1 Bank for International Settlements (Financial Stability Institute) - Committee of Banking Supervisors of West and Central Africa Khartoum, Sudan, 10 April 2002 RESOLUTION STRATEGIES FOR WEAK AND FAILED BANKS Errol Kruger Deputy Head - Bank Supervision South African Reserve Bank

2 Agenda Preconditions for resolution Resolution strategies –Restructuring plans –Mergers & acquisitions –Purchase and assumption transactions –Bridge banks –Open bank assistance Summary

3 Preconditions for resolution Accounting standards Auditing standards Legislation >Supervisor must have powers to act and be independent Judicial system >Must be expedient Corporate governance >Lack of, is leading cause of bank failures

4 Resolution strategies Restructuring plans Mergers and acquisitions transactions Purchase and assumption transactions and/or closure of bank Bridge banks Open bank assistance Private sector Public sector

5 Restructuring plans Forms part of corrective actions Bank specific and takes on form of permutation of various dimensions resulting from application of definition of a weak bank - eg –Inadequate capital or liquidity –Poor asset quality –Poor management –Weak systems and controls (Private sector)

6 Mergers and acquisition transactions Normally after completion of due diligence process (“DDP”) DDP Complete Share acquisition Scheme of arrangement Asset acquisition only Offer that is not acceptable (Private sector)

7 Share acquisition Offer demonstrates positive NAV If accepted, offer results in Bank being acquired as going concern from existing shareholders Simple acquisition of all or controlling interest in the shares via statutory legislative prescriptions Potential pitfalls: –Shareholders reluctant unless convinced that they are being offered fair value - any “discount” regarded with suspicion –Complicated legal capital structures

8 Scheme of arrangement Compromise sought with depositors and shareholders - major part of bank and shares transferred to acquirer Extremely flexible mechanisms - can take on any one of a number of forms e.g.: –Creditors claims negotiated collectively - no need to conclude separate agreements with each creditor of bank –Bank binds all creditors to agreement through court sanctioned procedures –Offeror makes proposal and central bank provides liquidity and solvency support Dependant on legislative framework of country

9 Asset acquisition only Offers received for parcels of assets only Proceeds applied to reduce depositors’ claims Residue of assets and deposits will be left for which a solution has to be found (which would possibly spill over into liquidation or public sector resolution depending on systemic nature)

10 Offer that is not acceptable Protracted negotiations required to achieve acceptable outcome to all parties In this case use of temporary bridge bank or open bank assistance to be considered Pursue assistance in obtaining regulatory and fiscal condonations and/or assurances eg. protection of assessed tax loss In event of no agreement of any type with private sector partners only possible solutions are: –Long term nationalisation, or –Liquidation

11 Purchase and assumption transactions and/or closure of bank Deposit base of distressed bank is attractive to bidders Selected very high quality assets of interest to bidders P&A deal thus ensures the safety of depositors, but leaves behind majority of assets Has been used in the USA, but no South African experience (Private sector)

12 Bridge banks Allows bank to continue its operations until a permanent solution can be found Closure of weak bank - formation of new bank (bridge bank) controlled by the liquidator Liquidator has the discretion in determining which assets and liabilities are transferred to the bridge bank “Bridge” the gap between the failure of the bank and: –the time necessary for the liquidator to evaluate and market the bank to allow the satisfactory acquisition by third party –the time necessary for potential purchasers to assess the banks condition and at the same time permits uninterrupted service to the banks customers No South African experience (Public sector)

13 Open bank assistance Ongoing public support to existing (restructured) bank involving: –Liquidity assistance –Solvency assistance Solvency and liquidity support can be limited to precise amounts (not “open ended”) Restructuring involves: –Short-term: Replacing board and management, rationalisation of operations –Long-term: New controlling shareholder (Public sector)

14 Summary

15 Identify weak bank? Preconditions Monitor and evaluate Assess solvency Is insolvency imminent? Is private sector solution possible? Is bank of systemic importance? Exit bank system Effective? Consider corrective action Private sector solution M&A or P&A With central bank liquidity support Public sector solution Open bank assistance Temporary bridge bank Long-term nationalisation yes no yes no yes no yes no FAILURE MANAGEMENT MODEL no CORRECTIVE ACTIONS FOR WEAK BANKS RESOLUTION STRATEGIES FOR WEAK BANKS AND FAILED BANKS

16 Most countries at some stage experience a banking crisis Timely macro prediction suitably arms the supervisor to deal with the crisis Do you know where your country is?

17 The wheel of banking fortune Plot your country !! Regulators take action Banks are prudent Economy and stock markets take off Loan growth skyrockets New competitors and banking M&A Excess liquidity, investment, optimism Overheating economy worries the regulators A banking crisis begins

18 THANK YOU!!!!