FSB KEY ATTRIBUTES OF EFFECTIVE RESOLUTION REGIME AND

FSB KEY ATTRIBUTES OF EFFECTIVE RESOLUTION REGIME AND BANK FAILURE RESOLUTION OPTIONS IN NIGERIA PRESENTED BY Dr KS Katata Dep. Dir. , Reseach, Policy & Int’l Relations 1

Outline • Legal Framework of Resolution at NDIC • Objective of Nigerian Failure Resolution Regimes • FSB Key Attributes for Effective Resolution • Basel Committee on Banking Supervision (BCBS)-IADI Core Principles & Key Attributes • Nigeria Bank Failure Resolution Options • Pillars for an Efficient Bank Resolution Framework • Advantages and Disadvantages of Resolution Options • Connecting the Key attributes & Core Principles • Challenges 2

Legal Framework at NDIC • The NDIC was established by Act No. 22 of 1988, now NDIC Act No. 16 of 2006 as a risk minimizer with four broad mandates of deposit guarantee, bank supervision, as well as provide mechanism for orderly resolution of failure, including bank liquidation. • NDIC shares bank failure resolution responsibility with the Central Bank Of Nigeria (CBN). • Section 59 of NDIC Act defines a “Failed Insured Institution” as one whose licence has been withdrawn while it defined a “Failing Insured Institution” as one whose capital adequacy ratio is below the minimum prescribed by the CBN. 3

Objective of Nigerian Failure Resolution Regimes • Effective resolution is a series of systematic action designed to end a bank’s distressed condition with minimal disruption and without exposing taxpayers to losses. • Objectives of resolution: – – – protect depositors minimise adverse effects on banking and financial system stability ensure continuity of basic banking functions minimise reliance on public sector support protect client funds and assets 4

Different Stages of a bank’s life 5

FSB Key Attributes of Effective Resolution Regimes for Financial Institutions Purpose 1) Set out the core elements that the FSB considers to be necessary for an effective resolution regime 2) To have designated resolution authorities with a broad range of powers to intervene and resolve a non-viable institution, which can allocate losses to shareholders and unsecured/ uninsured creditors in their order of seniority. 3) Allow authorities to manage the failure of large, complex and internationally active financial institutions in a way that: a) minimises severe disruption b) avoids recourse to public funds that expose taxpayers to the risk of loss c) they are regularly reviewed and updated and with annual assessments by authorities of feasibility of resolution strategies 6

Background and objectives: FSB key attributes • The Financial Stability Board Key Attributes of Effective Resolution Regimes (Key Attributes) were approved in November 2011 and their supporting Methodology under development. − Key Attributes a new umbrella standard designed to strengthen resolution regimes. − Key Attributes influenced the development of the revised Core Principles (e. g. resolution powers, funding, crisis preparedness). • Main objectives: …to resolve financial institutions in an orderly manner …without taxpayer exposure to loss from solvency support …while maintaining continuity of their vital economic functions 7

FSB Key Attributes of Effective Resolution Regimes for Financial Institutions 1. Scope 2. Resolution authority 3. Resolution powers 4. Set-off, netting, collateralisation, segregation of client assets 5. Safeguards 6. Funding of firms in resolution 7. Legal framework conditions for cross-border cooperation 8. Crisis Management Groups (CMGs) 9. Institution-specific cross-border cooperation agreements 10. Resolvability assessments 11. Recovery and resolution planning 12. Access to information and information sharing. 8

FSB Key Attributes of Effective Resolution Regimes for Financial Institutions • Scope (KA 1): : The regime should be clear and transparent as to the financial institutions within its scope. The resolution regime should require that at least all domestically incorporated global SIFIs (“G-SIFIs”) have in place a recovery and resolution plan. – The status and all statistics of all deposit-taking financial institutions (DMBs, PMBs and MFBs) are rendered through electronic-Financial Analysis Surveillance System (e. FASS) to Central Bank of Nigeria (CBN) & NDIC; – The 2013 Framework for Supervision of Domestic Systemically Important Banks in Nigeria (D-SIBs) has: • Identified 8 banks that are D-SIBs out of 24 operating banks based on size(Total Assets), Interconnectedness (net-interbank transactions), complexity (branch network & foreign subsidiaries) and substitutability (total net credit and total deposits); • The Framework has also specified the requirement of all D-SIBs to submit their Resolution Plans to both CBN and NDIC. • Resolution authority (KA 2): : Each jurisdiction should have a designated administrative authority or authorities. – NDIC shares bank failure resolution responsibility with the CBN – The NDIC, should as a matter of urgency, enter into agreements with all DIS 9 in

FSB Key Attributes of Effective Resolution Regimes for Financial Institutions Contd • Resolution powers (KA 3): Resolution authorities should have at their disposal a broad range of adequate and required resolution powers. – NDIC has the powers to do the following: Open Bank Assistance; Depositor Reimbursement; Purchase and Assumption; Bridge Bank Mechanism; Assisted Mergers and Purchase of Assets – CBN has the powers to do the following: Open Bank Assistance; Lender of last resort (LOLR) – AMCON has the powers to do the following: Purchase NPLs and recapitalize distressed banks – Ministry of Finance: Guarantor of Lender of Last Resort – Bail-in resolution power should be enshrined in the NDIC Act as stated in KA 3. – There is a need to enhance the mandates and capacity of resolution authorities (CBN and NDIC) to cooperate and coordinate measures across borders; 10

Nigeria Bank Failure Resolution Options Depositor Reimbursement Open Bank Assistance Purchase and Assumption Utilised and operational Open Bank Assistance Recapitalize distressed banks Guarantor of Lender of Last Resort Operational but not utilised Development in progress Financial Stability Fund Bail-in NDIC Bridge Bank Mechanism Assisted Mergers Purchase of Assets CBN Lender of Last Resort AMCON Purchase NPLs Ministry of Finance CBN & NDIC No Bail-in Powers yet, but proposed in NDIC Amendment Act 11

Pillars for an Efficient Bank Resolution Framework 12

Advantages and Disadvantages of Resolution Options 13

Advantages and Disadvantages of Resolution Options 14

FSB Key Attributes of Effective Resolution Regimes for Financial Institutions Contd • Open Bank Assistance (OBA): § Financial Assistance. In accordance with Section 37 (1) of the NDIC Act, NDIC granted Accommodation Facilities amounting to ₦ 2. 3 billion (US$500 million) to 10 banks which had serious liquidity problems in 1989. § Imposition of Holding Actions. These were corrective or self restructuring measures applied to 47 banks from 1994 to 1996. § Up to 2007, 32 distressed banks had been taken over by CBN/NDIC to safeguard their assets. § Acquisition & Sale of Banks. CBN/NDIC acquired, restructured and sold seven (7) distressed banks to new investors in 1997/98. 15

FSB Key Attributes of Effective Resolution Regimes for Financial Institutions Contd • Depositor Reimbursement (payment of insured deposits and payment of uninsured deposits): – Payment of insured deposit up to the insurable limit through direct payment and the use of Agent banks. – When the failed bank’s assets are realized liquidation dividends are paid to uninsured depositors on a pro-rata basis. – A total of 45 insured DMBs whose licences were revoked between 1994 and 2006 were liquidated by NDIC. 3 DMBs whose licences were revoked are still in court challenging the revocation of their licences. Liquidation activities of the 45 closed DMBs are on-going. – NDIC had paid the sum of ₦ 6. 824 billion (U$43. 19 mn) to 528, 277 insured depositors (or about 20%) and liquidation dividends of ₦ 93. 512 billion (U$591. 85 mn) to 250, 497 uninsured depositors as at Dec. 2013. – The NDIC is considering the use of e-payment and advance payment to improve the effectiveness of payment to insured depositors and boost confidence. 16

FSB Key Attributes of Effective Resolution Regimes for Financial Institutions Contd Purchase and Assumption (P&A): A resolution method in which a healthy financial institution or a group of investors assume some or all of the obligations, and purchase some or all of the assets of the failed financial institution. § Following the completion of the banking consolidation exercise in Dec 2005, No. of banks reduced from 89 to 25 while the 13 banks that failed to meet capital requirement of N 25 billion (U$200 mn) had their banking licenses revoked in Jan 2006. § Section 38 (1) of the NDIC Act granted it powers to adopt P & A. The method was first introduced in 2006 to resolve the problems of 13 banks that failed to meet the recapitalisation requirement of /banking consolidation exercise. § P & A was adopted for the following reasons, amongst others: § Giving depositors easy access to their funds without condition or disruptions to the banking system; § Facilitating continuity of banking services in the same premises used by the failed banks; § Encouraging depositors to establish banker-customer relationships with the acquiring bank and promoting banking culture. 17

FSB Key Attributes of Effective Resolution Regimes for Financial Institutions Contd Bridge Bank Mechanism: • A bridge bank refers to a temporary bank established and operated by the deposit insurer to acquire the assets and assume the liabilities of a failed bank until a final resolution can be accomplished. The bridge bank will retain the failed bank’s licence but operate under a different name preferably in the same premises used by the failed bank. • When it became clear that the three (3) banks out of the 10 found to be in grave financial condition in 2009 could not recapitalize, merge nor find an acquirer on or before September 30, 2011 deadline, bridge bank option had to be adopted by NDIC to address their problems as provided for in Section 39(1) of NDIC Act, 2006. • Reasons for adopting bridge bank include the following: – The 3 affected banks had attractive franchise and deterioration in their assets would hamper their sale. – Depositors were protected thus promoting confidence in the system by ensuring continuity of banking services. – Outright liquidation would have had dire consequences on depositors & other stakeholders. 18

FSB Key Attributes of Effective Resolution Regimes for Financial Institutions Contd Assisted Mergers : • As part of measures to resolve the problems of 4 out of the banks identified in 2009 to be in severe financial condition, the Regulatory Authorities embarked on assisted mergers of the banks in 2011 . The capital injection by AMCON to facilitate the acquisition of the banks and capital injections by the acquiring banks are presented below. • That brought the No of DMBs to 20 in 2011 as against 24 in 2010 ACQUIRED BANKS CAPITAL INJECTION BY AMCON [N’B] / [$’B] ACQUIRING BANKS AMOUNT PAID BY ACQUIRING BANKS Intercontinental 562. 22 / 3. 627 ACCESS 50. 00 / 0. 323 Oceanic 294. 03 / 1. 897 ECOBANK 55. 00 / 0. 355 Finbank 154. 69 / 0. 998 FCMB 6. 00 / 0. 039 Equitorial Trust 62. 93 / 0. 406 STERLING 7. 95 / 0. 051 [N’B] / [$’B] 19

FSB Key Attributes of Effective Resolution Regimes for Financial Institutions Contd Bailout by Government through the CBN: § A Special Audit of 24 DMBs by CBN/NDIC in June 2009. § Report of audit revealed that banks were afflicted by large volume of non-performing loans, capital erosion, poor risk management and poor corporate governance practices, amongst others. § 10 DMBs needed close supervisory monitoring out of which 8 were in precarious financial condition. § Government injected ₦ 620 billion (U$4. 28 bn) into the 8 banks as loan capital and liquidity support (CBN has recovered the amount from the banks). § CBN mounted a campaign for public confidence by assuring the banking public that no bank would be allowed to fail. § CBN gave guarantees for all the affected banks’ interbank takings and foreign credit obligations. § As the LOLR, the CBN gives facilities to banks through the Real-Time Gross Settlement system (RTGS) payment system and Deferred Net Settlement systems. 20

FSB Key Attributes of Effective Resolution Regimes for Financial Institutions Contd Purchase of NPLs and Recapitalization of distressed banks by AMCON : – AMCON was established in 2010 by an Act with the mandate to purchase non-performing loans from the banks, recapitalise the technically insolvent banks and enhance availability of credit to the critical sectors of the economy. – AMCON acquired the three (3) bridge banks and injected the sum of ₦ 1. 003 trillion (U$6. 98 billion) into them as capital injection • Enterprise Bank (₦ 194. 59 bn or U$1. 34 bn) • Keystone Bank (₦ 366. 89 bn or U$2. 53 bn) • Mainstreet Bank (₦ 451. 42 bn or U$3. 11 bn) – AMCON acquired NPL of ₦ 5. 68 trillion (U$35. 95 bn) in 20 banks (including 10 troubled banks) and it has redeemed a total of ₦ 1. 26 trillion (U$7. 8 bn) leaving an outstanding balance of ₦ 5. 12 trillion (U$32. 37 bn). 21

FSB Key Attributes of Effective Resolution Regimes for Financial Institutions Contd • Set-off, netting, collateralisation, segregation of client assets (KA 4): The legal framework governing set-off rights, contractual netting and collateralisation agreements and the segregation of client assets should be clear, transparent and enforceable during a crisis or resolution of firms. – Under the NDIC Act, no premium due from an insured institution to the Corporation shall be reduced, adjusted or withheld on the basis of set-off or claim that an insured institution may have against the corporation. – The NDIC is empowered as liquidator to pay to itself as it shall be entitled to receive on account of its subrogation to the claims of depositors and shall pay to depositors and other creditors the net amount available for distribution to them. – Counter claims from a person who maintains both deposit and loan account, the former serving as collateral for the loan are exempted from insurable deposits. – There is a need to examine further the set-off rights, contractual netting and collaterisation agreements and the segregation of client assets. A proper legal framework is required. 22

FSB Key Attributes of Effective Resolution Regimes for Financial Institutions Contd • Safeguards (KA 5): Resolution powers should be exercised in a way that respects the hierarchy of claims. The resolution authority should have the capacity to exercise the resolution powers with the necessary speed and flexibility, subject to constitutionally protected legal remedies and due process. • Depositors have the first right of claims thereafter other creditors. • As indicated, NDIC/CBN enjoy the right to exercise resolution powers with speed and flexibility without compromising due process. • NDIC can not pay depositors of a failed bank even in the face of serious threat unless the entity is pronounced closed by the CBN as the licencing authority. However, the legislative reform submitted to the National Assembly should enable NDIC pay depositors if the Corporation feels it is necessary to do so. 23

FSB Key Attributes of Effective Resolution Regimes for Financial Institutions Contd • Funding of firms in resolution (KA 6): Jurisdictions should have statutory or other policies in place so that authorities are not constrained to rely on public ownership or bail-out funds as a means of resolving firms. – The NDIC, as a well-designed DIS has in place mechanisms necessary to ensure that adequate funds are available to reimburse depositors promptly in the event of an insured institution’s failure and to cover the operating expenses of the system. – This is mainly through payment of mandatory annual premium as one of the conditions for membership of a DIS. The cumulative premium contributed by insured institutions is called Deposit Insurance Fund (DIF). – It may also be necessary, sometimes, to introduce special premiums or levies on the participating institutions, when the DIF is not sufficient to resolve some non-systemic failures or borrow from CBN and/or Fed Govt; and/raise bonds guaranteed by the Fed Govt if the need arises. – The NDIC, as a well-designed DIS has in place mechanisms necessary to ensure that adequate funds are available to reimburse depositors promptly in the event of an insured institution’s failure and to cover the operating expenses of the system. 24

FSB Key Attributes of Effective Resolution Regimes for Financial Institutions Contd • Financial Stability Funds (FSF) – As part of the efforts to meet the resolution cost of restoring financial stability, the FSF was set up by CBN in collaboration with the banks in 2010. – The CBN was to contribute N 50 billion annually for 10 years while each bank was to contribute 0. 3% (later increased to 0. 5%) of its total assets annually for 10 years, – The Fund was to ensure that future bank resolution could be achieved with minimum delay and with little contribution, if at all, from tax payers money. – The Fund had an initial target of ₦ 1. 5 trillion (about U$ 10 billion), which had been increased. – NDIC subsequently reduced the premium payment burden by decreasing premium base rate from 0. 5% (or 50 basis points) to 0. 4% (or 40 basis points) to reduce. 25

FSB Key Attributes of Effective Resolution Regimes for Financial Institutions Contd • Legal framework conditions for cross-border cooperation (KA 7): The statutory mandate of a resolution authority should empower and strongly encourage the authority wherever possible to act to achieve a cooperative solution with foreign resolution authorities. – NDIC does not insure deposits of Nigerian Banks’ subsidiaries abroad. – However, the conditions of Nigerian Banks’ subsidiaries abroad will affect their overall health and safety. – CBN has signed Mo. U to facilitate information sharing with host countries. – NDIC has an Mo. U with CBN to share information. 26

FSB Key Attributes of Effective Resolution Regimes for Financial Institutions Contd • Crisis Management Groups (CMGs) (KA 8): Home and key host authorities of all G-SIFIs should maintain CMGs with the objective of enhancing preparedness for, and facilitating the management and resolution of, a cross-border financial crisis affecting the firm. – Nigeria has no institution that is considered to be a G-SIFI but has Dometic Systemically Important Banks (D-SIBs). – The Framework for Bank Systemic Crisis has established a Crisis Management Committee comprising CBN, NDIC, FMF and the Presidency. – The FSRCC can ensure the constitution and implementation of a sub-committee to serve as a veritable CMG. 27

FSB Key Attributes of Effective Resolution Regimes for Financial Institutions Contd • Institution-specific cross-border cooperation agreements (KA 9): For all GSIFIs, at a minimum, institution-specific cooperation agreements, containing the essential elements set out in. Annex I, should be in place between the home and relevant host authorities that need to be involved in the planning and crisis resolution stages. • Even though Nigeria has no institution that is considered to be a G-SIFI but has D-SIBs, the NDIC should have agreements with jurisdictions where D-SIBs have branches/offices. Where there is no DIS in a jurisdiction that act as a host to a Nigerian bank, then the NDIC should seek all the required information from the CBN if the CBN has the agreement from the jurisdiction or contact the host authorities for the required information. 28

FSB Key Attributes of Effective Resolution Regimes for Financial Institutions Contd • Resolvability assessments (KA 10): Resolution authorities should regularly undertake, at least for G-SIFIs, resolvability assessments that evaluate the feasibility of resolution strategies and their credibility in light of the likely impact of the firm’s failure on the financial system and the overall economy. – Nigeria has no institution that is considered to be a G-SIFI – But resolvability assessments can be undertaken under the 2013 Framework for Supervision of Domestic SIBs. – NDIC should plan to undertake resolvability assessments of D-SIBs as a core part of domestic resolution planning work. 29

FSB Key Attributes of Effective Resolution Regimes for Financial Institutions Contd • Recovery and resolution planning : Jurisdictions should put in place an ongoing process for recovery and resolution planning, covering at a minimum domestically incorporated firms that could be systemically significant or critical if they fail. – The 2013 Framework for Supervision of Domestic Systemically Important Banks in Nigeria (D-SIBs) has specified the requirement of all D-SIBs to submit their resolution plans to both CBN and NDIC. – The 2013 Framework for Supervision of D-SIBs has specified the requirement of all D-SIBs to submit their resolution plans to both CBN and NDIC. 30

FSB Key Attributes of Effective Resolution Regimes for Financial Institutions Contd • Access to information and information sharing (KA 12): Jurisdictions should ensure that no legal, regulatory or policy impediments exist that hinder the appropriate exchange of information, including firm-specific information, between supervisory authorities, central banks, resolution authorities, finance ministries and the public authorities responsiblefor guarantee schemes. – At present, CBN, NDIC and other regulators have full access to data and information of all regulated firms. There is no impediment to data access by regulators – The Financial Services Regulation Coordinating Committee (FSRCC) ensures seamless information sharing and access by all Nigerian regulators 31

Topic Comparisons Core Principles Key Attributes 1. Public policy objectives 1. Scope 2. Mitigating and powers 2. Resolution authority 3. Governance 3. Resolution powers 4. Relationships 4. Set-off/netting, collateralization… 5. Cross-border issues 5. Safeguards 6. Crisis preparedness & management 6. Funding 7. Membership 7. Cross-border cooperation 8. Coverage 8. Crisis management groups 9. Funding 9. Institution-specific cross-border COAGs 10. Public awareness 10. Recovery and resolution planning 11. Legal protection 11. Resolvability assessments 12. Dealing with parties at fault 12. Access to information and info sharing 13. Early detection and timely intervention 14. Effective resolution processes 15. Reimbursing depositors 16. Recoveries 32

Connecting the Key attributes & Core Principles KA 1. Scope and operating environment • Regime for any financial institution that could be systemic – main focus G-SIFIs. • Adaptable to a wide range of circumstances, settings and systems. KA 2. Resolution authority (RA) • Single or multiple RAs. • Operationally independent, accountable authority with a mandate to pursue financial stability. KA 3. Resolution powers • Broad range of powers to intervene and resolve institutions, including through transfers of business, bridge bank and bailin within resolution and timely payout or transfer of insured deposits. CP 2/3. Mandates , Powers and Governance • DI mandates vary from “paybox” to “risk minimizers”. Many insurers have resolution powers and are RAs. • Mandate clarifies roles and responsibilities of deposit insurer and is aligned with the mandates of the other safety-net participants. • Deposit insurer is operationally independent and accountable. • Powers support its mandate. 33

Connecting the Key attributes & core principles KA 4 /5. Set-off, netting… Safeguards • Legal certainty, effectiveness & enforceability. • No creditor worse off than in liquidation principle. KA 6. Funding • Privately financed sources of funds in resolution (e. g. DI or resolution funds). • Ex post recoveries from industry, if necessary. • Reference to IADI CPs on deposit insurer funds & safeguards CP 9: Funding • Banks pay for deposit insurance. • Deposit insurer must have ex-ante funding and assured access to emergency liquidity. • Sound fund investment and management. • Start-up funding from government or international donors permitted under conditions. • Deposit insurer must authorize use of its funds. • Taxation and remittance limits. 34

connections KA 7. Cross-border Cooperation • Statutory mandate to cooperate and legal capacity to share information and to give effect to foreign resolution measures. • No discrimination against creditors based on nationality. KA 8 -10. Crisis Management Groups, Resolvabilty Assessment & COAGs CP 5. Cross-border issues • Formal information sharing and coordination in place among deposit insurers. • No discrimination against depositors based on nationality. CP 6. Crisis preparedness & management • Home, key hosts, central banks, supervisors, resolution authorities and finance ministries of GSIFIs to maintain CMGs. • Information sharing among home & key host authorities in recovery and resolution planning as well as in crisis. • The deposit insurer has effective contingency planning/crisis management policies/procedures. • The insurer should be a member of any institutional framework for coordination involving system-wide crisis preparedness & management. • Resolvability assessments for all G-SIFIs to evaluate feasibility/credibility of RRPs. • Institution-specific cross-border cooperation agreements. CP 14. Failure resolution • Resolution regime should enable the deposit insurer to provide for protection of depositors and contribute to financial stability. • Legal framework includes special resolution regime. 35

connections KA 11. Recovery and resolution planning (RRPs) • Set out recovery and resolution plans to be undertaken by all G-SIFIs. • To be informed by resolvability assessments. • Regularly updated and reviewed. 12. Access to information and information sharing • Robust management information systems • No impediments to cross-border sharing of information among authorities subject to confidentiality. CP 14. Failure Resolution • Resolution regime enables the deposit insurer to provide for the protection of depositors and contribute to financial stability. • All banks resolvable through a broad range of powers and tools which include: powers to preserve critical bank functions (bridge bank), transfers of deposits and assets, write-down and/or debt to equity conversion. CP 15. Reimbursing depositors • Most insured depositors to be reimbursed within seven working days utilizing a variety of reimbursement options. • Provisions to be made for making advance, interim or partial payments. • Access to depositor records at all times; authority to undertake advance or preparatory exams. • Scenario planning and simulations mandated. 36

CONCLUSION • • • The Key Attributes (KAs) set out the core elements of effective resolution regimes that apply to any financial institution that could be systemically significant or critical if it fails. Following their agreement, the FSB assessed that a majority of its member jurisdictions would need to undertake legislative reform to meet these new standards; something member jurisdictions are encouraged to do as a matter of priority and ahead of an end-2015 deadline. According to the FSB, all its member jurisdictions have assessed themselves against the standards set out in the Key Attributes to identify any gaps between what is required and what existing laws provide for. It is clear that Nigeria has a rich experience in bank failure resolution as it has adopted various resolution measures including open bank assistance, deposit payout & liquidation, P&A, bridge-bank as well as assisted mergers & acquisition. There is potential impact of a bank’s failure on confidence in the Nigerian financial sector, financial inclusion and socioeconomic consequences. Should a bank fail and its customers suffer hardship in the process, it is likely to harm their confidence in the formal banking system and to have broader social consequences, especially if there are spillover effects to other banks in the sector. 37

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