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BANK RESOLUTIONS: Core

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BANK RESOLUTIONS: Core Principles and Methodology By Dr. J. Ade Afolabi Director (Research, Policy & International) Nigeria Deposit Insurance Corporation (NDIC) – PowerPoint PPT presentation

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Title: BANK RESOLUTIONS: Core


1
  • BANK RESOLUTIONS Core
  • Principles and Methodology
  • By
  • Dr. J. Ade Afolabi
  • Director (Research, Policy International)
  • Nigeria Deposit Insurance Corporation (NDIC)
  • At IADI ARC Workshop held on May 9 13, 2011
  • in Abuja, Nigeria

2
Presentation Outline
  1. Introduction
  2. Use and objectives of Methodology
  3. 2010 Field Tests
  4. Core Principle 16
  5. Resolution Options
  6. Effective Resolution Conditions
  7. Concluding Remarks

3
1. Introduction
  • Core Principles approved and released in 2009 by
    IADI and the BCBS with input from EFDI.
  • Incorporated into Financial Stability Board (FSB)
    Compendium of Standards
  • Consultative process initiated to develop an
    Assessment Methodology
  • Basel Committee on Bank Supervision
  • European Forum of Deposit Insurers
  • IMF, World Bank, European Commission
  • Methodology required by FSB for Principles to be
    listed as Key standards

4
2. Use of Methodology
  • The methodology could be used in multiple
    contexts
  • Self-assessment performed by the deposit insurer
  • IMF/World Bank assessments in the context of the
    Financial Sector Assessment Program (FSAP)
  • Reviews conducted by third parties
  • Peer reviews (e.g. IADI regional committees,
    FSB).
  • Assessments conducted by qualified persons
  • Experienced practitioners
  • IADI to be active in providing training
  • Assessments require cooperation of all relevant
    authorities

5
Objectives of Methodology
  • Identification of the nature and extent of any
    weaknesses in the DIS and compliance
  • Benchmarks DIS against the Core Principles to
    judge how well the system is meeting its
    objectives
  • Aid the deposit insurer and policy makers in
    making improvements to the DIS and financial
    safety net
  • Therefore, ensure the Methodology
  • Is measurable
  • Applicable to a wide range of DIS
  • Identifies/detects key strengths/weaknesses

6
Assessment Methodology Compliance Framework
Core Principles for Effective Deposit Insurance Systems Proposed Compliance Table
Evaluation Core Principles
Compliant When all essential criteria are met without any deficiencies. Largely Compliant When only minor shortcomings are observed and the authoritys ability to achieve full compliance within a prescribed time frame. Materially Non-Compliant Severe shortcomings which cannot be rectified easily. Non-Compliant No substantive implementation of the principle. Not Applicable Not relevant to the circumstance of the insurer.
7
3. 2010 Field Tests
  • Czech Republic Sept 13-17, 2010
  • David Walker (CDIC/IADI), Clair McGuire (WB), Jan
    Nolte (BdB/EFDI)
  • India Sept 29- Oct 4, 2010
  • David Hoelscher (FDIC), David Parker (IMF),
    Guillermo Lopez (IPAB/ IADI)
  • Mexico Oct 14- 21, 2010
  • Luis Cortavarria (IMF), Kumudini Hajra
    (DICGC/IADI), David Walker (CDIC/IADI), David
    Hoelscher (FDIC)

8
Field Test Process
  1. Establish key contacts and meeting requests in
    advance
    - e.g. DIS,
    other safety net participants, commercial bankers
    etc
  2. Acquire key documentation in advance
    -e.g. DIS legislation, bank accounts,
    insolvency regime, ews and intervention regime
    etc
  3. Data requests
    -e.g. Banking
    industry structure, deposit and liability data
    etc

9
Methodology Training
  • IADI has commenced training of DIS personnel on
    the application of the methodology
  • The World Bank has indicated to organize regional
    training workshop on the Methodology for
    Assessing Compliance with the Core Principles
    under the auspices of the Financial Sector Reform
    and Strengthening (FIRST) Initiative in Nigeria
  • Efforts are being made to finalize arrangements
    on the training which is being proposed for
    either August or September, 2011

10
4. Core Principle 16
  • Principle 16 Effective failure-resolution
    processes should facilitate the ability of the
    deposit insurer to meet its obligations
    including reimbursement of depositors promptly
    and accurately and on an equitable basis
    minimize resolution costs and disruption of
    markets maximize recoveries on assets and,
    reinforce discipline through legal actions in
    cases of negligence or other wrongdoings.
  • In addition, the deposit insurer or other
    relevant financial system safety-net participant
    should have the authority to establish a flexible
    mechanism to help preserve critical banking
    functions by facilitating the acquisition by an
    appropriate body of the assets and the assumption
    of the liabilities of a failed bank (e.g.
    providing depositors with continuous access to
    their funds and maintaining clearing and
    settlement activities).

11
Core Principle 16
  • Effective failure-resolution processes should do
    the following
  • facilitate the ability of the deposit insurer to
    meet its obligations including reimbursement of
    depositors promptly and accurately and on an
    equitable basis
  • Minimise resolution costs and market disruptions.
  • Maximise recoveries on assets.
  • Reinforce discipline through legal actions in
    cases of wrongdoings.
  • Provide continuous access to banking services
    through asset sale and liability assumption.

12
5 Resolution Options
  • Four basic options
  • Open bank assistance
  • Liquidation and payout
  • Purchase and assumption
  • Bridge Bank

13
Resolution Option Purchase and Assumption (P A)
  • It is a resolution method where a healthy bank
    assume some or all of the obligations and
    purchase some or all of the assets, of the failed
    bank. The method has the following benefits,
    among others
  • Can preserve the functions of the failed bank and
    maintain the relationship of the depositor with
    the bank. Thus, it preserves confidence in the
    system
  • Covers all depositors, and it may preserve some
    jobs of the failed bank
  • Can minimize market disruptions since transfer of
    assets can be executed in a very short period
  • Allows customers access to their deposits and
    they do not suffer any break in banking service
    and for developing ctries
  • Can sustain the promotion of banking culture
    which is critical for savings and eco devpt.

14
Resolution Options
  • Authority to establish a bridge bank or other
    similar mechanism
  • Could be deposit insurer
  • Could be other relevant authority
  • Bridge bank maintains critical banking functions
  • Depositors have continuous access to funds
  • Clearing and settlement activities continue

15
6. Condition Precedent for Effective Failure
Resolution Process
  • For resolutions to work effectively, there is
    need for the following
  • A strong institutional framework
  • An operationally independent deposit insurer
  • Resolution powers aligned with mandate
  • A legal system capable of dealing with
    systemically important banks
  • Access to adequate funding
  • Ability to conduct onsite reviews and have
    depositor records before failure

16
7. Concluding Remarks
  • In line with its mission of contributing to the
    enhancement of the DI effectiveness globally,
    IADI and BCBS with input from EFDI developed a
    set of Core Principles for effective DIS
  • The Core Principles were incorporated into the
    FSB compendium of Standards
  • The methodology for applying the Core Principles
    was subsequently developed to enable FSB list
    them as Key Standards
  • Training is being conducted across the globe on
    the methodology

17
Concluding Remarks
  • Core Principle 16 is on failure resolution
  • Four basic options are available
  • Open bank assistance
  • Liquidation and payout
  • Purchase and assumption
  • Bridge Bank

18
Concluding Remarks
  • For an effective failure resolution there is need
    for
  • a strong institutional framework,
  • an operationally independent deposit insurer with
    the powers to carry out its mandate,
  • a legal system capable of dealing with
    systemically important banks
  • Have access to adequate funding
  • Be able to conduct onsite reviews and have
    depositor records before failure

19
Thank you for your attention
  • Questions/Comments
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