in respect of the property, or an asset substituted for the original property or its proceeds. Tracing allows transmission of legal claims from the original assets to either the proceeds of sale of the assets or new substituted assets.
Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd[1942] UKHL 4 is a leading House of Lords decision on the doctrine of frustration in English contract law.
English trust law concerns the protection of assets, usually when they are held by one party for another's benefit. Trusts were a creation of the English law of property and obligations, and share a subsequent history with countries across the Commonwealth and the United States. Trusts developed when claimants in property disputes were dissatisfied with the common law courts and petitioned the King for a just and equitable result. On the King's behalf, the Lord Chancellor developed a parallel justice system in the Court of Chancery, commonly referred as equity. Historically, trusts have mostly been used where people have left money in a will, or created family settlements, charities, or some types of business venture. After the Judicature Act 1873, England's courts of equity and common law were merged, and equitable principles took precedence. Today, trusts play an important role in financial investment, especially in unit trusts and in pension trusts. Although people are generally free to set the terms of trusts in any way they like, there is a growing body of legislation to protect beneficiaries or regulate the trust relationship, including the Trustee Act 1925, Trustee Investments Act 1961, Recognition of Trusts Act 1987, Financial Services and Markets Act 2000, Trustee Act 2000, Pensions Act 1995, Pensions Act 2004 and Charities Act 2011.
A bank failure occurs when a bank is unable to meet its obligations to its depositors or other creditors because it has become insolvent or too illiquid to meet its liabilities. A bank usually fails economically when the market value of its assets declines to a value that is less than the market value of its liabilities. The insolvent bank either borrows from other solvent banks or sells its assets at a lower price than its market value to generate liquid money to pay its depositors on demand. The inability of the solvent banks to lend liquid money to the insolvent bank creates a bank panic among the depositors as more depositors try to take out cash deposits from the bank. As such, the bank is unable to fulfill the demands of all of its depositors on time. A bank may be taken over by the regulating government agency if its shareholders' equity are below the regulatory minimum.
The English law of unjust enrichment is part of the English law of obligations, along with the law of contract, tort, and trusts. The law of unjust enrichment deals with circumstances in which one person is required to make restitution of a benefit acquired at the expense of another in circumstances which are unjust.
Capacity in English law refers to the ability of a contracting party to enter into legally binding relations. If a party does not have the capacity to do so, then subsequent contracts may be invalid; however, in the interests of certainty, there is a prima facie presumption that both parties hold the capacity to contract. Those who contract without a full knowledge of the relevant subject matter, or those who are illiterate or unfamiliar with the English language, will not often be released from their bargains.
A Quistclose trust is a trust created where a creditor has lent money to a debtor for a particular purpose. If the debtor uses the money for any other purpose, then it is held on trust for the creditor. Any inappropriately spent money can then be traced, and returned to the creditors. The name and trust comes from the House of Lords decision in Barclays Bank Ltd v Quistclose Investments Ltd (1970), although the underlying principles can be traced back further.
Borland's Trustee v Steel Brothers & Co Ltd [1901] 1 Ch 279 is a UK company law case, concerning the enforceability of a company's constitution and the nature of a company share. It is also one of the rare exceptions to the rule that a transfer of assets which only takes effect upon a person's bankruptcy is normally void.
Trevor v Whitworth (1887) 12 App Cas 409 is a UK company law case concerning share buybacks. It held they were unlawful. The case is often used in support for the Capital Maintenance Rule. The rule coming from the case itself has since been reformed by statute in several commonwealth countries. In the UK, the rule was reformed in 1980 and replaced with a statutory procedure so that shares can either be classed as redeemable or be bought back, under the Companies Act 2006 sections 684-723. In Australia, share buybacks are allowed under ss 257A-257J of the Corporations Act 2001.
The Attorney General for Hong Kong v Reid (UKPC)[1993] UKPC 2 was a New Zealand-originated trust law case heard and decided by the Judicial Committee of the Privy Council, where it was held that bribe money accepted by a person in a position of trust, can be traced into any property bought and is held on constructive trust for the beneficiary.
Westdeutsche Landesbank Girozentrale v Islington LBC[1996] UKHL 12, [1996] AC 669 is a leading English trusts law case concerning the circumstances under which a resulting trust arises. It held that such a trust must be intended, or must be able to be presumed to have been intended. In the view of the majority of the House of Lords, presumed intention to reflect what is conscionable underlies all resulting and constructive trusts.
Chase Manhattan Bank NA v Israel-British Bank (London) Ltd [1981] Ch 105 is an English trusts law case, concerning constructive trusts. It held that a trust arose to protect a payment made under a mistake, with the benefit of a proprietary remedy. This is seen important for the question of what response, personal or proprietary, may come from a claim in unjust enrichment.
Vaughan v Barlow Clowes International Ltd [1991] EWCA Civ 11 is an English trusts law case, concerning tracing.
Re Kayford Ltd (in liquidation) [1975] 1 WLR 279 is a UK insolvency law and English trusts law case, concerning the creation of a trust over payments made by consumers, in an insolvent company.
The local authorities swaps litigation refers to a series of cases during the 1990s under English law relating to interest rate swap transactions entered into between banks and local authorities. The House of Lords ruled that such transactions were unlawful. As a result of the decision over 200 separate actions were filed as hundreds of interest rate swap contracts had to be unwound by the courts at great expense.
Foley v Hill (1848) 2 HLC 28, 9 ER 1002 is a judicial decision of the House of Lords in relation to the fundamental nature of a bank account. Together with Joachimson v Swiss Bank Corporation [1921] 3 KB 110 it forms part of the foundational cases relating to English banking law and the nature of a bank's relationship with its customer in relation to the account.
