Cross-Border Bank Insolvency: A Few Lessons Learned Mark Carawan

1. Cross-Border Bank Insolvency:A Few Lessons LearnedMark Carawan Sixth Annual International Seminar on Policy Challenges for the Financial Sector Cross-Border Supervisory Cooperation – Issues and Challenges Washington, D.C., 7 – 9 2006 8 June 2006

2. Political environment Governance practices Business practices and related party transactions Legislation and practice: property, foreclosure, bankruptcy Regulatory agency role, independence, empowerment, resources Independence of the judiciary Pressures to achieve a least cost solution Market discipline Transparent, autonomous, empowered entities: embracing (generally) twelve guidelines. Bank Insolvency in Perspective: Unique Landscapes by Jurisdiction

3. Briefly review the generic structured approach to managing the bank insolvency process for a given jurisdiction. Consider at each stage the potential cross-border challenges and pitfalls leading up to and during the bank insolvency process. OBJECTIVES OF TODAY’S PRESENTATION

4. Strategy and Policy Setting Design and Development Assessment Implementation Restructuring, Recovery, Liquidation Generic Methodology

5. Strategy and Policy Setting Implementation Design and Development Assessment Restructuring / Recovery/Liquidation Financial Institution Rehabilitation Financial Institution Resolution / Restructuring Condition Satisfactory Asset Management Strategy Self-Rehabilitation Normal Supervision Asset Disposition Master Plan Confirmation Restructuring Scenarios Restructuring Support Valuation Assessment Closure and Liquidation Legal, Regulatory and Policy Institutional Preparation Liquidity Support Interagency Co-ordination Management Support International Co-ordination Public Relations

6. Resolution strategy approach aims to: identify potential liquidity, solvency and management issues early anticipate and resolve policy issues provide flexibility to the responsible government authorities define and communicate viable, credible plan, avoiding crisis management segment “potentially troubled” and “troubled” authorized institutions according to areas of risk rehabilitate and restructure vs. resolution and liquidation Strategy Master Plan Confirmation Institutional Preparation Strategy and Policy Setting

7. Building consensus across the jurisdiction’s relevant authorities Flexibility for policy makers Reduce overall costs by avoiding reactive measures Consider international interfaces Establish political credibility (domestically and internationally) Strategy Master Plan Confirmation Institutional Preparation Master Plan Confirmation

8. Methodology and Tools framework Instructions and Formats for management Financial Model Economic and Financial Assumptions approach Training Framework for Instructions: reporting accountants and advisors Asset Quality Liquidity Capital Adequacy RP Validation by RA Framework for resolution and insolvency managers Project Team Identification Strategy Master Plan Confirmation Institutional Preparation Institutional Preparation

9. Financial Institution Rehabilitation FI Resolution/Restructuring Asset Management Asset Disposition Valuation Legal, Regulatory and Policy Interagency Co-ordination Public Relations Financial Institution Rehabilitation FI Resolution/ Restructuring Asset Management Asset Disposition Valuation Legal, Regulatory and Policy Interagency Co-ordination International Co-ordination Public Relations Institutional Strengthening: Design and Development

10. Institutional Strengthening: Design and Development Least Cost Analysis Factors (Illustration) Incentives for Confidence Fiscal bank in banking Speed Cost performance system Bailout Assisted Mergers Recapitalization and sale Restructuring plan Liquidation and depositor payoff More bullet points represent anticipated better outcomes

11. Valuation Board (VB) Prepare detailed Terms of Reference, appointment documents and reporting procedures Identify and secure VB members Perform pre-selection procurement for VB subcontracted experts Confirm Asset Disposition Function(s) and Asset Management Company(ies) valuation related processes and procedures. Financial Institution Rehabilitation FI Resolution/ Restructuring Asset Management Asset Disposition Valuation Legal, Regulatory and Policy Interagency Co-ordination International Co-ordination Public Relations Institutional Strengthening: Design and Development

12. Legal, Regulatory and Policy Moratoria or Stays of Action against legal proceedings Outsourcing, partnership and franchise issues Transfer of business issues Insurance Asset Management Company establishment Protection of depositors vs other creditors and shareholders Financial Institution Rehabilitation FI Resolution/ Restructuring Asset Management Asset Disposition Valuation Legal, Regulatory and Policy Interagency Co-ordination International Co-ordination Public Relations Institutional Strengthening: Design and Development

13. Interagency Coordination Confirm appropriateness of existing Memoranda of Understanding (MOUs) Determine requirement to redraft existing MOUs and create new MOUs Responsibility, Accountability, Consultation, Information Decision rights Financial Institution Rehabilitation FI Resolution/ Restructuring Asset Management Asset Disposition Valuation Legal, Regulatory and Policy Interagency Co-ordination International Co-ordination Public Relations Institutional Strengthening: Design and Development

14. International Coordination Create and appoint a Private Sector Liaison Team Create and appoint a Regulatory Liaison Team Design and develop operating policies and procedures Establish (as appropriate) communication channels Financial Institution Rehabilitation FI Resolution/ Restructuring Asset Management Asset Disposition Valuation Legal, Regulatory and Policy Interagency Co-ordination International Co-ordination Public Relations Institutional Strengthening: Design and Development

15. Public Relations PR involvement should commence immediately, with all other design and development areas Scenarios and PR input should be anticipated and prepared from the start, e.g.: “Run” on AI and provision of liquidity support Pre-emptive overseas regulator actions Appointment of Manager to run AI Process descriptions: RP, Modeling, Valuation of Assets, etc. Entity/Function descriptions: asset management company, asset disposition function, etc. Test contingency plan for PR Financial Institution Rehabilitation FI Resolution/ Restructuring Asset Management Asset Disposition Valuation Legal, Regulatory and Policy Interagency Co-ordination International Co-ordination Public Relations Institutional Strengthening: Design and Development

16. Public Relations Program - Overview Newspapers *including surveys Opinion Articles & Editorial F Press R e Conference(s) e Identify Trigger Points Formulate message & Identify Audience Identify Spokesperson Prepare Spokesperson Identify Vehicle e s d Investor e b Conference(s) a a r c Educational c k Roundtables h * Seminars Booklets Website Other DATABASE CRISIS MANAGEMENT CONTINGENCY PLAN

17. Assessment of Authorized Institutions Segmentation of Authorized Institutions (AIs) Rehabilitation Planning (RP) Process (by AIs) RP Reviews and Analysis Reporting Accountant (RA) Verification and Validation RP Robustness: Individual, Peer Group and Sectoral Stress Tests Summary Reporting and Decision Process Notification and Intervention Actions Cross border comparability and validation challenges Assessment Assessment

18. Co-ordination Communication Consistency Concurrence Condition Satisfactory Self-Rehabilitation Restructuring Support Liquidity Support Management Support Implementation

19. General insolvency law vs. special legislation for banks Auction vs. structured sales Standard court system vs. specialist court system Value creating vs. value destroying Value preservation vs. value deterioration Normal Supervision Restructuring Scenarios Closure and Liquidation Restructuring: Rehabilitation and Resolution

20. Restructuring Scenarios (illustrative components) Collections and recoveries on assets Settlement of creditors Core asset sales to market or AMC Non-core asset sales to market Closure or discontinuance of distribution outlets Operational cost reduction (including selected outsourcing) Divestiture of portions of business Merger Identification and securing of new financing (capital and/or debt) Normal Supervision Restructuring Scenarios Closure Restructuring: Rehabilitation and Resolution

21. Questions?

22. Thank you!