BANK RESOLUTIONS: Core Principles and Methodology By Dr. J. Ade Afolabi Director Research, Policy  International Nigeria

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BANK RESOLUTIONS: Core Principles and Methodology By Dr. J. Ade Afolabi Director Research, Policy International Nigeria

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1. BANK RESOLUTIONS: Core Principles and Methodology By Dr. J. Ade Afolabi Director (Research, Policy & International) Nigeria Deposit Insurance Corporation (NDIC) At IADI ARC Workshop held on May 9 – 13, 2011 in Abuja, Nigeria

2. Presentation Outline Introduction Use and objectives of Methodology 2010 Field Tests Core Principle 16 Resolution Options Effective Resolution Conditions Concluding Remarks

3. 1. Introduction Core Principles approved and released in 2009 by IADI and the BCBS with input from EFDI. Incorporated into Financial Stability Board (FSB) Compendium of Standards Consultative process initiated to develop an “Assessment Methodology” : Basel Committee on Bank Supervision European Forum of Deposit Insurers IMF, World Bank, European Commission Methodology required by FSB for Principles to be listed as “Key “ standards

4. 2. Use of Methodology The methodology could be used in multiple contexts: Self-assessment performed by the deposit insurer; IMF/World Bank assessments in the context of the Financial Sector Assessment Program (FSAP); Reviews conducted by third parties; Peer reviews (e.g. IADI regional committees, FSB). Assessments conducted by qualified persons Experienced practitioners IADI to be active in providing training Assessments require cooperation of all relevant authorities

5. Objectives of Methodology Identification of the nature and extent of any weaknesses in the DIS and compliance Benchmarks DIS against the Core Principles to judge how well the system is meeting its objectives Aid the deposit insurer and policy makers in making improvements to the DIS and financial safety net Therefore, ensure the Methodology: Is measurable Applicable to a wide range of DIS Identifies/detects key strengths/weaknesses

6. Assessment Methodology: Compliance Framework

7. 3. 2010 Field Tests Czech Republic: Sept 13-17, 2010 David Walker (CDIC/IADI), Clair McGuire (WB), Jan Nolte (BdB/EFDI) India: Sept 29- Oct 4, 2010 David Hoelscher (FDIC), David Parker (IMF), Guillermo Lopez (IPAB/ IADI) Mexico: Oct 14- 21, 2010 Luis Cortavarria (IMF), Kumudini Hajra (DICGC/IADI), David Walker (CDIC/IADI), David Hoelscher (FDIC)

8. Field Test: Process Establish key contacts and meeting requests in advance - e.g. DIS, other safety net participants, commercial bankers etc Acquire key documentation in advance -e.g. DIS legislation, bank accounts, insolvency regime, ews and intervention regime etc Data requests -e.g. Banking industry structure, deposit and liability data etc

9. Methodology Training IADI has commenced training of DIS personnel on the application of the methodology The World Bank has indicated to organize regional training workshop on the Methodology for Assessing Compliance with the Core Principles under the auspices of the Financial Sector Reform and Strengthening (FIRST) Initiative in Nigeria Efforts are being made to finalize arrangements on the training which is being proposed for either August or September, 2011

10. 4. Core Principle 16 Principle 16: Effective failure-resolution processes should: facilitate the ability of the deposit insurer to meet it’s obligations including reimbursement of depositors promptly and accurately and on an equitable basis; minimize resolution costs and disruption of markets; maximize recoveries on assets; and, reinforce discipline through legal actions in cases of negligence or other wrongdoings. In addition, the deposit insurer or other relevant financial system safety-net participant should have the authority to establish a flexible mechanism to help preserve critical banking functions by facilitating the acquisition by an appropriate body of the assets and the assumption of the liabilities of a failed bank (e.g. providing depositors with continuous access to their funds and maintaining clearing and settlement activities).

11. Core Principle 16 Effective failure-resolution processes should do the following: facilitate the ability of the deposit insurer to meet it’s obligations including reimbursement of depositors promptly and accurately and on an equitable basis Minimise resolution costs and market disruptions. Maximise recoveries on assets. Reinforce discipline through legal actions in cases of wrongdoings. Provide continuous access to banking services through asset sale and liability assumption.

12. 5 Resolution Options Four basic options: Open bank assistance Liquidation and payout Purchase and assumption Bridge Bank

13. Resolution Option: Purchase and Assumption (P & A) It is a resolution method where a healthy bank assume some or all of the obligations and purchase some or all of the assets, of the failed bank. The method has the following benefits, among others: Can preserve the functions of the failed bank and maintain the relationship of the depositor with the bank. Thus, it preserves confidence in the system; Covers all depositors, and it may preserve some jobs of the failed bank; Can minimize market disruptions since transfer of assets can be executed in a very short period; Allows customers access to their deposits and they do not suffer any break in banking service; and for developing ctries Can sustain the promotion of banking culture which is critical for savings and eco devpt.

14. Resolution Options Authority to establish a bridge bank or other similar mechanism Could be deposit insurer Could be other relevant authority Bridge bank maintains critical banking functions Depositors have continuous access to funds Clearing and settlement activities continue

15. 6. Condition Precedent for Effective Failure Resolution Process For resolutions to work effectively, there is need for the following: A strong institutional framework An operationally independent deposit insurer Resolution powers aligned with mandate A legal system capable of dealing with systemically important banks Access to adequate funding Ability to conduct onsite reviews and have depositor records before failure

16. 7. Concluding Remarks In line with its mission of contributing to the enhancement of the DI effectiveness globally, IADI and BCBS with input from EFDI developed a set of Core Principles for effective DIS; The Core Principles were incorporated into the FSB compendium of Standards The methodology for applying the Core Principles was subsequently developed to enable FSB list them as “Key” Standards Training is being conducted across the globe on the methodology

17. Concluding Remarks Core Principle 16 is on failure resolution Four basic options are available: Open bank assistance Liquidation and payout Purchase and assumption Bridge Bank

18. Concluding Remarks For an effective failure resolution there is need for: a strong institutional framework, an operationally independent deposit insurer with the powers to carry out its mandate, a legal system capable of dealing with systemically important banks Have access to adequate funding Be able to conduct onsite reviews and have depositor records before failure

19. Thank you for your attention Questions/Comments

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