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Maximising Recoveries. Some observations Andrew Campbell. As noted in the Claims and Recoveries Paper banks can and do fail. In fact in recent times bank failure has been very common in many countries throughout the world.

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Maximising recoveries

Maximising Recoveries

Some observations

Andrew Campbell




  • Deposit insurance systems vary considerably and range from being simply a “paybox” to being a regulator and a liquidator (receiver) of the failed bank.

  • The nature of the role given to the deposit insurance agency, from the legal perspective has important consequences in the ensuing liquidation of a bankrupt bank.




Function of dia
Function of DIA liquidation proceedings, will seek to ensure that recoveries are maximised.

  • The position of the deposit insurer in all of this will depend on its function.

  • Is it a “paybox” only with no right to participate in the insolvency proceedings?

  • If so, is there any way it can assist?


  • Where it has a “paybox” only function it will be involved in the liquidation proceedings as a creditor.

  • From a legal perspective the DIA will be required to pay out the appropriate amount of compensation and then to stand in the shoes of those depositors as an unsecured creditor in the liquidation proceedings.




  • The liquidator may have no powers to do much to maximise recoveries and may also lack any incentive to do anything other than wind up the liquidation estate with maximum speed.

  • In some systems the liquidator will actually have an incentive to take things slowly to maximise its fees, but not to maximise asset recoveries.




  • This is a fundamental principle of insolvency laws in many jurisdictions.

  • Models for this type of approach, such as the Federal Deposit Insurance Corporation in the United States and the Canadian Deposit Insurance Corporation in Canada, provide an opportunity for the DIA to attempt to maximise asset values both in the pre-closure and post-closure phases.


Recovering asset values
Recovering asset values jurisdictions.

  • In many, if not most, bank failures there will be a problem with impaired assets.

  • These will often be found in the bank’s loan portfolio.

  • Non-performing loans and how to deal with them can be a problem.



Non performing loans
Non-performing loans jurisdictions.

  • What is an NPL?

  • Asian Development bank “the accepted international standard for classification of loans as non-performing is 90 days or more overdue”.

  • Why are they such a problem?


  • A different approach is taken in the International Financial Reporting Standards which provide that “a financial asset……is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a “loss event”) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset….that can be reliably estimated..”



  • May be difficult to sell impaired assets. this would include the number of days overdue while in others the approach may be based on qualitative factors such as available information on the borrower.

  • There may not be a market in the country.

  • May be very difficult to value.

  • The general rule is that assets should be disposed of as quickly as possible.


  • With NPLs the general rule will usually not apply. this would include the number of days overdue while in others the approach may be based on qualitative factors such as available information on the borrower.

  • May be potential for increase in value if the impaired loans are held while value maximisation is attempted.


  • How to deal with NPLs? this would include the number of days overdue while in others the approach may be based on qualitative factors such as available information on the borrower.

  • Special vehicle – asset management company.

  • Receiver/liquidator?

  • Either way it is likely to take a considerable amount of time to complete the process.



Some conclusions
Some Conclusions value over the longer term than would be achieved by an immediate sell off.

  • To give the DIA a role in the bankruptcy proceedings should assist in maximising value.

  • What should this role be?

  • Ideally will also be involved prior to the commencement of bankruptcy proceedings.





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