This manual addresses problem bank resolution from the time a bank is identified as being in financial trouble through intervention to liquidation. It comes with an interactive CD-Rom from which users can download and tailor documents to use in their own closing processes. The book draws on the author’s lengthy career as a bank liquidator for the Federal Deposit Insurance Corporation and Resolution Trust Corporation and his worldwide consulting experience with the IMF and other international organizations.
Closing a failed bank : resolution practices and procedures / by David C. Parker. –
Washington, D.C. : International Monetary Fund, 2010.
p. ; cm.
Includes bibliographical references.
1. Bank failures. 2. Banks and banking – State supervision. 3. Liquidation.
I. International Monetary Fund. II. Title.
The opinions expressed in this manual are those of the author and should not be reported as or attributed to the International Monetary Fund, its Executive Directors, or national authorities. The IMF does not guarantee any outcome arising from following the procedures in this manual.
Annex 3.2. Sample Problem Bank Resolution Action Plan*
Annex 3.3. Intervention Organizational Chart
Annex 3.4. Publication Notice of Appointment of Conservator or Receiver*
Annex 3.5. Notice for Registration at the Appropriate Court*
Annex 3.6. Door Notice of Appointment of Conservator or Receiver*
Annex 3.7. Notice to General Director of Appointment of Conservator or Receiver*
Annex 3.8. Notice to Correspondents of Appointment of Conservator or Receiver*
Annex 3.9. Notice to Bank Employees of Appointment of Conservator or Receiver*
Annex 3.10. Employee Code of Conduct and Confidentiality Agreement*
Annex 3.11. Notice to Shareholders, Depositors, Borrowers and Vendors of Appointment of Conservator or Receiver*
Annex 3.12. Initial Information
Annex 3.13. Outline for Initial Intervened Bank Employees Meeting
Annex 3.14. Sample Press Releases
Annex 3.15. Questions and Answers for the Press related to [Failed Bank]*
Annex 3.16. Telephone Script (Liquidation)*
Annex 3.17. Bank Intervention Managers Book Table of Contents*
Annex 3.18. Inventory Book of Assets and Liabilities
Annex 3.19. Estimated Loss in Assets Form*
Annex 3.20. Cash Count Sheets*
Annex 3.21. Asset Review Sheet*
Annex 3.22. Bank Account Reconciliation Guidelines
Annex 3.23. Subsidiary Due Diligence Review Checklist*
Annex 3.24. Business and Disposition Plan
CHAPTER 4 CONSERVATORSHIP OPERATIONS
Operations and Policies
Annex 4.1. Funds Flow Analysis
Annex 4.2. Contingency Funding Plan Summary*
CHAPTER 5 FINAL RESOLUTION
Closing the Transaction
Annex 5.1. Example of a Resolution Timeline*
Annex 5.2. Sample Deposit Transfer Form*
Annex 5.3. Confidentiality Agreement*
Annex 5.4. Escrow Agreement*
Annex 5.5. Exhibit “A” Bid Form*
Annex 5.6. Sample Print Advertisement for Bank Resolution*
Annex 5.7. Official Receipt*
CHAPTER 6 BANK LIQUIDATION PROCEDURES
Bank Liquidation Operations
Annex 6.1. Asset Management Companies
Annex 6.2. Structure Example: Division of Liquidation Office
CHAPTER 7 ASSET MANAGEMENT AND DISPOSITION
Asset Disposition Strategies and Timelines
Asset Collection Procedures
Delegation of Authority
Case Memorandum System
Annex 7.1. Sample Case Memoranda*
Annex 7.2. Case Memorandum Log*
Annex 7.3. Asset Collection Report*
APPENDIX PURCHASE AND ASSUMPTION AGREEMENT
2.1. What Makes a Problem Bank?
3.1. Intervention Staffing
4.1. Placing a Bank in Conservatorship
5.1. Open Bank Assistance
5.2. “Bridge” Banks and Nationalization
5.3. Branch Breakups
5.4. Paying Insured Deposits via Electronic Transfers to Another Bank
6.1. Example of Bankruptcy Claims Priorities
7.1. The 80/20 Rule
7.2. Asset Management in a Liquidation Context
7.3. Liquidation Goals
7.4. Some Loan Restructuring Guidelines
2.1. Decision Tree for Problem Bank Resolution
2.2. Bank Intervention Flow Chart
1.1. Contrasting a Special Bank Insolvency Regime with Commercial Bankruptcy Law
2.1. Examples of Informal and Formal Supervisory and Enforcement Actions
2.2. U.S. Prompt Corrective Action Capital Categories
3.1. Intervention Documents
5.1. Summary of a Typical Purchase and Assumption Transaction
5.2. Assuming Bank Purchase and Assumption Example
5.3. “Bridge” Bank Purchase and Assumption Example
7.1. Asset Types and Primary Disposition Strategies
7.2. Property Type and Loan-to-Value (LTV) Ratio
7.3. Examples of Discount Rate Calculations
7.4. Basis and Requirements for Write-offs by Type of Asset
This book is the culmination of a lengthy career primarily focused on bank closings and liquidation. It benefits from years of experience working as a bank liquidator for the Federal Deposit Insurance Corporation (FDIC) and Resolution Trust Corporation (RTC) as well as consulting experience all over the world in conjunction with projects of the U.S. Agency for International Development, World Bank, U.S. Treasury, and, since May 2005, International Monetary Fund. Throughout these years, there have been many colleagues who have contributed in some manner to this book’s publication.
First, in acknowledgment of my colleagues within the IMF, I would like to especially thank my former boss, David Hoelscher, former Assistant Director of the Monetary and Capital Markets (MCM) Department, who provided strong support and encouragement, along with review and suggestions. Thanks are also due to my current boss, Ceyla Pazarbasioglu, the MCM Assistant Director, for her continued support and encouragement in this endeavor. The book has benefited from review, suggestions, and contributions from Olivier Frecault, Luis Cortavarria, Noel Sacasa, Michaela Erbenova, and Steve Seelig. The book has also been informed by close work in the area with Aditya Narain, Virginia Rutledge, Alessandro Gullo, Barend Jansen, Alessandro Giustinani, and Lou Sanfelice. Last, but not least, I extend heartfelt appreciation to the inimitable assistants without whose support I would constantly flounder, namely, Charmane Ahmed, Claudia Cohen, and Kate Lapp.
Regarding contributions from those outside the IMF, my greatest appreciation goes to William C. Thomas, who provided in-depth critiques of many iterations of this book, along with invaluable insight, suggestions, and contributions. I would also like to thank Randy Sammons, in particular, who sent me to my first bank closing in Dayton, Tennessee, in November 1984, and provided support and opportunity early in my bank liquidating career. Thanks to colleagues from the FDIC and RTC would not be complete without mentioning some of the most effective people I’ve ever known in the difficult process of closing banks, including Sandy Warren, Brian Kelly, Rossana Milton, Joe Bush, Jay Hambric, and the late Karl Thorne, among many. It was a pleasure to work with all of them. Support and contributions were also received from Harold “Tuck” Ackerman, William Dudley, Gene Hollis, Dick Morant, Mike Rouswell, Jim Crozier, Phillip W. Smith, Terry Stroud, and Jim Rives.
Finally, I would like to extend special thanks to David Einhorn and Joanne Blake in the IMF’s External Relations Department for advice and assistance with this book’s publication.
This manual addresses problem bank resolution from the time a bank is identified as being in problem status through intervention to liquidation. Forms and checklists used during that process can be accessed on the companion CD-ROM through a user interface that allows practitioners to input information about a particular bank resolution case and then download or print the customized documents.
Chapter 1 sets the context of the book, discussing various (and preferred) legal frameworks; the function of deposit insurance during bank failures; and the importance of public and media relations throughout.
Chapter 2 provides the background for problem bank resolution by discussing problem bank supervision and the various measures and procedures used by a supervisory authority to rehabilitate, restructure or resolve a problem bank.
Chapter 3 covers bank intervention procedures. The primary goal of bank intervention is to control and inventory the assets of the bank, prepare a final balance sheet and, as applicable, compensate insured depositors. A bank intervention team should be prepared to accomplish functional duties such as security, cash operations, assets, deposit operations, facilities, information technology, and legal matters. Depending on the number of branches, branch teams must be prepared to perform the same functions at each branch. The supervisory authority and the deposit insurance agency (DIA) must work in partnership to accomplish these goals. Supervisory authority personnel are responsible for the inventory and control of assets, whereas the DIA is responsible for making repayment to insured depositors.
Chapter 4 looks at conservatorship operations. If the supervisory authority believes there is a chance to rehabilitate the bank, then it may appoint a conservator to accomplish this objective. The conservator appointed should thus have management control over the institution, with powers that replace those of shareholders, the board of directors, and senior management. The conservator should be given a specific time frame in which to thoroughly analyze the bank’s condition and prepare a resolution plan, if feasible, or its liquidation. To maintain confidence in the banking system during conservatorship, the bank should remain open to allow depositors access to their funds. Conservatorship functions should be limited (e.g., there should be no new lending) and focus on cost-saving measures and asset collection.
Chapter 5 covers various bank resolution alternatives along with methods for marketing a problem bank via a purchase and assumption (P&A) agreement. To promote public confidence, providing prompt repayment to insured depositors is paramount in a failed bank situation. To this end, the supervisory authority or conservator should work with the DIA to market the bank via a P&A whereby another bank would purchase certain assets and assume certain liabilities of the bank. Failing that, the receiver should attempt to arrange for another bank to act as paying agent for the DIA to compensate insured depositors. In some countries, depending on the competitive environment, banks may bid for the right to assume the deposits because it is an inexpensive method of increasing market share. In other countries, the DIA or supervisory authority may have to pay a bank a fee to act as paying agent. Problem bank resolution alternatives may be limited in countries without special bank insolvency regimes.
Chapter 6 looks at the operations and administrative procedures for bank liquidation or receivership and discusses liquidation office structures. Functions that relate to depositor and creditor claims, settlements, legal, management information systems, audit, and other administrative matters are covered.
Chapter 7 discusses asset management and disposition. A receiver should responsibly liquidate a failed bank’s assets with the goal of maximizing recovery to uninsured depositors and creditors of the receivership, using present value concepts in asset sales and collections. Standardized procedures are presented that deal with asset liquidation, including delegations of authority, case memorandum systems (i.e., a decision-making system), and reporting and filing systems.
It should be noted that this book is not about bank restructuring, which, while sometimes effective in stabilizing a banking system during a systemic crisis, is one of the least effective problem bank resolution methods during “normal” times. Throughout the decline of the bank into problem status, shareholders and senior managers have ample opportunity to reorganize (and/or recapitalize) the bank. The fact that they do not, despite shareholders presumably motivated by the potential loss of their investment, is an indication that new capital, not just restructuring, is required. When new capital is not forthcoming, it is an indication that the expected return was not sufficient to attract private equity investors.
In addition, bank restructuring, with continued participation of shareholders and senior management, does not solve the typical underlying problems at the institutions—abusive insider transactions and illiquidity. The problems (losses) are usually much greater than initially expected, and the anticipated turnaround is more difficult to pull off. Avoiding a complicated, drawn-out restructuring plan with a doubtful outcome in favor of a quick resolution of the problem bank will curtail the losses and allow a more accurate approximation of the cost of resolution.