RESOLUTION STRATEGIES FOR WEAK AND FAILED BANKS

1. Bank for International Settlements (Financial Stability Institute) - Committee of Banking Supervisors of West and Central AfricaKhartoum, Sudan, 10 April 2002 RESOLUTION STRATEGIES FOR WEAK AND FAILED BANKS Errol Kruger Deputy Head - Bank Supervision South African Reserve Bank

2. Agenda • Preconditions for resolution • Resolution strategies • Restructuring plans • Mergers & acquisitions • Purchase and assumption transactions • Bridge banks • Open bank assistance • Summary

3. Preconditions for resolution • Accounting standards • Auditing standards • Legislation • Supervisor must have powers to act and be independent • Judicial system • Must be expedient • Corporate governance • Lack of, is leading cause of bank failures

4. Resolution strategies Private sector • Restructuring plans • Mergers and acquisitions transactions • Purchase and assumption transactions and/or closure of bank • Bridge banks • Open bank assistance Private sector Private sector Public sector Public sector

5. Restructuring plans (Private sector) • Forms part of corrective actions • Bank specific and takes on form of permutation of various dimensions resulting from application of definition of a weak bank - eg • Inadequate capital or liquidity • Poor asset quality • Poor management • Weak systems and controls

6. Mergers and acquisition transactions (Private sector) • Normally after completion of due diligence process (“DDP”) DDP Complete Share acquisition Scheme of arrangement Asset acquisition only Offer that is not acceptable

7. Share acquisition • Offer demonstrates positive NAV • If accepted, offer results in Bank being acquired as going concern from existing shareholders • Simple acquisition of all or controlling interest in the shares via statutory legislative prescriptions • Potential pitfalls: • Shareholders reluctant unless convinced that they are being offered fair value - any “discount” regarded with suspicion • Complicated legal capital structures

8. Scheme of arrangement • Compromise sought with depositors and shareholders - major part of bank and shares transferred to acquirer • Extremely flexible mechanisms - can take on any one of a number of forms e.g.: • Creditors claims negotiated collectively - no need to conclude separate agreements with each creditor of bank • Bank binds all creditors to agreement through court sanctioned procedures • Offeror makes proposal and central bank provides liquidity and solvency support • Dependant on legislative framework of country

9. Asset acquisition only • Offers received for parcels of assets only • Proceeds applied to reduce depositors’ claims • Residue of assets and deposits will be left for which a solution has to be found (which would possibly spill over into liquidation or public sector resolution depending on systemic nature)

10. Offer that is not acceptable • Protracted negotiations required to achieve acceptable outcome to all parties • In this case use of temporary bridge bank or open bank assistance to be considered • Pursue assistance in obtaining regulatory and fiscal condonations and/or assurances eg. protection of assessed tax loss • In event of no agreement of any type with private sector partners only possible solutions are: • Long term nationalisation, or • Liquidation

11. Purchase and assumption transactions and/or closure of bank (Private sector) • Deposit base of distressed bank is attractive to bidders • Selected very high quality assets of interest to bidders • P&A deal thus ensures the safety of depositors, but leaves behind majority of assets • Has been used in the USA, but no South African experience

12. Bridge banks (Public sector) • Allows bank to continue its operations until a permanent solution can be found • Closure of weak bank - formation of new bank (bridge bank) controlled by the liquidator • Liquidator has the discretion in determining which assets and liabilities are transferred to the bridge bank • “Bridge” the gap between the failure of the bank and: • the time necessary for the liquidator to evaluate and market the bank to allow the satisfactory acquisition by third party • the time necessary for potential purchasers to assess the banks condition and at the same time permits uninterrupted service to the banks customers • No South African experience

13. Open bank assistance (Public sector) • Ongoing public support to existing (restructured) bank involving: • Liquidity assistance • Solvency assistance • Solvency and liquidity support can be limited to precise amounts (not “open ended”) • Restructuring involves: • Short-term: Replacing board and management, rationalisation of operations • Long-term: New controlling shareholder

14. Summary

15. Preconditions Monitor and evaluate FAILURE MANAGEMENT MODEL no Identify weak bank? yes yes yes yes CORRECTIVE ACTIONS FOR WEAK BANKS no Assess solvency Effective? Is insolvency imminent? Consider corrective action no yes Private sector solution • M&A or P&A • With central bank liquidity support Is private sector solution possible? Effective? yes no no Public sector solution • Open bank assistance • Temporary bridge bank • Long-term nationalisation Is bank of systemic importance? RESOLUTION STRATEGIES FOR WEAK BANKS AND FAILED BANKS Effective? yes no no Exit bank system

16. Most countries at some stage experience a banking crisis • Timely macro prediction suitably arms the supervisor to deal with the crisis • Do you know where your country is?

17. The wheel of banking fortunePlot your country !! Regulators take action A banking crisis begins 7 8 Overheating economy worries the regulators Banks are prudent 6 1 Economy and stock markets take off Excess liquidity, investment, optimism 2 5 4 3 Loan growth skyrockets New competitors and banking M&A

18. THANK YOU!!!!