Case Study on PayoutsHungary

Presented by:

Dr. András Fekete-GyőrNational Deposit Insurance Fund of

Hungary

www.iadi.org

Monday, December 8, 2003

Agenda

• Overview of the legal frame

• Work-flow of the Fund’s action

• Preconditions to an efficient reimbursement

– Legal issues

– Practical issues

– Technical issues

• Operation of the payout software

• Supplementary information

Case Study on Payouts - Hungary

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1993 • The Act on NDIF (Act No. XXIV of 1993)

Primary function: deposit payoff for depositors’ claim Secondary function: prevention of deposit payoff

1997 • The Act on Credit Institutions and Financial Undertakings (Act No. CXII of 1996)

Amendments to DIS: - Primary function: prevention of deposit payoff (98 §)Condition: assisting the exceptional measures of Hungarian Financial Supervisory Authority (HFSA), (157-168 §) - Variety of instruments (extension of credit or capital, issue of guarantee etc.) Condition: with recourse on market conditions (104 § (1))commitments cannot exceed deposit payoff- Least cost principle (104 § (2))- Public Service Corporation on Liquidation of Credit Institutions (177 § (3),(4) Supervisory Committee: 9 members (NBH, HFSA, MOF, NDIF)

Overview of the regulatory framework

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Work-flow of the Fund’s action

Supervision NDIF Notifies the Fund about the necessity of exceptional measures

Notifies the Supervision about its

least cost calculation Takes exceptional measures aiming at the best foreseeable result (with regard also to the Fund’s calculation)

Considers preventive action Imposes action plan on the bank (supported by the Fund)

Yes

Withdraws the license of the bank (closure)

No

Pay out

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Preconditions to an efficient reimbursement

Legal issues

Obligation to reimburse: • unavailability of deposits during 5 working days and/or• withdrawal of the banks licence (closure) by the Supervision

Coverage limit per depositor per bank:• HUF 3.2 million (€12,400) • co-insurance: 10%• reimbursement limit: HUF 3 million (€11,500)

Eligibility:• natural and legal persons • excluded depositors• trust accounts, joint deposits

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Preconditions to an efficient reimbursement

Legal issues (cont’d)Insured products

• registered deposits (Deposit Register, 1999)• bank obligations (bonds), CDs since January 1, 2003

Secrecy, confidentiality• unrestricted access to the deposit records in case of reimbursement

Timeframe• Start of reimbursement within 15 days after the closure• End of reimbursement within 90 days (might be extended twice by 90 days respectively)

Interest payment: no longer than 15 days after deposits became frozen

Others• set-off against expired debts• deposits used as collateral• advance payment

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Preconditions to an efficient reimbursement

Practical issues

Quality of records

Insufficient quality might cause complaints and delays

Regular examination of the member’s deposit record keeping

Improvements enforced

Reimbursement procedure

Access to the records right after closure (manipulation)

Internal regulation of reimbursement procedure (adjusted to each case)

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Preconditions to an efficient reimbursement

Practical issues (cont’d)

Claim declaration• Inaccurate data in the bank’s records• Selection of preferred method of payment

Methods of payment • Transfer to a requested bank account• Cash withdrawal by Deposit Insurance Card (Hungarian innovation)• Cash delivered (postal transfer)• Agent bank

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Preconditions to an efficient reimbursement

Practical issues (cont’d)Communication

Mandatory press releases• after closure• before start of payout

Telecommunication channels• internet: crisis communication site (hyperlinked to NDIF’s home page)• automatic voice-mail information• hot line

Direct mail • on the availability of the money• settlement enclosed• reminders

Complaints, inquiries, litigation• direct mail, e-mail, help desk• litigation (none in conjunction with deposit payout)

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Preconditions to an efficient reimbursement

Technical issues

Outsourced partners employed in• communication• IT (principally operated by own staff)

Accuracy of reimbursement is backed up by IT solutions

• two more data of the depositor other than the name

• precisely defined procedures and pre-audited software

• highly automated verification, reconciliation process and calculations

• automated preparation of settlements, letters, etc. and money transfer

• IT solution to manage inquires and complaints

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Preconditions to an efficient reimbursement

Operation of payout software

Preconditions to an efficient reimbursement

Operation of payout software (cont’d)

Preconditions to an efficient reimbursement

Operation of payout software (cont’d)

Preconditions to an efficient reimbursement

Operation of payout software (cont’d)

Preconditions to an efficient reimbursement

Operation of payout software (cont’d)

Preconditions to an efficient reimbursement

Operation of payout software (cont’d)

Preconditions to an efficient reimbursement

Operation of payout software (cont’d)

Preconditions to an efficient reimbursement

Operation of payout software (cont’d)

Preconditions to an efficient reimbursement

Operation of payout software (cont’d)

Preconditions to an efficient reimbursement

Operation of payout software (cont’d)

Supplementary information

Deposit Insurance Card (DIC)

Agreement with the largest bank network and the postal system (ATM’s and POS outlets)

Depositors wanting reimbursement through DIC get a ‘blank’ (debit) card with PIN at filing the claim, sign DIC contract

The DIC will be activated when the claim is successfully verified and reconciled with the records

Depositors are notified via mail on the availability of the money

The DIC is usable within 90 days (withdrawal in installments is possible)

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Supplementary information

Bank-crises handled by NDIF

−1993 Bankruptcy of a savings co-operative (Heves and Vicinity) NDIF’s activity: pay out Recovery: through liquidation (recovery rate: 0 p.c.)−1996 Open bank assistance to Iparbank’s (a small bank) silent self-liquidation NDIF’s activity: stand by credit in order to satisfy all creditors Recovery: by selling the assets of the bank (recovery rate: 90 p.c.)−1998-99 Open bank assistance to (recapitalization of) the insolvent Realbank (with a significant share in retail market) NDIF’s activity: rescue operation failed due to hidden losses, so pay-out after closure Recovery: through liquidation (recovery rate: about 60 p.c. incl. the lost capital)−2000 Bankruptcy of a credit co-operative (Rákóczi) NDIF’s activity: pay out via money transfer or OBA debit card Recovery: through liquidation (expected recovery rate: 60 p.c.)

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