ASSEMBLING AN INFORMATION PACKAGE ON THE FAILING INSTITUTION AND THE QUALIFIED BIDDERS’ LIST BY R. A. OLADIMEJI NIGERIA

1. ASSEMBLING AN INFORMATION PACKAGE ON THE FAILING INSTITUTION AND THE QUALIFIED BIDDERS’ LISTBYR. A. OLADIMEJINIGERIA DEPOSIT INSURANCE CORPORATION Information Package for P & A Resolution

2. 1.0 INTRODUCTION • The major failure resolution options open to the regulatory authorities in Nigeria for the resolution of failing or failed financial institutions are: • Open Bank Assistance; • Deposit Payout; and • Purchase and Assumption arrangement • Bridge Bank Information Package for P & A Resolution

3. IN • Purchase and Assumption (P&A) The P&A agreement is a closed bank transaction in which a healthy institution (generally referred to as either the acquirer or the “assuming” bank) purchases some or all of the assets of a failed bank and assumes some or all of the liabilities, including all insured deposits. The acquirer usually pays for the shortfall between the assets purchased and the liabilities assumed where the value of the assets exceed that of the liabilities or vice versa. NDIC adopted the P&A option for the eleven out of the thirteen banks whose licences were revoked in 2006 for their failure to meet consolidation requirements while deposit payout is favoured for the 103 microfinance banks currently being resolved by the Corporation. Information Package for P & A Resolution

4. INTRODUCTION CONTD. • This paper centres on how to put together an information package on the failing or failed financial institution in order to allow a potential acquirer access to the information of the failing or failed financial institution. • The paper would also look at the modalities for putting in place a list of qualified bidders. Information Package for P & A Resolution

5. 2.0 INFORMATION PACKAGE • Information Package is the assemblage of all relevant information prepared by the Corporation for onward transfer to interested acquirers of a failing/failed financial institution. • Such package is expected to provide the Potential Acquirer necessary and adequate information needed to take decision on the acquisition or otherwise of a failing/failed institution under a P&A arrangement. Information Package for P & A Resolution

6. 2.1 QUALIFIED BIDDERS LIST • The Qualified Bidders list shows the names of potential acquires which may include the approved licenced and healthy financial institutions operating in the country. The list may also include names of foreign owned financial institutions that have shown interest in the acquisition of the failing institution. • After the expression of interest by both the local and foreign owned financial institutions, the regulatory authorities normally conduct their own due diligence on the interested acquirers before the Qualified Bidders list is produced. This would allow only the financial institutions that have the wherewithal in terms of financial strength, management ability to participate in the exercise. The list is however reviewed periodically based on the condition of the financial institutions. Information Package for P & A Resolution

7. 3.0 FAILING VS FAILED INSTITUTION • FAILING FINANCIAL INSTITUTION An institution is said to be failing when its showing some signs of delinquencies in its assets (or capital) such that its assets may not be able to cover its liabilities. Even though its operating licence had not been withdrawn, the regulatory authorities would have put such institution on some special surveillance by placing Holding Actions or granting some form of assistance to enable the institution to continue in business to prevent systemic runs. Some signs of failure include inability to meet depositor’s demand, capital inadequacy, illiquidity and insolvency. • FAILED FINANCIAL INSTITUTION An institution has failed when it becomes impossible for it to perform its obligations and the regulatory authorities e.g. the Central Bank of Nigeria consequently withdrawn its operating licence. Immediately the licence is withdrawn the NDIC is automatically appointed by the CBN to take over the affairs of the failed institution for the purpose of implementing the approved resolution option which may be either a Payout or a P&A arrangement. Information Package for P & A Resolution

8. HOW TO OBTAIN NEEDED INFORMATION Information on failing or failed institution is often obtained by the regulatory authorities from the daily, weekly, monthly or quarterly returns regularly rendered by the financial institution to the regulatory authorities through e-FASS. (e-FASS is the acronym for electronic financial analysis surveillance system- a method whereby the financial institutions rendered there returns online to the CBN&NDIC on monthly quarterly basis). Other sources of information include: • Report from of-site surveillance through (Insurance & Surveillance Dept.) • On-site examination report (Bank Examination Departments of both the CBN & NDIC.) • Report on Special or Target examination of the regulatory authorities • Information shared from other safety-net participants • Report from Credit Rating Agencies Information Package for P & A Resolution

9. DETAILS OF INFORMATION • Information required for this purpose are those that would give the potential acquirer adequate information to enable it conduct a due diligence on the failing institution. Some of the information in the package may include the following: • Purpose of the information package • Profile of the failing/failed institution • Financial information. This include • Fixed assets • Current assets • Deposit Liabilities • Unexpired leases etc. • Legal documents including outstanding litigations. Information Package for P & A Resolution

10. DETAILS OF INFORMATION CNTD • Resolution method offered • Due diligence process • Bidding Procedure or Guidelines • Term of Purchase/Sale • Assets to be retained by the Corporation • Application process for branches • Bid submission and bid evaluation • NDIC Board Approval • Disclaimer. Information Package for P & A Resolution

11. QUALITY OF INFORMATION • The quality of information provided would, among others, depend on: • The source of the information • Its completeness • Integrity • Accuracy • Timeliness. Information Package for P & A Resolution

12. DISCLAIMER CLAUSE. • Disclaimer is an important part of the Information Package. • The Corporation relies on information obtained from the failing/failed institution in the normal course of business. • Details provided in the Package were obtained from either the failing/failed institution or a third party. • Corporation may not have sufficient time to verify some of the information. • Corporation may not be responsible for wrong or incomplete information received from failing/failed institution. • It is imperative for the potential acquirers to conduct due diligence. Information Package for P & A Resolution

13. REGULATORY/LEGAL RESTRICTION ON INFORMATION SHARING IN • NIGERIA. • Information obtained from the Financial Institutions are confidential. • The Corporation is not expected to disclose such information to outsiders. • The law allows disclosure for overriding public interest or when required by the court. • Information of a failing/failed financial institution may be disclosed to potential acquirers on any of these grounds. • Potential acquirer will be made to execute and abide with Confidentiality Agreement provided by the Corporation. • Since we have been dealing with closed banks the need for Confidential Agreement has not been so much emphasised. Information Package for P & A Resolution

14. ELIGIBILITY CRITERIA • It is the responsibility of the Corporation to select among the interested financial institutions those that meet the eligibility criteria for the P & A transactions. Some of the factors considered in selecting qualified bidders among the many financial Institutions that have shown interest are as follows: • Financial Position • Management Expertise • Geographical Location. Where regional or foreign institutions are involved. • Category of Licence • Supervisory History • Legal Issue Information Package for P & A Resolution

15. QUALIFIED BIDDERS’ MEETING The Corporation invite all the qualified bidders to a meeting to discuss the following issues: • Modalities for the P&A transactions • Application procedure • Bidding guidelines etc • The information package may be distributed at the meeting. • Names of contact persons and addresses of the failing institution business offices. • The name and phone numbers of the NDIC contacts. • Guidance, assistance and support available to qualified bidders. Information Package for P & A Resolution

16. APPROVAL AND GOVERNMENT AUTHORISATION • The following approval would be required for any institution to be • included in the qualified bidders list: • The approval and authorisation of the Federal Government of Nigeria would be necessary where cross border interests are involved. • Special approval of the CBN may be required where a financial institution that has a regional licence applied to acquire another institution in another region. • Approval of the CBN is also necessary before a financial institution can successfully consummate a P&A transaction. • The CBN on behalf of the Federal Government of Nigeria played prominent roles in the P&A conducted by the Corporation for the 11 banks. Information Package for P & A Resolution

17. APPROVAL AND GOVERNMENT AUTHORISATION CONTD. Some of the roles played by the CBN in the P&A were as follows: • Information sharing on the failing/failed financial institution • Joint participating in the bid analysis with the NDIC • Joint approval given by both the management of the CBN and NDIC to the highest bidders • Issuing of Promissory Notes to the assuming bank as and when due • Joint verification of payment by the assuming banks to the depositors of the failed financial institution Information Package for P & A Resolution

18. LESSONS LEARNT FROM 2006 EXPERIENCE • Wrong classification of deposit liabilities e.g. Bankers Acceptances and Commercial Papers classified as Off Balance Sheet items • Some interbank placements could be fictitious • Assets which the Corporation may wish to retain may be bided for by potential acquirers. • Some of the information obtained from the failing/failed financial institution may not be reliable. • Values of some of the assets would have been over stated. • Dissipation of the assets of the failing/failed financial institution by unscrupulous staff members and directors of the failed institution. • General apathy by some healthy Financial Institutions due to lack of understanding of the P&A transactions. • Avoidance of risk assets due to several factors: uncolectibility, absence of collateral, weak judicial system that impede enforcement of collateral even with perfection, etc Information Package for P & A Resolution

19. PITFALLS TO BE AVOIDED • The regulatory authorities may not have sufficient time to verify some of the information obtained from the failing/failed institution, therefore they need to be careful of the following pitfalls: • Assuming responsibility on the information obtained from failed institution. • Need to be transparent in all the transactions and processes involved • State clearly the source of the information • State clearly the assumptions made where necessary. • State clearly the date of the last Special/Target Examination or the date of the information provided. • State clearly the need for the acquiring financial institution to conduct its due diligence. • Terms and conditions of sale should be clearly spelt out. Information Package for P & A Resolution

20. THANK YOU FOR LISTENING Information Package for P & A Resolution