Most banking laws empower the supervisory authority to appoint a conservator or receiver for a problem bank.2 Moreover, the banking law usually provides that the conservator will assume the powers of the officers, directors, and shareholders of the bank to make decisions or take actions, but not their economic rights.3 This chapter is concerned with con-servatorship and can provide the basis for instructions (rules, policies, and procedures) that the supervisory authority gives the conservator.

Most banking laws empower the supervisory authority to appoint a conservator or receiver for a problem bank.2 Moreover, the banking law usually provides that the conservator will assume the powers of the officers, directors, and shareholders of the bank to make decisions or take actions, but not their economic rights.3 This chapter is concerned with con-servatorship and can provide the basis for instructions (rules, policies, and procedures) that the supervisory authority gives the conservator.

Conservatorship is a form of temporary management and control of a problem bank, with the conservator taking over all the powers of the bank’s shareholders, directors, and officers (Box 4.1).4 The conservator’s primary objectives are to preserve and conserve the bank’s assets and attempt to return the bank to a sound and solvent condition, including protecting its depositors until the bank is resolved. Conservatorship can also be an effective method to deal with management problems (e.g., fraud), or to control a bank while organizing a resolution plan (in this instance a conservatorship is similar to a bridge bank).

This chapter presumes that the bank will continue operating during conservatorship, although in a restricted manner. Depending on public confidence levels, however, it may be necessary to further restrict operations, such as imposing a partial deposit freeze. A partial deposit freeze would enable depositors access to funds in an amount sufficient to provide for normal living expenses. Businesses that have operating or payroll accounts at the bank may have different (higher) thresholds of deposit withdrawal.5

In conjunction with the primary objectives to preserve and conserve the bank’s assets and attempt to return it to a sound and solvent condition, a conservator should look to improve operations and focus on the bottom line. Such actions include the following:

  • Establish control and oversight of the bank’s operations, including stopping or preventing unsafe or unsound business activities of the bank, and correcting legal and regulatory violations.

  • Evaluate the bank’s condition and evaluate all assets to realistically identify losses.6

  • Promote confidence of customers and employees and maintain customer service.

  • Ensure that the institution is operated in a safe and sound manner by minimizing losses, limiting growth, eliminating speculative activities, and terminating waste, fraud, and insider abuse.

  • Determine what claims are outstanding against the bank (including contingent liabilities).

  • Develop a detailed bank resolution plan for the supervisory authority.

The conservator will face many management decisions shortly after the intervention. Because the primary objective is to protect depositors and preserve the bank’s assets, one of the most crucial decisions is which activities the bank will continue to operate. This decision depends primarily on liquidity and the resources for continued liquidity funding. The conservator must decide whether the bank will:

  • Continue core operations (e.g., currency transactions, transfer services, and limited or no lending)

  • Cease or curtail commercial operations

  • Engage in “neutral activities” only (deposits on the books prior to conservatorship are blocked; new money can flow in and out).7

Placing a Bank in Conservatorship

Takeover of a bank can take place with the full cooperation of the existing owners and management or can be imposed against their will.

When existing owners and management accept that the best option to maintain the value of the bank is for the supervisory authority to assume control and find a solution, it normally should be sufficient if the supervisory authority appoints a conservator, who will determine which of the bank’s senior staff to retain and which to replace.

When existing owners and management have explicitly opposed the supervisory intervention, or if there is a possibility that confusion or a temporary lack of full internal controls might provide an opportunity for owners or staff of the bank personally to benefit through asset stripping or destruction of records, the supervisory authority needs to take physical as well as legal control of the bank. In addition to removing the board and replacing existing management and other key persons, the supervisory authority needs to secure the bank’s premises and moveable assets.1 In such situations, the conservator’s team should follow the bank intervention procedures detailed in Chapter 3.


Michael Andrews and Mats Josefsson, “What Happens after Supervisory Intervention?” in Bank Restructuring and Resolution (Washington, 2006), p. 147.

The topics discussed in this chapter are equally applicable whether operations are continued, deposits and liabilities blocked, or in a hybrid situation where “neutral activities” are permitted. Basically, whether operational or not, the bank should exercise good governance, including the responsibility to abide by safe and sound banking policies, secure all assets, and maintain effective accounting and internal control policies. A conservator should base his or her decisions on the best interests of depositors and creditors.

Note as well that many of the policies and procedures detailed in this chapter can be applied to other bank resolution techniques. With slight changes in emphasis, these policies and procedures can be applied effectively in “bridge” or “nationalized” bank situations.

Whether a bank is placed in conservatorship or receivership, there are certain basic operating procedures and policies that must be observed. For example, though most banks have adequate management information, auditing, reporting, and filing systems, the conservator or receiver must ensure that these systems meet minimal standards, at least. Most of these concerns are more fully discussed in Chapters 6 and 7.


The conservator should stabilize the operations of the failed bank by developing cost-effective operating plans to manage the bank’s problems. All activities of the failed bank must be in accordance with any delegations of authority issued by the supervisory authority (see Chapter 7 for a detailed discussion of delegations of authority).

The conservator should immediately implement an overall “no growth” policy. He or she should review the failed bank’s operating policies (e.g., loan and investment policies, etc.) and, in the resolution plan (discussed below), identify, recommend, and implement any necessary changes.

A conservator can help maximize available cash by delaying spending on projects with long-term returns (including upgrades to information technology systems, advertising, and other discretionary costs). However, most successful operations will involve large personnel cuts (salaries and bonuses) and a significantly smaller operational scope.

The conservator should thoroughly review the failed bank’s operations to identify abuses, inefficiencies, and activities that increase its risk profile. He or she should deal with problem areas as soon as practicable. However, major or serious actions must comply with delegated authority of the supervisory authority and be supported by a legal opinion. Examples include:

  • Termination of employment

  • Repudiation of contracts

  • Sale or closing of branches and subsidiaries

  • Major asset sales.

Some typical examples of actions that the conservator may take include the following:8

  • Sell assets and purchase liabilities of the bank as may be necessary to conserve its value.

  • Repudiate or simply add to the contracts concluded by the bank or unilaterally amend them, including changes of rates, tariffs, and duration of validity.

  • Issue orders concerning dismissal, demotion, or temporary removal from a position, or the distribution of responsibilities between the bank’s employees.

  • Sign any contracts and documents and accept liabilities in the name of the bank.

  • Lodge claims in the name and interests of the bank, and represent the interests of the bank in court.

  • Suspend payment of any kind to officers, directors, and shareholders of the bank.


Immediately after appointment, the conservator should initiate a thorough review and analysis of the failed bank’s condition. This process should include an analysis of:

  • Examination and audit reports

  • All correspondence with the supervisory authority

  • Monthly financial statements for the past year (or more, as necessary)

  • Files on major assets (especially problem assets)

  • Off-balance-sheet activities

  • Interviews with bank employees and supervisory authority examiners.

Generally accepted bank accounting principles should be used to determine if accounting for transactions has been appropriate.

During the first few days after the intervention, the conservator must immediately evaluate and report on several time-sensitive issues.

Liquidity. Thoroughly analyze the funding situation. Develop plans to liquidate assets and reduce volatile or high-cost funding. Evaluate whether to maintain credit lines and correspondent banking relationships of the failed bank.

Public confidence. Managing the release of information to the public is as important as managing the bank’s financial positions and cash flow. The public’s perception of a bank’s condition, and thereby the safety of customer deposits, can change quickly because of negative news (whether substantiated or rumored) about the soundness of a bank’s condition. Customer reaction, which is difficult to predict, will influence needs for on hand liquidity and access to contingency sources. The conservator and supervisory authority should have effective processes in place to monitor and react to the contraction of deposits and other funding.

The potential high visibility and volatility of an intervention in a problem bank requires sensitivity in all public relations matters. Positive communication with customers and news media is critical to maintaining a core deposit base. The conservator is responsible for responding to routine questions about the specific institution. Comments should follow the pattern of the press release distributed at the time of the intervention.

The conservator should not comment to the press or public on specific actions, loans, deposits, or relationships of the institution unless specifically advised to do so by the supervisory authority. The appropriate public information officer should handle broader questions on the supervisory authority’s policies and procedures. Media and public relations are discussed in detail in Chapter 1.

No other employee of the institution should make any statement to the press. Of course, as part of ongoing business, employees must discuss loans, deposits, or other customer relationship matters. These discussions with customers or borrowers must be limited to the business matters at hand.

Assets needing special attention. Assets such as securities, interest rate swaps, foreign exchange operations, subsidiaries, unfunded loan commitments, collateralized obligations, and loans serviced for others may require assistance from specialists to coordinate management and/or disposition. Prompt attention to these and other problem assets can help prevent (further) deterioration.

Repudiation of contracts. The conservator should analyze all contracts for the possibility of repudiation. Onerous contracts may be broken to relieve operational crises. Even deposit contracts paying very high interest can be repudiated.


This section presents areas for conservator action following the initial assessment of the bank’s condition. The conservator must be flexible and adaptable to unique situations when prioritizing these activities. One of the most important functions is to maintain effective accounting and internal control systems. If the bank is deficient in these areas, the conservator can use the guidelines in Chapter 6.

In certain large and/or complex banks, the conservator may want to create committees, such as a credit review committee or an operations committee, to aid in the decision-making process. The committee structure should be well defined, with a specific mandate spelled out by the conservator. The meetings should have regular agendas, minutes, and clear-cut decisions. Committees are valuable both as communications vehicles and for on-the-job training purposes. Committees should not be allowed to deteriorate into discussion groups or vehicles for delay, however. Committee decisions at the institutional level are advisory to the conservator, who has the final decision-making authority.

The conservator:

  • Oversees the daily management of the bank, observing prudent banking practices

  • Approves schedules for achieving objectives as proposed by department managers

  • Requests, collects, reviews, and evaluates reports submitted by department managers

  • Distributes administrative information to department managers.

The conservator should review past external audits to determine if the recommendations regarding asset writedowns and internal controls were performed. Post-intervention, internal control audits can replace external audit procedures. Internal audit personnel may provide a wealth of knowledge to the conservator regarding strengths and weaknesses within the failed bank and may be capable of assisting in asset reviews and fraud investigation.

The conservator must also ensure that the conservator-ship’s operations comply with the audit principles detailed in Chapter 6.

Resolution Plan

This section discusses the resolution plan, which outlines specific plans for the management and final resolution of the bank, consistent with the supervisory authority’s objectives.

The supervisory authority should require the conservator to present a detailed written resolution plan within 60 days of appointment.9 This report must address the following options and recommend the most viable:

  • Restoring the bank to compliance with the requirements of the law and regulations of the supervisory authority, including an increase in the bank’s capital to the minimum level required within the time set forth in the plan

  • Selling the bank as a going concern

  • Merger or acquisition of one bank with another

  • Assisted transactions, such as selling any part of the assets and purchasing liabilities of the bank (e.g., using “good” assets and deposit insurance agency advances to fund transfer of insured deposits to another bank)

  • A liquidated payout.

The report should address the current financial condition and future prospects of the bank. Analytical documentation, including pro forma financial statements and the basis for the forecasts, should be maintained to provide support for the plan. The assumptions should include the realistic evaluation of debt collection, interest rates, asset recovery rates, holding costs, allocation reserves, contingent liabilities, and other appropriate data. Maximizing return to depositors and other creditors is paramount.10

To support the recommendation, the conservator’s report should show a comparative analysis with a priority weighting for each alternative resolution method. The conservator’s report can recommend combinations of resolution forms (with detailed clarification), if appropriate.

The plan should include a narrative description and the conservator’s personal evaluation of the principal elements of the bank. The conservator should describe all actions planned for the day-to-day management of the institution. It is important that the plan include description and analysis of the bank’s branch network, accounting systems, and data processing systems, as well as any relationships with computer servicing companies, accounting or auditing firms, law firms, or subsidiaries, affiliates, or other related entities.

The plan should include a balance sheet as of the date of intervention and projections of the financial effect of the changes it proposes. It should include an evaluation of the assets owned by the bank, particularly large, complex assets and insider transactions. The conservator should set forth a strategy for collecting or resolving such assets, including alternative methods, and outline potential problems.

The plan should recognize the present asset and liability structure of the failed bank. It should contain recommendations for change where risks can be significantly reduced, meaningful cost reductions can be achieved, or franchise value can be increased. Plans to restructure the balance sheet should be identified and explained in detail.

It is also important that the plan include an analysis of the deposit base as contingency planning for a possible payout, in the event liquidation is the only reasonable resolution option. The conservator should aspire to fair treatment of each depositor and creditor according to the specified legal priority.

In conjunction with the plan, the conservator should develop specific operating objectives. Components of these objectives include tasks to be completed, project completion dates, and the person responsible for completing the tasks. An operating budget should be prepared that will help accomplish the goals and objectives of the overall plan.

Operating Budget

An operating budget covering the first 12 months of operations should accompany the plan. The conservator should review historical profit-and-loss statements and all compensation arrangements with an objective to reduce costs. The conservator should identify and eliminate operating expenses that are no longer necessary, or control them via downsizing.

It should be recognized that, although reductions in spending where appropriate are desirable, in some cases justifiable increases in spending might sometimes be necessary to accomplish the goals of the plan. Once the initial budget has been submitted and approved, budgets should be revised and submitted on a quarterly basis to the supervisory authority.


Another portion of the plan should outline the bank’s staffing needs. The conservator’s objective is to maintain the viability of the bank and franchise value for resolution. Staffing requirements should include sufficient personnel to assure adequate servicing for performing loans, aggressive pursuit of problem assets, and regular customer service. In addition, competent personnel will be needed to:

  • Maintain the financial accounting and information technology systems of the bank

  • Prepare for the orderly disposition of liabilities, especially deposits

  • Analyze the asset structure of the bank by categories and individual asset, securing assets and determining their value.

The staffing plan should include an organizational chart showing all the principal officers and complete staffing levels. Payroll information for all personnel and a description of any special or contractual arrangements must also be included. Each function area of the institution should be analyzed, and staffing levels over the life of the conservatorship period should be projected. Particular emphasis needs to be placed on the need for any specialized expertise to accomplish the actions included in the plan. Of major importance is the maintenance of the financial and support functions of the institution, especially accounting and information technology. The successful completion of the conservatorship will be heavily dependent on these areas.

The plan, together with the operating budget and the staffing plan, forms the conservator’s evaluation of the institution and other important information to the supervisory authority. Approval of the plan does not necessarily constitute approval of all the individual actions that may be included in it. Each specific action must be presented in a timely manner, detailed in case memorandum format for approval at the proper level of delegated authority.

Often, the provisions of a banking law will be very broad and give the conservator great power within the constraints of the delegations of authority granted by the supervisory authority. Common limitations to these authorities should include a requirement that the conservator seek prior approval from the supervisory authority for actions that:

  • Exceed a specific amount

  • Involve former officers, directors, employees, shareholders, or other related parties of the institution

  • Involve the payout of deposits.

Questions may arise concerning the governing laws that are applicable to institutions in conservatorship. It is particularly important in managing the institutions that legal advice be sought and followed when making major decisions.

Preparation for Final Resolution

To facilitate the final resolution, the conservator should prepare material for a potential sale. The conservator should direct bank staff to prepare a bid package to use to market the institution. The bid package is designed to provide potential acquirers enough information to allow them to evaluate whether the bank fits as an acquisition target. Bid package preparation and format is discussed in Chapter 5.

Additionally, the conservator may have to devote resources to assist the supervisory authority in an asset valuation review. This involves reviewing a sample of each type of asset in order to derive a value for the bank’s assets. This is also discussed in Chapter 5. Under no circumstances should a former loan officer be allowed to review and assign value to a loan he or she has extended.

Finally, the conservator should maintain a list of banks and investor groups that have expressed interest in a possible acquisition. Often this can be a valuable addition to the database of potential acquirers solicited by the supervisory authority.

Asset Management

The conservator’s primary focus regarding assets is to conserve their value. The first step is to inventory all assets to identify and assess their value. The conservator must assure effective servicing for performing assets. Prompt and continuing attention will help prevent further deterioration and maximize recovery. Special attention regarding collection (e.g., restructurings, workouts, etc.) should be given to distressed assets. The conservator should develop a strategy for collecting or resolving such assets, including alternative methods, and outline potential problems. All assets and liabilities (booked and unbooked) should be identified and evaluated as soon as practicable.

An important responsibility of the conservator is the creation of a map of related debtors, indicating their respective companies, as well as the asset and liability accounts involved, associated collateral, and persons or representatives through which the presumed “fraud” of the directors and/or managers of the institution placed in conservatorship has been conducted, so that the legal and financial scam used for personal gain to the detriment of the bank will be absolutely clear.11


Any new lending should be avoided to the extent possible. Review all outstanding lending commitments with a bias toward cancellation, unless business and legal considerations strongly indicate otherwise. The conservator is responsible for making or recommending the business decision to cancel or continue any lending commitment. Implement aggressive collection practices immediately, especially with regard to past due or matured obligations. Inform all debtors that the terms of all debt agreements remain in force and that they are expected to comply with them.

Mark-to-Market Evaluation

Realistic market values are developed for assets by marking them to market (determining a realistic value based on present market conditions) and assigning appropriate loss reserves. Sell assets if possible, and develop other asset disposition alternatives for the remainder. Any intangible assets documented at previous supervisory examinations should be charged off promptly. Nonperforming tangible assets should be reduced to market value through charges to reserves using contra accounts.

“Workout” efforts can help reduce the volume of problem assets. A workout program can usually offer a greater chance for recovery than other alternatives such as foreclosure or litigation. If a borrower cannot pay the full amount of the debt, another cost-effective option is a compromise settlement. Often, potential litigation costs may be substantial, so it may be wiser to reach a settlement for repayment of less than the full amount.

Performing these tasks will require substantial judgment. Management of the supervisory authority should be available to advise as necessary. Some common problem areas found during asset review include those caused by:

  • Management’s lack of sound lending policies or sound credit judgment

  • Overlending

  • Failure to establish or enforce repayment agreements

  • Incomplete credit information

  • Overemphasis on loan income

  • Self-dealing, including loans in another name for the benefit of ownership interests

  • Technical incompetence, manifested by management’s inability to obtain and evaluate credit information and put together a sound loan package

  • Lack of supervision (whether active management supervision or oversight of board and senior management)

  • Competition among banks resulting in “growth at any cost” policy.

Insider Relationships and Abusive Transactions

As soon as possible after intervention, the conservator should:

  • Identify any individuals who are classified as insiders and examine their relationships with the institution.

  • Detail any existing relationships or transactions and describe the provisions of any existing arrangements, including compensation or consulting contracts.

  • Identify and block any insider deposits (and repudiate if appropriate).

  • Where sufficient basis exists, prepare and forward a criminal referral to the appropriate authorities (e.g., financial police). (Note: Conservators should not forward criminal referrals to any entity other than the appropriate authorities without prior approval of the supervisory authority.)

All insider transactions should be carefully reviewed, including loan commitments. Terminate any questionable or abusive arrangements as soon as legally possible. Immediately refer any evidence of suspected criminal activity to supervisory authority management to assist in making notifications to the appropriate authorities. If possible, block insider transactions such as:

  • Transfers to defraud creditors

  • Preferential payments in anticipation of intervention

  • Excessive compensation and benefits

  • Abusive service contracts

  • “Golden parachute” arrangements.

The conservator must notify the supervisory authority in a confidential memorandum of any known abusive transactions involving insider relationships. Suspected activity should also be brought to the attention of the supervisory authority even if documented proof of inappropriate activity is not immediately available.

Safe Deposit Boxes

Notify safe deposit box holders of the bank status and provide access as normal. If this is not feasible, the conservator can establish an access schedule. The conservator should allow access and removal of items from the boxes by properly authorized lessees of the boxes, except for insiders. Any release of valuables or other contents of the boxes to insiders should be quid pro quo or not at all until all insider matters have been satisfactorily resolved. These proceeds may well add value to the bank’s assets or be included in any settlements involving insiders.

Safekeeping Items and Possessory Collateral

Safekeeping items should be treated in a similar fashion, and the conservator should exercise maximum discretion in the release of such assets. Depending on value and/or circumstances, the conservator should prepare a case memorandum to ensure that a complete record of the decision to release the valuables is made and retained.

Possessory collateral items should be inventoried and remain in the possession of the bank under secure conditions. They should only be released in conjunction with the payment or settlement of the obligation for which they were pledged.


The conservator must manage assets, liabilities, and off-balance-sheet cash flows. Funding matters should be reviewed with the goal of reducing costs. Cost reduction is largely dependent on the downsizing efforts as discussed below. Specific attention should be given to eliminating the use of noncore, higher-cost funding. The bank should not pay higher interest on core deposits than local market rates. Weigh any potential deposit contract repudiation against a correlated effect on franchise value.

Deposit Review

One of the most important responsibilities of the conservator is to analyze the deposit liabilities of the institution. Components of the bank’s deposit strategy include funding needs, asset restructuring goals, and interest rates. The conservator must constantly monitor the stability of the deposit situation in relation to the institution’s liquidity. During liquidity crises, the conservator should work closely with the legal division regarding blocking of deposits or other liabilities.12 Deposit accounts earning excessively high interest rates should be reviewed for repudiation according to the law, and the conservator should make recommendations concerning these accounts accordingly.

In addition to an evaluation of deposits and other sensitive liabilities, conservators must also assess the liquidity of the bank’s assets and the effectiveness of associated policies and procedures. The increased reliance on market funding sources at the expense of core deposits poses significant risks and challenges. Institutional or wholesale fund providers and other market-based sources are significantly more price and credit sensitive than retail customers. Institutional customers are more likely to exercise market discipline and are simply less willing to provide funds to banks facing real or perceived financial difficulties. Additionally, reliance on market funding sources makes banks more susceptible to general or regional economic conditions. If not managed properly, market-based funding may be merely a more volatile and expensive source of liquidity, if available at all. Increased interest expense associated with wholesale funding may have a great effect on bank net interest margins.

A strong positive correlation exists between real or perceived asset quality problems and liquidity problems. Market confidence in a given bank’s financial condition is a critical element in assessing liquidity risk, especially for those institutions reliant on wholesale market funding sources. It should come as no surprise, therefore, that liquidity crises at individual institutions generally occur after marketplace awareness of existing or expected erosion in asset quality, earnings, and capital.

Liquidity Risk Management13

Conservators must be disciplined and effective liquidity risk managers. For these purposes, liquidity is defined as the ability to obtain cash for operations when needed, at a reasonable cost. The critical component in evaluating a given bank’s susceptibility to liquidity risk is market confidence in the entity’s overall financial condition and reputation.

There are two distinct discretionary tools for liquidity management—a funds flow analysis (FFA) and a contingency funding plan (CFP). The FFA depicts a bank’s historical sources and uses of funding and provides a general sense of funding activity and trends. The CFP is a forward-looking document that projects sources and uses of funding under alternative scenarios, when adverse circumstances exist for both the bank as well as the capital markets.

The FFA and CFP should be tailored to the specific institution. Furthermore, if the bank already produces the information contained in those reports, but in another format, that information should be used rather than imposing a separate format. In any case, the conservator must obtain the information necessary to monitor and manage liquidity.

Funds Flow Analysis

Annex 4.1 is an example of an FFA from the Office of the Comptroller of the Currency. Conservators can monitor liquidity by completing a similar FFA. The analysis should be tailored to ensure that significant balance sheet items are incorporated clearly. Because most banks centrally manage their liquidity risk and positions, these analyses typically reflect the condition of the consolidated organization. The reporting format used should allow conservators to distinguish bank from nonbank assets and liabilities.

Specific items that should be reported in the FFA can vary depending on the size of the bank and the structure of its activities. For example, a smaller bank that does not have foreign deposits should tailor the report to reflect its particular liabilities. Moreover, absolute accuracy is not required as a trade-off to obtaining the information promptly. Error tolerance levels can be established, monitored, and controlled. Often, data obtained through peripheral systems, rather than general ledger systems, are acceptable. The funds flow definitions included in Annex 4.1 are intended as a guide, but the bank should provide additional details to ensure accurate interpretation by all users.

Contingency Funding Plan

Annex 4.2 is an example of a CFP from the Office of the Comptroller of the Currency. A CFP helps ensure that a conservatorship can manage fluctuations in liquidity prudently and efficiently. The plan is an extension of ongoing liquidity management objectives that follow:

  • Maintenance of an appropriate amount of liquid assets

  • Measurements and projection of funding requirements during various scenarios

  • Management of access to contingency funding sources.

The degree and sophistication of a CFP should be commensurate with the bank’s complexity, risk exposure, activities, products, and organizational structure. Conservators should analyze the CFP to ensure that the bank can control daily liquidity risk. The CFP should show that the bank could obtain sources of funds to cover its uses, and document the sources in preferred order.

Conservators should manage implementation of the CFP and regularly reassess the underlying assumptions in the CFP. If the actual funding events are different from the bank’s projections, the conservator should revise the contingency plans.

If the CFP projects that there may be more uses of funds than sources in a near-term scenario, the conservator should reduce the imbalance immediately. The bank has some basic options to reduce the imbalance:

  • Reduce assets that require funding (e.g., the loan portfolio).

  • Replace credit-sensitive liabilities (e.g., public funds or other deposits that exceed $100,000) with more stable, credit-insensitive funding, such as term retail deposits.

  • Lengthen the duration of liabilities.

There are many ways to manage liabilities and assets, though these are somewhat limited in a conservatorship. Retail deposits can be attracted by increasing the yields offered or by accessing the broker market consistent with the requirements of any brokered deposits regulation.14 It may be possible to manage assets by using marketable securities to enter into a repurchase agreement. The conservator can also suspend new loan originations or manage loan renewals.

Conservators should address liquidity concerns in their regular reports. Those reports should include information on the adequacy of short-term asset positions and contingency sources relative to short-term liabilities and erosion trends. It also should provide information on the longer-term liquidity position and prospects. This will include cash flow projections depicting the estimated volume and timing of funds flows and the effect of offsetting liquidity enhancement programs, such as asset sales.15


Orderly downsizing through liquidation of assets and other restructuring efforts is another major focus of the conservator. Growth is not the proper management objective of a bank in conservatorship. Try to reduce or work out nonperforming assets but avoid “fire sales” or asset “dumping.” As in all conservatorship operations matters, follow prudent, safe, and sound banking practices.

The conservator should develop asset disposition strategies to ensure effective marketing practices and efficient transition for ongoing collection activities. Aggressive asset collection procedures will doubly benefit the bank by providing liquidity while downsizing.

Consolidate or close unprofitable or redundant branches. Review foreign branches in particular for sale or closure. The conservator should work with the supervisory authority’s legal department to comply with any regulatory requirements regarding notification or approval prior to any action regarding branch closures.

As part of the downsizing and risk reduction goals, the securities portfolio should be carefully reviewed and reported to the supervisory authority. Securities that pose significant interest rate or credit risk should be identified for special attention. Reducing such risks should be part of operational plans for liquidity and funding.

Personnel Concerns and Consulting Agreements

The conservator should organize the institution’s personnel around the work needs, recognizing the strengths and knowledge of the individuals involved. The conservator should establish goals to:

  • Minimize adverse public reaction

  • Reduce risk

  • Reduce cost

  • Increase franchise value.

The conservator should analyze the bank’s basic functional areas and if they are deficient, reorganize around the function areas as outlined in Chapter 3. Those functional areas are:

  • Facilities

  • Security

  • Personnel

  • Branch operations

  • Accounting

  • Information technology

  • Legal

  • Cash, teller, and vault operations

  • Deposit operations

  • Asset management (loans, other items, off-balance-sheet items).

Although it is not necessary to organize all conservator-ship operations according to this listing of functional areas, it will be helpful in providing organizational consistency during the conservatorship process. Conservators may use their judgment is organizing the bank, but must ensure that each functional area is completely dealt with if its organization is different from that described.

Staffing problems commonly arise in banks that have been intervened. The conservator should make solving staffing problems a high priority because properly trained personnel are critical to accomplishing the necessary work. These problem areas should be addressed early after intervention and actions taken for their remedy. The conservator should work closely with the legal department, especially in matters such as terminating employment or initiating part-time employment relationships with the employees of the bank.

To the extent legally practicable, the conservator should terminate onerous employment, severance, consulting, or other compensation contracts. It is important that the conservator meet with the bank employees immediately after intervention to discuss the policy and operational procedures that are to be followed during the conservatorship period.


To the extent that contractors will be used, the conservator should work with the supervisory authority to develop contracting procedures to ensure a competitive basis and avoid unnecessary extra costs. Contracting procedures must comply with at least the spirit of the following standards:

  • Maximize the price of such sale or disposition, consistent with the goal of protection of depositors and other creditors of the bank.

  • Ensure fair competition among potential purchasers or merger partners.

  • Prohibit any kind of discrimination in the solicitation and consideration of offers.

These standards are equally applicable when dealing with contractors. Nondiscriminatory solicitations of offers and fair competition among potential contractors lead to competitive bidding. Competitive bidding in turn results in lower expenses, which effectively maximizes recoveries.


The conservator is responsible for the organization and maintenance of the files and documents of the conservatorships. These files should include all documentation prepared before and during the intervention and all documents, including case memoranda, reflecting any decisions or actions taken during the conservatorship period.

The conservator is also responsible for the retention and security of the files of the institution as he or she found them at intervention. Proper filing procedures for a conservatorship operation are detailed in Chapter 6.

Termination of Conservatorship

The powers of the conservator end at the discretion of the supervisory authority, generally upon final resolution, whether private, assisted, or a liquidation. The supervisory authority usually ceases control of the bank at this time.




Source: Comptroller of the Currency, Administrator of National Banks, Problem Bank Identification, Rehabilitation and Resolution (Washington, January 2001).Note: Sources and uses do not balance on this schedule since it purposely includes only balance sheet line items likely to affect liquidity. Longer term assets/liabilities, such as fixed assets and other liabilities, which usually have little impact on liquidity, are excluded in order to focus on meaningful cash flows. The out of balance condition can be monitored and controlled, and if significant should be researched. This process allows for more timely availability and presentation of data.


Most of the line item definitions can be modified by the bank to clarify individual bank reports, but there are certain exceptions, as noted.

Bank Assets

(Note: Include ONLY bank balances, NOT nonbank subsidiaries)

(1) Required Reserve Balance at Central Bank

The sum of Required Reserves due from bank balances.

(2) Total Loans and Leases

The sum of gross loans plus other real estate owned.

(3) Free Securities

This term is strictly limited to securities meeting the following characteristics: Salable securities held, securities available for pledging, un-pledged securities in transit, and assets securitized. These securities are not encumbered in any way, and are of sufficient unit/transaction size and credit quality to be repurchased or sold in the market at will. Book value rather than market value is acceptable.

An accurate number for “free securities” is not typically available from the general ledger. Management’s judgment is required to arrive at a representative figure in accordance with the definition provided. Various methods may be used, but should be subject to periodic testing to ensure reasonable accuracy.

(4) Money Market Assets

This term is limited strictly to the following instruments held externally in non-affiliated banks. No variance in the definition of “money market assets” is allowed. Additional columns may be added, if necessary, to provide an accurate portrayal of other liquid assets.

— Interbank accounts – due from, both overnight and term (do not include repos)

— Negotiable CDs purchased

— Foreign deposits placed, both overnight and term (euro-dollars and other foreign currency)

Bank Liabilities

(Note: Include ONLY bank balances, NOT nonbank subsidiaries)

(5) Demand Deposit Account Net of Float

Total demand deposit ledger balances, net of due from banks-deferred, due from Central Bank-deferred, and “other” cash items, such as items in process.

(6) Consumer Deposits

Separate consumer accounts, which exceed $100 million, if significant. The line (does not include DDA, which is reported separately) should reflect consumer deposits, such as:

— NOW accounts

— Money market checking accounts

— Non-transaction accounts, interest or noninterest bearing

— CDs < $100,000 (net of public funds)

— Passbook savings

— Money market savings

— IRA and Keogh accounts

(7) Interbank Accounts — Overnight

The sum due to other bank, as principal on an overnight basis.

(8) Interbank Accounts — Term

The sum due to other bank, principal for a term longer than overnight.

(9) Foreign Deposits — Overnight

All euro-dollars and foreign currency accepted as foreign branch liabilities on an overnight basis. Report retail deposits separate from wholesale or professional funds providers if significant.

(10) Foreign Deposits — Term

All euro-dollars and foreign currency accepted as foreign branch deposits for a term longer than overnight. Report retail deposits separate from wholesale or professional funds providers, if significant.

(11) CDs > $100,000

Total balance of jumbo CDs (net of investment agreements and public funds). This category could include deposit notes, or other similar liabilities, if they are in excess of $100,000. Include the entire deposit if it is greater than $100,000, but not deposits that are less than or equal to $100,000, if possible, based on management information system availability. Note: For potential erosion estimates, it is best to assume that an entire deposit which exceeds $100,000 will leave the bank rather than the amount in excess that of $100,000. However, for identification of uninsured deposits for FDIC purposes, only the amount of each deposit exceeding $100,000 is technically uninsured.

(12) Other Sensitive Funds/Deposits

Total of all funding sources that may exhibit unusual credit sensitivity that are not already defined.

(13) Treasury, Tax, and Loan

The sum of the Treasury, tax, and loan balances.

(14) Central Bank Window

Total borrowings from the central bank.

Nonbank Assets (Parent)

(15) Short-Term Internal Investments

Foreign deposits placed (from parent’s perspective).

Other short-term liquid assets Note: Typically, these parent company assets are placed in affiliated bank liability accounts, such as foreign deposits taken, and therefore also are reflected on the bank’s asset side — presumably in money market assets. An understanding of how these funds flow from the parent to affiliate and back is critical in an analysis of the funds flow analysis report to avoid double counting. It must be assumed that the bank’s liabilities to the parent will have priority on the bank’s liquid assets. Therefore, for analysis purposes they must be subtracted from the money market asset number for an assessment of bank level liquidity.

(16) Short-Term External Assets

Cash, foreign deposits placed, other short-term liquid assets. Note: Ensure that these assets are not carried in the “consolidated” funds flow analysis money market assets figure (4). They represent liquid assets the parent maintains outside of its own corporation and are available to the parent over the listed total money market assets figure in the funds flow analysis report.

Nonbank Liabilities (Parent)

(17) Commercial Paper, etc.

Total commercial paper issued by the parent company or subsidiary, master notes, and any other short-term liability, including term debt or debt payments that are approaching maturity.


(Sample format, tailor as appropriate)




Source: Comptroller of the Currency, Administrator of National Banks, Problem Bank Identification, Rehabilitation and Resolution (Washington, January 2001).

An earlier version of this chapter was published in David C. Parker, Provisional Administration - FBA (U.S. Agency for International Development, Washington, 2000).


Other terms identify the period in which a supervisory authority assumes responsibility for managing the affairs of a bank (e.g., provisional administration, special control, rescue bank, etc.). For consistency, the term con-servatorship is used throughout.


Banking laws regarding this subject differ from jurisdiction to jurisdiction; for example, some jurisdictions do not require that banks in con-servatorship meet normal capital requirements. The supervisory authority should, however, retain some degree of oversight to assure that the conser-vatorship is operating within proper guidelines.


Note that some jurisdictions do not grant such sweeping powers to a conservator.


The authorities should obtain legal advice regarding any adverse legal implications for such an action (e.g., does such a deposit freeze represent a violation of capital controls rules in the European Union?).


Experience shows that problem banks’ assets are generally worse than estimated by the supervisory authority. Frequently, those banks that are considered possible candidates for rehabilitation have far greater losses than estimated. Therefore a key function for the conservator is to do an in-depth asset valuation to adjust for more realistic valuations.


This option is strongly discouraged, except when necessary during systemic crises. If normal or core operations lead to depositor runs on the bank, then it should probably cease daily operations or be placed directly into receivership.


On appointing a conservator, the supervisory authority should consider allowing him to delegate limited decision-making authority to others.


The period for completion of the resolution plan can vary among banking laws; however, 60 days is considered a reasonable time frame depending on the size and complexity of the bank.


Note that bank rehabilitation/restructuring is not addressed in-depth. There are several books and publications regarding bank restructuring; however, most deal with the issue as regards a systemic crisis, which is not the focus of this manual. Ad hoc bank restructuring is difficult and expensive; if tried, the authorities should follow the same basic operating procedures detailed in this chapter, along with meeting the criteria for open bank assistance, as discussed in Chapter 5.


Fernando de Mergelina, The Resolution Process for a Bank in Crisis and the Operating Manuals for that Process. Operating Manual No. 1: Conducting a Bank Receivership (Inter-American Development Bank, Washington, 2004), p. 19.


As mentioned earlier, blocking deposits is strongly discouraged, unless it is an insider deposit, or related to a loan.


Portions of this section are summarized from Comptroller of the Currency, Administrator of National Banks, Problem Bank Identification, Rehabilitation and Resolution (Washington, January 2001).


As mentioned above, however, the bank should not pay higher interest on core deposits than local market rates.


Summarized from Comptroller of the Currency, Administrator of National Banks, Problem Bank Identification, Rehabilitation and Resolution (Washington, January 2001).