Javier Bolzico • Alberto Figueroa • Ricardo Tappatá • Yira...
Transcript of Javier Bolzico • Alberto Figueroa • Ricardo Tappatá • Yira...
Bank Resolution Workshop 0Washington DC, Nov 30 – Dec 2, 2004
• Javier Bolzico• Alberto Figueroa• Ricardo Tappatá• Yira Mascaró
BANK RESOLUTION WORKSHOP
Javier BolzicoYira Mascaró
Washington DC, November 2004
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Different stages of the life of a bankIntroduction
Private Solution (market-driven)
Licensing Normal Operations Someweaknesses
•Prompt Corrective Actions
•Regularization Plan
Standard Supervision(Camels 1-3)
IntensiveSupervision(Camels 4)
Status
Measures
Point of noPoint of noreturn return
•Resolution
ResolutionProcess
UnviableBank
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What is Bank Resolution?
The procedures and measures taken by the authorities to solve the situation of an unviable bankThe procedures and measures taken by the authorities to solve the situation of an unviable bank
The resolution of a bank implies a certain degree of deposit payment and typically leads to the withdrawal of the bank´s license
The resolution of a bank implies a certain degree of deposit payment and typically leads to the withdrawal of the bank´s license
A possible definition
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And… It affects And… It affects depositors´ resourcesdepositors´ resources
Why is Bank Resolution of great importance?
It could lead to negative systemic effects if a bank closure is mismanagedIt sets incentives for the remaining part of the systemIt has an impact on the total cost of resolution, depending on the modus operandi in which the bank is closedIt is at this point that bank supervision is really tested
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Most common resolution schemes (Basel Definitions)
Closure of the bank and payment of deposits11
Open bank assistance22
Government intervention (take-over)33
Merger with other banks (induced by authorities)44
“Bridge Bank”55
Purchase-and-assumptions transactions (P&A)66
F & H (“Forbearance and Hope”)
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Closure of the bank and payment of deposits
• The problem is solved
• Small moral hazard – market discipline
Advantages
11
• Very costly
• Loss of banking services and jobs
• Deterioration of assets due to the judicial liquidation process
• Possible systemic impact
Disadvantages
The failed bank is closed and deposits (total or partial) are paid. The bank is later liquidated
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Open bank assistance
• Preserves Bank operations
• Avoids -- temporarily -- the cost of bank closure
Advantages
• Very costly - Fiscal & monetary impact
• Does not attack the root of the problem
• May increase the final cost of resolution
• Moral hazard
Disadvantages
The government keeps the troubled bank open by providing solvency and/or liquidity support
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Government Intervention33
• Preserves bank operations
• Avoids - temporarily- the cost of bank closure
Advantages
• Very costly - Fiscal & monetary impact
• Does not attack the root of the problem
• May increase the final cost of resolution
• Moral hazard
Disadvantages
The Central Bank (or any other public Institution) takes over the management and shareholders of the failing bank and runs the business
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Merger with other banks (induced by authorities)44
• Preserves bank operations
Advantages
• May cause problems to acquiring bank
• May discourage private investment
• Moral hazard
Disadvantages
The failed bank is absorbed by another (solvent) bank. The authorities may use “persuasion”
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“Bridge Bank”55
• Preserves bank operations & buys time
Advantages
• The bridge could “become a road” • May require capital and liquidity
support from the government• May increase the final cost of
resolution • Interferes with the Market• Moral hazard
Disadvantages
The authorities close the troubled bank and, at the same time, create a new bank (“bridge bank”) with some, or all, of the original assets and liabilities. A designated “liquidator” runs the bank until its shares are sold to the market
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Purchase-and-assumptions (P&A) transactions66
In a P&A, one o more healthy banks (or investors) purchase some, or all of the assets and assume liabilities. The process is conducted by the authorities and implies the withdrawal of the bank´s license. The original shareholders and managers can be removed in the process.
The P&A transaction may be structured in many different ways:
Here we will refer to onespecific form of aP&A transaction
Good Bank - Bad Bank scheme
“Bad bank”“Good bank”
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Purchase-and-assumptions (P&A) transactions (cont.)What makes the “Good bank-Bad bank” scheme different among P&A transactions?
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The legal unity is split into two
Thus, a large portion of the assets avoids being eroded through a judicial
liquidation process
The legal unity is split into two
Thus, a large portion of the assets avoids being eroded through a judicial
liquidation process
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Purchase-and-assumptions (P&A) transactions (cont)If it is well applied it:
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• Minimizes the cost of resolution (preserves the value of assets)
• Has a very small impact on bank operations
• Is market friendly • Minimizes moral hazard
Advantages
• Its implementation requires skills, expertise, political will and guidelines
• Requires the voluntary participation of private banks
• It may not be so attractive from the political point of view
Disadvantages
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“Good Bank” - “Bad Bank” Scheme
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Separates the failed bank intoSeparates the failed bank into
How it works…“Good Bank”- “ Bad Bank” scheme
Transfers the “good bank” to one or more solventTransfers the “good bank” to one or more solventbanks willing to acquire it banks willing to acquire it
Leaves the “bad bank” to its owners and startLeaves the “bad bank” to its owners and startthe liquidation process (typically ends in bankruptcy)the liquidation process (typically ends in bankruptcy)
“Good bank”
“Bad bank”
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“Good Bank”- “ Bad Bank” scheme
What are the elements of each component…
An efficient way to transfer assets is through a Trust
“Bad bank”
• Rest of liabilities and remaining (bad) assets
“Good bank”
• Liabilities: Deposits and Labor claims
• Assets: the good assets + contribution from deposit insurance agency; not greater than liabilities
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Let’s see in more details how it works...
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“Good Bank”- “ Bad Bank” scheme
Failed Bank
Assets (real value-net) Deposits
Other Liabilities
Bad Bank Good Bank
Trust
Assets Deposits
Deposit Insurance Agency
Bank
Acquiring Bank (s)
Judicial liquidation
The “ice cream”theory
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Transfer topurchasing
bank (s)
Trust
TrustCertificate
TrustCertificate
TrustCertificate
TrustCertificate
Bank Resolution framework in Guatemala: EAPBalance sheet of failed bank
Assets(net)
Provisions
Guaranteed deposits
Other deposits
Other liabilities
Good BankLabor claims
Guaranteed deposits
Other deposits
FOPA Contributions
Note: It assumes that net assets + FOPA contributions are enough to transfer all the deposits to the “Good Bank”.
Assets(net)
The certificate amount = sum of transferred liabilities|
Bad Bank (residual bank)
Other liabilitiesResidual assets (after coveringFOPA contribution)
Toliquidation
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Trouble Bank
Is it always possible to apply Good Bank-Bad bank scheme?
Is GB-BB scheme
feasible?YesFailed Bank
Assets (real value-net) Deposit
Other Liabilities
Bad Bank
Judicial liquidation
Good Bank
Trust
Assets Deposit
Deposit Insurance Agency
NoPayment of Deposits´
Guarantee
Liquidation
Failed Bank
Assets (real value-net) Deposits
Other Liabilities
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“Good Bank”- “ Bad Bank” scheme
Some advantages of the Good Bank-Bad Bank scheme
Minimizes contagion risk & is market friendly
Minimizes costs:• No public funds (typically)• No further deterioration of assets• No further operating and financial losses
Preserves banking services and jobs
Eliminates legal contingencies for buyer (all hidden claims remain with the bad bank)
Minimizes moral hazard (shareholders of failed bank face a bankruptcy process)
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• Proper legislation
• Deposit Insurance Agency (solvent)
• Formal procedures (regulations, manuals, criteria, etc)
• Implementation capability (skills, training, organization, logistic)
• Enhanced supervision
• BCF (Bank capitalization fund)
“Good Bank”- “Bad Bank” scheme
Preconditions to apply “Good Bank” - “Bad Bank” scheme
(and… political will)(and… political will)
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Handling Bank Resolution: Learning Curve (Argentina)
Period of unavailability of deposits (working days)
“Good Bank”- “Bad Bank” scheme
“Close the bank on Friday, open it on Monday”
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42
0 4 5 00
1020304050607080
Jun-98 Oct-98 Nov-98 Feb-99 Apr-99 May-00
Cases (90’s)
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102694%28292939TOTAL3100%1010Compañía Financiera Luján Williams SA 26-May-00
100100%456456Banco Mendoza SA16-Abr-9960100%168168Banco Israelita de Córdoba12-Feb-9960100%171171Banco Almafuerte CL27-Nov-98350100%708708Banco Mayo CL30-Oct-98
100%106106Banco Medefin UNB SA25-Jun-98121100%331331Banco Patricios SA04-Jun-981854%2445Banco Platense SA 30-Abr-988774%251340Banco Crédito Provincial SA18-Dic-9760100%184184Banco Argencoop12-Dic-979100%2323Nuevo Banco de Azul SA08-May-97
118100%296296Banco Unión Comercial e Industrial SA30-Abr-9740100%101101Coopesur CL31-Mar-97
SEDESA (millions)
% of PaidDeposits
Paid Deposits(millions)
Total Deposits(millions)BankDate
Applied experience – Argentine case (90´s)Banks resolved in Argentina (97-00)
“Good Bank”- “Bad Bank” scheme
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Needed actions for implementing a successful Bank Resolution:
“Good Bank”- “Bad Bank” scheme
• Collect relevant financial and economic information
• Prepare the provisional balance sheet of the “Good Bank”
• Find a “buyer”
• Plan the Resolution process
• Materialization of the Resolution
• …
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RehabilitationPlan
time
AA BB“Needed actions”
RehabilitationPlan
timeSuspension ofbank operations
End of BankResolution Process
AA BB“Needed actions”
timeSuspension ofbank operations
End of BankResolution Process
AA BB
RehabilitationPlan
“Needed actions”
RehabilitationPlan
timeAA
“Needed actions”“Needed actions”
BB
Period of Deposit unavailability (suspension)
BB
“Good Bank”- “Bad Bank” scheme“Good Bank”- “Bad Bank” scheme
Reducing length of resolution period...
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Adequate legal and regulatory
framework
Operating manuals & procedures
Adequate implementation
capabilities
Cases
WB Support provided through FSALs, FTALs, FSAPs, etc.
Implementation of “Good Bank”- “Bad Bank” Scheme“Good Bank”- “Bad Bank” scheme
Where is the region?
Work in progress
ArgentinaBoliviaPeru
ParaguayGuatemala
Dominican R.El SalvadorHondurasNicaragua
Selected countries
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“Good Bank”- “Bad Bank” scheme
Main participants (stakeholders)
Employees
1) Central Bank, Superintendency, etc
Depositors
BankCapitalization
Fund
Deposit Insurance Agency
SupervisoryAuthority1)
Othercreditors
Trustee
Judicial Power
AcquiringBank
Financial Sector
Failed Bank
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Exercise: Role Play
Role Play: Stakeholders of a Bank Resolution
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Role Play: Stakeholders of a Bank Resolution
Based on my own experience, any (banking crisis) resolution is bound to be faced with strong resistance and delays. First, the budget (i.e. the Ministry of Finance) will not willingly accept that it has to pay for the costs of banking crisis resolution. Second, the management of the banks will try to change the banking problem resolution and not shoulder the costs of their actions. They have clear vested interests in the bank as it is (their high salaries, their influence through credit allocation, the wish to hide previous decisions, etc). Third, depositors (households and companies) will make every effort to minimize their losses and get someone else to bear the costs of the problem. Fourth, the owners of banks will try to put political pressure on the government to bail them out. Fifth, there is the personnel of the bank, because they know that either all or part of them will lose their jobs. Sixth, politicians will try to minimize the problem in the hope that it will not hurt their “image”…
As a governor of a Central Bank once said…
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Role Play: Stakeholders of a Bank ResolutionPriorities for this exercise:
Establish: why are you involved in this situation?
Each group will assume the role of some of the main participants
Which are your main interests?
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Main participants (stakeholders)
Failed BankOwner-Managt.t
Employees
1) (Central Bank, Superintendency, etc
Depositors
BankCapitalization
Fund
Deposit Insurance Agency
SupervisoryAuthority1)
Othercreditors
Trustee
Judicial Power
AcquiringBank
Financial Sector
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Seminar on BANK RESOLUTION