COMMON RESOLUTION OPTIONS AND RECENT NIGERIA BANK RESOLUTION EXPERIENCE Adeleke A. A. Director

COMMON RESOLUTION OPTIONS AND RECENT NIGERIA BANK RESOLUTION

EXPERIENCE

Adeleke A. A.DirectorAsset Management Department, NDIC.

Common Resolution Options & Recent Nigeria Bank Resolution Experience.

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OUTLINE

Introduction Applicable Failure Resolution Options:

Rehabilitation; Deposits Pay-out; Insured Deposits Transfer; Purchase and Assumption (P&A); and Bridge Bank

Experience So Far Challenges


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BANK A N’ Million

% To TotalAssets

BANK A N’ Million

% To TotalAssets

BANK A N’ Million

% To TotalAssets

TOTAL ASSETS 1,957,258 504,163 372,612

DEPOSIT LIABLITIES

1,385,936 71 356,137 71 243,747 65

PAID UP CAPITAL 16,316 <1 14,481 <3 9,375 <3

SHAREHOLDERS’ FUNDS

340,735 <2 129,373 25 77,559 <21

09/05/2011 Common Resolution Options & Recent Nigeria Bank Resolution Experience.

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INTRODUCTION

Effective resolution is a series of systematic action designed to end a bank’s distressed condition.Focus of a good resolution option: Maintains public confidence and stability in the

banking system. Ensures fairness, equity, transparency and

accountability. Instills market discipline while discouraging moral

hazards. Achieves minimum disruption to payment

system.


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INTRODUCTION

Speedy payment to insured depositors and quick realization of assets for the benefits of uninsured depositors and creditors.

Minimize the likelihood of having to bail-out uninsured depositors and creditors.

A typology of problem banks Illiquid but solvent Insolvent but liquid Illiquid and insolvent.


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RESOLUTION OPTIONS

Rehabilitation Financial Assistance (Accommodation Facility). Imposition of Holding Actions. Change in Management. Take-Over of Control & Management. Acquisition & Sale of Banks.


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RESOLUTION OPTIONS

Deposits Pay-Out Bank is closed and put in liquidation. Insured depositors paid up to the insured limit. As assets are realized, uninsured depositors are

paid on pro-rata basis.(i) Merits

Increase market discipline since depositors could also suffer losses. (small depositors protected, rest sustain losses unless there are proceeds of assets to share)

Shareholders lose all their investment unless there is still fund after other creditors have been fully paid from the realized assets.


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RESOLUTION OPTIONS

(ii) Demerits Delay in paying depositors undermines public

confidence. Liquidation of assets could extend to many

years, often more than 10 years. Uninsured depositors, other creditors and shareholders could therefore wait for many years before being paid, if they will ever be paid.

Borrowers lose access to loans with potential macroeconomic consequences.

Pay-out might maximize fiscal outlay at the time of closing.


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RESOLUTION OPTIONS

Insured Deposits Transfer Insured deposits of a failed bank transferred to

another bank(s). Acquiring bank(s) given enough cash and/or

risk-less assets to cover insured deposits transferred.

A variant of pay-out option as only insured deposits would be fully covered.

Deposit insurance agency would take over assets for realization.

Acquiring bank(s) might also purchase some or all the assets of the failed bank.


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RESOLUTION OPTIONS

(i) Merits Least cost option as premium was received to

pay insured depositors. All merits of Pay-Out also applies. Insured depositors could continue to enjoy

banking services without any disruption from the acquiring bank(s).

(ii) Demerits Loss to uninsured depositors and delay in

paying them from realised assets, if any, could undermine public confidence.


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Liquidation of assets could be protracted and extend to many years.

Borrowers could lose access to loans with the negative impact on macroeconomic situation.

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RESOLUTION OPTIONS

RESOLUTION OPTIONS

Purchase and Assumption (P&A) Healthy bank purchase assets and assume

deposit liabilities of the failed bank, similar to M&A.

A failed bank could be split to make it attractive to banks that wish to enhance market penetration or establish new branches where the failed bank had branches.

Acquirer(s) chosen on the basis of highest premium offered during bidding.

Deposit insurer or government would put cash/securities for the difference. Such could be recovered from bad assets of the failed bank.


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RESOLUTION OPTIONS

(i) Merits Depositors are protected. Continuity in rendering services thereby

sustaining public confidence in the banking system.

Other creditors might not be paid thus providing some form of market discipline.

Avoids disruption to depositors, borrowers and payment system.

Shareholders wiped out and inefficient bank closed.


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RESOLUTION OPTIONS

(ii) Demerits Large and uninsured depositors protected, thus

eroding market discipline. It could be costly especially if fund from Central

Bank/government/deposit insurer to fill gap between total deposits and assets purchased is significant.


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RESOLUTION OPTIONS

Bridge Bank A new bank created to acquire assets and

assume liabilities of the failed bank. It is a variation of P&A.

New bank could be privately owned or the government could create it for the purpose.

If government owned, it could be operated for about 2 years after which it would be sold to fresh investors.

(i) Merits Avoid losing the failed bank thus protecting jobs

and continuing banking services to the community.


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RESOLUTION OPTIONS

All shareholders would lose their investments. All depositors and creditors would be covered

and that would engender public confidence in the banking system.

(ii) Demerits Undermines market discipline as it encourages

moral hazard. It could be costly. The bridge bank could fail thus postponing the

“evil day” and aggravating the cost of resolution.


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EXPERIENCE SO FAR

REHABILITATION Take-Over Of Control

1 Bank in 1992 5 Banks in 1993 16 Banks in 1995 1 Bank in 1996 1 Bank in 1999

Sale of Banks 7 banks sold to new investors.


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EXPERIENCE SO FAR - BANK FAILURE AND EXTENT OF FAILURE IN NIGERIA BETWEEN 1994 AND 2006

Year of Closure

No of Banks Total Assets(N’B)

Total Deposits(N’B)

Ratio of Assets of Close Banks to Total Assets of Banks Ind(%)

Ratio of Assets of Close Banks to Total Deposits of Banks Ind(%)

Ratio of Assets of Close Banks to GDP(%)

Number of Depositors

1994 4 6.10 2.00 1.94 1.12 0.66 6,411

1995 1 0.40 0.80 0.09 0.38 0.02 7,416

1998 26 34.60 16.30 4.50 4.34 1.11 1,709343

2000 3 2.70 3.80 0.14 0.45 0.06 31,969

2002 1 20.20 11.60 0.68 0.95 0.35 228,585

2003 1 2.10 3.41 0.06 0.24 0.03 1,044

2006 13 160.10 177.28 1.23 4.69 0.55 961,211

TOTAL 49 165.9 215.19 0.93 2.59 0.44 3,165,979


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EXPERIENCE SO FAR

Liquidation Activities Claim settlement

N3.3 billion paid out of N5.2 billion Insured Deposits

N6.14 billion paid out of N10.9 billion declared liquidation dividend to uninsured depositors

Depositors of 11 out of 34 banks have been paid in full

Creditors of 7 banks have received liquidation dividend


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EXPERIENCE SO FAR

Shareholders of 3 banks have received liquidation dividend in the sums of N620 million, N600 million & N293 million respectively

Risk Assets Management N22 billion recovered from debtors of 43

banks Sale of Fixed Assets/Chattels

N19.34 billion realized from sale of physical assets

Sale of Investment N2.64 billion realized from sale of investment


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CHALLENGES

Public Awareness Legal

Long-drawn out litigation on winding-up actions and debt recovery matters

Operational Bank management

Poor corporate governance Insider abuse


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CHALLENGES

Poor lending culture Credit appraisal Documentation

Poor record keeping Financials Mandate records Broken down IT systems

Uncooperative attitude with the bank closing team


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CHALLENGES

Asset Realization Risk Assets (Loans)

Poor quality Large size insider loans Lack of secondary market Court sympathy for debtors

Real Properties Weak title for landed properties Slump in property market


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THANK YOU FOR LISTENING!


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COMMON RESOLUTION OPTIONS AND RECENT NIGERIA BANK RESOLUTION EXPERIENCE Adeleke A. A. Director

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Transcript of COMMON RESOLUTION OPTIONS AND RECENT NIGERIA BANK RESOLUTION EXPERIENCE Adeleke A. A. Director