Case Study on Payouts Hungary Presented by: Dr. András Fekete-Győr National Deposit Insurance Fund of Hungary Monday, December 8, 2003

Agenda Overview of the legal frame Work-flow of the Fund’s action Preconditions to an efficient reimbursement – Legal issues – Practical issues – Technical issues Operation of the payout software Supplementary information Case Study on Payouts - Hungary

1993 The Act on NDIF (Act No. XXIV of 1993)  Primary function: deposit payoff for depositors’ claim  Secondary function: prevention of deposit payoff 1997 The Act on Credit Institutions and Financial Undertakings (Act No. CXII of 1996) Amendments to DIS: - Primary function: prevention of deposit payoff (98 §) Condition: assisting the exceptional measures of Hungarian Financial Supervisory Authority (HFSA), ( §) - Variety of instruments (extension of credit or capital, issue of guarantee etc.) Condition: with recourse on market conditions (104 § (1)) commitments cannot exceed deposit payoff - Least cost principle (104 § (2)) - Public Service Corporation on Liquidation of Credit Institutions (177 § (3),(4) Supervisory Committee: 9 members (NBH, HFSA, MOF, NDIF) Overview of the regulatory framework Case Study on Payouts - Hungary

Work-flow of the Fund’s action Case Study on Payouts - Hungary

Preconditions to an efficient reimbursement Legal issues Obligation to reimburse: unavailability of deposits during 5 working days and/or withdrawal of the banks licence (closure) by the Supervision Coverage limit per depositor per bank: HUF 3.2 million (€12,400) co-insurance: 10% reimbursement limit: HUF 3 million (€11,500) Eligibility: natural and legal persons excluded depositors trust accounts, joint deposits Case Study on Payouts - Hungary

Preconditions to an efficient reimbursement Legal issues (cont’d) Insured products registered deposits (Deposit Register, 1999) bank obligations (bonds), CDs since January 1, 2003 Secrecy, confidentiality unrestricted access to the deposit records in case of reimbursement Timeframe Start of reimbursement within 15 days after the closure End of reimbursement within 90 days (might be extended twice by 90 days respectively) Interest payment: no longer than 15 days after deposits became frozen Others set-off against expired debts deposits used as collateral advance payment Case Study on Payouts - Hungary

Preconditions to an efficient reimbursement Practical issues Quality of records  Insufficient quality might cause complaints and delays  Regular examination of the member’s deposit record keeping  Improvements enforced Reimbursement procedure  Access to the records right after closure (manipulation)  Internal regulation of reimbursement procedure (adjusted to each case) Case Study on Payouts - Hungary

Preconditions to an efficient reimbursement Practical issues (cont’d) Claim declaration Inaccurate data in the bank’s records Selection of preferred method of payment Methods of payment Transfer to a requested bank account Cash withdrawal by Deposit Insurance Card (Hungarian innovation) Cash delivered (postal transfer) Agent bank Case Study on Payouts - Hungary

Preconditions to an efficient reimbursement Practical issues (cont’d) Communication Mandatory press releases after closure before start of payout Telecommunication channels internet: crisis communication site (hyperlinked to NDIF’s home page) automatic voic information hot line Direct mail on the availability of the money settlement enclosed reminders Complaints, inquiries, litigation direct mail, , help desk litigation (none in conjunction with deposit payout) Case Study on Payouts - Hungary

Preconditions to an efficient reimbursement Technical issues Outsourced partners employed in communication IT (principally operated by own staff) Accuracy of reimbursement is backed up by IT solutions two more data of the depositor other than the name precisely defined procedures and pre-audited software highly automated verification, reconciliation process and calculations automated preparation of settlements, letters, etc. and money transfer IT solution to manage inquires and complaints Case Study on Payouts - Hungary

Preconditions to an efficient reimbursement Operation of payout software

Preconditions to an efficient reimbursement Operation of payout software (cont’d)

Preconditions to an efficient reimbursement Operation of payout software (cont’d)

Preconditions to an efficient reimbursement Operation of payout software (cont’d)

Preconditions to an efficient reimbursement Operation of payout software (cont’d)

Preconditions to an efficient reimbursement Operation of payout software (cont’d)

Preconditions to an efficient reimbursement Operation of payout software (cont’d)

Preconditions to an efficient reimbursement Operation of payout software (cont’d)

Preconditions to an efficient reimbursement Operation of payout software (cont’d)

Preconditions to an efficient reimbursement Operation of payout software (cont’d)

Supplementary information Deposit Insurance Card (DIC)  Agreement with the largest bank network and the postal system (ATM’s and POS outlets)  Depositors wanting reimbursement through DIC get a ‘blank’ (debit) card with PIN at filing the claim, sign DIC contract  The DIC will be activated when the claim is successfully verified and reconciled with the records  Depositors are notified via mail on the availability of the money  The DIC is usable within 90 days (withdrawal in installments is possible) Case Study on Payouts - Hungary

Supplementary information Bank-crises handled by NDIF −1993Bankruptcy of a savings co-operative (Heves and Vicinity) NDIF’s activity: pay out Recovery: through liquidation (recovery rate: 0 p.c.) −1996Open bank assistance to Iparbank’s (a small bank) silent self-liquidation NDIF’s activity: stand by credit in order to satisfy all creditors Recovery: by selling the assets of the bank (recovery rate: 90 p.c.) − Open bank assistance to (recapitalization of) the insolvent Realbank (with a significant share in retail market) NDIF’s activity: rescue operation failed due to hidden losses, so pay-out after closure Recovery: through liquidation (recovery rate: about 60 p.c. incl. the lost capital) −2000 Bankruptcy of a credit co-operative (Rákóczi) NDIF’s activity: pay out via money transfer or OBA debit card Recovery: through liquidation (expected recovery rate: 60 p.c.) Case Study on Payouts - Hungary