Cross-Border Bank Insolvency: A Few Lessons Learned Mark Carawan Sixth Annual International Seminar on Policy Challenges for the Financial Sector Cross-Border Supervisory Cooperation – Issues and Challenges Washington, D.C., 7 – June 2006

Cross-Border Bank Insolvency Bank Insolvency in Perspective: Unique Landscapes by Jurisdiction Political environment Governance practices Business practices and related party transactions Legislation and practice: property, foreclosure, bankruptcy Regulatory agency role, independence, empowerment, resources Independence of the judiciary Pressures to achieve a least cost solution Market discipline Transparent, autonomous, empowered entities: embracing (generally) twelve guidelines.

Cross-Border Bank Insolvency OBJECTIVES OF TODAY’S PRESENTATION Briefly review the generic structured approach to managing the bank insolvency process for a given jurisdiction. Consider at each stage the potential cross-border challenges and pitfalls leading up to and during the bank insolvency process.

Cross-Border Bank Insolvency Generic Methodology Strategy and Policy Setting Design and Development Assessment Implementation Restructuring, Recovery, Liquidation

Cross-Border Bank Insolvency Strategy and Policy Setting Restructuring / Recovery/Liquidation Implementation Design and DevelopmentAssessment Public Relations Legal, Regulatory and Policy Interagency Co-ordination International Co-ordination Asset Disposition Asset Management Institutional Preparation Strategy Master Plan Confirmation Valuation Self- Rehabilitation Restructuring Support Liquidity Support Condition Satisfactory Closure and Liquidation Restructuring Scenarios Normal Supervision Assessment Financial Institution Rehabilitation Financial Institution Resolution / Restructuring Management Support

Cross-Border Bank Insolvency Strategy and Policy Setting Resolution strategy approach aims to: –identify potential liquidity, solvency and management issues early –anticipate and resolve policy issues –provide flexibility to the responsible government authorities –define and communicate viable, credible plan, avoiding crisis management –segment “potentially troubled” and “troubled” authorized institutions according to areas of risk –rehabilitate and restructure vs. resolution and liquidation Institutional Preparation Strategy Master Plan Confirmation

Cross-Border Bank Insolvency Master Plan Confirmation Building consensus across the jurisdiction’s relevant authorities Flexibility for policy makers Reduce overall costs by avoiding reactive measures Consider international interfaces Establish political credibility (domestically and internationally) Institutional Preparation Strategy Master Plan Confirmation

Cross-Border Bank Insolvency Institutional Preparation Methodology and Tools framework –Instructions and Formats for management –Financial Model –Economic and Financial Assumptions approach –Training Framework for Instructions: reporting accountants and advisors –Asset Quality –Liquidity –Capital Adequacy –RP Validation by RA Framework for resolution and insolvency managers Project Team Identification Institutional Preparation Strategy Master Plan Confirmation

Cross-Border Bank Insolvency Financial Institution Rehabilitation FI Resolution/Restructuring Asset Management Asset Disposition Valuation Legal, Regulatory and Policy Interagency Co-ordination Public Relations Institutional Strengthening: Design and Development Public Relations Legal, Regulatory and Policy Interagency Co-ordination International Co-ordination Asset Disposition Asset Management Valuation Financial Institution Rehabilitation FI Resolution/ Restructuring

Cross-Border Bank Insolvency Institutional Strengthening: Design and Development Least Cost Analysis Factors (Illustration) Bailout Assisted Mergers Recapitalization and sale Restructuring plan Liquidationand depositor payoff More bullet points represent anticipated better outcomes Speed Fiscal Cost Incentives for bank performance Confidence in banking system

Cross-Border Bank Insolvency Valuation Board (VB) Prepare detailed Terms of Reference, appointment documents and reporting procedures Identify and secure VB members Perform pre-selection procurement for VB subcontracted experts Confirm Asset Disposition Function(s) and Asset Management Company(ies) valuation related processes and procedures. Institutional Strengthening: Design and Development Public Relations Legal, Regulatory and Policy Interagency Co-ordination International Co-ordination Asset Disposition Asset Management Valuation Financial Institution Rehabilitation FI Resolution/ Restructuring

Cross-Border Bank Insolvency Legal, Regulatory and Policy Moratoria or Stays of Action against legal proceedings Outsourcing, partnership and franchise issues Transfer of business issues Insurance Asset Management Company establishment Protection of depositors vs other creditors and shareholders Institutional Strengthening: Design and Development Public Relations Legal, Regulatory and Policy Interagency Co-ordination International Co-ordination Asset Disposition Asset Management Valuation Financial Institution Rehabilitation FI Resolution/ Restructuring

Cross-Border Bank Insolvency Interagency Coordination Confirm appropriateness of existing Memoranda of Understanding (MOUs) Determine requirement to redraft existing MOUs and create new MOUs Responsibility, Accountability, Consultation, Information Decision rights Institutional Strengthening: Design and Development Public Relations Legal, Regulatory and Policy Interagency Co-ordination International Co-ordination Asset Disposition Asset Management Valuation Financial Institution Rehabilitation FI Resolution/ Restructuring

Cross-Border Bank Insolvency International Coordination Create and appoint a Private Sector Liaison Team Create and appoint a Regulatory Liaison Team Design and develop operating policies and procedures Establish (as appropriate) communication channels Institutional Strengthening: Design and Development Public Relations Legal, Regulatory and Policy Interagency Co-ordination International Co-ordination Asset Disposition Asset Management Valuation Financial Institution Rehabilitation FI Resolution/ Restructuring

Cross-Border Bank Insolvency Public Relations PR involvement should commence immediately, with all other design and development areas Scenarios and PR input should be anticipated and prepared from the start, e.g.: –“Run” on AI and provision of liquidity support –Pre-emptive overseas regulator actions –Appointment of Manager to run AI –Process descriptions: RP, Modeling, Valuation of Assets, etc. –Entity/Function descriptions: asset management company, asset disposition function, etc. Test contingency plan for PR Institutional Strengthening: Design and Development Public Relations Legal, Regulatory and Policy Interagency Co-ordination International Co-ordination Asset Disposition Asset Management Valuation Financial Institution Rehabilitation FI Resolution/ Restructuring

Cross-Border Bank Insolvency Public Relations Program - Overview Press Conference(s) Investor Conference(s) Educational Roundtables Seminars Booklets Website Opinion Articles & Editorial Newspapers DATABASE Other F e e d b a c k R e s e a r c h*h* *including surveys CRISIS MANAGEMENT CONTINGENCY PLAN Identify Trigger Points Identify Vehicle Formulate message & Identify Audience Identify Spokesperson Prepare Spokesperson

Cross-Border Bank Insolvency Assessment of Authorized Institutions Segmentation of Authorized Institutions (AIs) Rehabilitation Planning (RP) Process (by AIs) RP Reviews and Analysis Reporting Accountant (RA) Verification and Validation RP Robustness: Individual, Peer Group and Sectoral Stress Tests Summary Reporting and Decision Process Notification and Intervention Actions Cross border comparability and validation challenges Assessment

Cross-Border Bank Insolvency Implementation Co-ordination Communication Consistency Concurrence Self- Rehabilitation Restructuring Support Liquidity Support Condition Satisfactory Management Support

Cross-Border Bank Insolvency Restructuring: Rehabilitation and Resolution General insolvency law vs. special legislation for banks Auction vs. structured sales Standard court system vs. specialist court system Value creating vs. value destroying Value preservation vs. value deterioration Closure and Liquidation Restructuring Scenarios Normal Supervision

Cross-Border Bank Insolvency Restructuring Scenarios (illustrative components) Collections and recoveries on assets Settlement of creditors Core asset sales to market or AMC Non-core asset sales to market Closure or discontinuance of distribution outlets Operational cost reduction (including selected outsourcing) Divestiture of portions of business Merger Identification and securing of new financing (capital and/or debt) Restructuring: Rehabilitation and Resolution Closure Restructuring Scenarios Normal Supervision

Cross-Border Bank Insolvency Questions?

Cross-Border Bank Insolvency Thank you!