International Association of Deposit Insurers Discussion Paper on Claims and Recoveries

1. International Association of Deposit Insurers Discussion Paper General Guidance on Claims and Recoveries Discussion Paper General Guidance on Claims and Recoveries Rio de Janeiro, Brazil Rio de Janeiro, Brazil November 17, 2006 November 17, 2006 Fred S. Carns Fred S. Carns Director Director Office of International Affairs Office of International Affairs Federal Deposit Insurance Corporation Federal Deposit Insurance Corporation

2. International Association of Deposit Insurers Introduction Introduction Purpose: Purpose: Discuss suggested guidance on paying claims when banks fail and recovering value from a failed banks assets Discuss suggested guidance on paying claims when banks fail and recovering value from a failed banks assets Importance: Importance: Timely and accurate payout is one of the most important functions of the deposit insurer Timely and accurate payout is one of the most important functions of the deposit insurer Applicability: Applicability: Officials creating or enhancing deposit insurance systems Officials creating or enhancing deposit insurance systems Acknowledgement: Acknowledgement: The Research and Guidance Committee of IADI The Research and Guidance Committee of IADI

3. International Association of Deposit Insurers Introduction Introduction The orderly closing of a failed bank is attained by revoking or transferring the banks charter and satisfying the claims and managing recoveries of depositors and creditors The claims and recoveries guidance paper: Was designed for deposit insurance practitioners and other interested parties Was prepared based on the judgment of IADI members, associates and observers

4. International Association of Deposit Insurers When a Bank Fails The Deposit Insurer May Have Many Roles When a Bank Fails The Deposit Insurer May Have Many Roles Open Bank But Weak Satisfying Claims Bank Closed (Intervention) Managing Receivership to Maximize Recoveries Deposit insurers will honor claims and many may also manage the recovery process Deposit insurers will honor claims and many may also manage the recovery process

5. International Association of Deposit Insurers Overview Overview Guidance is designed to be broad and flexible Country laws and practices may limit applicability Scope of Deposit Insurers mandate will dictate its activities Economy and depth of markets must be considered Political environment may be a factor The effectiveness of the processes must be measured within the constraints of those country-specific conditions While uncommon for the deposit insurer to act as the receiver of the failed institution, in a number of countries this is the practice In some countries the deposit insurer may be called upon to oversee the process

6. International Association of Deposit Insurers Key Factors to Consider When Settling Claims Key Factors to Consider When Settling Claims Conducting a timely and accurate payout of insured depositors is among one of the most important functions of the deposit insurer Prompt and decisive actions establish and maintain the deposit insurers credibility Role of the deposit insurer is to provide depositors access to their insured funds and reimburse creditors as permitted by law Claims process should consider the expectations of insured depositors and creditors Scope and level of coverage should be clearly defined in law Orders of Priority should be clear and enforced Coverage determination should be made swiftly Insured deposit reimbursement should be timely

7. International Association of Deposit Insurers Before Closing the Bank Maintaining Relationships Is Critical Before Closing the Bank Maintaining Relationships Is Critical The deposit insurer needs information about its deposit obligations as quickly as possible once it has been determined that a bank is in trouble or likely to fail. The deposit insurer needs information about its deposit obligations as quickly as possible once it has been determined that a bank is in trouble or likely to fail. Key Items include: Key Items include: Deposit ledgers and customer records Deposit ledgers and customer records Loan and collateral documents Loan and collateral documents Source codes for information and technology systems Source codes for information and technology systems Coordination Coordination Cooperation Cooperation Communication Communication

8. International Association of Deposit Insurers Before Closing the Bank Before Closing the Bank Ideally, deposit insurer should have access to all bank records and systems Ideally, deposit insurer should have access to all bank records and systems Reconcile bank accounts and make deposit insurance determinations Reconcile bank accounts and make deposit insurance determinations Ensure appropriate staffing to handle claims process Ensure appropriate staffing to handle claims process Public awareness: Public awareness: Managing depositor expectations is important Managing depositor expectations is important Transparency and good communication helps in maintaining public confidence Transparency and good communication helps in maintaining public confidence Funding considerations: Funding considerations: Ensure adequacy of deposit insurers funding sources Ensure adequacy of deposit insurers funding sources Plans to restore Deposit Insurance Funds Plans to restore Deposit Insurance Funds

9. International Association of Deposit Insurers After Closing the Bank After Closing the Bank Reinforce public awareness and information campaign Reinforce public awareness and information campaign Explain filing requirements by depositors and creditors Explain filing requirements by depositors and creditors Communicate appeals process if any Communicate appeals process if any Establish and announce time frame for reimbursement Establish and announce time frame for reimbursement Reconcile depositor accounts immediately after bank closing Reconcile depositor accounts immediately after bank closing Identify insured and uninsured depositors Identify insured and uninsured depositors Identify creditors with bona fide claims Identify creditors with bona fide claims

10. International Association of Deposit Insurers Steps in the Claims Process Steps in the Claims Process Establish a Clear Claims Plan Establish a Clear Claims Plan Clear delineation of when to start and end the claims process Clear delineation of when to start and end the claims process Deposit insurer should test and adjust the plan Deposit insurer should test and adjust the plan Following a payout, deposit insurer should conduct post mortem and reevaluate effectiveness of plan Following a payout, deposit insurer should conduct post mortem and reevaluate effectiveness of plan Communication Communication Foster and maintain effective working relationship between the deposit insurer and other relevant safety net players Foster and maintain effective working relationship between the deposit insurer and other relevant safety net players Deposit Insurer needs to begin the claims process immediately upon closure of an insured institution Deposit Insurer needs to begin the claims process immediately upon closure of an insured institution To promote public confidence in deposit insurance system To promote public confidence in deposit insurance system To maintain stability in the financial sector To maintain stability in the financial sector To minimize erosion of asset or franchise value of the failed institution To minimize erosion of asset or franchise value of the failed institution

11. International Association of Deposit Insurers Recovering Asset Values in Failed Banks Recovering Asset Values in Failed Banks Once a bank has failed, disposition of its assets should be pursued b y an appointed receiver who markets and liquidates assets and distributes the proceeds to creditors Once a bank has failed, disposition of its assets should be pursued b y an appointed receiver who markets and liquidates assets and distributes the proceeds to creditors Powers of the receiver may vary, but generally include: Powers of the receiver may vary, but generally include: Ability to enforce or repudiate contracts Ability to enforce or repudiate contracts Stay litigation Stay litigation Challenge fraudulent transfers Challenge fraudulent transfers

12. International Association of Deposit Insurers Recovering Asset Values in Failed Banks Recovering Asset Values in Failed Banks While the general goal of an effective asset disposition strategy is to maximize the return to the receivership, receiverships will be guided by: While the general goal of an effective asset disposition strategy is to maximize the return to the receivership, receiverships will be guided by: The health and depth of economy and the markets in which the assets will be disposed The health and depth of economy and the markets in which the assets will be disposed An evaluation of whether it would be best to market failed bank as an ongoing concern or based on liquidation value An evaluation of whether it would be best to market failed bank as an ongoing concern or based on liquidation value Scope and volume of problem assets and the ability of the receiver to dispose of assets quickly Scope and volume of problem assets and the ability of the receiver to dispose of assets quickly Experience and risk management capacity of the receiver Experience and risk management capacity of the receiver

13. International Association of Deposit Insurers Recovering Asset Values in Failed Banks Recovering Asset Values in Failed Banks In general, the guidance points for conducting the recovery process are as follows: In general, the guidance points for conducting the recovery process are as follows: Important to obtain clear title and take control of the assets of the failed institution Important to obtain clear title and take control of the assets of the failed institution Employ efficient asset-disposition strategies including tools to validate valuation assumptions Employ efficient asset-disposition strategies including tools to validate valuation assumptions The receiver must identify, quantify, and manage or hedge risks related to interest rates, market fluctuations, disposition strategies and asset-specific and legal issues The receiver must identify, quantify, and manage or hedge risks related to interest rates, market fluctuations, disposition strategies and asset-specific and legal issues

14. International Association of Deposit Insurers Recovering Asset Values in Failed Banks Recovering Asset Values in Failed Banks Transparency and access to information are critical to obtaining maximum value for assets Transparency and access to information are critical to obtaining maximum value for assets The quality of information and access to information are key factors in the determination of asset prices by the market; the market will discount asset prices if there is uncertainty about the quality of the asset The quality of information and access to information are key factors in the determination of asset prices by the market; the market will discount asset prices if there is uncertainty about the quality of the asset Unique or unusual assets may make private negotiation a better alternative to market sales Unique or unusual assets may make private negotiation a better alternative to market sales

15. International Association of Deposit Insurers Recovering Asset Values in Failed Banks Recovering Asset Values in Failed Banks Two main goals of recovery efforts: Two main goals of recovery efforts: disposing of assets quickly, disposing of assets quickly, and achieving maximum value and achieving maximum value These competing goals must be balanced by the receiver in its decisions regarding asset sales These competing goals must be balanced by the receiver in its decisions regarding asset sales Where appropriate, asset-disposition strategies should maximize value on a net present value basis Where appropriate, asset-disposition strategies should maximize value on a net present value basis However, if other priorities take precedence over these goals they should be identified and addressed explicitly by the receiver However, if other priorities take precedence over these goals they should be identified and addressed explicitly by the receiver

16. International Association of Deposit Insurers Conclusions/Takeaways Conclusions/Takeaways Application of guidance will vary among countries Application of guidance will vary among countries Cooperation, Communication, and Coordination between supervisors is paramount Cooperation, Communication, and Coordination between supervisors is paramount Availability of information to deposit insurer and stakeholders is critical Availability of information to deposit insurer and stakeholders is critical Establishing and testing a Resolutions Plan is important Establishing and testing a Resolutions Plan is important Efficiency in the Claims process will be helped by managing expectations of the public, depositors, and creditors Efficiency in the Claims process will be helped by managing expectations of the public, depositors, and creditors When disposing assets the market discounts for unclear or imperfect information When disposing assets the market discounts for unclear or imperfect information Where there is room for a country to change law, the change should be pursued Where there is room for a country to change law, the change should be pursued