Cross-Border Bank Insolvency: A Few Lessons Learned Mark Carawan Sixth Annual International Seminar on Policy Challenges for the Financial Sector Cross-Border

Cross-Border Bank Insolvency:A Few Lessons Learned

Mark 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

Cross-Border Bank InsolvencyBank Insolvency in Perspective: Unique Landscapes by Jurisdiction• 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.

Cross-Border Bank Insolvency

OBJECTIVES OF TODAY’S PRESENTATION

• 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.


Generic Methodology

• Strategy and Policy Setting

• Design and Development

• Assessment

• Implementation

• Restructuring, Recovery, Liquidation


Strategy and Policy Setting Restructuring / Recovery/Liquidation

ImplementationDesign and Development Assessment

Public Relations

Legal, Regulatory and Policy

Interagency Co-ordination

International Co-ordination

Asset Disposition

Asset Management

Institutional Preparation

Strategy

Master Plan Confirmation Valuation

Self-Rehabilitation

Restructuring Support

Liquidity Support

Condition Satisfactory

Closure and Liquidation

Restructuring Scenarios

Normal Supervision

Assessment

Financial Institution

Rehabilitation


Resolution / Restructuring

Management Support


Strategy and Policy Setting

• 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 Confirmatio

n


Master Plan Confirmation

• 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


n



• 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


n


Financial Institution Rehabilitation

FI Resolution/Restructuring

Asset Management

Asset Disposition

Valuation



Public Relations

Institutional Strengthening: Design and Development

Public Relations

Legal, Regulatory and

Policy



Asset Disposition

Asset Management

Valuation


Rehabilitation




Least Cost Analysis Factors (Illustration)

Bailout

Assisted Mergers

Recapitalization and sale

Restructuring plan

Liquidation and depositorpayoff

More bullet points represent anticipated better outcomes

SpeedFiscalCost

Incentives forbank

performance

Confidencein banking

system


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.


Public Relations


Policy



Asset Disposition

Asset Management

Valuation


Rehabilitation




• 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


Public Relations


Policy



Asset Disposition

Asset Management

Valuation


Rehabilitation



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


Public Relations


Policy



Asset Disposition

Asset Management

Valuation


Rehabilitation



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


Public Relations


Policy



Asset Disposition

Asset Management

Valuation


Rehabilitation



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


Public Relations


Policy



Asset Disposition

Asset Management

Valuation


Rehabilitation



Public Relations Program - Overview

Press Conference(s)

InvestorConference(s)

EducationalRoundtables

Seminars

Booklets

Website

Opinion Articles& Editorial

Newspapers

DATABASE

Other

Feedback

Research*

*including surveys

CRISIS MANAGEMENT CONTINGENCY PLAN

Identify Trigger Points

Identify

Vehicle

Formulate

message &

Identify Audienc

e

IdentifySpokespers

on

Prepare Spokespers

on


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


Implementation

Co-ordination

Communication

Consistency

Concurrence

Self-Rehabilitation

Restructuring Support

Liquidity Support

Condition Satisfactory

Management Support

Cross-Border Bank InsolvencyRestructuring: Rehabilitation and Resolution

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

Closure and Liquidation


Normal Supervision


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)

Restructuring: Rehabilitation and Resolution

Closure


Normal Supervision


Questions?


Thank you!

Documents

Cross-Border Bank Insolvency: A Few Lessons Learned Mark Carawan Sixth Annual International Seminar on Policy Challenges for the Financial Sector Cross-Border