BANK INTERVENTION and RESOLUTION: Part 2

1. BANK INTERVENTION andRESOLUTION: Part 2 United States Department of the TreasuryOffice of Technical AssistanceBanking & Financial Services

2. Bank Intervention and Resolution Advance Preparation Effective preliminary preparation and execution of the action plan can make the Intervention and Resolution much easier. Intervention and Resolution are not separate—much overlap

3. Advance Preparation - Intervention Intervention Action Plan Management and Legal Information Packages Function Areas Advance Preparation

4. Advance Preparation - Intervention Both bank intervention and resolution advance preparation should be conducted concurrently.

5. Legal – Advance Preparation Prepare notices and other legal documents regarding appointment of the Conservator or Receiver File at the appropriate court

6. Conservator or Receiver Failed bank employee retention strategy Appropriate Delegations of Authority and Powers of Attorney have been issued

7. Bank Intervention Manager Main function is managing and coordinating all intervention team members to assure that the intervention goes as smoothly as possible. He can delegate many of the functions to others; however, the BIM bears ultimate responsibility to assure completion of intervention activities as required.

8. Intervention Action Plan A checklist for planned actions and assignments (who, what, when, where, why, how). Ensures that all areas of risk will be controlled without delay

9. Management and Legal Management - meeting with the bank’s General Director and his key staff to be held at the bank immediately before the date and time of Intervention

10. Management and Legal • Legal - drafting corrective measures, transactional documents as applicable (i.e., P&A), any required notices, any required Powers of Attorney for the Conservator or Receiver and providing legal assistance to a Liquidator on broad matters

11. Intervention Preparation The Bank Intervention Manager should begin preparing an Intervention Action Plan. The Intervention Action Plan is a checklist for planned actions and assignments (who, what, when, where, why, how). It is designed to ensure that all areas of risk are addressed.

12. Intervention Team Bank closings are best carried out using a team approach. Team members may be drawn from the Supervisory Authority and Deposit Guarantee Fund.

13. Intervention preparation The Bank Intervention Manager must designate Function area managers and begin advance preparation for the intervention. All Function managers should: review the Information Package for items in the functional area; and determine staffing, supplies, equipment and security needs.

14. Function Areas Advance Preparation Accounting Team Asset Team Branch Operations Team Deposit Operations Team Facilities and Security Team Information Technology Team Legal Team: Personnel Team

15. Intervention preparation Accounting: Review P&A for asset and liabilities splits with Assuming Bank. Review bank’s financial reports.

16. Intervention preparation Asset Team Review bank’s financial reports to determine types and amounts of assets Work with Accounting for asset splits with Assuming Bank

17. Intervention preparation Branch Operations Identify the number of branches and the contact person at each branch. For any branches located abroad, contact Legal to secure the services of an experienced banking attorney in each country prior to the intervention.

18. Intervention preparation Deposit Operations Team (under the DGF) Perform a preliminary insurance determination according to governing deposit insurance law. Work with Accounting for deposit liability splits with Assuming Bank

19. Intervention preparation Facilities Ensure necessary supplies, forms and documents are available. Arrange for an official seal, tape or other means to control drawers, and use labels for inventory, etc. Determine if the bank’s existing facilities has the capacity to accommodate the intervention team. Arrange for additional work space if necessary (e.g. hotel conference rooms).

20. Intervention preparation Security Meet with contracted Security Guard firm or police to provide instructions, determine locations and assignments.

21. Intervention preparation Information Technology If possible, the IT Manager should visit the failing institution to help prepare data files, equipment, and information needed for the intervention. Determine capability of stopping accruals, when to expect the download files, report generation capability, delivery logistics, and staffing.

22. Legal The Supervisory Authority’s Legal department will be involved throughout the process, drafting: Corrective measures, P&A transactional documents, Any required legal notices (for registering with court, posting on premises, publishing, etc.), Powers of Attorney for the Administrator or Receiver, and, Providing legal assistance to a Administrator or Receiver on broad matters

23. Intervention preparation Legal Team Review the bank inspection report Prepare the proper legal order (i.e., Administration or Receivership) as required by law

24. Intervention preparation Legal Team Review major contracts and agreements as requested by the Administrator/Receiver or the Bank Intervention manager (including letters of credit, open credit lines, unfunded and partially funded commitments, etc.).

25. Intervention preparation Legal Team • Accompany the Administrator/Receiver, the Bank Intervention Manager, and the representative from the applicable Supervisory Authority when the proper legal notice (i.e., Administration or Receivership) is served on the bank. • Make sure that the notice is published in accordance with the Law

26. Advance Preparation - Resolution Resolution preparation Marketing strategy Legal documents Potential acquirers Marketing presentation Due diligence Bid acceptance Contract signing

27. Resolution preparation Compiling Initial Information about the bank Asset Valuation Completion of a financial information package (Bid Package) Marketing Meeting Logistics

28. Initial Information Number of offices Location of main offices and branch locations Loans Deposits Borrowings – secured or unsecured

29. Initial Information • Subsidiaries • Trust Department or activities • Ownership structure • Enforcement actions pending • Litigation • Other – leases, etc.

30. Asset Valuation Statistical sampling of asset categories Liquidation value is derived from the future cash flows and the expenses likely to be incurred during the collection of the asset

31. Asset Valuation • Adjustments - discount future cash flows; account for liquidation expenses • Loss factors are aggregated and extrapolated to the bank as a whole • Loss factor, or cost of liquidation, which will be used in assessing bids from potential acquirers

32. Bid Package Builds on Initial Information: Demographic information, Balance sheet schedules: Cash and equivalents Investment securities s Loans Fixed assets

33. Bid Package Builds on Initial Information: Other real estate Subsidiaries Other assets Deposit base Borrowings Guaranties

34. Bid Package Builds on Initial Information: Other liabilities Contingent liabilities Capital accounts Detailed description of the Data Processing (in-house or outsourced, applications, etc.) Employees Contracts Litigation

35. Marketing Meeting Logistics Date, time, and place for the Marketing Presentation

36. Least Cost Analysis The calculation to determine the problem bank resolution method that is the least costly A typical formula to calculate least cost is: (Loss on assets – equity capital- unsecured creditors’ loss) x (insured deposits/total deposits)

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

38. P&A Some benefits of a P&A include: Customers suffer no loss in service Acquiring bank can increase market share Usually less expensive than a payoff Depending on transaction, can keep assets in private sector

39. P&A Assets of the failed bank help offset the deposit liabilities transferred to the assuming bank Reduces impact on deposit insurance fund (if there are not enough “good” assets to balance the amount of insured deposits, the DGF must advance the cash to balance the transaction--assets must equal liabilities)

40. Types of P&A Whole Bank - where the authorities pay an acquirer to take all assets and liabilities of a failed bank (negative bid). Clean Bank – some good assets are sold to an acquirer who also assumes insured deposit liabilities. “Bridge” Bank – where a temporary financial institution, owned and operated by the government, is established to receive the deposits and good assets of one or several failed institutions.

41. Bank Resolution An effective failing bank resolution plan can help avoid disruption of orderly economic activity such as: Loss of a bank in an isolated area Severe reduction in credit availability for an industry or region Considerable government ownership of a failed bank’s assets

42. Branch Break-ups Branch Break-up (i.e., offering branch offices individually, or in clusters, to multiple bidders): Pros: Provides for more potential bidders (especially smaller banks), which may increase the premiums received. Increases the resolutions options available to the bidders.

43. Branch Break-ups Branch Break-up (i.e., offering branch offices individually, or in clusters, to multiple bidders): Cons: Information technology and conversion costs are usually higher. A quick and smooth transaction is more difficult. One acquirer must be the “lead” acquirer (an often onerous role), in processing and allocating transactions and costs. Some branches may be undesirable, resulting in liquidated payoff.

44. Legal documents Confidentiality Agreement Purchase and Assumption Agreement Interim Asset Servicing Agreement Escrow Agreement Bid Agreement Form

45. Potential acquirers Opportunity for an acquiring bank to either increase market share or to expand. Paying a premium for deposits and options on banking premises is more cost-effective. (In the U.S., estimates are that the acquirers in these types of transactions retain approximately 70% of deposits.)

46. Potential Acquirers • Additionally, the efficiency of the P&A transaction: • limits financial disruption to a community, • maintains public confidence and stability in the banking system.

47. Potential acquirers Maintain a database of approved banks and investors that are interested in establishing bank operations in the country.

48. Potential acquirers • When evaluating investor groups for approval, the Supervisory Authority must consider, among other factors: • The length of time required for licensing a new bank • Whether the investor group can raise sufficient capital • Whether the investor group can provide competent management

49. Potential acquirers The Supervisory Authority must be confident that those parties on the list are strong enough to acquire a failed bank and sustain profitable operations. The Supervisory Authority should keep track of any seriously interested bank or investor group

50. Potential acquirers Contact all strong, healthy banks in the country to solicit their interest in acquiring the failing bank. Additionally, solicit the interest of foreign banks attempting to obtain licenses in the country