Abstract

To avoid financial disruption to a local community or other adverse economic implications, a bank resolution should be completed promptly. Officials from the supervisory authority and the deposit insurance agency (DIA) (and the conservator, as applicable) should work together to accomplish a smooth resolution in order to make prompt insured deposit repayment and maintain public confidence in the banking system. Note that any resolution method chosen will be more effective with early planning and preparation.

To avoid financial disruption to a local community or other adverse economic implications, a bank resolution should be completed promptly. Officials from the supervisory authority and the deposit insurance agency (DIA) (and the conservator, as applicable) should work together to accomplish a smooth resolution in order to make prompt insured deposit repayment and maintain public confidence in the banking system. Note that any resolution method chosen will be more effective with early planning and preparation.

There are three broad categories for problem bank resolution:

Bank resolution through private solutions is the responsibility of management and shareholders. In theory, the supervisory authority should have encouraged these solutions prior to any intervention. It should be noted that recapitalization in an attempt to rehabilitate a bank is extremely difficult in an emerging market (and can sometimes exacerbate the losses incurred by the bank’s depositors, creditors, and shareholders). Similarly, attempting to negotiate a merger with an existing bank is time-consuming and may extend the losses already incurred by the failing bank.1

A liquidated payout is the most extreme form of problem bank resolution, and the least desirable. It can be time-consuming and labor-intensive and can remove banking offices from communities. Therefore, the most practical approach is to focus on assisted transactions (i.e., the sale of the whole bank or parts of the bank). This option is facilitated by use of a purchase and assumption (P&A) agreement as an efficient method of problem bank resolution that also provides prompt payment to insured depositors.2 Some jurisdictions provide for financial assistance to ailing banks; however, this is strongly discouraged, except during systemic crises (see Box 5.1).

Generally, banking laws provide that, when corrective measures have failed, the supervisory authority (via a conservator or receiver) may carry out this task with all powers, authority, and ownership rights of the officers, directors, and shareholders of the bank.

Usually it is provided that a conservator or receiver may:

  • Sell all or substantially all, or any part, of the assets and redeem liabilities of the bank

  • Merge the bank with another bank or sell the bank to an acquirer, subject to the supervisory authority’s approval

  • In the event it is ultimately determined that the bank cannot be rescued, liquidate the bank and decide the validity of, and pay claims against, it.

In carrying out this responsibility, the supervisory authority should conduct the sale or merger of a bank in a manner that will:

  • Maximize the price of such sale or disposition, consistent with the goal of depositor and creditor protection

  • Ensure fair competition among potential purchasers or merger partners

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

  • Ensure that the acquirer, merger partner, or combined bank is a strong bank, majority-owned and controlled by private owners.

Open Bank Assistance

Direct capital injections, purchases of financial institutions’ stocks, direct loans, or placement of deposits from the government or deposit insurance agency (DIA) represent a direct subsidy to recipient financial institutions. These types of financial assistance are commonly referred to as open bank assistance (OBA) and are strongly discouraged except in systemic crises.

Any bank resolution method should be subject to the “least costly” form of resolution. OBA is seldom the least costly form of resolution. On paper, a business plan may look like the least costly form of resolution, but the reality is that business plans from problem banks are usually speculative and optimistic. Bank losses are virtually always greater than those identified by bank examiners, and the resolution cost is bound to be greater than originally thought. At best, the outcome is uncertain.

A bank’s management and stockholders are responsible for its success or failure, and they bear the responsibility for rehabilitation, including raising additional capital. The fact that shareholders, presumably motivated by the potential loss of their investment, will not or cannot recapitalize the bank is a good indication that the expected return is insufficient. If recapitalizing a troubled bank is a good investment, then the market will provide that capital injection. If a bank cannot attract private investments, then it is probably not a sound investment. If a bank has been unsuccessful in rehabilitation efforts, then it is unlikely that it will ultimately survive.

Providing OBA to a troubled bank, therefore, is a poor financial decision (“pouring good money after bad”), and will likely result in further financial losses. OBA increases moral hazard. If ailing banks know that OBA is readily available, they could use the funds to engage in ever more risky activities (“gambling for resurrection”), which will significantly increase a DIA’s risk exposure and likely losses, potentially damaging financial sector stability. Additionally, if a DIA has the legal authority to provide financial assistance to troubled banks, political pressure could compel such an injection into an ailing bank when it would not do so on its own decision.

DIAs in particular should not offer financial assistance to problem banks. Deposit insurance is to protect depositors, not prevent bank failures. In a normal market economy, banks should be allowed to fail. Insolvent banks should be closed. Using deposit insurance funds for OBA contradicts the mandate of an explicit, limited deposit insurance scheme, since it involves protection of uninsured depositors and other creditors.

OBA should only be considered during systemic crises and then should be led and guaranteed by the government, not the DIA. OBA can confuse the role of the safety net participants. For example, the central bank, not the DIA, should provide lender-of-lastresort functions. If a DIA is to support troubled banks, it should do so only on the request, and with the guaranty, of the government.

To avoid the possibility of supporting ailing banks in inappropriate circumstances, any financial assistance should be required, at a minimum, to meet the following conditions, as determined by the DIA and Supervisory Authority:

  • Least cost. The DIA must establish that the assistance is the least costly resolution method (i.e., liquidated payout, other negotiated assistance transactions, such as a purchase and assumption agreement or insured deposit transfer). In most cases, bank closing proposals are less costly to the insurance fund. Requiring the least costly method to resolve an ailing bank should provide greater incentives for an insured bank’s shareholders and large creditors to impose more discipline on management to operate safely and soundly, thus helping to reduce moral hazard. In systemic crises, however, the authorities may not have the time to analyze or implement a least costly solution.

  • Management competence. The DIA should either require new management or ensure that the bank’s management is competent, has complied with all applicable laws, rules, and supervisory directives and orders, and has never engaged in any insider dealings, speculative practices, or other abusive activity.

  • Injection of private capital. If at all possible, new or existing shareholders must be required to inject significant matching funds to the institution to assure that the risk of the bank’s potential failure is not borne entirely by the DIA.

  • No benefit to former shareholders. The DIA must ensure that the ailing bank’s ownership interest is eliminated entirely or diluted to a nominal amount (in proportion to private capital injection). A major criticism of OBA is that shareholders of failing institutions can benefit from the assistance provided by the public funds.

  • Exit strategy. Open bank assistance must require a legitimate business plan that elaborates that the assistance will restore the bank to profitability and result in full repayment within a reasonable time frame and include a satisfactory rate of return. Executive compensation should be limited and dividend payments should be suspended until the financial support is repaid.

Any financial assistance to an ailing bank must be properly monitored and conditioned by the supervisory authority (and DIA, if applicable). Strict oversight will be essential if the DIA provides OBA. At the very least, the bank should still be considered under special supervision to ensure safe and sound practices.

When resolving problem banks, the supervisory authority must avoid individually negotiated deals with banks or other investors. Frequently, there is little assurance of adequate capitalization for individually negotiated deals, and they can be more difficult to analyze.

A P&A agreement should be a standardized contract setting forth the conditions of a bank resolution to all interested parties.3 This provides for a level playing field where all parties realize that there will be no preferential treatment for any possible investor (as long as they have or will have a bank license and adequate capitalization). Competition among potential acquirers will be enhanced when they are assured of fair and equitable treatment for all.

The resolution method that comes closest to duplicating a free market process will generate the best economic outcome for all involved. Ideally, the method will:

  • Maximize the number of bidders

  • Permit several options of transaction structures

  • Give accurate and ample information to the extent possible

  • Allow adequate time for due diligence.

A P&A transaction provides that a financially healthier bank will purchase certain “good” assets and pay the purchase price through an assumption of insured deposit liabilities.4 This approach represents a more expedient method of resolving a failed bank because it can be accomplished quickly (usually over a weekend), and has the potential to maintain banking services in underserved communities. Additionally, when there are several potential bidders, the failed bank’s franchise value can be captured, to the benefit of the creditors, reducing the final cost of the failure.5 Using assets in a P&A transaction to fund deposits has two added benefits: first, keeping assets in the private sector; and second, reducing the financial outlay that a DIA must provide to repay insured deposits.

This chapter presents a systematic marketing strategy of an efficient standardized resolution process for failing banks.6 The resolution process involves valuing a bank, marketing it, soliciting and accepting bids for its sale, and working with an acquirer through the closing process (or liquidation, if there is no acquirer).

Of course, it will not always be possible to follow all the recommended procedures due to time constraints, confidentiality concerns, or conflicting bankruptcy legislation,7 to name a few. The bank resolution methods described may have to be modified and steps skipped in order to accomplish a successful resolution and payment of insured depositors. Annex 5.1 is an illustration of the FDIC’s resolution timeline.8

RESOLUTION PREPARATION

When a problem bank is dealt with swiftly, asset and franchise values are preserved, generating maximum return. This makes the failing bank more desirable to potential acquirers and lowers the ultimate cost of resolution. Resolution preparation involves:

  • Compiling initial information about the bank

  • Asset valuation

  • Completion of a financial information package (bid package)

  • Marketing meeting logistics.

Regardless of whether the bank is operating or closed, experienced and qualified personnel should complete the asset valuation. If the bank is in conservatorship, bank staff can prepare the bid package, under the direction of the conservator.

Initial Information

While the assets are being valued and the bid package is being completed, a marketing specialist should work very closely with the conservator to gather preliminary information regarding the bank. The conservator should be prepared to provide such logistical and financial summary information as follows:9

  • Bank premises and owned property (location and number of main offices and branches—those that are open, those not in operation; number of employees at each location; records maintained on-site at each location; banking premises owned or leased; recorded value; other tenants; information system—computerized or manual)

  • Number and value of loans at each location (name and amount of major debtors; insider lines, e.g., directors, officers, shareholders, affiliates; location of notes; loan classifications)

  • Deposits (number and value of deposits at each location; name and amount of major depositors; insider depositors, e.g., directors, officers, shareholders; distribution of depositors; debtor/depositor relationships for potential offsets)10

  • Borrowings—secured or unsecured

  • Subsidiaries

  • Contingent liabilities

  • Trust department activities

  • Ownership structure

  • Enforcement actions pending

  • Litigation

  • Other—leases, contracts, etc.

This preliminary information will give the marketing specialist an idea of the condition of the bank and will likely affect the decision as to the type of transaction to offer. A more comprehensive information package (discussed below) will be prepared for potential acquirers’ review.

Asset Valuation

The supervisory authority staff or other experts should estimate the worth of a bank’s assets using valuation models. Because time is of the essence, there is not enough time to appraise every asset, so the models will provide statistical sampling. They can divide the assets into categories, identify a sample, and carefully review the assets to establish a liquidation value for each asset.

The liquidation value is derived from the future cash flows and the expenses likely to be incurred during the collection of the asset. Adjustments can be made to discount future cash flows and to account for liquidation expenses. The loss factor that results from that estimate is then applied to the category from which the sample was taken.

When all categories are sampled and evaluated, the loss factors are aggregated and extrapolated to the bank as a whole. This computation will produce a loss factor, or cost of liquidation, which will be used in assessing bids from potential acquirers.

Bid Package

The bid package should build on the initial information and include detailed data on the amounts and types of assets and liabilities that the failing bank holds. The information may vary from bank to bank, depending on the business strategy as reflected in the asset and liability structure. Some of the more important information contained in the bid package includes:

  • Demographic information, including market area, population, history of bank, customer type, competition.

  • Schedules that represent the book value of items that comprise the bank’s balance sheet:

    • Cash and equivalents—due from banks spread by bank name, term, and interest rates.

    • Investment securities—separated by marketability, and listed by name, term, and interest rates.

    • Loans—summary reports by type (commercial, real estate, installment, credit cards, etc.), concentrations of credits, maturity, interest rate, etc., including accrued interest receivable. Provide separate reports for local currency and each foreign exchange currency used.

    • Fixed assets—location of bank premises, including branches, appraisals (if available), terms of leases and leasehold improvements (as applicable), computer and other equipment, furniture and fixtures, and applicable insurance coverage.

    • Distribution of ATM machines, itemizing the number of operations per day and per location, and the mean volume per transaction.

    • Other real estate—individually listed by name, location, book value, and appraised value (if available).

    • Subsidiaries—name, type, purpose, and status (active or dormant).

    • Other assets—detailed listing.

    • Deposit base—summary reports reflecting cost of deposits, by type (demand, savings, time) and maturity, including accrued interest payable. Detailed listing of individual deposits, concentrations, and number of debit cards. Provide separate reports for local currency and each foreign currency used.

    • Borrowings—identified by name, term, and interest rates.

    • Guaranties—identified by name and other details (including obligations regarding term, interest rates, etc.).

    • Other liabilities—detailed listing.

    • Contingent liabilities.

    • Capital accounts—include recent income and expense statement.

  • Detailed description of the data processing (topology, applications, conceptualization).

    • Description of the communications map.

    • Description of the security modules (redundant files, backups, etc.).

    • If the data processing is outsourced, it will be necessary to include the contract, with any negotiations under way, as well as the terms and scope of the service so acquired.

  • Employees—short biographies of key management personnel, unusual situations (golden parachutes, onerous employment contract obligations), chart of all employees (titles, number, capabilities, training and salaries, if possible).

  • Contracts—detailed listing of all contracts, whether the bank is party as provider or receiver of goods or services.

  • Litigation—detail of pending court cases, including a legal opinion estimating the outcome and foreseeable consequences for the bank.

Both the asset valuation and the bid package are proprietary and strictly confidential. Although the bid package will be provided to potential acquirers, the asset valuation will not.

Marketing Presentation Logistics

The marketing specialist should estimate the necessary time for completion of the asset valuation and the bid package, so that a marketing presentation can be scheduled. Prepare confidentiality agreements for all potential acquirers who will be invited. (Both these subjects are discussed in greater detail below.)

Based on the marketing specialist’s time frame estimates, a date, time, and place for the marketing presentation must be established. If the supervisory authority has appropriate accommodations, it is simply a matter of reserving the space and maintaining confidentiality. If not, a neutral site should be selected, such as a hotel conference room.

MARKETING STRATEGY

Once the information mentioned above has been compiled, the marketing specialist can begin determination of the best transaction form to offer potential acquirers. Some factors that affect the marketing strategy are:

  • Asset and liability composition of the failing bank

  • Competitive and economic conditions of the bank’s market area

  • Prior resolution experience in the same market

  • Other relevant information (such as potential fraud at the bank).

Some of the questions that must be answered to determine the appropriate form of the transaction are:

  • Will the bank be sold whole or in parts?

  • What types or categories of assets will be offered?

  • How should the assets be packaged?

  • How should the assets be priced?

Least-Cost Analysis

Some jurisdictions require that the resolution method be the least costly of any other resolution method. Resolution alternatives are evaluated on a net present value basis, using a reasonable discount rate, to determine the least costly resolution.

The least-cost analysis is generally defined as the calculation to determine the problem bank resolution method that is the least costly to a deposit insurance fund (or government budget) of all possible means of resolving the failed bank. Some factors that can influence the least-cost analysis include the difference between assets and liabilities book values, levels of insured deposits, premium paid by an acquirer, and losses on contingent claims.

A typical formula to calculate least cost is: (Loss on assets – equity capital – unsecured creditors’ loss) × (insured deposits/total deposits).

A P&A is a transaction in which a healthy bank (the acquirer) purchases some or all of the assets of a failed bank and assumes the insured deposits. To gain entry to a new market or to increase market share, an acquirer will often pay a premium for this transaction. When the amount of insured deposits assumed exceeds the value of the premium plus assets purchased, an acquirer may receive assistance. Some benefits of a P&A transaction include:

  • Customers suffer no loss in service

  • Acquiring bank can increase market share

  • Usually less expensive than a payoff

  • Depending on transaction, can keep assets in the private sector

  • P&A transaction with put options on assets allows acquirer to perform due diligence after transaction (although this “cherry-picking” often leads an acquirer to neglect servicing questionable assets).11

The P&A transaction, whether used to transfer insured deposits and selected assets to an assuming bank or to a “bridge” bank managed by the government until an assuming bank is found, employs the instant use of the failed bank’s assets to offset the liabilities transferred.

Under the P&A concept, certain assets and insured deposits of the failed bank are transferred to an assuming bank at book value. In this way, the assets of the failed bank help offset the deposit liabilities transferred to the assuming bank, thus reducing the impact on the deposit insurance fund (if there are not enough “good” assets to balance the amount of insured deposits, the DIA must advance the cash to balance the transaction—assets must equal liabilities). The real cost of not employing a P&A transaction can be devastating to a deposit insurance reserve fund.

Although there are several variations of the P&A transaction used around the world, the concept is very simple. The objective is to include as many assets as possible in the transaction while ensuring that they are of adequate quality so as to not jeopardize any deal or create a problem bank situation with an acquirer. Table 5.1 illustrates the various forms of assets and liabilities with regard to a P&A.

TABLE 5.1

Summary of a Typical Purchase and Assumption Transaction

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Depending on the bank insolvency regime, some cash may be needed to fund receivership operations until asset liquidation generates enough working capital. Most bankruptcy regimes (commercial or special) stipulate that receivership operating expenses have the highest claim priority.

See footnote 2 in this chapter.

Some examples of the forms a P&A transaction can take are:

  • Whole bank. Where a liquidating supervisory authority or the government pays an acquirer to take virtually all assets and liabilities of a failed bank (negative bid).

  • Clean bank. Some good assets are sold to an acquirer that also assumes insured deposit liabilities. There are many variations of the asset sale. It can include put-back rights, exclusive asset purchase options, and representations and warranties. Of these, the exclusive asset purchase option, or “cherry pick,” is probably the simplest. The liquidator, or receiver, may lack funds to pay for assets put back, and asset quality is usually insufficient to justify representations and warranties.

  • Deposit transfer. An acquirer assumes insured deposits and acts as paying agent for the DIA. Few assets are transferred other than the cash needed to cover the transferred deposits.

Tables 5.2 and 5.3 are two pro forma illustrations of the impact of a P&A transaction on a problem bank’s balance sheet. Both begin with an original balance sheet, which is then adjusted for loss in the bank’s loan portfolio, and concludes with the split of assets and liabilities. In the first example (Table 5.2), the split is between the assuming bank and the receivership; in the second example (Table 5.3), the split is between a newly created “bridge” bank (temporarily owned and operated by the government) and the receivership.

TABLE 5.2

Assuming Bank Purchase and Assumption Example: Failed Bank—Original Balance Sheet

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TABLE 5.3

“Bridge” Bank Purchase and Assumption Example: Failed Bank—Original Balance Sheet

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A bridge bank allows greater flexibility in that either insured or all depositors can be protected (Box 5.2). Other creditors may be protected as well, depending on governmental decision. A great benefit of a bridge bank is that the contingent liabilities (e.g., unfunded loan commitments, letters of credit, litigation, unknown liabilities, etc.) can be left behind in the receivership, along with selected other liabilities, and the government will bear none of those liabilities.

There is no “one size fits all” answer when choosing a resolution transaction, but a P&A transaction is a versatile vehicle to fit many situations. The proper vehicle for a failing bank resolution can help avoid disruption of orderly economic activity such as:

  • Loss of a bank in an isolated area

  • Severe reduction in credit availability for an industry or region

  • Considerable government ownership of a failed bank’s assets.

An in-depth analysis of asset quality is the primary factor in the type of transaction planned. It is more cost-effective and less disruptive to sell as many assets as possible through the P&A transaction. Often this fact will justify selling the assets at a discount from book value. An acquirer’s reluctance to pay reasonable value for assets should not lead to a “fire sale” mentality, however.

The basic P&A transaction is adaptable to change. For example, where there is a very large failing bank, it may be advisable to market it branch by branch (or in clusters) in order to maximize potential bidders (Box 5.3). The provisions of the P&A transaction should be accommodating enough to return the greatest value for the failed bank. When liquid assets are sufficient to cover payment of insured deposits, a good strategy may be to offer a P&A transaction with an exclusive option to purchase certain assets. This will give an acquirer enough time for asset review to determine which ones meet its criteria. Purchase of additional assets may fund payment of all or part of uninsured deposits and other creditors, and will quickly return assets to the private sector.

Another alternative is to pass assets at book value initially and then provide for third-party valuation after the fact. The government and the assuming bank can each hire an independent auditing firm to value the assets and negotiate from the two results. If there is more than a 10 percent variation between the two reports, a third can be ordered.

“Bridge” Banks and Nationalization

A bridge bank is a temporary financial institution established to receive the deposits and good assets of one or several failed institutions.1 A bridge bank is a type of purchase and assumption (P&A) agreement where the government (or the restructuring agency) itself temporarily acts as the acquirer until the time that the institution is ready for a sale. The bridge bank may be allowed to undertake all or only some banking business, such as providing new credit and rolling over existing credit. Bad assets are liquidated or transferred to an asset management company. If it is expected that the bridge bank will be sold quickly to a solvent bank, the government may opt not to inject any capital in the bank, which makes the bridge bank arrangement potentially a cheap arrangement for the government.

Nationalization of a failing bank means that the government becomes the (main) owner of the insolvent bank and recapitalizes it. The use of the term here is different from the more traditional nationalization, which refers to a situation wherein the government which takes over a solvent bank. In a systemic crisis, the government’s aim is usually to own the bank temporarily and to seek to privatize it at an early date.2

1

Generally in a P&A agreement, only insured deposits transfer to an assuming bank. In a bridge bank situation, however, insured-only or all deposits may be transferred, depending on potential systemic impact.

2

Edward J. Frydl and Marc Quintyn, “The Benefits and Costs of Intervening in Banking Crises” in Bank Restructuring and Resolution (International Monetary Fund, Washington, 2006), pp. 32–33.

Branch Breakups1

There may be instances where a bank has so many branch offices that it may not be feasible for a single institution to acquire it. If such is the case, the supervisory authority may want to consider a “branch breakup” (i.e., offering branch offices individually, or in clusters, to multiple bidders). Following are some pros and cons of branch breakups:

Pros:

  • Provides for more potential bidders (especially smaller banks), which may increase the premiums received

  • Increases the resolutions options available to the bidders.

Cons:

  • Information technology and conversion costs are usually higher

  • A quick and smooth transaction is more difficult

  • One acquirer must be the “lead” acquirer (an often onerous role), in processing and allocating transactions and costs.

Some branches may be undesirable, resulting in liquidated payoff.

1

Federal Deposit Insurance Corporation, Resolutions Handbook (Washington, 1998).

Preferred failing bank resolution methods are those that help prevent adverse economic results. Their goals are to:

  • Preserve franchise values

  • Maximize private ownership of assets

  • Minimize government ownership of assets

  • Preserve (or help create) competitive markets.

If none of the above options prove feasible, then it will be necessary to perform a liquidated payout to insured depositors. During such a situation, it is critical to avoid public gatherings and lines at the failed bank’s offices, as this may result in contagion and possible systemic risk. One solution to this problem is to mail checks to insured depositors. If this option is selected, then it must be highly publicized in all media sources.

Another viable option is to make insured deposit payment via electronic transfers to another bank (Box 5.4). Upon bank failure, depositors should be clearly instructed that they should open an account at another bank, which will transmit the information to the DIA for verification and payment via electronic transfer. Depositors should be notified via a press release to printed media, public service announcements on television, and flyers distributed at every failed bank location.

Other banks should be notified of the process as soon as possible following the bank closing and requested to waive any bank account opening fees they may normally charge. Electronic depositor transfer forms (Annex 5.2) and nonconfidential depositor information should be provided to the other banks for more efficient processing. DIA personnel will review and verify the deposit information, and make deposit transfers as appropriate.

LEGAL DOCUMENTS

There are several standardized documents for a P&A transaction. Supervisory authority attorneys will need to review them to ensure compliance with applicable legislation. Briefly, the documents include:

  • Confidentiality agreement. This must be signed by any bank or investor group that is interested in receiving any information regarding the pending transaction. Confidentiality is paramount in order to maintain public confidence and limit competitive abuse (Annex 5.3).12

Paying Insured Deposits via Electronic Transfers to Another Bank

  • Upon bank failure, depositors should be clearly notified of the deposit claim process via:

    • Press release to print media

    • Public service announcements on television

    • Notices posted and flyers distributed at every failed bank location.

  • Other banks should be notified of the process as soon as possible following the bank closing and requested to waive any bank account opening fees they may normally charge.

  • Depositors should be clearly instructed that they should open an account at another bank (or, in the case of an existing account, request that information be provided to the deposit insurance agency - DIA).

  • Electronic depositor transfer forms (Annex 5.2) and nonconfidential depositor information should be provided the other banks for more efficient processing.

  • The other bank will transmit the information to the DIA for verification and payment via electronic transfer.

  • DIA personnel will review and verify the deposit information, and make deposit transfers as appropriate.

  • P&A agreement. The P&A deposit agreement identifies the deposits, terms, and conditions under which they are to be assumed. It also comprises the terms and conditions of any assets to be sold as part of a problem bank resolution. Additionally, in all these agreements, the acquirer is indemnified for any actions of the failing bank prior to failure, unless expressly assumed. (This is not a monetary indemnification, but a legal redirection of claims to the receiver.)

  • Interim asset servicing agreemnent. This agreement requires an acquirer to responsibly service specific assets for a certain period. This can apply in cases where the acquirer has an exclusive purchase option on assets, or when the liquidating supervisory authority lacks personnel to service their assets.

  • Escrow agreement. This provides an opportunity to consummate a P&A transaction in advance of the scheduled bank closing. It assures both parties that commitments will be honored (Annex 5.4).

  • Bid agreement form. A legal document and form that commits the potential acquirer to abide by the restrictions of the resolution process and pay the amount specified (Annex 5.5).

POTENTIAL ACQUIRERS

A P&A transaction is an excellent opportunity for an acquiring bank to either increase market share or expand into areas where the acquirer does not have a presence. Paying a premium for deposits and options on banking premises is much more cost-effective than obtaining premises and soliciting deposits on a de novo basis. (In the United States, estimates are that the acquirers in these types of transactions retain approximately 70 percent of deposits.)13

Additionally, the efficiency of the P&A transaction limits financial disruption to a community, maintaining public confidence and stability in the banking system, which should be a mutual goal of every organization involved in the banking sector.

In many cases, it may be prudent to maintain a database of approved banks and investors that are interested in establishing bank operations in the country. When evaluating investor groups for approval, the supervisory authority must consider, among other factors:

  • The length of time required for licensing a new bank

  • Whether the investor group can raise sufficient capital

  • Whether the investor group can provide competent management.

The supervisory authority must be confident that those parties on the list are strong enough to acquire a failed bank and sustain profitable operations. The supervisory authority should keep track of any seriously interested bank or investor group and provide that information to the marketing specialist.

A marketing specialist should confidentially work with the supervisory authority and contact all strong, healthy banks in the country to solicit their interest in acquiring the failing bank. Additionally, again with the supervisory authority, the specialist should solicit the interest of foreign banks attempting to obtain licenses in the country. Another method to elicit interest is to run general advertisements in international trade journals (especially in the specific region) announcing these opportunities (Annex 5.6); however, confidentiality and the adverse impact on the banking system must be considered in relation to such an act.

MARKETING PRESENTATION

After potential acquirers have been identified they should be contacted and invited to a marketing presentation. Registration forms and confidentiality agreements should be mailed or faxed to the potential acquirer. Neither of these forms should identify the failing bank under consideration. Potential acquirers should return a copy of each of the forms. This will guide the marketing specialist in preparing the appropriate number of information packages. The potential acquirers should retain the original forms and present them as their admission tickets to the marketing presentation.14

Before the meeting, the marketing specialist should ensure that logistical requirements of the meeting are met. There should be adequate numbers of chairs and tables. Any audiovisual equipment (e.g., microphones, overhead or slide projectors, personal computers for PowerPoint presentation, etc.) should be tested. The marketing specialist should also have a rehearsed, standardized script in order to assure a professional presentation.

A registration table, staffed by adequate supervisory authority personnel, should be set up near the entrance of the meeting room. Supervisory authority personnel should screen persons seeking entry. The confidentiality of the proceedings must continually be stressed. Only approved potential acquirers (with properly completed registration forms and confidentiality agreements) should be allowed in. Members of the press must not be allowed to attend.

At registration, an information package consisting of financial data, legal documents, transaction description, and other material should be provided to each potential acquirer. (More than one representative from a potential acquirer may attend the presentation, but only one package should be provided.)

The marketing specialist should cover the following topics:

  • Financial data on the bank. This should consist of applicable portions of the bid package discussed above redacted of any confidential information.

  • P&A transaction summary. Provide a sample pro forma balance sheet, clearly marked “for reference purposes only,” that demonstrates the financial effects of the transaction. It should show the effect of the required assets to be purchased and deposits to be assumed. Optional asset purchase opportunities can be on other schedules.

  • Legal summary. A supervisory authority attorney should make a short presentation describing the nature of the transactional documents and be available to address legal issues.

  • Regulatory requirements. Briefly describe the capital and other requirements of a new or enlarged bank.

  • Due diligence scheduling. Potential acquirers should have the opportunity to go on-site and examine the relevant records of the failing bank. Depending on the nature of the proposed transaction and the size of the failing bank, this could range from one day to one week or more. The marketing specialist should provide contact information for due diligence scheduling.

  • Bid process. The bid agreement form, provided in the package of materials, spells out the legally binding process for bid acceptance. The marketing specialist should estimate the time needed for due diligence and establish tentative dates for bid acceptance and closing of the transaction.

The marketing specialist should clearly advise potential acquirers that they are not to discuss the bank failure or the impending transaction with any failed bank employee, bank vendors, lessors, attorneys, or accountants prior to the actual closing of the transaction. Any such communication is a violation of the confidentiality agreement. Additionally, the marketing specialist should stress that potential acquirers are strictly prohibited from contacting other potential acquirers regarding any aspect of the process.

DUE DILIGENCE15

Due diligence is the potential acquirers’ on-site inspection of the premises, records, and operations of the failing bank. Due diligence allows the potential acquirers to assess the franchise value and calculate a knowledgeable bid amount.

Approved potential acquirers will have the opportunity to go on-site and examine the relevant records of the failing bank. The potential acquirer must have completed a confidentiality agreement and should be reminded of the need for confidentiality regarding the transaction. The confidentiality agreement is a legally binding document and violations are subject to criminal penalties.

Maintaining the “level playing field” concept, all potential acquirers conducting due diligence should have access to the same information. The number of members of potential acquirers’ due diligence teams will depend on available space.

Potential acquirers should be granted adequate review time, keeping in mind the urgency of the resolution process. If the failing bank is relatively small and/or the contemplated transaction is a deposit transfer with no asset sales, due diligence may be accomplished in a day or less. On the other hand, a larger bank in a transaction with possible asset sales may require a week or more. In cases of lengthy due diligence, appropriate financial information may be updated and provided to all potential acquirers.

The marketing specialist should create and maintain a schedule of the due diligence calendar. Scheduling should generally be on a first-come, first-served basis. Each potential acquirer performing due diligence must provide the name of the leader of the team (with contact information: telephone number, fax number, e-mail address, etc.) and a list of all the members of their due diligence team. The number and/or names of other due diligence teams should not be disclosed under any circumstances.

Working with the conservator, the marketing specialist must ensure that all necessary information (as of the same date) is available to each due diligence team. The conservator or designee should monitor the due diligence process on-site. Unusual requests should be cleared with the marketing specialist. Sign in/out forms should be developed and use required of the due diligence teams.

Policies regarding record review access must be developed. For example, to prevent customer raiding, due diligence policy may dictate providing depositor information represented only by account numbers, with no names and addresses (if possible). More access should be allowed in asset review, because it is in the best interest of the supervisory authority to divest as many assets as possible.

Copying of the failing bank’s records should be prohibited, although handwritten notes or personal computer-generated information may be permitted. Additionally, the potential acquirers conducting due diligence should not have access to board minutes, supervisory examinations, or personnel or other sensitive records.

BID ACCEPTANCE

After all potential acquirers have finished due diligence, they will submit their bids to the appropriate authority (Annex 5.5). The bid amount (or premium) is the price a potential acquirer puts on the value of the transaction (asset purchase options, deposit base, branch network, etc.).

Unless the level of due diligence scheduling prevents it, the bid date announced at the marketing presentation should be adhered to. Bid submission policy should require personal delivery of an original bid, signed by an authorized officer of the potential acquirer. Faxed bids should not be allowed except in very unusual circumstances (and then the original must be delivered via overnight mail).

Although the bid forms should not be altered, the supervisory authority reserves the right to accept or reject any bid for any reason. After bids are received, the winner is selected. Because the P&A transaction is so simple, usually this is a matter of selecting the highest bid. When priced pools of assets have been offered as an option, however, more complex analysis may be necessary.

The winning bidder should be notified, and a meeting to sign contracts should be scheduled. A reminder of the confidentiality of the process is appropriate at this point. Losing bidders should also be notified; however, again because of confidentiality concerns, the identity of the winning bidder should not be disclosed. The winning bidder is referred to as the “assuming bank” in the P&A transaction because it is assuming deposits as an agent of the supervisory authority.

CONTRACT SIGNING

To provide a comfort level to both parties to the transaction, the P&A contracts are signed several days prior to the actual closing of the bank. This eliminates last-minute conditions or demands by either party. Authorized representatives from the supervisory authority and the agent bank will sign the P&A agreements, and, if applicable, the interim servicing agreement. Both parties will also sign the escrow agreement. The escrow agreement merely states that the aforementioned documents were signed and put into escrow until the stipulated date. The agent bank receives only a copy of the escrow agreement. The other signed agreements will be delivered to the agent bank at the time of the bank closing.

CLOSING THE TRANSACTION

Bank failures can disrupt a community and undermine confidence in a banking system. Because it is critical to provide prompt access of customers to their deposits, a quick resolution to the event is required. The final step in the resolution process is actually closing the bank and transferring the assets purchased and deposits assumed to the assuming bank.

If the bank has been operating under conservatorship, much of the preparation for the final resolution can be done in advance. The final resolution will occur in a similar fashion to the initial intervention and appointment of a conservator. That is, supervisory authority staff will address each functional area, striving for asset control and security as stipulated Chapter 3.

The supervisory authority is responsible for settling the affairs of the closed bank. At the closing, the accounting team will prepare pro forma financial statements. According to the terms of the P&A transaction, the team will:

  • Balance the accounts of the bank

  • Transfer certain assets and insured deposits to the acquirer

  • Prepare a pro forma balance sheet demonstrating the division of assets and deposit liabilities that pass to an acquirer and those that remain with the liquidation

  • Calculate any amount necessary to balance the transaction (assets purchased compared to deposits assumed, minus bid amount).

An efficient use of time is to close a bank at the usual time on a Friday, work through the weekend to prepare the pro forma, and allow the assuming bank to re-open the bank as a branch the following Monday morning. The assuming bank will sign official receipts documenting the assets and liabilities transferred to it (Annex 5.7).

On Monday, the assuming bank will have access to the liquid assets purchased in an amount necessary to fund the transferred deposits. This will be based on the pro forma created over the weekend. If the pro forma is not completed, an estimate will be produced, subject to adjustment for errors and omissions.

PUBLIC AWARENESS

When the bank is closed and the supervisory authority appoints a receiver, the supervisory authority issues a press release to inform the public (see Annex 3.14 in Chapter 3).

The press release should stress that the action is being taken to minimize the impact of a bank failure on the local economy by finding an assuming bank to handle deposits and transferring assets into the private sector. The assuming bank may also issue a press release; however, the P&A transaction requires that the supervisory authority approve it in advance.

As mentioned in Chapter 1, goodwill can be created by sharing as much information as possible with the local media. Television, radio, and local newspaper announcements can provide failed bank customers with critical information regarding their accounts (whether loan or deposit). It is critical to publicize information regarding when and where insured deposits will be paid. Another information vehicle to consider is the town meeting, where representatives from the supervisory authority and/or DIA are available to answer questions about the failure, resolution process, closing process, and other general questions. Of course, private, confidential, customer-specific information should not be disclosed or discussed.

The marketing specialist should remain on-site throughout the weekend in case there are any disputes arising from misinterpretations of the transaction. After the bank is reopened on Monday morning, the marketing specialist is finished and the remaining assets and liabilities are subject to the liquidation process.

Of course it will not always be possible to follow all the recommended procedures due to time constraints, confidentiality concerns, or conflicting bankruptcy legislation, to name a just few possible complications. The bank resolution methods described may have to be modified and steps skipped in order to accomplish a successful resolution and pay insured depositors.

ANNEX 5.1 EXAMPLE OF A RESOLUTION TIMELINE

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Source: Adapted from Federal Deposit Insurance Corporation, Resolutions Handbook (Washington, 1998).

ANNEX 5.2. SAMPLE DEPOSIT TRANSFER FORM

ANNEX 5.3. CONFIDENTIALITY AGREEMENT

In consideration of , or its Affiliates (hereinafter collectively referred to as the “Bank”) and the Federal Deposit Insurance Corporation’s (the “FDIC”) furnishing to the undersigned potential acquirer (the “Potential Acquirer”) Proprietary Information (hereinafter defined) in order to enable the Potential Acquirer to evaluate a possible FDIC assisted acquisition of the Bank or any of its assets and liabilities (“Transaction”) and to prepare an acquisition proposal (“Proposal”), the Potential Acquirer hereby covenants and agrees with the FDIC as follows:

1. Definitions.

  1. “Proprietary Information” means all information, including without limitation, financial data and reports, plans and policy statements, business strategy and objectives, marketing information, names, addresses, loan files, and other information about depositors, businesses, organizations, individuals, governmental units, or other persons having a past, current, or potential banking or business relationship with the Bank (“Customers”), furnished by the Bank or the FDIC, or their respective directors, officers, employees, agents, or controlling persons, to the Potential Acquirer in connection with the Potential Acquirer’s evaluation of the Transaction at any time, and regardless of the manner in which it is furnished. Proprietary Information also includes: (a) this agreement, the circumstances under or for which it was made, the Information Package, the Instructions for Prospective Acquirers, any Summary of Terms or Summary of the Transaction and any other documents, financial data, and other information (written or oral) relating to the Bank obtained from, prepared by, or compiled by the FDIC; and (b) information, documents, data, or other materials derived from Proprietary Information. Proprietary Information does not include, however, information which (i) is or becomes generally available to the public other than as a result of a disclosure by the Potential Acquirer or its Representatives or Potential Investors (as such terms are hereinafter defined), (ii) was available to the Potential Acquirer on a non-confidential basis prior to its disclosure by the Bank or the FDIC, or (iii) becomes available to the Potential Acquirer on a non-confidential basis from a person other than the Bank or the FDIC, provided the Potential Acquirer has no reasonable basis to believe that such person is bound by a confidentiality covenant or agreement with the Bank or the FDIC, or that such person is otherwise prohibited from transmitting such information to the Potential Acquirer;

  2. “Affiliate” means any Person who is directly or indirectly controlling, or controlled by, or under direct or indirect common control with the party in question, including any person who would be an Affiliate or Subsidiary within the meaning of Section 2 of the Bank Holding Company Act;

  3. “Person” means any corporation, governmental unit (excluding the FDIC), company, partnership, joint venture, association, trust, unincorporated organization, or individual;

  4. “Representative” means any Affiliate, director, officer, employee, agent, or other contractor, including attorneys, accountants, and other advisors of the Potential Acquirer.

2. The Potential Acquirer agrees that it shall identify in writing to the FDIC, and provide other information as requested by the FDIC concerning, any agent, attorney, accountant, advisor, or contractor of the Potential Acquirer who is not a full-time employee of the Potential Acquirer prior to (i) any communications between such agent, attorney, accountant, advisor, or contractor and the FDIC regarding the Transaction, and (ii) the release or disclosure of any Proprietary Information by the Bank, the FDIC, or the Potential Acquirer to such agent, attorney, accountant, advisor, or contractor. The Potential Acquirer also agrees that it shall identify in writing to the FDIC, and provide other information as requested by the FDIC, concerning any Person (“Potential Investor”) with whom the Potential Acquirer intends to, or may enter into, a joint venture, partnership, syndication, investor group, or similar arrangement for the purpose of consummating, or attempting to consummate, the Transaction or preparing a Proposal, prior to (i) any communications between such Potential Investor and the FDIC regarding the Transaction, and (ii) the release or disclosure of any Proprietary Information by the Bank, the FDIC, or the Potential Acquirer or its Representatives to such Potential Investor.

3. Unless otherwise agreed to in writing by the FDIC, the Potential Acquirer agrees, and shall cause its Representatives and any Potential Investor to agree, except as required by law, (a) to safeguard and keep all Proprietary Information confidential and not to disclose or reveal any Proprietary Information to any person other than the Potential Acquirer or its Representatives or Potential Investors who are participating in the evaluation of the Transaction, or who otherwise need to know Proprietary Information for the purpose of evaluating the Transaction, (b) not to use Proprietary Information for any purpose other than to evaluate the Transaction and prepare a Proposal on behalf of the Potential Acquirer, and (c) to comply with the terms of this agreement. The Potential Acquirer acknowledges that the Proprietary Information may contain information subject to the confidentiality provisions of 12 C.F.R. Part 309 as such regulation may, from time to time, be amended, and may include Customer information subject to the Right to Financial Privacy Act as such Act may be amended and that any unauthorized use of such information may result in the imposition of criminal penalties under 18 U.S.C. Section 641 as such section may be amended. The Potential Acquirer will be liable for any breach of the terms of this agreement by any Representatives or Potential Investors, and any Representative or Potential Investor will be liable for any breach of the terms of this agreement by such Representative or Potential Investor. Further, the Potential Acquirer or any Representative or any Potential Investor will not take any originals or copies of Proprietary Information off the premises of the Bank without the prior written consent of the FDIC or as otherwise agreed to in writing between the Potential Acquirer and the FDIC.

4. In the event that the Potential Acquirer is requested pursuant to, or required by, applicable law or regulation, or by legal process, to disclose any Proprietary Information, the Potential Acquirer agrees that, as soon as possible prior to any such disclosure, the Potential Acquirer will promptly notify the FDIC of any such request or requirement so as to enable the FDIC to seek an appropriate protective order or take other appropriate action, and the Potential Acquirer will consult with the FDIC regarding the reasons for and the nature of any proposed disclosure. In the event that the Potential Acquirer is prohibited from notifying and consulting with the FDIC by court order or other compulsory legal process, the Potential Acquirer will notify and consult with such party as early as may be permissible. With respect to any disclosure referred to in the first sentence of this Section 4, the Potential Acquirer will furnish only that portion of Proprietary Information that, in the opinion of the Potential Acquirer’s counsel, is legally required, and the Potential Acquirer will exercise the Potential Acquirer’s best efforts to obtain reliable assurances that confidential treatment will be accorded such Proprietary Information. This Section 4 shall not restrict the Potential Acquirer in disclosing Proprietary Information to the Board of Governors of the Federal Reserve System, the Comptroller of the Currency, the Office of Thrift Supervision, or other federal or state regulatory agencies, if such disclosure is necessary to obtain required regulatory approvals of a Proposal or is otherwise required. References in this Section 4 to the “Potential Acquirer” shall be deemed to include its “Representatives” and “Potential Investors” unless the context otherwise directs in the judgment of the FDIC.

5. Unless otherwise required by law, neither the Potential Acquirer nor its Representatives or any Potential Investor will, without the prior written consent of the FDIC, disclose to any person (other than any person described in Section 3(a)) any information about the Transaction, or the terms, conditions, or any other facts relating thereto, including the fact that discussions are taking place with respect thereto or the status thereof, or the fact that Proprietary Information has been made available to the Potential Acquirer. The restrictions of this Section 5 shall not apply if the Potential Acquirer is selected as the acquirer of the Bank and consummates the Transaction.

6. If the Potential Acquirer decides not to submit a Proposal, the Potential Acquirer will promptly advise the FDIC of that decision. In that case, or if the Potential Acquirer is not selected as the acquirer of the Bank or the Transaction is otherwise not consummated by the Potential Acquirer, or upon the request of the FDIC at any time, the Potential Acquirer and its Representatives and Potential Investors will promptly deliver to the Bank all Proprietary Information obtained from the Bank, and to the FDIC all Proprietary Information obtained from the FDIC, and the Potential Acquirer and its Representatives and Potential Investors will destroy all copies, reproductions, computer records, notes, summaries, analyses, or extracts of Proprietary Information, or based on Proprietary Information, in the Potential Acquirer’s possession or in the possession of any of its Representatives or any Potential Investor. Upon the request of the FDIC, the Potential Acquirer will certify that the requirements of this Section 6 have been satisfied.

7. The Bank and the FDIC do not make any representation or warranty, express or implied, as to the genuineness, accuracy, or completeness of Proprietary Information. Neither the FDIC nor the Bank, nor any of their respective officers, directors, employees, agents, or controlling persons (within the meaning of Section 20 of the Securities Exchange Act of 1934) shall have any liability to the Potential Acquirer or to its Representatives or Potential Investors relating to or arising from the use of Proprietary Information. Information compiled by the FDIC with respect to insured institutions is compiled for the FDIC’s own supervisory purposes and is not a sufficient basis for preparing a Proposal.

8. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS HEREUNDER SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE FEDERAL LAW OF THE UNITED STATES OF AMERICA, AND IN THE ABSENCE OF CONTROLLING FEDERAL LAW, IN ACCORDANCE WITH THE LAWS OF THE STATE IN WHICH THE MAIN OFFICE OF THE BANK IS LOCATED.

9. The Potential Acquirer and its Representatives and Potential Investors acknowledge that the Bank or the FDIC, as the case may be, is the sole and rightful owner of Proprietary Information and that unauthorized disclosure will cause great and irreparable injury to the Bank or the FDIC for which there is no adequate remedy at law. Without prejudice to any rights and remedies otherwise available to the Bank or the FDIC, including compensatory damages, the Bank and the FDIC, and each of them, shall be entitled to equitable relief by way of injunction if the Potential Acquirer or any of its Representatives or Potential Investors breaches or threatens to breach any of the provisions of this agreement.

10. The Potential Acquirer agrees that, for a period of two years from the date hereof, the Potential Acquirer and its Affiliates or Potential Investors (who are bank or thrift depository institutions) who receive Proprietary Information or who have knowledge of the Transaction: (a) will not, nor will they encourage other persons to, directly or indirectly, solicit to hire any employees of the Bank; and (b) will not solicit Customers, including depositors with, or borrowers from, the Bank, other than in the normal and general course of business, and no such solicitation shall be based on or make use of Proprietary Information, directly or indirectly. The restrictions of this Section 10 shall not apply if the Potential Acquirer is selected as the acquirer of the Bank and consummates the Transaction.

11. It is further understood and agreed that no failure or delay by the FDIC in exercising any right, power, or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power, or privilege hereunder or under applicable law. The Potential Acquirer and its Representatives and Potential Investors acknowledge that any breach of, or failure to comply with, this agreement may constitute grounds for the FDIC to limit or suspend the eligibility of the breaching person to participate in any other FDIC-assisted acquisitions. No provision of this agreement may be amended or waived except in writing by the FDIC and the Potential Acquirer. This agreement, which may be executed in counterparts, constitutes the entire understanding of the parties with respect to the subject matter hereof.

In witness whereof, this agreement has been executed as of the day of , 20 .

ANNEX 5.4. ESCROW AGREEMENT

THIS ESCROW AGREEMENT made and entered into by and between the undersigned acquirer (the “Acquirer”), and the Federal Deposit Insurance Corporation (“FDIC”), hereinafter collectively the “Parties.”

WHEREAS, (the “Bank”) may be closed by the appropriate governmental authority on , 20 ; and

WHEREAS, it is contemplated that the FDIC will be appointed Receiver of the Bank; and

WHEREAS, in contemplation of the closing of the Bank, the appointment of the FDIC as Receiver thereof, and the consummation of a certain transaction (the “Transaction”), the Acquirer and the FDIC have this date executed a certain Purchase and Assumption Agreement (the “Agreement”); and

WHEREAS, the parties to the Agreement desire that the Agreement and any ancillary documents be held in escrow in accordance herewith.

NOW, THEREFORE, in consideration of the foregoing, it is hereby agreed by and between the Parties as follows:

1. The Parties hereby appoint and constitute below designated person as Escrow Agent and herewith deposit the Agreement and the ancillary documents, if any, in escrow with the Escrow Agent subject to the following instructions:

  1. The Escrow Agent shall hold the Agreement and any other ancillary documents pending the closing of the Bank and the appointment of the FDIC as Receiver.

  2. At the direction of the Regional Director Field Operations Branch (or designee) of the FDIC’s Division of Resolutions and Receiverships, upon the closing of the Bank and appointment of the FDIC as Receiver, the Escrow Agent shall release and distribute the escrowed documents to the appropriate parties in order to consummate the Transaction, which consummation is conditioned upon the receipt of requisite regulatory or other approval(s) as provided in the Agreement.

  3. In the event that: (i) the required regulatory or other approval(s) is/are not granted, or (ii) the closing of the Bank and appointment of the FDIC as Receiver have not taken place within two (2) days following the originally contemplated date and time for such closing, it is understood and agreed by the Parties that the Agreement and any ancillary documents deposited in escrow shall become null and void, without further action by any Party or the Escrow Agent. Provided, however, such two (2) day period may be extended by the FDIC, in its sole discretion, for up to an additional twelve (12) days beyond such two days. The Acquirer agrees that the FDIC may in its discretion alter the Agreement to reflect the appropriate effective or closing date in the event the Transaction is completed; in such event, the Acquirer further agrees to initial any such alteration(s), reexecute the Agreement, and/or otherwise affirm any such alterations in writing, as may be required by the FDIC.

  4. The Escrow Agent expressly shall have the power to appoint a successor Escrow Agent, in writing or otherwise, as the same shall become necessary or convenient, in the course of performing the duties of Escrow Agent here-under.

2. The Parties agree to indemnify and hold harmless the Escrow Agent hereby appointed and any successor Escrow Agent appointed pursuant to paragraph 1(d) from and against any cause, suit or action, or claim made by any person in any manner predicated upon the Escrow Agent’s exercise of his or her powers or performance of his or her duties pursuant hereto.

3. This Escrow Agreement may be executed in any number of counterparts and by different Parties hereto on separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same Escrow Agreement.

4. THIS ESCROW AGREEMENT AND THE RIGHTS AND OBLIGATIONS HEREUNDER SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE FEDERAL LAW OF THE UNITED STATES OF AMERICA, AND IN THE ABSENCE OF CONTROLLING FEDERAL LAW, IN ACCORDANCE WITH THE LAWS OF THE STATE WHERE THE MAIN OFFICE OF THE BANK IS LOCATED.

IN WITNESS WHEREOF, the Parties have caused this Escrow Agreement to be executed by their duly authorized representatives on this day of , 20 .

ACQUIRER

ACCEPTANCE BY ESCROW AGENT

The undersigned hereby accepts the appointment to act as Escrow Agent in accordance with the foregoing Escrow Agreement effective as of the date of such Agreement.

ANNEX 5.5. EXHIBIT “A” BID FORM

The undersigned Potential Acquirer submits this Bid Form (“Bid”), in accordance with the Instructions to Potential Acquirers (“Instructions”) and instructions contained on this Form, to acquire certain assets and liabilities pursuant to a Purchase and Assumption (Whole Bank) with Loss Share Agreement.

I. Transaction # 1 – All Deposits

The Potential Acquirer is:

The asset premium (discount) bid must be stated as a dollar amount. The Deposit premium bid must be stated as a percentage. Bids may be stated as a positive or as a negative number. When completing the Bid Form, Potential Acquirers must indicate a negative bid by placing parentheses “()” around the number. Bids will be considered positive if not in parentheses. If no bid is made for a transaction or option, leave the space blank or write “no bid.” If one of the two components is filled in and the other is blank, the bid will be treated as a live bid with a bid of 0 in the blank. A bid of zero in any form will be treated as a live bid of $0 or 0%.

The asset premium (discount) bid is: .

The Deposit premium bid is:*.

*All Deposits will be assumed, but the bid is calculated on only certain deposits per the bid instructions.

II. Transaction # 2 – Insured Deposits Only

The Potential Acquirer is: .

The asset premium (discount) bid must be stated as a dollar amount. The Deposit premium bid must be stated as a percentage. Bids may be stated as a positive or as a negative number. When completing the Bid Form, Potential Acquirers must indicate a negative bid by placing parentheses “()” around the number. Bids will be considered positive if not in parentheses. If no bid is made for a transaction or option, leave the space blank or write “no bid.” If one of the two components is filled in and the other is blank, the bid will be treated as a live bid with a bid of 0 in the blank. A bid of zero in any form will be treated as a live bid of $0 or 0%.

The asset premium (discount) bid is: .

The Deposit premium bid is:*.

*The bid is calculated on only certain deposits per the bid instructions.

V. Consummation of Transaction

The Potential Acquirer agrees that upon notification (which may be verbal) from the Corporation that the Potential Acquirer’s Bid with respect to one of the transactions contemplated herein has been accepted, the Potential Acquirer will execute the appropriate agreement(s) and work diligently to consummate the transaction. Such consummation shall occur at such time and place as the Corporation in its sole discretion determines.

The Potential Acquirer represents and warrants that it has executed and delivered to the Corporation a Confidentiality Agreement, is eligible to purchase assets and able to execute a Purchaser Eligibility Certification (“Certification”), and that all information provided and representations made by or on behalf of the Potential Acquirer in connection with this transaction and the transactions contemplated hereby, including, but not limited to, the Confidentiality Agreement and its eligibility to purchase assets and ability to execute a Certification, are and remain true and correct in all material respects and do not fail to state any fact required to make the information contained therein not misleading. The Potential Acquirer agrees that if it is a successful bidder that on notification it will execute and immediately deliver to the FDIC a Certification via fax and overnight delivery.

The undersigned, on behalf of the Potential Acquirer, hereby certifies that (i) the Potential Acquirer has full power and authority to submit this Bid and has taken all corporate action necessary with respect thereto, and (ii) the undersigned has been duly authorized to execute and submit this Bid on behalf of the Potential Acquirer.

A Board resolution authorizing the submission of the bid and authorizing this representative to sign on behalf of the institution or group has been submitted with each bid form.

ANNEX 5.6. SAMPLE PRINT ADVERTISEMENT FOR BANK RESOLUTION

BANKING OPPORTUNITY

The is presently restructuring one or more banks and is preparing to offer them for sale. This represents an excellent opportunity for banks or investors to enter or expand into the banking market. Selected banks will be sold under a contract similar to the U.S. Federal Deposit Insurance Corporation’s Purchase and Assumption Agreement (P&A). Simply put, an acquirer will:

  • Purchase certain assets (liquid and/or performing assets)

  • Assume certain liabilities (predominantly insured deposits)

Banks who participate in this process will be able to acquire a deposit base quickly and inexpensively. They will also have an option to continue banking business in existing premises. It is expected that a potential acquirer will be willing to pay a reasonable premium for this opportunity.

If your bank is interested in entering or expanding into the banking market of the , an authorized bank officer should contact:

ANNEX 5.7. OFFICIAL RECEIPT

Receipt Number Branch Number

1

Local situations vary, but bank rehabilitation or restructuring is generally feasible. There are several books and publications on bank restructuring from both ad hoc and systemic crisis perspectives, so the subject is not discussed at length in this manual.

2

The Federal Deposit Insurance Corporation (FDIC) frequently enters into P&A transactions that involve an assumption of all deposits, or more than the insured deposit amount. In countries with specific, limited deposit insurance, such transactions should generally be avoided because they can establish a bad precedent of de facto blanket coverage for depositors, consequently weakening the DIA. During systemic crises, it may be appropriate to use such a transaction; however, the DIA should not be involved in funding coverage of all deposits. For purposes of this manual, the P&A transaction contemplates a transfer of insured deposits only, and so is used interchangeably with the insured deposit transfer. Note that in countries with depositor preference, using the P&A transaction to cover uninsured deposits may be appropriate, but only in cases where there are adequate “good” assets to cover all deposits.

3

An example of the FDIC’s Purchase and Assumption Agreement is included as the Appendix to this manual.

4

As mentioned previously, in jurisdictions with depositor preference (where depositors have a higher priority of claim than other creditors), uninsured deposits may also be transferred, depending on the level of “good” assets to fund them. DIA funds should not be used to fund uninsured depositor repayment.

5

Steven A. Seelig, “Techniques of Bank Resolution,” in Bank Restructuring and Resolution (International Monetary Fund, Washington, 2006), p. 109.

6

Note that, in cases of large, complicated, and/or systemic problem banks, the supervisory authority and/or DIA may want to consider hiring an experienced bank sales advisor to assist in the marketing process.

7

The difficulties of conducting a bank liquidation via commercial bankruptcy court are discussed in Chapter 1.

8

Federal Deposit Insurance Corporation, Resolutions Handbook (Washington, 1998).

9

If the bank is not in conservatorship, marketing specialists should work with supervisory authority examiners to compile the information.

10

Depending on local law.

11

Federal Deposit Insurance Corporation, Resolutions Handbook (Washington, 1998). Typically the period for “put-backs” runs 60 days.

12

Annexes 5.35.5 are examples of official FDIC documents, as provided to the author.

13

In many countries, banks do not seem to recognize this opportunity; occasionally it is necessary to pay a fee to an agent bank to make repayment of deposits on behalf of the DIA or supervisory authority.

14

Where there is expected to be a limited amount of interest in acquisition of a problem bank, this process can be conducted in a more informal manner.

15

Often, a problem bank will need such swift action that a period of due diligence is not possible. These guidelines are provided for those situations where there is adequate time for it.

Resolution Practices and Procedures