BANK RESOLUTIONS: CorePrinciples and MethodologyBy

Dr. J. Ade AfolabiDirector (Research, Policy & International)Nigeria Deposit Insurance Corporation

(NDIC)At IADI ARC Workshop held on May 9 – 13,

2011in Abuja, Nigeria

Presentation Outline

1. Introduction2. Use and objectives of Methodology3. 2010 Field Tests4. Core Principle 165. Resolution Options6. Effective Resolution Conditions7. Concluding Remarks

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

2. Use of Methodology

The methodology could be used in multiple contexts:

I. Self-assessment performed by the deposit insurer;II. IMF/World Bank assessments in the context of the

Financial Sector Assessment Program (FSAP);III. Reviews conducted by third parties;IV. Peer reviews (e.g. IADI regional committees, FSB).

Assessments conducted by qualified personsI. Experienced practitionersII. IADI to be active in providing training

Assessments require cooperation of all relevant authorities

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

Assessment Methodology: Compliance Framework

3. 2010 Field Tests

Czech Republic: Sept 13-17, 2010David Walker (CDIC/IADI), Clair McGuire (WB), Jan

Nolte (BdB/EFDI)India: Sept 29- Oct 4, 2010David Hoelscher (FDIC), David Parker (IMF),

Guillermo Lopez (IPAB/ IADI)Mexico: Oct 14- 21, 2010Luis Cortavarria (IMF), Kumudini Hajra (DICGC/IADI),

David Walker (CDIC/IADI), David Hoelscher (FDIC)

Field Test: Process

1. Establish key contacts and meeting requests in advance - e.g. DIS, other safety net participants, commercial bankers etc

2. Acquire key documentation in advance -e.g. DIS legislation, bank accounts, insolvency regime, ews and intervention regime etc

3. Data requests -e.g. Banking industry structure, deposit and liability data etc

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

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).

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.

5 Resolution Options

Four basic options:Open bank assistanceLiquidation and payoutPurchase and assumptionBridge Bank

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.

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

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

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

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

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

Thank you for your attention

Questions/Comments