Financial Safety Net Conference May 2015 Stockholm, Sweden. Gail L. Verley Secretary General International Association of Deposit Insurers
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1 Financial Safety Net Conference May 2015 Stockholm, Sweden Gail L. Verley Secretary General International Association of Deposit Insurers
2 International Association of Deposit Insurers (IADI) Mission, History and IADI s Global Presence Deposit Insurance System Functions and System Mandates Resolution of Non-systemic Banks Definition, Statistics of Bank Failures, Methods and Issues Purchase and Assumption Concept, Strength and Weakness, Types of Transaction The Role of Deposit Insurers Core Principles for Effective Deposit Insurance Systems and Key Attributes for Resolution
3 1. International Association of Deposit Insurers (IADI) Introduction to IADI Deposit Insurance Systems (DIS) Worldwide IADI Representation in DIS Worldwide
4 Mission History Key Advancements Guidance & Research Training & Capacity Building To contribute to the enhancement of deposit insurance effectiveness by promoting guidance and international cooperation Established in 2002 with 25 Founding Members Membership in Members, 7 Associates and 13 Partners Secretariat located at the BIS in Basel, Switzerland Core Principles for Effective Deposit Insurance Systems (CP) issued in 2009 and revised in 2014, included in the Compendium of Key International Standards of Financial Stability CP has been incorporated into the Financial Sector Assessment Program (FSAP) of IMF & World Bank and FSB s Country Peer Reviews Biennial Research Conference in Basel, 3-4 June 2015 IADI Annual Survey and ad Ad hoc surveys 102 respondents in 2014 To issue papers and manage database related to deposit insurance Global/Regional conferences, seminars and workshops Website and On-line tutorials to provide members with various information
5 Financial Crisis of 2007~2008
6 Founding (Number of Respondents) Jurisdictions with Explicit DIS* IADI Members Jurisdictions with Members Membership Growth Rate - 4% 31% 3% 20% 10% 4% 8% 4% 15% 2% 3% 11% 10% Jurisdiction Coverage** 29% 29% 37% 37% 44% 47% 48% 50% 52% 58% 58% 58% 63% 67% * The number of jurisdictions may include multiple DIS. ** The percentage of the total number of jurisdictions with IADI Members compared to the total number of jurisdictions with explicit DISs IADI Membership has tripled and the coverage has doubled since its inception A number of countries recognised the importance of an explicit deposit insurance system after Global Financial Crisis of Regional Breakdown of IADI Membership Region Africa Americas Asia Europe Oceania Total Number of Members (Geographical Classification based on United Nations Geoscheme )
7 2. Deposit Insurance System Why Should a DIS Be Explicit? Functions of a Deposit Insurance Agency Mandates of Deposit Insurance Systems
8 Financial Consumer Protection To protect unsophisticated, retail and/or smalldepositors in case of a bank failure. Fair Competition Both smaller and newer, as well as larger, banks would be seen as safe places for depositors to store their funds Advantages of Explicit DIS Confidence and Stability Depositors are far less likely to have runs on banks in the event of a failure Greater Certainty Precise coverage and scope limits enable DIS to avoid potentially enormous cost for blanket guarantees
9 Authorities design safety net given local conditions Role of deposit varies widely across jurisdictions Risk Minimiser A full suite of resolution powers and prudential oversight Loss Minimiser Actively engages in selection/funding of resolution strategies Paybox plus Reimbursement plus a limited role in resolution (e.g. financial support) Paybox Only responsible for the reimbursement of insured deposits
10 Risk Minimiser 12,3 Loss Minimiser 17,5 17,5 Pay-box+ Risk Minimiser 12,7 Loss Minimiser 12,7 36,3 Pay-box+ Pay-box 52,6 Pay-box 38,2 (%) (%) Pay-box Pay-box+ Loss Minimizer (Number of DIAs) Pay-box+ DIAs have increased since 2009 due to the entry of Survey participants and recognition of the critical role of DIA in resolution The number of Loss/Risk Minimisers is on a gradual increase while Pay-box is still dominant (Source: IADI Annual Survey 2009/2014) 7 Risk Minimizer
11 3. Resolution of Non-Systemic Banks Definition of Resolution Liquidation and Deposit Reimbursement Open Bank Assistance (OBA) Bridge Bank Bank Failures since Deposit Insurer s Inception Preferred Method for Resolution Changing Trend in Resolution Method
12 Liquidation and depositor reimbursement Transfer and/or sale of assets and liabilities (Purchase and Assumption) The establishment of a temporary bridge institution The write-down of debt or conversion to equity (Bail-in) The application of procedures under insolvency law to parts of an entity in resolution, in conjunction with the exercise of resolution powers A jurisdiction s resolution regime may involve multiple resolution authorities. The specific resolution powers assigned to a Deposit Insurer vary depending on its mandate.
13 What it is Payment of depositors of the failed institution the amount of their insured deposits (either directly or through an agent) No liabilities are assumed and no assets are purchased by another institution Reasons Court decision on forcible bank liquidation, or a wind-up order has been made with limited time to use alternate resolution Least cost resolution Limited franchise value of failed bank Issues Entails bank closure, potential loss of continuity/critical functions Depositors do not have access to funds for a brief period European Deposit Guarantee Scheme Directive (DGSD) is aiming to reduce the payout time of EU Members from 20 to 7 working days by 2024
14 What it is An insured bank in danger of failing receives assistance in the form of a direct loan, contribution, an assisted merger, or a purchase of assets Reasons To minimize the cost of a failing bank to the deposit insurance fund To maintain public confidence and banking services to a community To avoid a serious threat to the stability of the financial system and national economies Issues Shareholders and other creditors of the failing institution benefited from the assistance provided by the government May not be seen favourably by public, who do not agree with this use of taxpayer funds. In 2008, OBA was used with Citigroup and Bank of America in the United States (US) The Dodd-Frank Law enacted in July 2010 eliminated this option for use within the United States thereafter
15 What it is Temporary bank established and operated by DIA or Financial Regulator to acquire the assets and assume the liabilities of a failed bank until a final resolution can be accomplished Reasons Bank with an attractive franchise is in danger of failing The bank is too large to fund for reimbursement Not enough time to market the bank s assets to potential acquirers To maintain daily operations Issues Government involvement in longer restructuring of bank requires dedicated resources. If a bridge bank fails to wind down its operations within the limited time, DIA is forced to liquidate it as a receiver. FDIC (US) is authorized to operate a bridge bank for a period of up to three years, until a buyer can be found for its operations EU Bank Recovery and Resolution Directive (BRRD) also allows authorities to put banks into an orderly resolution in which their critical functions would be preserved by a sale to a third party or the creation of a bridge bank
16 (Total number of failures in each region, to the year end of 2013) North America Caribbean 9 Latin America Europe Africa 297 Eurasia 4 Middle-East & North Africa Asia- Pacific Worldwide, the total number of bank failures since DIAs inception is 10,715 while North America makes the largest portion of failures (72.1%) Philippines (618), Korea (541), India (350) and Nigeria (257) experienced a large number of bank failures next to FDIC (4,071) and NCUA (3,582) in the United States (Source: IADI Annual Survey 2014)
17 North America (Number of times used in each region, Including multiple answers for dual methods) Europe Eurasia FDIC (1,886) NCUA (1,827) Caribbean Latin America Asia-Pacific Middle East & North Africa Africa Purchase and Assumption (P&A) Open Bank Assistance (OBA) Bridge Bank Depositor Reimbursement Liquidation Purchase and Assumption has been the most frequently used method by FDIC (1,886 times, 46.3%) and NCUA (1,827 times, 51.0%) since their inceptions Excluding these two DIAs, Depositor Reimbursement (2,003 times, 50.6%) is the most preferred method for bank resolution by DIAs worldwide (Source: IADI Annual Survey 2014)
18 (Number of DIAs, Multiple answers) Liquidation (87) and Deposit Reimbursement (82) are most common tools available for bank resolution to DIAs worldwide P&A and Bridge Bank methods are recognised as a key tool and promoted by FSB s Key Attributes of Effective Resolution Regimes for Financial Institutions (Source: IADI Annual Survey 2013/2014)
19 4. Purchase and Assumption What Is Purchase and Assumption (P&A)? The Strengths of P&A The Weaknesses of P&A Types of P&A Transactions Basic, Whole Bank and Optional Shared Loss Statistics of FDIC s Failed Banks Resolution
20 A resolution transaction in which a healthy institution (Acquiring Institution or AI ) purchases some or all of the assets of a failing institution and assumes some of the liabilities, including all insured deposits. Can vary based on factors such as, amount of time available to arrange the transaction location and size of the financial institution the nature of its deposits the assets available for sale. Structure of P&As has evolved to incorporate procedures and incentives to entice potential Acquirers to assume more assets of the failed institution. Designed to provide flexibility, since each potential Acquirer has different interests and market conditions change over time.
21 Acquirer retains the bank locations of the failed bank to enable customers to continue bank services at same location. P&A often covers all depositors, the timing of cash obligations can be stretched out and it may preserve some jobs of the failed bank. Often the least expensive and disruptive resolution approach. May not require any additional funds from Resolution Authority. P&A can minimise market disruptions as transference of assets can be executed in a very short period. Allows customers access to their deposits and they do not suffer any shortcomings in service.
22 Potential difficulty finding an Acquirer when economic circumstances or the banking system is weak. Possible loss of significance of Deposit Insurance limit when all depositors are covered. Private investors are typically not interested in acquiring an insolvent bank; therefore, in order to attract an Acquirer, funding may be required from Resolution Authority to cover losses associated with assets of the failed bank. DI faces arduous task of facilitating the early valuation of assets and liabilities of the failing institution as it endeavours to maintain secrecy. Not all P&A transactions involve acquiring all deposit liabilities, so not all (100%) of depositors are always fully protected.
23 1 2 3 Basic P&A Whole Bank P&A P&A with Optional Shared Loss Some assets are purchased outright while others may be subject to an exclusive purchase option by Acquirer depending on the type of P&A The Whole Bank P&A with optional asset pools is the most common method in those jurisdictions that use P&A for the resolution of failed banks The loss sharing transactions are considered specialised P&A
24 The premises of failed institutions (including furniture, fixtures, and equipment) are often offered to Acquirers on an optional basis. Liabilities assumed by Acquirers will include the portion of the deposit liabilities covered by deposit insurance and may also include all deposits. Customers with insured deposits suffer no loss in service and interest on their accounts. Acquirers have an opportunity for new customers. DIA can use this method when there is not enough time to complete due diligence. Benefit Drawback Uninsured depositors may or may not suffer losses. DIA left with mostly bad assets to liquidate since Acquirers would cherrypick assets with values above book values. Receivership must liquidate the majority of the failed institution s assets.
25 Bidders are asked to bid for all assets of the failed institution on an as is discounted basis (with no guarantees). The highest whole bank bid is less costly than a Depositor Reimbursement. Franchise value of the failed bank is clearly evident by Acquirer. Customers can continue banking business with the new bank. The initial cash outlay by DIA is minimised. The amount of assets held by deposit insurer or liquidator for liquidation is greatly reduced. Benefit Drawback Bidders tend to bid very conservatively to cover all potential losses. Acquirers are reluctant to purchase commercial credits without credit enhancements even if assets are purchased at a discount.
26 Shared loss assets are distressed portfolio of the failing institution that otherwise might not appeal to potential Acquirers without some sort of incentive or protection from losses. Shared loss assets are typically single-family residential loans, commercial loans, commercial real estate loans and owned real estate. DIA reimburses Acquirer a substantial percentage (i.e. 80%) of defined losses and expenses. Reduced risk for the Acquirer Can lower the DIA s cost Reduces the DIA s immediate funding needs Assets remain in the private sector It is operationally simpler Moves assets quickly into the private sector Benefit Drawback Additional administrative duties are required for both the Acquirer and DIA. Time consuming as agreements generally last 8 to 10 years. DIA does not control the assets, yet retains a large portion of the potential losses.
27 Transaction Type Year Number of Failed banks (A) Total Deposits (B) Total Assets (C) Estimated Loss (D) Average Deposits (B/A) Average Assets (C/A) Average Loss (D/A) Resolution Cost Ratio (D/C, %) P&A 05~ , ,681 57,679 1,015 1, ,691 2, Subtotal: P&A , ,594 58, , P&A Insured Deposits (ID) only (Number of failed banks, USD Million) 05~ ,687 40,357 15,043 2,130 3,104 1, Subtotal: P&A ID only 13 27,687 40,357 15,043 2,130 3,104 1, Pay-out 05~ ,888 15,901 4, (Deposit Reimbursement) Subtotal: Pay-out 26 13,888 15,901 4, Subtotal: Failure , ,852 77, , Assistance 05~ ,371,125 3,223,524 n/a 105, ,963 n/a n/a n/a 0 0 n/a n/a Subtotal: Assistance 13 1,371,125 3,223,524 n/a 105, ,963 n/a n/a Total (Average) 523 1,875,160 3,915,377 77,595 3,585 7, (Source: FDIC Historical Statistics on Banking ) FDIC used P&A 484 times (94.9%) and Deposit Reimbursement 26 times (2.5%) during the recent 10 years while only P&A has been used 18 times in 2014 Open Bank Assistance (OBA) was used 13 times for significant bank failures with a large amount of assets (avg. assets of failed banks: USD 247,963 mm) P&A of the Insured Deposits only method (37.3%) shows higher resolution cost compared to P&A (9.1%) or Deposit Reimbursement (27.9%) For Reference: Mr. Kenneth Blincow (Kblincow@fdic.gov) Assistant Director, Division of Resolutions & Receiverships Federal Deposit Insurance Corporation (USA)
28 5. The Role of Deposit Insurer Core Principles for Effective Deposit Insurance Systems DIA's Role for Resolution Decision DIA s Involvement Handling a Systemic Crisis IADI s Assistance Program
29 Definition on Resolution Resolution refers to the disposition plan and process for a non-viable bank. Resolution may include the liquidation and reimbursement of insured deposits, the transfer and/or sale of assets and liabilities, the establishment of temporary bridge institutions, and the write-down and/or conversion of debt to equity of the non-viable institution. Resolution may also include the application of procedures under insolvency law to parts of a firm in resolution, in conjunction with the exercise of resolution powers. Principle 14 FAILURE RESOLUTION An effective failure resolution regime should enable the deposit insurer to provide for protection of depositors and contribute to financial stability. The legal framework should include a special resolution regime. Essential Criteria 1. The deposit insurer has the operational independence and sufficient resources to exercise its resolution powers consistent with its mandate. 2. The resolution regime ensures that all banks are resolvable through a broad range of powers and options. 3. Where there are multiple safety-net participants responsible for resolution, the legal framework provides for a clear allocation of objectives, mandates, and powers of those participants, with no material gaps, overlaps or inconsistencies. Clear arrangements for coordination are in place.
30 Europe Eurasia 20 3 (Number of DIAs in each region) North America Asia-Pacific Middle East & North Africa Caribbean Latin America 2 Africa Sole Decision 1 1 Contribute to a Decision No Input or Responsibility No input but to Participate in Resolution Funding Other 6 DIAs make a sole decision and 30 DIAs contribute to the decision for the resolution of failing member banks/institutions 36 DIAs have no input or responsibility in the decision-making process and the other 14 DIAs only participate in resolution funding (Source: IADI Annual Survey 2014)
31 Eurasia Europe (Number of DIAs in each region) North America Caribbean Latin America Asia-Pacific Middle East & North Africa Africa 3 2 Yes No Other 50 DIAs worldwide are involved in the process of handling a systemic crisis DIAs in North and Latin America play more active role dealing with a systemic crisis than DIAs in other regions (Source: IADI Annual Survey 2014)
32 First issued in Jun 2009, updated in Oct Collaborated with BCBS, IMF, World Bank, EFDI and European Commission. Core Principles for Effective Deposit Insurance Systems Research & Guidance Papers Enhanced Guidance Papers and 30 Research/Discussion Papers are available at IADI website ( IADI Research Conference, Basel, Jun 2015 FSI-IADI Joint Seminar, Basel, Sep 2015 Annual Conference, Kuala Lumpur, Oct 2015 Conference, Training and Seminars Capacity Building Program For deposit insurers, financial authorities and government officials seeking to develop, strengthen or make a transition to deposit insurance schemes
33 Gail L. Verley Secretary General International Association of Deposit Insurers c/o Bank for International Settlements Centralbahnplatz 2, CH 4002 Basel, Switzerland Disclaimer of Warranties/Accuracy and Use of IADI Annual Survey Data Although the survey data found using IADI Survey tool (ifost) have been produced and processed from IADI members, associates and sources believed to be reliable, no warranty expressed or implied is made regarding accuracy, adequacy, completeness, legality, reliability or usefulness of any information. IADI provides this information on an "AS IS" basis. All warranties of any kind, express or implied are disclaimed. Changes may be non-periodically added to the information. These changes may or may not be incorporated in any new version of the publication. Data can also subject to change as IADI carries out validation of the survey result. It is recommended that the user pay careful attention to the contents of this presentation material and any metadata associated with IADI Annual Survey.
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