COMMON RESOLUTION OPTIONS AND RECENT NIGERIA BANK RESOLUTION EXPERIENCE Adeleke A. A. Director Asset Management Department, NDIC. Common Resolution Options & Recent Nigeria Bank Resolution Experience. 109/05/2011

OUTLINE  Introduction  Applicable Failure Resolution Options:  Rehabilitation;  Deposits Pay-out;  Insured Deposits Transfer;  Purchase and Assumption (P&A); and  Bridge Bank  Experience So Far  Challenges Common Resolution Options & Recent Nigeria Bank Resolution Experience. 209/05/2011

BANK A N’ Million % To Total Assets BANK A N’ Million % To Total Assets BANK A N’ Million % To Total Assets TOTAL ASSETS1,957,258504,163372,612 DEPOSIT LIABLITIES 1,385, , ,74765 PAID UP CAPITAL 16,316<114,481<39,375<3 SHAREHOLDERS’ FUNDS 340,735<2129, ,559<21 09/05/2011Common Resolution Options & Recent Nigeria Bank Resolution Experience. 3

INTRODUCTION Effective resolution is a series of systematic action designed to end a bank’s distressed condition. Focus of a good resolution option:  Maintains public confidence and stability in the banking system.  Ensures fairness, equity, transparency and accountability.  Instills market discipline while discouraging moral hazards.  Achieves minimum disruption to payment system. Common Resolution Options & Recent Nigeria Bank Resolution Experience. 409/05/2011

INTRODUCTION  Speedy payment to insured depositors and quick realization of assets for the benefits of uninsured depositors and creditors.  Minimize the likelihood of having to bail-out uninsured depositors and creditors. A typology of problem banks  Illiquid but solvent  Insolvent but liquid  Illiquid and insolvent. Common Resolution Options & Recent Nigeria Bank Resolution Experience. 509/05/2011

RESOLUTION OPTIONS  Rehabilitation  Financial Assistance (Accommodation Facility).  Imposition of Holding Actions.  Change in Management.  Take-Over of Control & Management.  Acquisition & Sale of Banks. Common Resolution Options & Recent Nigeria Bank Resolution Experience. 609/05/2011

RESOLUTION OPTIONS  Deposits Pay-Out  Bank is closed and put in liquidation.  Insured depositors paid up to the insured limit.  As assets are realized, uninsured depositors are paid on pro-rata basis. (i)Merits  Increase market discipline since depositors could also suffer losses. (small depositors protected, rest sustain losses unless there are proceeds of assets to share)  Shareholders lose all their investment unless there is still fund after other creditors have been fully paid from the realized assets. Common Resolution Options & Recent Nigeria Bank Resolution Experience. 709/05/2011

RESOLUTION OPTIONS (ii)Demerits  Delay in paying depositors undermines public confidence.  Liquidation of assets could extend to many years, often more than 10 years. Uninsured depositors, other creditors and shareholders could therefore wait for many years before being paid, if they will ever be paid.  Borrowers lose access to loans with potential macroeconomic consequences.  Pay-out might maximize fiscal outlay at the time of closing. Common Resolution Options & Recent Nigeria Bank Resolution Experience. 809/05/2011

RESOLUTION OPTIONS  Insured Deposits Transfer  Insured deposits of a failed bank transferred to another bank(s).  Acquiring bank(s) given enough cash and/or risk-less assets to cover insured deposits transferred.  A variant of pay-out option as only insured deposits would be fully covered.  Deposit insurance agency would take over assets for realization.  Acquiring bank(s) might also purchase some or all the assets of the failed bank. Common Resolution Options & Recent Nigeria Bank Resolution Experience. 909/05/2011

RESOLUTION OPTIONS (i)Merits  Least cost option as premium was received to pay insured depositors.  All merits of Pay-Out also applies.  Insured depositors could continue to enjoy banking services without any disruption from the acquiring bank(s). (ii)Demerits  Loss to uninsured depositors and delay in paying them from realised assets, if any, could undermine public confidence. Common Resolution Options & Recent Nigeria Bank Resolution Experience. 1009/05/2011

 Liquidation of assets could be protracted and extend to many years.  Borrowers could lose access to loans with the negative impact on macroeconomic situation. 09/05/2011Common Resolution Options & Recent Nigeria Bank Resolution Experience. 11 RESOLUTION OPTIONS

 Purchase and Assumption (P&A)  Healthy bank purchase assets and assume deposit liabilities of the failed bank, similar to M&A.  A failed bank could be split to make it attractive to banks that wish to enhance market penetration or establish new branches where the failed bank had branches.  Acquirer(s) chosen on the basis of highest premium offered during bidding.  Deposit insurer or government would put cash/securities for the difference. Such could be recovered from bad assets of the failed bank. Common Resolution Options & Recent Nigeria Bank Resolution Experience. 1209/05/2011

RESOLUTION OPTIONS (i)Merits  Depositors are protected.  Continuity in rendering services thereby sustaining public confidence in the banking system.  Other creditors might not be paid thus providing some form of market discipline.  Avoids disruption to depositors, borrowers and payment system.  Shareholders wiped out and inefficient bank closed. Common Resolution Options & Recent Nigeria Bank Resolution Experience. 1309/05/2011

RESOLUTION OPTIONS (ii)Demerits  Large and uninsured depositors protected, thus eroding market discipline.  It could be costly especially if fund from Central Bank/government/deposit insurer to fill gap between total deposits and assets purchased is significant. Common Resolution Options & Recent Nigeria Bank Resolution Experience. 1409/05/2011

RESOLUTION OPTIONS  Bridge Bank  A new bank created to acquire assets and assume liabilities of the failed bank. It is a variation of P&A.  New bank could be privately owned or the government could create it for the purpose.  If government owned, it could be operated for about 2 years after which it would be sold to fresh investors. (i)Merits  Avoid losing the failed bank thus protecting jobs and continuing banking services to the community. Common Resolution Options & Recent Nigeria Bank Resolution Experience. 1509/05/2011

RESOLUTION OPTIONS  All shareholders would lose their investments.  All depositors and creditors would be covered and that would engender public confidence in the banking system. (ii)Demerits  Undermines market discipline as it encourages moral hazard.  It could be costly.  The bridge bank could fail thus postponing the “evil day” and aggravating the cost of resolution. Common Resolution Options & Recent Nigeria Bank Resolution Experience. 1609/05/2011

EXPERIENCE SO FAR  REHABILITATION  Take-Over Of Control 1 Bank in Banks in Banks in Bank in Bank in 1999  Sale of Banks 7 banks sold to new investors. Common Resolution Options & Recent Nigeria Bank Resolution Experience. 1709/05/2011

EXPERIENCE SO FAR - BANK FAILURE AND EXTENT OF FAILURE IN NIGERIA BETWEEN 1994 AND 2006 Year of Closure No of BanksTotal Assets(N’B) Total Deposits (N’B) Ratio of Assets of Close Banks to Total Assets of Banks Ind(%) Ratio of Assets of Close Banks to Total Deposits of Banks Ind(%) Ratio of Assets of Close Banks to GDP(%) Number of Depositors , , , , , , ,211 TOTAL ,165,979 Common Resolution Options & Recent Nigeria Bank Resolution Experience. 1809/05/2011

EXPERIENCE SO FAR  Liquidation Activities  Claim settlement N3.3 billion paid out of N5.2 billion Insured Deposits N6.14 billion paid out of N10.9 billion declared liquidation dividend to uninsured depositors Depositors of 11 out of 34 banks have been paid in full Creditors of 7 banks have received liquidation dividend Common Resolution Options & Recent Nigeria Bank Resolution Experience. 1909/05/2011

EXPERIENCE SO FAR Shareholders of 3 banks have received liquidation dividend in the sums of N620 million, N600 million & N293 million respectively  Risk Assets Management N22 billion recovered from debtors of 43 banks  Sale of Fixed Assets/Chattels N19.34 billion realized from sale of physical assets  Sale of Investment N2.64 billion realized from sale of investment Common Resolution Options & Recent Nigeria Bank Resolution Experience. 2009/05/2011

CHALLENGES Public Awareness Legal  Long-drawn out litigation on winding-up actions and debt recovery matters Operational  Bank management  Poor corporate governance Insider abuse Common Resolution Options & Recent Nigeria Bank Resolution Experience. 2109/05/2011

CHALLENGES  Poor lending culture  Credit appraisal  Documentation  Poor record keeping  Financials  Mandate records  Broken down IT systems  Uncooperative attitude with the bank closing team Common Resolution Options & Recent Nigeria Bank Resolution Experience. 2209/05/2011

CHALLENGES Asset Realization  Risk Assets (Loans)  Poor quality  Large size insider loans  Lack of secondary market  Court sympathy for debtors  Real Properties  Weak title for landed properties  Slump in property market Common Resolution Options & Recent Nigeria Bank Resolution Experience. 2309/05/2011

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