Issues on Resolution of Banks: Lessons from Crisis

1. Issues on Resolution of Banks: Lessons from Crisis Role of Deposit Insurance in Financial Institution Resolution • Jean Pierre Sabourin, • 14-16 November 2011, • Jodhpur, India

2. Agenda • Introduction • Three Key Questions of Financial Institution Resolution • Effective Financial Institution Resolution Framework • What is an Effective Resolution Framework? • 5 Essential Elements of an Effective Resolution Framework • MDIC’s Approach to Intervention and Failure Resolution

3. A. Introduction

4. Financial Institution Intervention and Failure Resolution:Three Key Questions

5. B. Effective Financial Institution Resolution Framework

6. What Is an Effective Resolution System?

7. Five Essential Elements of Effective Financial Institution Resolution

8. C. MDIC’s Approach to Resolving Non-Viable Financial Institutions

9. MDIC’s Intervention and Failure Resolution Powers: 3 Broad Categories • (1) Loss Mitigation Powers – purpose to reduce/avert risk to financial system or a threatened loss to MDIC • Acquire assets from a member • Make loans or advances with or without security from a member • Acquire shares or capital instruments of a member • Make a deposit with a member • Guarantee all or part of a member’s deposit liabilities • (2) Special Examination Powers • Powers that allow for detailed assessment and investigation to be undertaken early when the member institution shows signs of distress. These powers are fundamental in facilitating MDIC’s readiness to determine and implement IFR action. • (3) Failure Resolution Powers • Wide toolkit to resolve troubled non-viable financial institutions in a manner to minimise costs to financial system

10. Loss Mitigation Powers: Intervention Powers and Actions MDIC may acquire shares of a member institution. MDIC may :(a) provide loans or advances with or without security, or guarantee with or without security any loan or advance provided to a member institution. (b) make a deposit with a deposit taking member. (c) impose a premium surcharge on the member institution. Existing Shareholders MDIC may acquire assets from a member institution. Failed Bank comprises of: MDIC may guarantee or assume all or part of the liability of a deposit taking member in respect of a deposit. Assets Liabilities MDIC may make a loan, whether with or without security, to a corporation other that a member institution Employees Business Undertakings • For the purpose of or in connection with the implementation of any resolution actions; or • For purpose of reducing or averting a risk to the financial system or a threatened loss to the Corporation.

11. Special Examination Powers: Detailed Assessments and Investigations

12. Failure Resolution Powers: Prompt Execution of Financial Institution Resolution Actions • MDIC may acquire shares of a member institution from its existing shareholders. • MDIC may reduce share capital and cancel shares of member institutions under assumption of control (subject to conditions and with Court approval). MDIC may subscribe to shares issued by the member institution (i.e. new money). Existing Shareholders • MDIC may: • (a) Require a member institution: • To take any steps/action as MDIC considers necessary • Cease soliciting , taking or repaying deposits • Restructure the whole or part of its business. • (b) Terminate membership of member institution. • (c) Present a petition to the High Court for the winding up of the member institution. Failed Bank comprises of: Assets • MDIC may: • Assume control of the whole or part of the assets, liabilities, business and affairs of the member institution. • Apply to the High Court to appoint a receiver, manager or receiver and manager to manager the whole or part of the assets, liabilities, business and affairs of the member institution. • Transfer such assets, liabilities, business and affairs of the member institution to a Bridge Institution. Liabilities Employees Business Undertakings

13. MDIC’s Other Resolution Powers

14. Early Warning and Detection Objective • Allows pre-emptive measures to be taken in monitoring public confidence and promoting stability • Enhance the early detection and assessment of member institutions • Complements MDIC’s Early Intervention and Resolution Approach Components • Central Bank’s Prompt Corrective Action Framework • MDIC’s Risk Assessment and Monitoring Function • Effective Information Access from Central Bank • Financial institution’s statistical information • Supervisory Ratings Reports • Supervisory Letters • Regular communication and meetings with supervisors Approach • Two separate agencies with distinct mandates and core competencies • Check and balance between two regulators • Collaborative working relationship focussed on maintaining stability in financial system

15. Premium Surcharge The Viability Spectrum: Transition Phases of a Failing Financial Institution Non-Viability Notice by BNM Early Intervention Trigger Viable MIs Non-Viable MIs - D MDIC ’ ’ s s Above Above Low Low Moderate Moderate Watch Watch Special Special Risk Risk Average Average Risk Risk Risk Risk List List Mention Mention Categories Categories Risk Risk MDIC ’ ’ s s Going Going Early Early Viability Viability Resolution Resolution Intervention Concern Concern Warning Warning Risk Risk Stages MDIC ’ s MDIC Intervention and Failure Resolution Risk Assessment & Monitoring Activities / Intervention Interventions: and Failure · · Due Diligence Financial Assistance Resolution · · Preparatory Examination Asset Carve-Out/AMC/AMD Failure Resolutions: · Bridge Institution · Restructuring · Closure & Liquidation · Agency Arrangement · Purchase & Assumption Mechanisms: · · Assumption of Control Receivership BNM ’ s Low Early Risk to Viability Viability / Solvency in Non - Viability / Supervisory Priority Warning / Solvency Serious Doubt Insolvency Stages (Stage 0) (Stage 1) (Stage 2) (Stage 3) Imminent (Stage 4) Supervisory Oversight and Actions by BNM Legend Triggers for Early Intervention D Intervention and Failure Resolution Actions by MDIC

16. Early Intervention: When to Act and Triggers IFR Action Occurrence of an emergency event such as runs on Member, fraud, gross mismanagement and severe financial losses or exposure experienced by the Member; The Member’s capital is close to breaching the minimum regulatory level and the Member has not taken any effective measures or the measures taken have failed to strengthen the capital level within an appropriate time frame; Rising trend in deposit withdrawal within a specific time frame; Loss of confidence by the regulators in the management of the Member; Breach of regulatory requirements that may lead to an adverse effect on the Member’s business and financial soundness; Concern over the Member’s ability to meet some of its maturing obligations and the Member’s access to funding is limited; or Failure or potential failure of the Member’s parent company, important associate and affiliate companies or significant shareholder. The Member is not following sound business and financial practices and further regulatory directives would not reasonably improve the Member’s prospects to restore or preserve its business and financial soundness; Shareholders are unlikely to restore the Member’s capital to its regulatory level within an appropriate time frame and failure to do so would jeopardise the interest of depositors; The Member is dependent, to an excessive extent, on loans, advances, guarantees or other financial assistance to sustain its operations; or The Member has lost the confidence of depositors and the public. Early Intervention Triggers Non-Viability Triggers

17. Conclusion DI should be the responsible resolution agency – financial accountability and core competencies Adequate legislation, formal procedures, enhanced supervision, seamless functioning of safety net players, and operational readiness are 5 key essential elements of effective financial institution resolutions Separation of duties and responsibilities, clarity of roles among safety net are critical for effective decision making and execution of resolution activities

18. Thank You