Discussion Paper General Guidance on Claims and Recoveries

1. Discussion PaperGeneral Guidance on Claims and Recoveries Rio de Janeiro, Brazil November 17, 2006 Fred S. Carns Director Office of International Affairs Federal Deposit Insurance Corporation International Association of Deposit Insurers

2. Introduction • Purpose: • Discuss suggested guidance on paying claims when banks fail and recovering value from a failed bank’s assets • Importance: • Timely and accurate payout is one of the most important functions of the deposit insurer • Applicability: • Officials creating or enhancing deposit insurance systems • Acknowledgement: • The Research and Guidance Committee of IADI International Association of Deposit Insurers

3. Introduction • The orderly closing of a failed bank is attained by revoking or transferring the bank’s charter and satisfying the claims and managing recoveries of depositors and creditors • The claims and recoveries guidance paper: • Was designed for deposit insurance practitioners and other interested parties • Was prepared based on the judgment of IADI members, associates and observers International Association of Deposit Insurers

4. Satisfying Claims Deposit insurers will honor claims and many may also manage the recovery process Open Bank – But Weak Bank Closed (Intervention) Managing Receivership to Maximize Recoveries When a Bank FailsThe Deposit Insurer May Have Many Roles International Association of Deposit Insurers

5. Overview • Guidance is designed to be broad and flexible • Country laws and practices may limit applicability • Scope of Deposit Insurer’s mandate will dictate its activities • Economy and depth of markets must be considered • Political environment may be a factor • The effectiveness of the processes must be measured within the constraints of those country-specific conditions • While uncommon for the deposit insurer to act as the receiver of the failed institution, in a number of countries this is the practice • In some countries the deposit insurer may be called upon to oversee the process International Association of Deposit Insurers

6. Key Factors to Consider When Settling Claims • Conducting a timely and accurate payout of insured depositors is among one of the most important functions of the deposit insurer • Prompt and decisive actions establish and maintain the deposit insurer’s credibility • Role of the deposit insurer is to provide depositors access to their insured funds and reimburse creditors as permitted by law • Claims process should consider the expectations of insured depositors and creditors • Scope and level of coverage should be clearly defined in law • Orders of Priority should be clear and enforced • Coverage determination should be made swiftly • Insured deposit reimbursement should be timely International Association of Deposit Insurers

7. Before Closing the BankMaintaining Relationships Is Critical The deposit insurer needs information about its deposit obligations as quickly as possible once it has been determined that a bank is in trouble or likely to fail. Key Items include: • Deposit ledgers and customer records • Loan and collateral documents • Source codes for information and technology systems Cooperation Communication International Association of Deposit Insurers

8. Before Closing the Bank • Ideally, deposit insurer should have access to all bank records and systems • Reconcile bank accounts and make deposit insurance determinations • Ensure appropriate staffing to handle claims process • Public awareness: • Managing depositor expectations is important • Transparency and good communication helps in maintaining public confidence • Funding considerations: • Ensure adequacy of deposit insurer’s funding sources • Plans to restore Deposit Insurance Funds International Association of Deposit Insurers

9. After Closing the Bank • Reinforce public awareness and information campaign • Explain filing requirements by depositors and creditors • Communicate appeals process – if any • Establish and announce time frame for reimbursement • Reconcile depositor accounts immediately after bank closing • Identify insured and uninsured depositors • Identify creditors with bona fide claims International Association of Deposit Insurers

10. Steps in the Claims Process • Establish a Clear Claims Plan • Clear delineation of when to start and end the claims process • Deposit insurer should test and adjust the plan • Following a payout, deposit insurer should conduct post mortem and reevaluate effectiveness of plan • Communication • Foster and maintain effective working relationship between the deposit insurer and other relevant safety net players • Deposit Insurer needs to begin the claims process immediately upon closure of an insured institution • To promote public confidence in deposit insurance system • To maintain stability in the financial sector • To minimize erosion of asset or franchise value of the failed institution International Association of Deposit Insurers

11. Recovering Asset Values in Failed Banks • Once a bank has failed, disposition of its assets should be pursued by an appointed receiver who markets and liquidates assets and distributes the proceeds to creditors • Powers of the receiver may vary, but generally include: • Ability to enforce or repudiate contracts • Stay litigation • Challenge fraudulent transfers International Association of Deposit Insurers

12. Recovering Asset Values in Failed Banks • While the general goal of an effective asset disposition strategy is to maximize the return to the receivership, receiverships will be guided by: • The health and depth of economy and the markets in which the assets will be disposed • An evaluation of whether it would be best to market failed bank as an ongoing concern or based on liquidation value • Scope and volume of problem assets and the ability of the receiver to dispose of assets quickly • Experience and risk management capacity of the receiver International Association of Deposit Insurers

13. Recovering Asset Values in Failed Banks • In general, the guidance points for conducting the recovery process are as follows: • Important to obtain clear title and take control of the assets of the failed institution • Employ efficient asset-disposition strategies including tools to validate valuation assumptions • The receiver must identify, quantify, and manage or hedge risks related to interest rates, market fluctuations, disposition strategies and asset-specific and legal issues International Association of Deposit Insurers

14. Recovering Asset Values in Failed Banks • Transparency and access to information are critical to obtaining maximum value for assets • The quality of information and access to information are key factors in the determination of asset prices by the market; the market will discount asset prices if there is uncertainty about the quality of the asset • Unique or unusual assets may make private negotiation a better alternative to market sales International Association of Deposit Insurers

15. Recovering Asset Values in Failed Banks • Two main goals of recovery efforts: • disposing of assets quickly, • and achieving maximum value • These competing goals must be balanced by the receiver in its decisions regarding asset sales • Where appropriate, asset-disposition strategies should maximize value on a net present value basis • However, if other priorities take precedence over these goals they should be identified and addressed explicitly by the receiver International Association of Deposit Insurers

16. Conclusions/Takeaways • Application of guidance will vary among countries • Cooperation, Communication, and Coordination between supervisors is paramount • Availability of information to deposit insurer and stakeholders is critical • Establishing and testing a Resolutions Plan is important • Efficiency in the Claims process will be helped by managing expectations of the public, depositors, and creditors • When disposing assets – the market discounts for unclear or imperfect information • Where there is room for a country to change law, the change should be pursued International Association of Deposit Insurers