Transcript Presentation Bank Resolutions JP

PROTECTING YOUR DEPOSITS
Handling Problem Financial
Institutions
J.P Sabourin
President and Chief Executive Officer
Canada Deposit Insurance Corporation
December 9, 2003
Canada Deposit
Insurance Corporation
Société d’assurance-dépôt
du Canada
Canada
CDIC Objects
CDIC Mandate
Provide insurance against loss of
deposits (maximum $60,000)
Promote standards of sound
business and financial practices
Minimize exposure to loss for the
Corporation
Canada Deposit
Insurance Corporation
Société d’assurance-dépôt
du Canada
Canada
CDIC Objects
The Corporation pursues
objects throughout the life
cycle of members
Oversees member application
process
Undertakes ongoing risk
assessment, monitoring,
intervention
Deals with financial institution
failures
Canada Deposit
Insurance Corporation
Société d’assurance-dépôt
du Canada
Canada
Deposit Insurance Application Process
Institutions must obtain
approval from:
Minister of Finance
Office of the Superintendent of
Financial Institutions (OSFI)
Canada Deposit
Insurance Corporation
Société d’assurance-dépôt
du Canada
Canada
Deposit Insurance Application Process
CDIC Act
Board of
Directors
Licensed under Bank Act or federal
or provincial legislation
CDIC ensures sound financial and
governance footing of institutions
Canada Deposit
Insurance Corporation
Société d’assurance-dépôt
du Canada
Canada
Deposit Insurance Risk Assessment,
Monitoring and Intervention Process
Insurer (CDIC)
Provision of
insurance
Assessment and
management of
risk
Supervisor (OSFI)
Traditional
supervisory role
Assessment of safety and
soundness of institutions
Canada Deposit
Insurance Corporation
Société d’assurance-dépôt
du Canada
Canada
Deposit Insurance Risk Assessment,
Monitoring and Intervention Process
Risks to CDIC are both internal
and external to member
institutions. They include:
Soundness and prudence of risk
management activities
Financial performance
Economic and competitive
environment
Compliance with statutory
requirements
Canada Deposit
Insurance Corporation
Société d’assurance-dépôt
du Canada
Canada
Deposit Insurance Risk Assessment,
Monitoring and Intervention Process
CDIC’s Standards of Sound
Business and Financial
Practices
Applied to “directing minds” of an
institution
Sanctions can, and are, imposed when
there is a breach of the Standards
Termination of insurance policy
Legal action against management and
directors
Canada Deposit
Insurance Corporation
Société d’assurance-dépôt
du Canada
Canada
Deposit Insurance Risk Assessment,
Monitoring and Intervention Process
Differential Premium System
Able to charge institutions a
higher premium
Disincentive to higher risk-taking
Provides and early warning to
developing problems
Information gathering allows for
timely and appropriate action
against institutions
Canada Deposit
Insurance Corporation
Société d’assurance-dépôt
du Canada
Canada
Intervention Process
CDIC may apply measures /
sanctions to minimize exposure
to loss
1
Premium Surcharge
Short-term behaviour
modification
Can be applied to healthy
institutions that are following a
riskier path
Canada Deposit
Insurance Corporation
Société d’assurance-dépôt
du Canada
Canada
Intervention Process
CDIC may apply measures /
sanctions to minimize exposure
to loss
2
Special examination
Detailed review of assets and
liabilities
Assessment will dictate options
for intervention and resolution
Canada Deposit
Insurance Corporation
Société d’assurance-dépôt
du Canada
Canada
Intervention Process
CDIC may apply measures /
sanctions to minimize exposure
to loss
3
Termination of policy
Can be imposed immediately if
and institution is in breach of
Standards, by-laws or
conditions of the policy
Canada Deposit
Insurance Corporation
Société d’assurance-dépôt
du Canada
Canada
Intervention Process
CDIC may apply measures /
sanctions to minimize exposure
to loss
3
Termination of policy
Deposits in these institutions are
insured for two years for demand
deposits or to maturity for longerterm deposits
Steps are generally taken to liquidate
the bank or find a going concern
solution
Canada Deposit
Insurance Corporation
Société d’assurance-dépôt
du Canada
Canada
Dealing with Failures
Options for intervention
1. Formal liquidation and payout
2. Sale of the institution
Options are assessed accounting for:
Stability of the overall financial system
Minimizing exposure to loss for CDIC
Canada Deposit
Insurance Corporation
Société d’assurance-dépôt
du Canada
Canada
Dealing with Failures
1. Deposit payout
CDIC releases payments to a
maximum of $60,000
Depositor preference
does not apply
Insured, uninsured and general
creditors receive a proportionate return
“Modified payout” – funds are
transferred to another member
institution in a lump-sum payment
Canada Deposit
Insurance Corporation
Société d’assurance-dépôt
du Canada
Canada
Dealing with Failures
2. Purchase and assumption
1
Actual purchase of the shares or
purchase of some or all of the assets
and the assumption of
all liabilities
“Clean institution” purchase and
assumption
Purchase only the highest quality
assets and assumes all liabilities
May purchase only specific pools
of assets
Canada Deposit
Insurance Corporation
Société d’assurance-dépôt
du Canada
Canada
Dealing with Failures
2. Purchase and assumption
2
Actual purchase of the shares or
purchase of some or all of the assets
and the assumption of
all liabilities
“Whole institution” transaction
All assets are purchased
Occurs before insolvency
Seen as re-capitalization of
institution
Canada Deposit
Insurance Corporation
Société d’assurance-dépôt
du Canada
Canada
Dealing with Failures
2. Purchase and assumption
Bids reflect the expected value of assets,
liabilities and perceived franchise value
CDIC provides financial assistance for
the difference between the market value
estimate and the liabilities assumed
Assistance varies:
Fixed dollar amount;
Secured loan; or
A combined solution.
Canada Deposit
Insurance Corporation
Société d’assurance-dépôt
du Canada
Canada
Dealing with Failures
Distinctions for purchase and
assumption transactions
All depositors (uninsured or insured)
receive full payment
Non-deposit creditors may receive
partial or full payment
Full or substantial losses are
imposed on subordinate debt
holders and shareholders
Canada Deposit
Insurance Corporation
Société d’assurance-dépôt
du Canada
Canada
Failure Resolution of
Central Guaranty Trust Company
Central Guaranty Trustco
Central Guaranty
Trust (CGT)
(Late 1980s) 4th largest trust company in Canada
Canada Deposit
Insurance Corporation
Société d’assurance-dépôt
du Canada
Canada
Failure Resolution of
Central Guarantee Trust Company
Early 1990s
CGT paying high
dividends to Trustco
Canada Deposit
Insurance Corporation
Société d’assurance-dépôt
du Canada
Trustco showing
deficits
Canada
Failure Resolution of
Central Guaranty Trust Company
December 1991
CGT Q3 = $116 million loss
CDIC constructed financial models to
compare formal liquidation versus a
going concern transaction
Canada Deposit
Insurance Corporation
Société d’assurance-dépôt
du Canada
Canada
Failure Resolution of
Central Guaranty Trust Company
Expression of interest solicited
from 45 organizations
Toronto-Dominion Bank (TD)
agreed to acquire $9 billion of
assets and all liabilities
Also acquired personal and
pension trust business
Canada Deposit
Insurance Corporation
Société d’assurance-dépôt
du Canada
Canada
Failure Resolution of
Central Guaranty Trust Company
CDIC provided a $1.35 billion loan for
the transaction
The loan was converted to an asset
management company (Adelaide
Capital Corporation)
Adelaide managed, collected and
optimized recoveries with assets to
retire the CDIC loan
Transaction closed January 1, 1993
Canada Deposit
Insurance Corporation
Société d’assurance-dépôt
du Canada
Canada
Criteria for Assisting a Transaction
1. Cost of purchase and assumption
must resemble cost of liquidation
2. CDIC must have assurance of
future viability of the institution
3. Must provide sufficient
capitalization and meet capital
requirements
4. CDIC must receive sufficient
specified repayment of assistance
Canada Deposit
Insurance Corporation
Société d’assurance-dépôt
du Canada
Canada
Criteria for Assisting a Transaction
5. Assistance must benefit troubled
member, depositors and CDIC
6. Transaction must involve
substantial investment or a
guarantee (or combination) from
acquirer
7. Acquirer must share risk with
CDIC
8. Proposal must provide for
adequate management resources
Canada Deposit
Insurance Corporation
Société d’assurance-dépôt
du Canada
Canada
Criteria for Assisting a Transaction
9. Acquirer must service all assets
10. Professionally managed bidding
process must be in place
11. Acquirer must establish
quantitative limits on all financial
items in a proposal
12. Shareholders, subdebtholders and
other creditors must be prepared
to make some concessions
Canada Deposit
Insurance Corporation
Société d’assurance-dépôt
du Canada
Canada
Conclusion
Need for open communications and a
transparent process
Open communication must extend to
the public
Need to revisit trigger mechanisms to
initiate an intervention situation
Determination of ongoing viability
results in prompt action before
insolvency
Canada Deposit
Insurance Corporation
Société d’assurance-dépôt
du Canada
Canada
PROTECTING YOUR DEPOSITS
Handling Problem Financial
Institutions
J.P Sabourin
President and Chief Executive Officer
Canada Deposit Insurance Corporation
December 9, 2003
Canada Deposit
Insurance Corporation
Société d’assurance-dépôt
du Canada
Canada