Banking Crisis Management - PowerPoint Presentation

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Banking Crisis Management

Baku

April 5, 2016

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Contents Organizing Management of Financial Crisis.............................................7

Coordinating

Management of Financial Crisis .......................................8

Maintaining Confidence..........................................................................9Strengthen Capital Base of Banks........................................................10Resolve Weak Banks promptly.............................................................11-18 POWERS OF A RESOLUTION AGENCY (TURKEY)................................19-283. Restructuring State Owned Banks.......................................................294. Resolve Non Performing Loans (NPLs).................................................30-41BREAK

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Contents

BAKU APPROACH

.................................................................................4

2-48 “CLAW-BACK” FROM RESPONSIBLE PERSONS........................................49-565. Ensure strong, reliable and sustainable safety nets ...................................57-58 BANK INTERVENTION IN TURKEY..........................................................61-69 ROLES & RESPONSIBILITIES OF SDIF IN TURKEY......................................70-726. Start Lending Again....................................................................................73-74QUESTIONS3

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Components

of Financial StabilityBanks & NBFIs

Adequate Capitalization,

High Asset Quality,

Stable Funding Structure,High Liquidity,Profitability,Strong, reliable & sustainable safety net,Increased Credit to Private Sector.4

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Common factors of a “Financial Crisis”

Factor

Usually

IdeallyState of economy ProblematicFiscal&monetary disciplinePolitical willingness to take actionNone/WeakProactiveCredibility of institutionsWeak Strong; trustworthyAdequacy of deposit insurance scheme??? Strong; sustainable;transparent ;reliableMagnitude of vulnerable banksMany banks; big in sizeMinimalEffective ELAOpaqueTransparent; reliable5

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Which

usually results in...

A lack of confidence in

the

banking system.Financial Instability.6

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Organizing Management of Financial Crisis

Either…

Financial Stability Committee–by law, decree,

MoU. CB, Supervisor, DGF, MOF, MOE etc. Share responsibility, information, Liaise with Government, Presidential Admin., Propose legislative changes to improve powers of institutions,OrStay as is and empower institutions on standalone.Support of Parliament, President & Government7

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Coordinating Management of Financial Crisis

DUTY

RESPONSIBLE

AGENCYDefinition of systemic bank/crisisSupervisorCoordinating with the government/other agenciesEvery InstitutionProposing to the government policies on; deposit protection, government involvement in bank capitalization, blanket guarantees and bank holidays, measures that cannot be taken due to inadequacies in the legislation.DIASupervisorEvery InstitutionEstablishing communication channels.Every InstitutionAssessing costs of different forms of government support.Supervisor+MOFTimely statements (to avoid misinformation).Every InstitutionIndividual Duties and Responsibilities 8

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Maintaining Confidence

Strengthen Capital Base of

Banks

2. Resolve Weak Banks promptlyRestructure State owned Banks (financial + operational)Resolve stock and flow of NPLs5. Ensure strong, reliable and sustainable safety nets9

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1. Strengthen Capital Base of BanksRequire banks to address shortfalls,

apply

Capitalization Program with “zero”

tolerance, bail-in junior debts, write down SHs for losses, inject private capital or request public capital, restructure/resolve assets/operations.Encourage M&As.Decide on nationalization criteria and model.Deposits are safe in healthy/strong banks or in State owned banks.10

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2. Resolve Weak Banks promptly

Private Capital is priority,

Government capitalization,(set eligibility, exit strategy).Resolution Agency with more tools,Bridge Bank, Merge with or sell to another bank,Purchase and Assumption Transactions,Liquidity Support,Issue guarantee for buyers,4. Liquidate.See “Powers of Turkish Resolution Agency” presentation111

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2. Resolve Weak Banks promptly 2

Speed.

Act promptly. No forbearance. Otherwise the pain grows.Cost-efficiency. Least cost criterion between alternative actions.Flexibility. Be able to exercise discretion. Avoid moral hazard. Supervisory action should not protect the interest of the bank’s corporate officers & SHs. Transparency and cooperation. Inadequate or incorrect information from the bank increases uncertainty for everyone involved. Don’t forget, nothing costs more than a loss of confidence in your financial system.12

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2.

Resolve Weak Banks promptly Standard ConditionsThe bank’s management should be with

the R

esolution

Agency/TA, Its existing shareholders should have been written down for the accumulated losses.No need for consent of depositors, creditors or borrowers for any action of the resolution authority.No court can stop implementation of the decisions of the Resolution Authority & the Supervisor. Define the principles and procedures.313

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2. Resolve Weak Banks promptlyPrivate Capitalization: Incentives for compensating with partial government capital. Establish Bridge Banks: By the Resolution Authority for a temporary period of time; not necessarily subject to prudential norms; all liabilities are under guarantee of the Resolution Authority/ Government.

No court should be able to stop implementation of the decisions of the Resolution Authority & the Supervisor.

4

14

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2. Resolve Weak Banks promptlyMergers and Acquisitions (M&As):

Encouraged by the Supervisor (voluntary) when the bank is a “problem bank”,

Forced by the Resolution Authority when the bank is under its control, Good/Bad bank split by the Resolution Authority, Give incentives to encourage voluntary M&As.515

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2. Resolve Weak Banks promptly Purchase and Assumption Transactions

Basic P&A:

only cash and cash equivalent assets.

Modified P&A: + performing loan portfolio.Whole bank P&A: all assets, liabilities.Guaranteed P&A: the government/resolution agency guarantees the performance of certain assets. The goal should be to cover as much deposits as possible. 616

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2. Resolve Weak Banks promptly Government Capitalization

Independent

due diligence and share valuation.Pledge of shares of existing shareholders (if any) to the government with irrevocable right to sell them.Bail-in tools.Participation in management.There is no free ride and no bail-out for the shareholders.717

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2. Resolve Weak Banks promptlyOperational Coordination

Supervisor,

Central Bank,

Deposit Insurance Agency,Resolution Agency (if different than DIA),Ministry of Finance, Treasury – Debt Management, Budget.Everybody is in the same boat.818

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POWERS OF A RESOLUTION AGENCY (TURKEY)

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Prerequisites For A Strong Resolution Authority Operational independence. Transparent processes.

Legal protection.

Sound governance, accountability, evaluation, sale mechanisms, and

Adequate resources.20

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Powers of Resolution Agency-Turkey For the banks which

are transferred to the DGF

(the consent of debtors & creditors are not required);to transfer assets and liabilities, partially or wholly, to a bank that will be established or to an existing volunteer bank or to merge the bank with another bank by providing technical and financial assistance if necessary,to increase its capital, to postpone or reduce the legal reserve requirements,121

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Powers of Resolution Agency-Turkey to cancel the penalty interest that would be imposed,

to purchase its subsidiaries, real estates

+ other assets.to provide advance in return to assets,to make deposits,take-over its losses, to sell the assets through discounting or similar means, 222

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Powers of Resolution Agency-Turkey to guarantee obligations of the bank,

to take over its assets and liabilities,

to take all other measures it deems necessary,

to manage & control any company, which is managed &controlled by a DGF bank, or by the SHs of a DGF bank, to discharge all or any director, auditor or officer, to appoint new directors or auditors. 323

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Powers of Resolution Agency-Turkey In

connection with its all kinds of claims the Fund shall be authorized to

;

apply discount; decide to collect the sale proceeds in installments;enter into compromises; sell or buy back; take over movables&immovables on account of its claim under the conditions it will specify; 424

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Powers of Resolution Agency-Turkey enter into agreements with debtors including new repayment plans for the claims;

file or not to file lawsuits

;

ask the court to suspend the lawsuits already filed; demand and receive all kinds of guarantees;intervene in all kinds of criminal lawsuits.525

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Powers of Resolution Agency-TurkeyThe Fund may file lawsuits, within five years following completion of liquidation, against the bank’s partners, former

directors &

auditors found to be

liable for compensation of the loss they have inflicted due to their actions.If unsuccessful at the auctions, the Fund can select competition or private sale methods. The reasonable market price of any asset is the amount which can be received following proper advertisement of the sale/search for a willing buyer.626

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Powers of Resolution Agency-Turkey The Fund can borrow from the CBT

against the guarantee of the

Government.

The Government can lend directly to the Fund and guarantee the Fund’s borrowings from third parties without requiring any collateral.The Fund can combine loans of same borrowers if this would increase the opportunity of their sale or collection possibilities.727

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In

General...In systemic crises, resolution and deposit insurance funds would likely be inadequate. Therefore, the assurance of fiscal and monetary backstops—the availability of common public resources for resolving banks and restoring confidence in the financial sector—is required to halt disorderly dynamics, such as deposit flight.

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3. Restructuring State Owned BanksProper capitalization (GBs).

Eliminate existing duty losses. No directed lending.

Clean-up NPLs.

Professional management; professional staff.Arms length relationship with the Government.Some may need to be liquidated (P&A).Start selling branches.Look into opportunities of mergers, (cost cutting).Complete independent Supervisory Boards.Prepare exit plans (yes, they cannot be sold in the near future).Amend laws if necessary.29

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4. Resolve Non Performing Loans (NPLs) A “Must”.. because;

Undermines public’s trust in banks,

Banks may go into bankruptcy,Deteriorates borrower discipline,Banks overburdened with NPLs will not have the appetite to lend & invest,Over-indebted companies cannot borrow ; they may go insolvent.130

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4. Resolve NPLs Difficult, because;

The bank has to recognize the loss, increase capital, accept lending mistakes.

The bank has to start legal and criminal proceedings against owners/directors/ management.

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4. Resolve NPLs Difficult, because;

Creditors not protected adequately following up bad loans are cumbersome banks evade the process.

The financial system may have been politicized or nationalized already NPL resolution to be obsolete.Therefore letting the loan to “evergreen” is easier.332

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4. Resolve NPLs Obstructed, because;

Enforcement of contract/collateral; difficult, takes too long,

Judicial system is inefficient, even is corrupt,

Tax disincentives,No or underutilized out-of-court restructurings,Underdeveloped markets for distressed assets.Source: Vienna Initiative Report, March 2012.433

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4. Resolve NPLs Restructure

Sell

Write-off

Swift loss recognition is necessary.534

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Restructuring of NPLsClassification & Provisioning

When to upgrade the restructured loan class?

🔑

Treat new loans differently.Clarify Taxes.Regulate out-of-court and court supervised restructuring process (see Baku Approach presentation)Rules of majority.For viable companies.Exclude Related Parties from voting process.No cosmetics... Voluntary but real restructuring.35

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Restructuring of NPLs

All specific LLPs should be tax deductable.

Principle/interest forgiveness should not be taxed (creditor&debtor).

Strengthen regulations regarding loan underwriting, risk management & corporate governance of banks.Allow broad range of restructuring tools (interest/ debt forgiveness, debt/equity swaps, new loan, extend maturity).Ensure Asset Classification, NPL, LLP, collateral evaluation standarts are realistic & conservative 36

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Selling NPLs

Legislation should permit NPL sale.

Buyers (ARCs) are licensed and regulated and are privately owned. (tax exemption??)

Use Public ARCs for only NPLs of SOBs.Sale of assets/collateral should be VAT exempt.Market value= Principle37

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Selling NPLsPublic Asset Resolution Company (ARC);

Buys NPLs only from state-owned banks+ADIF.

Market value.

Independent Board (no political interference).Full powers to buy/sell/manage/restructure/invest.Solve “Funding” problems.Lifespan.Clear transfer of titles should be provided for.Weak market demand,weak property rights,weak protection of creditors’ rights.38

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Writing-off NPLs

Balance between liquidation and reorganization.

Efficient liquidation of nonviable businesses/assets.

Don’t wait for court order of bankruptcy to write-off. Write-off to be tax deductable.39

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How to Remove the Impediments in front of NPL Resolution?Effective system to enforce debt:

Fast track procedures of courts; experienced judges; no corruption; condensed & less costly enforcement procedures; no minimum bidding price requirements; proactive enforcement officers; heavy penalty for fictitious leases, fake bankruptcies, collateral sale during enforcement; no hold up of collateral execution; ease in change of ownership; no retroactive bankruptcy decleration.40

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How to Remove the Impediments in front of NPL Resolution?

An

Impartial & objective judicial system.Improve the protection of creditors’ rights. “Claw-back” from Responsible Persons. (see presentation)41

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BAKU APPROACH

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NPLs-Baku Approach

Banks

should

focus on rescheduling & restructuring. Commit fresh money when necessary,Not spoil the process (small creditors),Not see this as cosmetic restructuring.Only viable companies. Others go into liquidation.The tax office &other agencies should be part of the deal.May need second/third rounds. Set principles of valuation, treatment of claims (tax, labor, social security, secured-unsecured creditors, lease contracts)43

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Baku Approach- StepsBorrower applies.(to bank with largest exposure).

2. Creditors

Committee accepts application

.3. Confidentiality & standstill agreements are signed.4. Due diligence starts.5. Coordinator bank is assigned.44

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Baku Approach- Steps6. Negotiations (terms & documents) start if company is found to be viable;Realistic period for debtor to turn around its business.

Address financial weaknesses and collateral issues.

New/restructured facilities (raising funds;SHs, sub-loan, creditors, sale&lease back etc.). New money will have priority over existing debt.

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Baku Approach- StepsIf the restructuring terms and conditions are approved by;

More than 75% of the creditors (in amount), then the agreement is signed by all creditors & the debtor.

Less than 50% of the creditors (in amount), then there is no agreement.

50%-75% of the creditors, then it is referred to the Arbitration Council for decision.46

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Baku Approach- Standstill AgreementCreditors will;

Commit

to keep outstanding risk at the same level.

Defer/waive interest during standstill period.Not take further security to improve their position.Define period of standstill & how it can be extended.Not take any action to enforce security, demand or accelerate loan claims.Not bring legal proceedings against debtor.Define events of defaults that will end standstill.Set principles of bridge-finance (if any).47

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Baku Approach- Standstill AgreementThe Debtor/Shareholders will, during the standstill period;

Commit not to strip, hide, sell assets (of the company or of the shareholders).

Not to give privileges to any creditor for any reason.

Not to give any collateral to anybody.48

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“CLAW-BACK” FROM RESPONSIBLE PERSONS

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Claw-back from Responsible Persons

Define Responsible Persons (RP)

Major shareholders, Directors,

management and internal auditors, who are found to be liable for the bank’s losses as a result of their actions/inactions.Define Related Parties (RP) As wide as possible.Define the Base of the Responsibility All bank resources utilized by or via Responsible Persons. 50

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Claw-back from Responsible Persons

Define “utilization of bank resources”:

The credit facilities which are extended to;

The RPs/RPs or persons represented by RPs/RPs.The companies owned or controlled by or employees of which are RPs/RPs.Persons who represent the RPs/RPs by proxy/as a trade representative/as agent. The persons who later transfer the credit facilities to RPs/RPs .51

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Claw-back from Responsible Persons

The credit facilities which are extended to;

The companies, which do not have adequate commercial operations and are founded solely for transfer of sources.

The subsidiaries and/or direct and/or indirect affiliates of RPs/RPs and/or the bank. The companies where the RPs/RPs or their employees are a founder, partner, director or auditor.52

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Claw-back from Responsible Persons

The transfers made to the companies/FIs owned by RPs/RPs.

All kinds of assignments made to RPs/RPs at a price "below the current market price“.

"Back-to-back" credits made available and extended between the subsidiaries, affiliates and shareholders of the same bank. Proceeds of sale of all kinds of properties, shares, goods and services to the bank or its subsidiaries at excessive and exorbitant prices by the RPs/RPs.53

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Claw-back from Responsible PersonsSources and services transferred to RPs/RPs through long-term lease or financial lease.

All kinds of sources, including through fiduciary deals with the FIs transferred to RPs/RPs.

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Claw-back from Responsible PersonsIf the bank fails and the outstanding utilized resources are not paid back: “All kinds of money, properties, receivables and rights

acquired by the

RPs and

by their related parties and/or acquired by third persons with the assistance of the RPs/RPs after the utilization date of the bank resource shall be deemed to have been acquired by and/or via the Responsible Persons.” The Responsible Persons shall pay them back.55

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Claw-back from Responsible PersonsThird persons, who are a party to sale/transfer/rent

&

assignment

etc. relating to setting up of personal rights or rights in kind before the revocation of the bank’s license revokation or the introduction of TA, will have to prove that they have acted in good faith.Third persons cannot raise the plea of good faith for the transactions executed after introduction of TA or license revokation.The Responsible Persons cannot raise the plea of good faith for such transactions at all. 56

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5. Ensure strong, reliable and sustainable safety nets

Increase/

widen

the deposit guarantee limit/coverage base?2. Decide if “Blanket Guarantee” is needed. Direct/Indirect?3. Widen ELA opportunities? Collateral; term.57

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5. Decisions regarding deposit guarantee bail-outs lie at the heart of every financial crisis

Deposits are safe only in healthy

banks & SOBs

Depositors’ reactions to the crisis = frequency &volume of withdrawals from their accounts Government is to ensure that deposits in the banks are safeUnwillingness in taking the correct measures = speed up of withdrawalsWithdrawals start from the weaker banks with threat of spreading to the healthier ones 58

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BREAK

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BANK INTERVENTION IN TURKEY

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The Bank...Did not take the requested measures within the period given by the CBA (max.9 months) or,

Even

if having taken these measures,

its financial structure did not &cannot be strengthened, or The continuation of its activities will endanger the depositors’ rights and the stability of the financial system, or 62

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The Bank...Did not fulfill its obligations as they fall due

,

or

Its total liabilities exceed total assets, or Its dominant partners or managers fraudulently use its resources in their own or in others’ favor in such a manner that its sound operation will be at stake, causing a loss. 63

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Then the Authority will...

Either

revoke the operating permissions of those

banks, The Fund assumes the bank’s management and control in order to start and complete its bankruptcy and liquidation . (The bank cannot operate. Existing BOD & internal Auditors are replaced by the Fund immediately. (by staff or from outside). Fund is the General Assembly.) or,64

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Then the Authority will...Transfer the shareholders’ rights (except for dividends) together

with the management and control of those banks to the

Fund.

The bank continues to operate. General Assembly function moves to the Fund. It appoints the BOD. It is authorized to provide technical and financial assistance in order to transfer/sell the bank to or merge it with another bank and to take all measures in order to strengthen it and to restructure it. 65

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Transfer the SHs’ rights & the management and control to the Fund

The Fund does not own the majority shares of the bank;

Stop operations for a period necessary,

P&A assets/liabilities to another bank, Pay for the difference between assets & liabilities, (not to exceed the amount of insured deposits), or Request the Authority to revoke its operating license.66

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Transfer the SHs’ rights & the management and control to the Fund

The Fund owns the bank’s majority shares;

(Takes over the shares against payment for the losses-not to exceed the amount of insured deposits-& may buy rest of the shares if the losses

<paid-in capital.)To partially or completely P&A to a bank (new or interested banks), or to merge the bank with any other interested bank, by providing financial and technical assistance.To sell any of its assets, by any method and to take any measure it may deem necessary.To transfer to third persons the Bank’s shares.67

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Transfer the SHs’ rights & the management and control to the Fund.

The Fund owns the bank’s majority shares;

increase its capital ,

purchase its affiliates/subsidiaries/other assets; or obtain them as collateral and lend in return,place deposits with it (liquidity), overtake its losses, carry out any transaction pertaining to its assets and liabilities and convert them into cash. 68

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General ConditionsNot subject to the consent of anybody.Shareholders to be written down for the losses.Special powers for misuse of bank’s resources.

Not subject to the rules of Capital Markets Law and the Law on Companies.

Tax exempt.

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Roles & Responsibilities of SDIF in Turkey

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Roles and Responsibilities of SDIF

71

 

Risk-Minimizer More than Pay-boxPay-boxReimbursing insured depositors üüüCalculating and raising premiums üüüRisk assessment üü 

Imposing differential (risk-adjusted) premiums

ü

ü

 

Risk monitoring

ü

ü

 

Role in handling bank failures

ü

ü

 

Off-site examinations

ü

 

 

On-site inspection

ü

 

 

Intervention in the affairs of its member banks

ü

 

 

SDIF

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Main Functions of SDIF

Cost efficiency

Imposing differential

(risk-adjusted) premiums Calculating and raising premiums Risk monitoringRisk assessment Role in handling bank failures Reimbursing insured depositors OR Resolution of failed banks thru Sales, Merger & Acquisition, Liquidation Resolution of NPAsSales Rescheduling Legal Follow Up 72

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6. INCREASED CREDIT TO PRIVATE SECTOR Banks will not have appetite to lend under the existing “creditors’ rights” & the way creditors are treated in the judicial system.Form a working group (Supervisor; banks; law companies; audit firms; MOF; Tax Office; MOJ).Enact amendments to laws and regulations.Train judges anf enforcement officers.

Strengthen efficiency of bankruptcy proceedings.

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The Pillars to Protection of Creditors’ Rights

Engin Akçakoca

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