Transcript Financial Safety

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IADI GUIDANCE FOR THE RESOLUTION OF
BANK FAILURES
Ganiyu A. Ogunleye, OFR
Managing Partner
Jaffa Consulting Limited
Email: [email protected]
Presented at IADI Africa Regional Workshop on Problem Bank Resolution
Held on May 9, 2011
In Abuja, Nigeria
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Presentation Outline
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6.
7.
Introduction
General Issues
Interrelationship & Cross-Border Issues
Statutory Powers & Mandate
Operational & Administrative Issues
Resolution of Failing and Failed Banks
Conclusion
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1.0 Introduction
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Guidance for Failure Resolution was issued in
December 2005 in pursuance of IADI’s mission
“to contribute to the enhancement of DI effectiveness by
promoting guidance and international cooperation”
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It seeks to assist Deposit Insurers in establishing or
enhancing their mechanism for dealing with bank
failures.
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Resolution is defined as a disposition plan generally
designed to fully protect insured deposit while
minimising costs to the Deposit Insurer
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1.0 Introduction 
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continued
Guidance is encapsulated in the Core Principles
for Effective Deposit Insurance Systems issued by
BIS and IADI in June 2009 (see Principles 15 and
16)
Guidance is divided into 5 sections:
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General Issues
Inter-relationship and Cross-Border Issues
Statutory Powers of a DI
Operational and Administrative Issues
Resolution of Failed Banks
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2.0 General Issues
2.1 Robust Institutional Framework
 Key elements include:
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sound macro-economic policies
effective bank supervision/regulation
market discipline
efficient failed bank resolution process
effective judicial and criminal investigation
system
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2.0 General Issues
2.2 Sound Corporate Governance of DI
 Four Key Elements :
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operational independence (insulation from
undue political and industry influence)
accountability
transparency
integrity
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2.0 General Issues
2.3 Alignment of Mandate & Powers
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Powers granted to a DI should be consistent
with its public policy objectives and mandate
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Example: A least-cost mandate should be
supported with power to decide on
appropriate resolution approach or take
preventive measures before bank failure
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2.0 General Issues
2.4 Exceptional Recourse to Temporary
Blanket Guarantee
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Blanket guarantee could be used to handle a large
bank failure or where a systemic crisis has occurred
There should be a clear and explicit definition of
qualifying circumstances
Be provided on a temporary basis with explicit dates
of expiration
Shareholders to bear losses where public funds
are used
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3.0 Inter-relationship & Cross-Border
Issues
3.1 Delineation of Roles, Duties and
Responsibilities of Safety Net Participants (SNPs)
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Who has power to declare whether or not a bank has
failed
Who decides resolution method
Division of duties either through legal arrangement,
contracts or administrative regulation
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3.0 Inter-relationship & Cross-Border
Issues
3.2 Information Sharing & Coordination
Mechanism
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Formal mechanism for information sharing and
coordination amongst SNPs should be in place
DI to have advance notice prior to intervention to
enable it assess potential impact on DIF
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3.0 Inter-relationship & Cross-Border
Issues
3.3 Mechanism for Dealing with Systemic Crises
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Need for criteria for determining what constitute
systemic crisis
Clear intervention framework for dealing with bank
failures and resolutions
Statutory mechanism for dealing with “Too Big To Fail
Institutions”
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3.0 Inter-relationship & Cross-Border
Issues
3.4 Cross-Border Coordination Mechanism
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Information sharing and coordination framework amongst
international deposit insurers and supervisory authorities
Need for formal contracts, agreements or arrangement to deal
with cross-border issues
The current dispute between Iceland, Britain and Netherlands
is instructive. Iceland rejected compensation claims by Britain
and Netherlands for making good local deposits in failed
Iceland Banks. Iceland’s offer to pay €4 billion claims of
foreign depositors in icesave, the on-line arm of failed
Landsbanki from disposition of the bank’s assets, not
acceptable
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4.0 Statutory Powers & Mandate
4.1 Mandate should be clearly defined –
Pay-box or Risk-minimizer
4.2 Clearly defined funding mechanism
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Establish DIF
Statutory target for the fund
Clear procedure for achieving funding goal
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4.0 Statutory Powers & Mandate
4.3
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Authority to accept or reject membership
Ability to control risk exposure and moral hazard
Power to terminate insurance status (in coordination
with supervisory authority)
4.4 Authority to conduct onsite reviews by DI
4.5 Legal protection for DI’s officers & employees
4.6 Explicit legal system for prosecution of
directors, officers and auditors of failed banks
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5.0 Operational & Administrative
Issues
5.1 Articulate appropriate policies and
Standard Operational Procedures (SOPs) for
bank resolution
5.2 Authority to outsource services where
internal resources are insufficient
5.3 Ensure transparent valuation and disposal
of assets
5.4 Put in place effective public awareness
and communication mechanism
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5.0 Operational & Administrative
Issues
5.5
Code of conduct for employees
5.6 Ability to investigate and if necessary
litigate against those responsible for bank
failure
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6.0 Resolution of Failing or Failed
Banks
6.1 Rule Based or Statutory Trigger Mechanism
for early intervention
6.2 Determination of viability or non- viability of
problem bank by professional staff or experts
6.3 Authority to decide on Resolution Method
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Open Bank Assistance
Deposit Pay-out / Reimbursement
Purchase for Assumption
Bridge Bank
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6.0 Resolution of Failing or Failed
Banks
6.4 Establish effective resolution policies
and procedures
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Application of least-cost methods
Dealing with systemic repercussion of failures
Avoiding disruption of banking services
6.5 Resolution strategies should seek to
maximise recovery of assets
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6.0 Resolution of Failing or Failed
Banks
6.6 Adopt market principles and mechanisms
as much as possible in resolution transactions
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Use cost-effective rather than lowest cost method
Where possible, employ mark-to-market approach
in appraisal process
6.7 Provide incentives to facilitate marketbased resolution. Examples:
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Tax incentives ( M & A, Debt write-offs)
Administrative incentives (interest waiver)
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6.0 Resolution of Failing or Failed
Banks
6.8 Ensure efficient and effective depositor
reimbursement
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Explicit time frame between revocation of banking licence
and actual deposit payout
Continuous disclosure of information to the public during
reimbursement process and liquidation
Unfettered access to failed bank’s depositor records
before bank closure
Legal rules regarding set-offs and subrogation should be
well defined
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6.0 Resolution of Failing or Failed
Banks
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Ability to effect partial payment to needy depositors
before the actual payout
6.9 Guiding rules of liquidation process should
be well defined and documented
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7.0 Conclusion
7.1 Guidance should serve as a benchmark
for IADI members and other interested
parties
7.2 IADI members are encouraged to
conduct self assessment
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Questions and Comments
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