BANK INTERVENTION and RESOLUTION: Part 1

1. BANK INTERVENTION andRESOLUTION: Part 1 United States Department of the TreasuryOffice of Technical AssistanceBanking & Financial Services

2. Program Introduction Advance Preparation Intervention Resolution Immediate Actions at Intervention Functional Areas – Checklists Conclusion

3. Introduction Problem bank resolution is a challenge in many countries worldwide and comprises two processes: Intervention Resolution

4. Bank Intervention The process of actually securing and inventorying a bank’s assets and preparing a final set of financial statements

5. Bank Intervention 3 situations for Bank Intervention: To close a bank and immediately liquidate or do a P&A transaction To take control of a bank and appoint a Special Administrator To resolve a bank in Special Administration

6. Bank Intervention and Resolution Non-linear actions Advance preparation should be concurrent and coordinated. Both converge at intervention

7. Bank Resolution The decisive action to solve the problems of the bank; by private solutions (e.g. recapitalization, sale of bank shares, merger, etc.), assisted transaction (e.g., P&A transaction), or liquidated payout

8. Problem Bank Resolution Two major regulatory players: Supervisory authority (NBM) Deposit Guarantee Fund (DGF)

9. Problem Bank Resolution The supervisory authority should: Have an effective licensing or chartering regime Conduct regular and thorough examinations of individual banks Have a problem bank process that includes early detection, timely intervention, and resolution

10. Deposit Insurance Objectives Protect small depositors Promote financial stability by making prompt reimbursement to insured depositors in the event of a bank failure

11. Effective Legal Framework Highly desirable to have a special bank resolution regime (SRR) At a minimum, the SRR provides for a level of judicial review such that the bank supervisor’s decisions cannot be reversed—any successful appeals limited to monetary damages

12. Legal Framework Nexus with DGF Objectives Promote financial stability by making prompt reimbursement to insured depositors in the event of a bank failure. If DGF must wait to reimburse insured depositors while bankruptcy court appeal process runs its course, it’s impossible to meet this objective

13. Legal Framework Nexus with DGF Objectives With SRR (and with advance preparation), DGF can make insured depositor reimbursement virtually immediately—either directly or via a P&A transaction

14. Bank Resolution Problem bank resolution is broadly characterized in three categories: Private solutions (mergers, recapitalization, sale, etc.) Assisted transactions (P&A transactions) Liquidation

15. Private solutions Do nothing (forbearance) Arrange mergers, recapitalization, sale, etc.) Perhaps during Administration

16. Assisted transactions Purchase and Assumption (P&A) transactions Insured or all deposits and certain assets Transferred to stronger (assuming) bank

17. Assisted transactions • Bridge bank • All or part of bank’s business • Owned and operated temporarily by government

18. Liquidation Only insured deposits are paid Additional recoveries to uninsured depositors and other creditors derived from the liquidation of assets NBR responsible for management and disposition of all closed bank assets and has authority independent of the court system

19. Bank Resolution Preferred failing bank resolution methods are those that help prevent adverse economic results. Their goals are to: Preserve franchise values Maximize private ownership of assets Minimize government ownership of assets Preserve (or help create) competitive markets

20. P&A Standardized contract setting forth the conditions of a bank resolution to all interested parties

21. P&A Financially healthier bank will purchase certain “good” assets and assume insured deposit liabilities

22. P&A Can be accomplished quickly (usually over a weekend) Potential to maintain banking services in under-served communities.

23. P&A Using assets in a P&A to fund deposits has two added benefits: keeps assets in the private sector, and, reduces the financial outlay that a DIA must provide to repay insured deposits

24. Primary Goals of Bank Intervention A bank intervention is a process driven function consisting of two primary areas: Secure, Control and Inventory Reconcile and Balance

25. Bank Intervention Advance Preparation for Intervention Immediate Actions at Intervention Function Areas Checklists

26. Bank Intervention Intervention is necessary whenever the Supervisory Authority appoints a SpecialAdministrator or Receiver for a problem bank

27. Special Administration Two alternatives to guide the extent of intervention activities in case of Special Administration: Where existing owners and management are cooperative in trying to preserve value and rehabilitate the bank, and Where a bank’s owners and management are uncooperative and opposed to any intervention

28. Cooperative Management: The Authorities may be comfortable with the quality of the bank’s staff, operations and controls and not require a full-scope Intervention.

29. Uncooperative Management: The Authorities should fully incorporate appropriate Bank Intervention procedures in order to prevent asset stripping, destruction of records, etc., and any consequent potential adverse impact on public confidence.

30. Bank Intervention The intervention team must be prepared for a large number of customers who want their deposits.

31. Bank Intervention and Resolution Advance Preparation Both bank intervention and resolution advance preparation should be conducted concurrently.

32. KEY ISSUES AND CONCERNS Specific information about the bank is also vital Most recent balance sheet Most recent reports of examination and audit reports Information on parties who have contributed to the failure of the bank Estimates of insured and uninsured deposits Locations of branches and other facilities Information on large borrowers and depositors

33. KEY ISSUES AND CONCERNS The more information about the bank that is available, the easier and quicker the closing will be. Conversely, inadequate information can lead to a difficult and lengthy closing process and delay the insured deposit payment

34. Preparedness NBM and DGF should be working to be prepared for both types of resolution: Policies and Procedures written for all areas of operation Training programs based on policies and procedures Staff should be hired and trained ahead of time Delegations of authority and decision making system should be in place with appropriate training

35. Preparedness Clear lines of communication and cooperation should be worked out between NBM and DGF before bank is closed Sharing of all required information on a timely basis Early identification of failing banks and which resolution method will be used Closing assistance of NBM and DGF personnel when necessary Projected schedule of interventions into failing banks

36. Bank Intervention Team Special Administrator (or) Receiver Bank Intervention Manager Accounting Team Asset Team Branch Operations Team Deposit Operations Team Facilities and Security Team Information Technology Team Legal Team: Personnel Team

37. Team Responsibility Special Administrator Responsible for conserving the assets and liabilities, preparing a final resolution plan and winding up all affairs of the Special Administration. Handles all contacts with the Media after the Intervention period Has Power of Attorney to execute documents on behalf of the Special Administration.

38. Team Responsibility Receiver Responsible for liquidating the assets and liabilities and winding up all affairs of the Receivership Handles all contacts with the Media after the Intervention period Has Power of Attorney to execute documents on behalf of the Receivership.

39. Team Responsibility Bank Intervention Manager Plans, manages and coordinates all activities relating to the intervention. Manages the Intervention Team including release dates Acts as the primary contact for the Assuming Bank and failed bank employees.

40. Team Responsibility Accounting Team Closes out the books of the failed bank. Reconciles general ledger accounts and compiles an adjusted final balance sheet for the failed bank

41. Team Responsibility Asset Team Inventories, segregates and secures pooled notes, files and collateral Determines, based on the Agreement, the split of assets between the Assuming Bank and the Receiver.

42. Team Responsibility Asset Team (cont) Begins disposal of retained other real estate (ORE), vehicles, and Other Assets Reviews assets retained by Receiver, assembles packages, and implements procedures to market and sell the assets, via a sealed bid process, to interested investors

43. Team Responsibility Branch Operations Team Control branch premises and operations. Take control of the cash and any other valuable documents (notes, negotiable collateral, safekeeping items and other negotiable instruments) at these branches. Coordinate branch operations with functional areas, including facilities management, personnel, lending, teller, and deposit functions

44. Team Responsibility Deposit Operations Team Responsible for the repayment of insured deposits. Notifies and meets with uninsured depositors. Completes determinations of insurance and creditor claims. Determines and notifies the general creditors that the bank has failed and communicates the claims filing procedures (time period, etc.).

45. Team Responsibility Facilities and Security Team Responsible for financial and physical maintenance of office properties and other fixed assets. Arrange and maintain work stations for all employees (locate and provide additional work space if needed)

46. Team Responsibility Facilities and Security Team (cont) Arrange for delivery of copiers, fax machines, and printers as needed Place moveable assets, such as vehicles, furniture, fixtures, and equipment under control and immediately inventory (from largest to smallest value)

47. Team Responsibility Facilities and Security Team (cont.) To safeguard the assets of the bank and safety of employees by preventing: Entry by unauthorized persons; Vandalism of property, including files and records Theft of bank property.

48. Team Responsibility Information Technology Team Coordinates and communicates with the data processing servicer, whether in-house or off-site. Coordinates report generation and distribution. Controls, transfers or terminates any E-Banking capability, including ATMs

49. Team Responsibility Legal Team: Advisory capacity to Administrator or Receiver and Bank Intervention Manager prior to and during bank Intervention Ensures that intervention documents are complete, accurate, signed and properly filed. Review of Contingent Liabilities and Preparation of the Closing Memoranda and the Legal Closing Book

50. Team Responsibility Legal Team (cont.) Oversight of Inherited Litigation Intake Provides the Intervention Team with legal interpretations of any transactional agreement. Processes bond claims and Director and Officer insurance claims. Duties include employee interviews, desk audits and gathering and inspection of bank records.