Preparing for the Resolution of a Troubled Bank. Have Your Toolkit Ready

Preparing for the Resolution of a

Troubled Bank

Outline of Presentation



Planning for a bank resolution as part of

your overall contingency planning– what

and why?



Know your market and legal framework



Elements of a bank resolution plan



The resolution handbook in detail

Bank Resolution Contingency Planning

What Is It?



Contingency planning consists of devising a plan to deal with the consequences of potentially destabilizing events



Properly handled, the closing of a bank need not be destabilizing



If you prepare for a bank closing you will be better able to manage it when needed and mitigate any negative impacts

Bank Resolution Contingency

Planning- Why Do It?

 All market participants, including financial

institutions, must be allowed to fail; failure is an essential part of efficient markets

 Contingency planning for bank closings should be undertaken on a regular basis even though the actual closing will be different than the one you planned for

 Such contingency planning can require a significant resource commitment including the time of staff

and senior management

 The benefits of contingency planning outweigh the costs

FSB’s Consultative Document

of July 2011

“A national resolution regime should

provide the authorities with the tools to

intervene safely and quickly to ensure the continued performance of the firm’s

systemically important functions. It should ensure prompt payout or transfer of

insured deposits and prompt access to

transactions accounts…. It should enable the transfer or sale of viable portions of the firm ….”

Elements of a Bank Resolution

Contingency Plan



Understanding your financial system

and the systemically important pieces



Understanding the external and internal

risks to your financial system



Identifying the parties you would need

to work with in a financial crisis



Reviewing your legal powers and

Understanding Your Financial System



Determine which parts of your financial system are critical and why (banks,

insurance companies, payment systems) -most of the time only a few elements are truly “critical”



Identify the principal sources of liquidity and capital for the key elements of the financial system



What are the principal linkages between the various parts of the financial system?

Understanding the Risks to

Your Financial System



Identify and monitor risks internal and external to the financial system – what could go wrong?



Typical concerns include rapid credit

growth, steep escalation in asset values (especially property) and sharp increases in capital flows



Conduct regular stress tests to assess potential impact of threats

Identifying Key Parties

When a Bank Needs to be Resolved

 Government entities that would be involved (Prime Minister, Central Bank, Deposit Insurer, Ministry of Finance)

 Media (domestic and foreign)

 Foreign home/host supervisors of parents, subsidiaries and branches of local institutions

 Private sector participants that may be acquirers of banks or assets or specialized service providers such as professional services firms or asset

managers

 Maintain names and coordinates for key people and establish working relationships with them in pre-crisis times

Reviewing Your Legal Powers and

Resources for Bank Resolution



Prepare a list of main steps in managing a bank resolution such as enforcing remedial measures, providing liquidity support,

reorganizing an institution, taking an

ownership stake in or recapitalizing a bank



Review legislation and regulations to be

sure powers are adequate and make

needed changes, considering international best practices and relevant literature

Reviewing Your Legal Powers and

Resources for Bank Resolution (2)



Review adequacy of resources, both

financial and personnel, to manage a bank resolution



Develop contingency plans to obtain

additional resources on demand such as consultants or retired employees



Research past financial crises in your country and others and develop lists of lessons learned

Develop a Communications Plan



Overriding objective: maintain public confidence



Problems should be acknowledged but accompanied by solutions



Consistent focused message coordinated between key agencies



Make use of a main spokesperson (with back-up) and involve senior people - stay on message

Possible Triggers For A Bank Closing

Can Have Different Consequences

Consider these various scenarios:



Capital adequacy below threshold level



Failure of a plan for capital raising



A rogue event such as fraud



Losses of confidence



Market events (collapse of one or more markets)

 Some organizations may not have anticipated or prepared for the extensive destruction and prolonged recovery period resulting from Hurricane Katrina.

 To be realistic, disaster drills should include all critical functions and areas.

 Anticipate disruptions in communications services, possibly for extended periods of time.

 Critical staff may not be able to reach their assigned recovery location.

 People are essential to the recovery of operations.

 Replacement supplies may be difficult to obtain during a protracted recovery period.

 Financial institutions’ facilities could be damaged or destroyed, creating a need for alternate facilities.

 The location of any back-up site can be critical to successful recovery efforts.

 Processing transactions may be extremely difficult.

 Be prepared to operate in a “cash only” environment.

 The financial industry is dependent on numerous critical infrastructure sectors that potentially have competing interests.

From Lessons Learned During Hurricane Katrina: Preparing Your Institution For A Catastrophic

Event http://www.fdic.gov/regulations/resources/lessons

Lessons Learned From Hurricane

Katrina

What Documents Would Be Needed In

Each of These Situations?



Make use of The Resolution Toolkit in planning for a bank resolution

(http://siteresources.worldbank.org/EXTFI NANCIALSECTOR/Resources/Bank_Reso lution_Toolkit.pdf)



Review the legal authority and market for acquisition of whole banks or bank assets and put together the outlines for all types of possible acquisitions

Prepare Your Resolutions Handbook



The Handbook should outline all the

steps needed for a bank closing tied to

the legal framework in place



Plan all the steps needed before the

bank closes, making use of forms for

gathering information on the bank and if

necessary “costing” the various options

for resolution to determine the lesser

Prepare Your Resolutions Handbook (2)



Determine what will be needed if the

bank is closed to include



Staffing at Branches



Communications



Interpretive Services



Legal Support



Accounting Support



Asset Management

Managing the Resolution

 Make use of table-top exercises in advance of a bank closing to prepare staff for event itself

 Early intervention is important to preserve options for resolution

 Decisions must be made in the face of uncertainty

 Speed of decision-making as important as perfection

 Uncertainty/loss of confidence are major enemies

Managing the Resolution (2)



Communications may be biggest challenge



There may be need for liquidity support for certain types of resolutions – where will it come from?



Manage individual bank resolutions to prevent a systemic crisis



Prepare an after action report to capture “lessons learned”

Q&A

Thank

You

Claire McGuire, Sr. Financial Sector Specialist, The World Bank