The Nigeria Deposit Insurance Corporation (NDIC) hosted a Regional workshop organized by the African Regional Committee (ARC) of the International Association of Deposit Insurers (IADI) from 9th -13th May 2011. The theme of the workshop was Resolution of Problem Banks: Purchase and Assumption (P&A) Option. The workshop drew 41 participants from Nigeria, Kenya, Zimbabwe, Tanzania and USA. It featured a series of capacity building sessions focusing on the procedures and processes of Bank Resolution, Purchase and Assumption Transactions, On-site Due Diligence, Legal Transfer of Assets/Deposits, Legal Authorizations and Asset (Liability) Valuation, among other issues.
The conference had the following objectives:
i) To enhance individual participants’ capacity in the resolution of problem bank in general and P&A in particular;
ii) Share experience with countries that had undergone single or multiple bank failures using P&A as a resolution option; and
iii) Foster greater cooperation among African Regional Committee members of IADI
In his welcome address, the Managing Director/CEO, Mr. Umaru Ibrahim, mni informed participants, especially those coming in contact with IADI for the first time that IADI was formed in May 2002 with its registered office at the Bank for International Settlement in Basel, Switzerland. He disclosed that membership of the association had grown from 25 at inception to 62 excluding Associates, Observers and Partners. Participants were also informed that IADI was established with the objective of contributing to the stability of financial systems by promoting international cooperation and interaction among deposit insurers and other players in the financial system. He stated that the workshop was organized in line with that objective and in particular to build capacity among middle management staff of member organizations. He welcomed the resource persons and participants to the workshop particularly those from USA, Kenya, Tanzania, and Zimbabwe and was optimistic that at the end of the workshop, the participants would be better equipped to more effectively discharge their functions as deposit insurers in the area of failure resolution, than hitherto.
KEYNOTE ADDRESS BY THE MINISTER OF STATE FOR FINANCE
The Keynote address at the workshop was delivered by the Hon. Minister of State for Finance, Hajiya Yabawa Wabi, mni. She started her address by commending the organizers for choosing the topic for the workshop, which was of great relevance to all member countries as P&A had become one of the popular options being adopted in the resolution of problem banks. Thereafter, she noted that because of the negative effects of bank failures, virtually all countries were seeking ways to strengthen the existing mechanisms for dealing with failing or failed deposit-taking financial institutions. In that regard, she observed that the overriding concern was promoting financial system stability. She recalled the recent Nigerian experience with failure resolution and noted that the adoption of P&A option was based on public policy considerations which included giving depositors easy access to their trapped funds, to facilitate the continuity of banking services in the same premises utilized by the failed banks, promote banking culture which was critical to savings mobilization for economic development and to generally improve public confidence in the financial sector of the economy. The Hon. Minister further disclosed that the implementation of P&A as a resolution option by NDIC was confronted with many challenges such as slow judicial process, power to prosecute debtors etc, some of which have been addressed by the NDIC Act 2006.
In conclusion, the Minister commended the NDIC for hosting the workshop and was confident that at the end of the workshop the issues and challenges associated with a successful conduct of P&A transactions would be adequately addressed.
In addition to technical sessions, country experiences from Nigeria, USA,
Kenya, Tanzania, Zimbabwe were presented. The various experiences presented show a convergence of experience in failure resolution except that of the USA. That was as a result of similar level of economic development, which made many supporting institutional frameworks to be lacking or unavailable unlike those of the USA, which had developed over the years. Furthermore, experience sharing by member countries revealed that like in Nigeria, poor corporate governance structure, insider dealing and high non-performing loans were major factors responsible for bank failures.
In all, several questions were asked and comments made by participants covering the various papers presented during the workshop.
The following observations were drawn from the papers presented:
• The variant of P&A to be adopted in resolution of problem bank would depend on the level of sophistication of a country’s financial system.
• Core Principles and Methodology in the application of bank resolution should be adopted to reflect the local environment.
• The role of the judiciary in prompt determination of cases is critical to effective problem bank resolution.
• Experiences from Nigeria, Kenya, Tanzania and Zimbabwe show that the judicial process in these countries is slow.
• Institution of a strong legal framework is also critical in problem bank resolution.
• There was a real challenge in information integrity in Nigeria and other African countries.
• There is need for cooperation and collaboration among the safety net players in the financial system such that information gathering and sharing among safety net players become seamless in addressing problem bank resolution.
• Proper valuation of assets (intangible and tangible) and liabilities are necessary for a successful P&A, using independent, professional and other investment valuers.
• Poor public awareness and low financial literacy constitute a huge challenge for deposit insurers globally.
• It was observed that the scope of coverage for all DISs in Africa remains restricted to deposit instruments of deposit-taking financial institutions as they do not provide coverage for deposit-like products of insurance companies as is the case in Malaysia.
• There is need for Deposit Insurance Agencies to be granted powers to take part in due diligence of institutions seeking banking licenses as they are statutorily required in most cases to extend deposit insurance to these institutions once they are licensed.
• There is need for clear definition of insurable products to avoid ambiguity in computing insured deposits for purposes of claim settlement.
• As much as P&A is a very good option to resolve bank failure, there is need to review the prudential guidelines to prescribe early triggers of distress for prompt corrective action. This is currently absent in most ARC member countries.
• There is a long delay in depositor reimbursement after bank closures in most ARC member countries.
• There is a long delay in the realisation of assets of closed banks which has adversely affected bank resolution process.
Based on the above observations, the following recommendations were drawn from the conference:
1. For effective problem bank resolution, there is need for a robust collaborative framework among all the safety-net players which clearly defines the responsibility of each of the players to avoid overlapping of functions.
2. Deposit Insurance Agencies (DIAs) should be given adequate resolution powers including powers of access to information prior to license revocation and power to prosecute bank officials/director who might have contributed to the failure of the banks. In addition, staff of the DIAs should be protected for actions taken in good faith in the course of their duties.
3. There is need to give adequate time for due diligence to be conducted by intending assuming banks in P&A transactions.
4. There is need to leverage on the expertise of the Deposit Insurance Agencies in problem bank resolution by ensuring that the Deposit Insurance Agency handles and administers bank resolution cases even in situations where government funds are involved as is done in US, Malaysia and Taiwan, among other countries. In that case there is the need to execute appropriate Memorandum of Understanding (MoU) between the deposit insurance agency and other safety-net players.
5. Bidding process in P&A transactions should follow due process to ensure transparency. To do this, there should be separate committees involved in bid opening and bid analysis to ensure transparency instead of one committee performing all the functions.
6. Challenges of low public awareness, inadequate legal framework, slow asset realisation and operational challenges are common to Deposit Insurers in Africa and should be addressed for an effective failure resolution in general and for ensuring the effectiveness of the P&A transactions, in particular.
7. There is need to have a clear policy and procedures in the conduct of business, delegation of duties and documentation of approval process for an effective P&A transaction.
8. There is need for Deposit Insurance Agencies to be granted powers to take part in due diligence of institutions seeking banking licenses as they are statutorily required in most cases to extend deposit insurance to these institutions once they are licensed.
10. The insurable products should be clearly defined to avoid ambiguity in the computation of insured deposits thereby fostering market discipline as well as facilitating prompt depositor reimbursement.
11. DISs should put in place a mechanism for the quick reimbursement of depositors in line with best practices by identifying and addressing issues inhibiting prompt reimbursement so as to further boost depositors’ confidence in the financial system.
Source:Nigeria Deposit Insurance Corporation (NDIC)