COMMON RESOLUTION OPTIONS AND RECENT NIGERIA BANK RESOLUTION EXPERIENCE Adeleke A A Director Asset Management Department NDIC Common Resolution Options amp Recent Nigeria Bank Resolution Experience ID: 771132
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COMMON RESOLUTION OPTIONS AND RECENT NIGERIA BANK RESOLUTION EXPERIENCE Adeleke A. A.DirectorAsset Management Department, NDIC. Common Resolution Options & Recent Nigeria Bank Resolution Experience. 1 09/05/2011
OUTLINE IntroductionApplicable Failure Resolution Options: Rehabilitation;Deposits Pay-out; Insured Deposits Transfer; Purchase and Assumption (P&A); and Bridge BankExperience So FarChallenges Common Resolution Options & Recent Nigeria Bank Resolution Experience. 2 09/05/2011
BANK A N’ Million% To Total AssetsBANK A N’ Million % To TotalAssets BANK A N’ Million % To Total Assets TOTAL ASSETS1,957,258504,163372,612DEPOSIT LIABLITIES 1,385,936 71356,137 71243,747 65 PAID UP CAPITAL 16,316<114,481<39,375<3SHAREHOLDERS’ FUNDS340,735<2129,3732577,559<21 09/05/2011 Common Resolution Options & Recent Nigeria Bank Resolution Experience. 3
INTRODUCTIONEffective resolution is a series of systematic action designed to end a bank’s distressed condition.Focus of a good resolution option:Maintains public confidence and stability in the banking system. Ensures fairness, equity, transparency and accountability. Instills market discipline while discouraging moral hazards. Achieves minimum disruption to payment system. Common Resolution Options & Recent Nigeria Bank Resolution Experience. 4 09/05/2011
INTRODUCTION Speedy payment to insured depositors and quick realization of assets for the benefits of uninsured depositors and creditors.Minimize the likelihood of having to bail-out uninsured depositors and creditors.A typology of problem banks Illiquid but solvent Insolvent but liquid Illiquid and insolvent. Common Resolution Options & Recent Nigeria Bank Resolution Experience. 5 09/05/2011
RESOLUTION OPTIONS RehabilitationFinancial Assistance (Accommodation Facility).Imposition of Holding Actions.Change in Management. Take-Over of Control & Management. Acquisition & Sale of Banks.Common Resolution Options & Recent Nigeria Bank Resolution Experience. 6 09/05/2011
RESOLUTION OPTIONS Deposits Pay-Out Bank is closed and put in liquidation. Insured depositors paid up to the insured limit.As assets are realized, uninsured depositors are paid on pro-rata basis. Merits Increase market discipline since depositors could also suffer losses. (small depositors protected, rest sustain losses unless there are proceeds of assets to share) Shareholders lose all their investment unless there is still fund after other creditors have been fully paid from the realized assets. Common Resolution Options & Recent Nigeria Bank Resolution Experience. 7 09/05/2011
RESOLUTION OPTIONS DemeritsDelay in paying depositors undermines public confidence. Liquidation of assets could extend to many years, often more than 10 years. Uninsured depositors, other creditors and shareholders could therefore wait for many years before being paid, if they will ever be paid. Borrowers lose access to loans with potential macroeconomic consequences.Pay-out might maximize fiscal outlay at the time of closing. Common Resolution Options & Recent Nigeria Bank Resolution Experience. 8 09/05/2011
RESOLUTION OPTIONS Insured Deposits TransferInsured deposits of a failed bank transferred to another bank(s).Acquiring bank(s) given enough cash and/or risk-less assets to cover insured deposits transferred. A variant of pay-out option as only insured deposits would be fully covered. Deposit insurance agency would take over assets for realization.Acquiring bank(s) might also purchase some or all the assets of the failed bank. Common Resolution Options & Recent Nigeria Bank Resolution Experience. 9 09/05/2011
RESOLUTION OPTIONS MeritsLeast cost option as premium was received to pay insured depositors.All merits of Pay-Out also applies. Insured depositors could continue to enjoy banking services without any disruption from the acquiring bank(s). Demerits Loss to uninsured depositors and delay in paying them from realised assets, if any, could undermine public confidence. Common Resolution Options & Recent Nigeria Bank Resolution Experience. 10 09/05/2011
Liquidation of assets could be protracted and extend to many years. Borrowers could lose access to loans with the negative impact on macroeconomic situation.09/05/2011 Common Resolution Options & Recent Nigeria Bank Resolution Experience. 11 RESOLUTION OPTIONS
RESOLUTION OPTIONS Purchase and Assumption (P&A)Healthy bank purchase assets and assume deposit liabilities of the failed bank, similar to M&A.A failed bank could be split to make it attractive to banks that wish to enhance market penetration or establish new branches where the failed bank had branches. Acquirer(s) chosen on the basis of highest premium offered during bidding. Deposit insurer or government would put cash/securities for the difference. Such could be recovered from bad assets of the failed bank. Common Resolution Options & Recent Nigeria Bank Resolution Experience. 12 09/05/2011
RESOLUTION OPTIONS MeritsDepositors are protected.Continuity in rendering services thereby sustaining public confidence in the banking system. Other creditors might not be paid thus providing some form of market discipline. Avoids disruption to depositors, borrowers and payment system.Shareholders wiped out and inefficient bank closed. Common Resolution Options & Recent Nigeria Bank Resolution Experience. 13 09/05/2011
RESOLUTION OPTIONS DemeritsLarge and uninsured depositors protected, thus eroding market discipline.It could be costly especially if fund from Central Bank/government/deposit insurer to fill gap between total deposits and assets purchased is significant. Common Resolution Options & Recent Nigeria Bank Resolution Experience. 14 09/05/2011
RESOLUTION OPTIONS Bridge Bank A new bank created to acquire assets and assume liabilities of the failed bank. It is a variation of P&A.New bank could be privately owned or the government could create it for the purpose. If government owned, it could be operated for about 2 years after which it would be sold to fresh investors. Merits Avoid losing the failed bank thus protecting jobs and continuing banking services to the community. Common Resolution Options & Recent Nigeria Bank Resolution Experience. 15 09/05/2011
RESOLUTION OPTIONS All shareholders would lose their investments.All depositors and creditors would be covered and that would engender public confidence in the banking system.Demerits Undermines market discipline as it encourages moral hazard. It could be costly.The bridge bank could fail thus postponing the “evil day” and aggravating the cost of resolution. Common Resolution Options & Recent Nigeria Bank Resolution Experience. 16 09/05/2011
EXPERIENCE SO FARREHABILITATION Take-Over Of Control1 Bank in 19925 Banks in 1993 16 Banks in 19951 Bank in 1996 1 Bank in 1999 Sale of Banks 7 banks sold to new investors. Common Resolution Options & Recent Nigeria Bank Resolution Experience. 17 09/05/2011
EXPERIENCE SO FAR - BANK FAILURE AND EXTENT OF FAILURE IN NIGERIA BETWEEN 1994 AND 2006 Year of Closure No of Banks Total Assets(N’B) Total Deposits (N’B) Ratio of Assets of Close Banks to Total Assets of Banks Ind(%) Ratio of Assets of Close Banks to Total Deposits of Banks Ind (%) Ratio of Assets of Close Banks to GDP(%) Number of Depositors 1994 4 6.10 2.00 1.94 1.12 0.66 6,411 1995 1 0.40 0.80 0.09 0.38 0.02 7,416 1998 26 34.60 16.30 4.50 4.34 1.11 1,709343 2000 3 2.70 3.80 0.14 0.45 0.06 31,969 2002 1 20.20 11.60 0.68 0.95 0.35 228,585 2003 1 2.10 3.41 0.06 0.24 0.03 1,044 2006 13 160.10 177.28 1.23 4.69 0.55 961,211 TOTAL 49 165.9 215.19 0.93 2.59 0.44 3,165,979 Common Resolution Options & Recent Nigeria Bank Resolution Experience. 18 09/05/2011
EXPERIENCE SO FARLiquidation Activities Claim settlement N3.3 billion paid out of N5.2 billion Insured DepositsN6.14 billion paid out of N10.9 billion declared liquidation dividend to uninsured depositors Depositors of 11 out of 34 banks have been paid in full Creditors of 7 banks have received liquidation dividend Common Resolution Options & Recent Nigeria Bank Resolution Experience. 19 09/05/2011
EXPERIENCE SO FARShareholders of 3 banks have received liquidation dividend in the sums of N620 million, N600 million & N293 million respectively Risk Assets ManagementN22 billion recovered from debtors of 43 banks Sale of Fixed Assets/Chattels N19.34 billion realized from sale of physical assetsSale of Investment N2.64 billion realized from sale of investment Common Resolution Options & Recent Nigeria Bank Resolution Experience. 20 09/05/2011
CHALLENGESPublic AwarenessLegalLong-drawn out litigation on winding-up actions and debt recovery mattersOperational Bank management Poor corporate governanceInsider abuse Common Resolution Options & Recent Nigeria Bank Resolution Experience. 21 09/05/2011
CHALLENGESPoor lending cultureCredit appraisalDocumentationPoor record keepingFinancials Mandate recordsBroken down IT systems Uncooperative attitude with the bank closing team Common Resolution Options & Recent Nigeria Bank Resolution Experience. 22 09/05/2011
CHALLENGESAsset RealizationRisk Assets (Loans)Poor quality Large size insider loansLack of secondary market Court sympathy for debtorsReal Properties Weak title for landed propertiesSlump in property market Common Resolution Options & Recent Nigeria Bank Resolution Experience. 23 09/05/2011
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