1 IADI GUIDANCE FOR THE RESOLUTION OF BANK FAILURES Ganiyu A. Ogunleye, OFR Managing Partner Jaffa Consulting Limited Presented at IADI Africa Regional Workshop on Problem Bank Resolution Held on May 9, 2011 In Abuja, Nigeria

2 Presentation Outline 1.Introduction 2.General Issues 3.Interrelationship & Cross-Border Issues 4.Statutory Powers & Mandate 5.Operational & Administrative Issues 6.Resolution of Failing and Failed Banks 7.Conclusion

3 1.0Introduction Guidance for Failure Resolution was issued in December 2005 in pursuance of IADI’s mission “to contribute to the enhancement of DI effectiveness by promoting guidance and international cooperation” It seeks to assist Deposit Insurers in establishing or enhancing their mechanism for dealing with bank failures. Resolution is defined as a disposition plan generally designed to fully protect insured deposit while minimising costs to the Deposit Insurer

1.0Introduction - continued Guidance is encapsulated in the Core Principles for Effective Deposit Insurance Systems issued by BIS and IADI in June 2009 (see Principles 15 and 16) Guidance is divided into 5 sections: General Issues Inter-relationship and Cross-Border Issues Statutory Powers of a DI Operational and Administrative Issues Resolution of Failed Banks 4

2.0General Issues 2.1Robust Institutional Framework Key elements include: sound macro-economic policies effective bank supervision/regulation market discipline efficient failed bank resolution process effective judicial and criminal investigation system 5

2.0General Issues 2.2Sound Corporate Governance of DI Four Key Elements : operational independence (insulation from undue political and industry influence) accountability transparency integrity 6

2.0General Issues 2.3Alignment of Mandate & Powers Powers granted to a DI should be consistent with its public policy objectives and mandate Example: A least-cost mandate should be supported with power to decide on appropriate resolution approach or take preventive measures before bank failure 7

2.0General Issues 2.4Exceptional Recourse to Temporary Blanket Guarantee Blanket guarantee could be used to handle a large bank failure or where a systemic crisis has occurred There should be a clear and explicit definition of qualifying circumstances Be provided on a temporary basis with explicit dates of expiration Shareholders to bear losses where public funds are used 8

3.0Inter-relationship & Cross-Border Issues 3.1 Delineation of Roles, Duties and Responsibilities of Safety Net Participants (SNPs) Who has power to declare whether or not a bank has failed Who decides resolution method Division of duties either through legal arrangement, contracts or administrative regulation 9

3.2 Information Sharing & Coordination Mechanism Formal mechanism for information sharing and coordination amongst SNPs should be in place DI to have advance notice prior to intervention to enable it assess potential impact on DIF Inter-relationship & Cross-Border Issues

3.3 Mechanism for Dealing with Systemic Crises Need for criteria for determining what constitute systemic crisis Clear intervention framework for dealing with bank failures and resolutions Statutory mechanism for dealing with “Too Big To Fail Institutions” Inter-relationship & Cross-Border Issues

3.4 Cross-Border Coordination Mechanism Information sharing and coordination framework amongst international deposit insurers and supervisory authorities Need for formal contracts, agreements or arrangement to deal with cross-border issues The current dispute between Iceland, Britain and Netherlands is instructive. Iceland rejected compensation claims by Britain and Netherlands for making good local deposits in failed Iceland Banks. Iceland’s offer to pay €4 billion claims of foreign depositors in icesave, the on-line arm of failed Landsbanki from disposition of the bank’s assets, not acceptable Inter-relationship & Cross-Border Issues

4.0Statutory Powers & Mandate 4.1Mandate should be clearly defined – Pay-box or Risk-minimizer 4.2Clearly defined funding mechanism Establish DIF Statutory target for the fund Clear procedure for achieving funding goal 13

4.3Authority to accept or reject membership Ability to control risk exposure and moral hazard Power to terminate insurance status (in coordination with supervisory authority) 4.4Authority to conduct onsite reviews by DI 4.5Legal protection for DI’s officers & employees 4.6Explicit legal system for prosecution of directors, officers and auditors of failed banks Statutory Powers & Mandate

5.0Operational & Administrative Issues 5.1Articulate appropriate policies and Standard Operational Procedures (SOPs) for bank resolution 5.2Authority to outsource services where internal resources are insufficient 5.3Ensure transparent valuation and disposal of assets 5.4Put in place effective public awareness and communication mechanism 15

16 5.5Code of conduct for employees 5.6Ability to investigate and if necessary litigate against those responsible for bank failure 5.0Operational & Administrative Issues

6.0Resolution of Failing or Failed Banks 6.1 Rule Based or Statutory Trigger Mechanism for early intervention 6.2 Determination of viability or non- viability of problem bank by professional staff or experts 6.3 Authority to decide on Resolution Method Open Bank Assistance Deposit Pay-out / Reimbursement Purchase for Assumption Bridge Bank 17

6.4 Establish effective resolution policies and procedures Application of least-cost methods Dealing with systemic repercussion of failures Avoiding disruption of banking services 6.5 Resolution strategies should seek to maximise recovery of assets Resolution of Failing or Failed Banks

6.6Adopt market principles and mechanisms as much as possible in resolution transactions Use cost-effective rather than lowest cost method Where possible, employ mark-to-market approach in appraisal process 6.7Provide incentives to facilitate market- based resolution. Examples: Tax incentives ( M & A, Debt write-offs) Administrative incentives (interest waiver) Resolution of Failing or Failed Banks

6.8Ensure efficient and effective depositor reimbursement Explicit time frame between revocation of banking licence and actual deposit payout Continuous disclosure of information to the public during reimbursement process and liquidation Unfettered access to failed bank’s depositor records before bank closure Legal rules regarding set-offs and subrogation should be well defined Resolution of Failing or Failed Banks

Ability to effect partial payment to needy depositors before the actual payout 6.9Guiding rules of liquidation process should be well defined and documented Resolution of Failing or Failed Banks

22 7.0Conclusion 7.1Guidance should serve as a benchmark for IADI members and other interested parties 7.2IADI members are encouraged to conduct self assessment

Questions and Comments 23