INTERNATIONAL ASSOCIATION OF DEPOSIT INSURERS
Resolution of Problem Banks: Purchase and Assumption
Option
Session 19:Recent Bank resolution Experience- Zimbabwe
Presented By
W MANDIZVIDZA
Deposit Protection Board Zimbabwe
Abuja , Nigeria
May 9th – 13th , 2011
OUTLINE
• Introduction
• Rationale for Setting up Deposit Protection
Scheme.
• Causes of the Banking Crisis
• Bank Resolution Methods Adopted
• Challenges Faced By DPB and Central Bank
• Enhanced Supervisory Processes
• Concluding Remarks
Introduction
• Since independence in 1980,Zimbabwean banking
sector was relatively stable.
• After 1995, banking sector started exhibiting distress
signals when 6 institutions were identified to be
clearly insolvent(CBZ , Zimbank , ZBS , United
Merchant Bank ,First National B/S & Universal
Merchant Bank).
• Government responded by bailing out 3 of the
affected banks( CBZ, Zimbank & ZBS).
Introduction(cont)
• One bank was liquidated in in 1998 (United
Merchant Bank) , whilst 2 banks were placed under
curatorship (Universal Merchant Bank and First
National B/S).
• During this period there was no explicit deposit
compensation arrangements in place and the
winding up of banks was governed by the
Companies Act.
• The liquidation of banks through the provisions of
the Companies Act, proved cumbersome , time
consuming and did not accord depositors priority in
claims settlement.
Establishment of Deposit Protection
Scheme
• Depositors endured undue hardships as they
could not easily access their funds upon bank
closure.
• It is in light of these events that the government
saw it fit to establish an explicit Deposit
Protection Scheme.
• This led to formation of the Deposit Protection
Board(DPB) in July 2003.
Establishment of Deposit Protection
Scheme(cont)
• DPB is currently operating as a pay box and its role
during the 2003-2006 crisis was confined to
reimbursing depositors in the event of a bank failure.
• The Central Bank played a more prominent role
during the 2003 -2006 financial crisis.
• DPB started operations at a time when the financial
sector was in the middle of its worst financial crisis
since the country attained its independence in 1980.
Number of Institutions affected by
the Financial Crisis
• The year 2004 saw 9 Financial institutions being
placed under curatorship/receivership,
• 2 discount houses were liquidated in 2004
( Rapid & Century Discount Hses)
• Whilst, a Finance House (Sagit Finance) was
liquidated in 2006.
• First time since independence to have more than
10 distressed institutions facing collapse.
Causes of the Banking Crisis
2003-2006
A number of factors contributed to the crisis.
• Unstable macro economic environment-inflation 7 % in
1980, 622% in Jan 2004 and by Jan 2006 inflation had
risen to 1281 %,whilst the economy shrank 8.5 % in
2003 and a further 4.5% in 2004.
• Diversion from core business to speculative activities;
purchase of bricks, cars, real estate , shares etc
• Inadequate risk management systems
• Poor corporate governance structures- poor board
oversight , dominance by a few shareholders &
improperly constituted boards.
Causes of Banking Crisis(cont)
• High levels of non performing insider loans
• Overstatement of capital – under providing for non
performing loans.
• Chronic liquidity challenges- flight to quality, deposit
flight from indigenous banks to international banks
perceived as less risky
• Lax prudential supervision
Measures Put in Place by the Reserve
bank to Deal with Troubled Banks
• Troubled bank Fund
• Corrective orders
• Troubled Bank Resolution framework
Troubled Bank Fund
• At the height of financial crisis, RBZ created the
Troubled Banks Fund (TBF).
• The purpose of the fund(public funds) was to resolve
solvency and liquidity deficiencies in banking
institutions.
• Some of the institutions which accessed the funds,
not only failed to repay the loans, but also failed to
recapitalize- cost of funds 900 % per annum by
December 2003.
Corrective Orders
The nature of corrective orders issued included;
• Operational restructuring- revisiting business
strategies &shedding unprofitable business units;
• Suspending a director, officer or employee,
• Amending ,suspending or canceling a license(Time
bank license cancelled in May 2006).
• Penalties/fines
RBZ would periodically assess the progress of remedial
actions.
Troubled Bank Resolution Framework
• When faced with the imminent closure of no less
than 9 institutions, it was not practical for the RBZ to
close all the institutions as it would have led to
serious losses to depositors.
• The RBZ then formulated a Troubled Bank
Resolution(TBR) Framework to address problems in
the banking sector in a holistic manner.
• Depositors had lost confidence in the banking sector
during this period.
Troubled Bank Resolution Framework
Objectives of TBR Framework
• Strengthen the banking system and promote
sound banking practices;
• Restore stability of the financial sector;
• Preserve indigenization of the financial sector
The Troubled Financial
Institutions(Resolution) Act[chapter 24:28]
• Promulgated in January 2005, to provide for the
administration of troubled financial institutions.
• Enables the RBZ to issue an order declaring a
financial institution insolvent, and to proceed to
appoint an administrator.
• The powers of the administrator included
reconstructing the troubled institution ,
amalgamating /merging the institution with one or
more other institutions or winding up the troubled
financial institution.
Troubled Bank Resolution Framework
Resolution Techniques applied:
• Amalgamation/merging of institutionsinitiated by RBZ
• Restructuring/reconstruction of institutions
• Liquidation and depositor reimbursements
Troubled Bank Resolution Framework
Amalgamation of institutions- ZABG
• The Reserve Bank created a special purpose vehicle ,
Allied Financial Services, which facilitated the
conversion of debt in troubled banks to equity.
• 3 banks (Trust, Royal & Barbican )were then
consolidated into a single entity known as the
Zimbabwe Allied Banking Group(ZABG) which was
granted a business license and commenced business
on 31 January 2005.
• RBZ ceded debt to government, and government
became the biggest shareholder.
Troubled Bank Resolution Framework
Re -structuring
• Intermarket Bank merged with Intermarket discount
house, group restructured and debt converted to
equity.
• CFX bank merged with CFX Merchant bank following
debt equity conversions.
• Boards were reconstituted and branch networks
reduced to improve efficiency.
• NDH recapitalised and resumed operations in May
2006.
Troubled Bank Resolution Framework
Liquidation and depositor reimbursements
• This was a last resort measure taken by the Central
Bank when all other resolution options had failed.
3 deposit taking institutions were liquidated;
• Century and Rapid Discount Houses in 2004 and
Sagit Finance House in 2006.
Troubled Bank Resolution Framework
DPB’s role during Liquidation
• DPB’s role was confined to compensating
depositors up to the insured amount in the event
of a bank failure.
• DPB handled the payouts for the three liquidated
institutions.
• Payout turnaround time averaged 2 months.
• Payouts handled to date have been for relatively
small banks( 300 – 3000 accounts).
Troubled Bank Resolution Framework
Reserve Bank /Liquidator Roles during Liquidation
• The Reserve bank is responsible for closing the bank
and appointing the liquidator who will later be
confirmed by the High Court.
• The liquidator is responsible for liquidating assets of
the closed bank and pay liquidation dividends to
creditors.
• The Liquidator ensures that DPB receive a verified
deposit register to facilitate deposit insurance
payments.
Challenges faced by DPB
• Lack of access to depositor records before bank
closure.
• Inability to pay depositors during curatorship-legal
constraints, affects payout turnaround time
• Low deposit insurance cover :
-resulted in low response rate, averaged 45%;
- failed to stop bank runs during financial crisis.
Challenges Faced By the Central Bank
Legal Challenges
• 2 of the institutions which were amalgamated into
ZABG(Royal & Trust Banks), challenged the legality of
their amalgamation into ZABG.
• The banks were engaged in a drawn out legal battle
with the RBZ,where the banks appeals were initially
dismissed by the RBZ but the banks were finally
relicensed in September 2010 after appealing to the
Finance Minister.
Challenges Faced By the Central
Bank(cont)
Curatorships/Judicial management
• Whilst curatorship was meant to preserve depositors
funds, it had the unintended consequences of
denying depositors access to their funds for long
periods of time.
• Many depositors were questioning the wisdom of
placing banks under curatorship.
• Depositors lost confidence in financial sector.
Enhanced Supervisory Processes
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In response to the challenges in the banking sector,
the RBZ had to refine its supervisory approaches by
introducing;
Risk based supervision;
Prompt corrective action programmes;
Consolidated supervision
Compulsory credit rating of banks
Issuing corporate governance guidelines
Concluding Remarks
The various strategies pursued in finding permanent solutions
to troubled banking institutions are now bearing fruit as
evidenced by the following observations:
• Our economic environment has stabilized since
introduction of multicurrency regime in 2009- annual
inflation now around 3% as compared to 230 million
% in June 2008!
• No bank failures of deposit taking institutions since
2006 to date.
• As 31 March 2011 there were 26 deposit taking
institutions as compared to 39 banks in 2003 before
the financial crisis.
Concluding Remarks(cont)
• Proper Corporate governance structures- boards
now properly constituted, board oversight
significantly enhanced.
• Consolidated Supervision- Asset management
companies now regulated by RBZ, which was not the
case during the financial crisis when they were used
as conduits for non core activities.
• Enhanced risk management systems-capacity of
banks to control and manage risks has been
enhanced since the introduction of Enterprise Risk
Management to monitor, manage and treat material
risks.
Concluding Remarks(cont)
• To overcome some of the bank resolution challenges
faced during the financial crisis, the Deposit Protection
Corporation Bill is before Parliament and it seeks to
provide DPB with bank resolution powers and
effectively complement the supervisory efforts of the
Central bank.
• Progress has also been made on the economic front to
stabilize the economic environment and the key lesson
for us is that the financial sector cannot thrive in a
hyperinflationary environment whilst at the same time
deposit insurance becomes ineffective.
CONCLUSION
The challenges presented by the 2003-2006
financial crisis, has presented opportunities
for us to fine tune our processes, which we
believe is a positive thing as it strengthens
regulatory and supervisory preparedness and
capacity to deal with similar challenges.
THE END
DISCUSSION