Part 2
United States Department of the Treasury
Office of Technical Assistance
Banking & Financial Services
Bank Intervention and Resolution
Advance Preparation
• Effective preliminary preparation and
execution of the action plan can make the
Intervention and Resolution much easier.
• Intervention and Resolution are not
separate—much overlap
Advance Preparation Intervention
Intervention Action Plan
Management and Legal
Information Packages
Function Areas Advance Preparation
Advance Preparation Intervention
• Both bank intervention and resolution advance
preparation should be conducted concurrently.
Legal – Advance Preparation
• Prepare notices and other legal documents
regarding appointment of the Conservator or
• File at the appropriate court
Conservator or Receiver
• Failed bank employee retention strategy
• Appropriate Delegations of Authority and
• Powers of Attorney have been issued
Bank Intervention Manager
• Main function is managing and coordinating all
intervention team members to assure that the
intervention goes as smoothly as possible.
• He can delegate many of the functions to others;
however, the BIM bears ultimate responsibility to
assure completion of intervention activities as
Intervention Action Plan
• A checklist for planned actions and assignments
(who, what, when, where, why, how).
• Ensures that all areas of risk will be controlled
without delay
Management and Legal
• Management - meeting with the bank’s
General Director and his key staff to be held
at the bank immediately before the date and
time of Intervention
Management and Legal
• Legal - drafting corrective measures,
transactional documents as applicable (i.e.,
P&A), any required notices, any required Powers
of Attorney for the Conservator or Receiver and
providing legal assistance to a Liquidator on
broad matters
Intervention Preparation
• The Bank Intervention Manager should
begin preparing an Intervention Action
• The Intervention Action Plan is a
checklist for planned actions and
assignments (who, what, when, where,
why, how).
• It is designed to ensure that all areas of risk
are addressed.
Intervention Team
• Bank closings are best carried out using a
team approach. Team members may be
drawn from the Supervisory Authority and
Deposit Guarantee Fund.
Intervention preparation
• The Bank Intervention Manager must designate
Function area managers and begin advance
preparation for the intervention.
• All Function managers should:
• review the Information Package for items in the
functional area; and
• determine staffing, supplies, equipment and security
Function Areas Advance
Accounting Team
Asset Team
Branch Operations Team
Deposit Operations Team
Facilities and Security Team
Information Technology Team
Legal Team:
Personnel Team
Intervention preparation
• Accounting:
• Review P&A for asset and liabilities splits with
Assuming Bank.
• Review bank’s financial reports.
Intervention preparation
• Asset Team
• Review bank’s financial reports to determine
types and amounts of assets
• Work with Accounting for asset splits with
Assuming Bank
Intervention preparation
• Branch Operations
• Identify the number of branches and the
contact person at each branch.
• For any branches located abroad, contact
Legal to secure the services of an
experienced banking attorney in each country
prior to the intervention.
Intervention preparation
• Deposit Operations Team (under the DGF)
• Perform a preliminary insurance
determination according to governing deposit
insurance law.
• Work with Accounting for deposit liability splits
with Assuming Bank
Intervention preparation
• Facilities
• Ensure necessary supplies, forms and
documents are available.
• Arrange for an official seal, tape or other
means to control drawers, and use labels for
inventory, etc.
• Determine if the bank’s existing facilities has
the capacity to accommodate the intervention
team. Arrange for additional work space if
necessary (e.g. hotel conference rooms).
Intervention preparation
• Security
• Meet with contracted Security Guard firm or
police to provide instructions, determine
locations and assignments.
Intervention preparation
• Information Technology
• If possible, the IT Manager should visit the
failing institution to help prepare data files,
equipment, and information needed for the
• Determine capability of stopping accruals,
when to expect the download files, report
generation capability, delivery logistics, and
• The Supervisory Authority’s Legal department
will be involved throughout the process,
• Corrective measures,
• P&A transactional documents,
• Any required legal notices (for registering with
court, posting on premises, publishing, etc.),
• Powers of Attorney for the Administrator or
Receiver, and,
• Providing legal assistance to a Administrator or
Receiver on broad matters
Intervention preparation
Legal Team
• Review the bank inspection report
• Prepare the proper legal order (i.e.,
Administration or Receivership) as required by
Intervention preparation
Legal Team
• Review major contracts and agreements as
requested by the Administrator/Receiver or the
Bank Intervention manager (including letters of
credit, open credit lines, unfunded and partially
funded commitments, etc.).
Intervention preparation
Legal Team
• Accompany the Administrator/Receiver, the
Bank Intervention Manager, and the
representative from the applicable Supervisory
Authority when the proper legal notice (i.e.,
Administration or Receivership) is served on the
• Make sure that the notice is published in
accordance with the Law
Advance Preparation - Resolution
Resolution preparation
Marketing strategy
Legal documents
Potential acquirers
Marketing presentation
Due diligence
Bid acceptance
Contract signing
Resolution preparation
• Compiling Initial Information about the bank
• Asset Valuation
• Completion of a financial information package
(Bid Package)
• Marketing Meeting Logistics
Initial Information
Number of offices
Location of main offices and branch locations
Borrowings – secured or unsecured
Initial Information
Trust Department or activities
Ownership structure
Enforcement actions pending
Other – leases, etc.
Asset Valuation
• Statistical sampling of asset categories
• Liquidation value is derived from the future
cash flows and the expenses likely to be
incurred during the collection of the asset
Asset Valuation
• Adjustments - discount future cash flows;
account for liquidation expenses
• Loss factors are aggregated and extrapolated to
the bank as a whole
• Loss factor, or cost of liquidation, which will be
used in assessing bids from potential acquirers
Bid Package
Builds on Initial Information:
• Demographic information,
• Balance sheet schedules:
Cash and equivalents
Investment securities s
Fixed assets
Bid Package
Builds on Initial Information:
• Other real estate
• Subsidiaries
• Other assets
• Deposit base
• Borrowings
• Guaranties
Bid Package
Builds on Initial Information:
• Other liabilities
• Contingent liabilities
• Capital accounts
• Detailed description of the Data Processing
(in-house or outsourced, applications, etc.)
• Employees
• Contracts
• Litigation
Marketing Meeting Logistics
• Date, time, and place for the Marketing
Least Cost Analysis
• The calculation to determine the problem bank
resolution method that is the least costly
• A typical formula to calculate least cost is:
(Loss on assets – equity capital- unsecured
creditors’ loss) x (insured deposits/total deposits)
• Financially healthier bank will
purchase certain “good” assets
and assume insured deposit
Some benefits of a P&A include:
Customers suffer no loss in service
Acquiring bank can increase market share
Usually less expensive than a payoff
Depending on transaction, can keep assets in
private sector
• Assets of the failed bank help offset the
deposit liabilities transferred to the assuming
• Reduces impact on deposit insurance fund (if
there are not enough “good” assets to
balance the amount of insured deposits, the
DGF must advance the cash to balance the
transaction--assets must equal liabilities)
Types of P&A
• Whole Bank - where the authorities pay an
acquirer to take all assets and liabilities of a
failed bank (negative bid).
• Clean Bank – some good assets are sold to an
acquirer who also assumes insured deposit
• “Bridge” Bank – where a temporary financial
institution, owned and operated by the
government, is established to receive the
deposits and good assets of one or several
failed institutions.
Bank Resolution
An effective failing bank resolution plan can help
avoid disruption of orderly economic activity
such as:
• Loss of a bank in an isolated area
• Severe reduction in credit availability for an
industry or region
• Considerable government ownership of a failed
bank’s assets
Branch Break-ups
Branch Break-up (i.e., offering branch offices
individually, or in clusters, to multiple bidders):
• Pros:
• Provides for more potential bidders (especially
smaller banks), which may increase the premiums
• Increases the resolutions options available to the
Branch Break-ups
Branch Break-up (i.e., offering branch offices
individually, or in clusters, to multiple bidders):
• Cons:
• Information technology and conversion costs are
usually higher.
• A quick and smooth transaction is more difficult.
• One acquirer must be the “lead” acquirer (an often
onerous role), in processing and allocating
transactions and costs.
• Some branches may be undesirable, resulting in
liquidated payoff.
Legal documents
Confidentiality Agreement
Purchase and Assumption Agreement
Interim Asset Servicing Agreement
Escrow Agreement
Bid Agreement Form
Potential acquirers
• Opportunity for an acquiring bank to either
increase market share or to expand.
• Paying a premium for deposits and options
on banking premises is more cost-effective.
(In the U.S., estimates are that the acquirers
in these types of transactions retain
approximately 70% of deposits.)
Potential Acquirers
• Additionally, the efficiency of the P&A
• limits financial disruption to a community,
• maintains public confidence and stability in
the banking system.
Potential acquirers
• Maintain a database of approved banks and
investors that are interested in establishing
bank operations in the country.
Potential acquirers
• When evaluating investor groups for approval,
the Supervisory Authority must consider, among
other factors:
• The length of time required for licensing a new bank
• Whether the investor group can raise sufficient capital
• Whether the investor group can provide competent
Potential acquirers
• The Supervisory Authority must be confident
that those parties on the list are strong
enough to acquire a failed bank and sustain
profitable operations.
• The Supervisory Authority should keep track
of any seriously interested bank or investor
Potential acquirers
• Contact all strong, healthy banks in the
country to solicit their interest in acquiring the
failing bank.
• Additionally, solicit the interest of foreign
banks attempting to obtain licenses in the
Marketing Presentation
Financial data on the bank
P&A transaction summary
Legal summary.
Regulatory requirements
Due diligence scheduling
Bid process
Due Diligence
• Due diligence is the potential acquirers’ on-site
inspection of the premises, records, and
operations of the failing bank. It allows the
potential acquirers’ to assess the franchise value
and calculate a knowledgeable bid amount.
• Note: The resolution preparation process can
be shortened by not allowing due diligence.
Due Diligence
• Approved potential acquirers will have the
opportunity to go on-site and examine the
relevant records of the failing bank.
• The potential acquirer must have completed a
Confidentiality Agreement, which is a legally
binding document and violations are subject
to criminal penalties.
Due Diligence
• Maintaining the “level playing field concept,”
all potential acquirers conducting due
diligence should have access to the same
• Potential acquirers should be granted
adequate review time, keeping in mind the
urgency of the resolution process.
Due Diligence
• Small bank, simple transaction - maybe a day or
• Larger bank, complex transaction - may require
a week or more.
Due Diligence
• When potential acquirers have the
opportunity to conduct due diligence, they
can put their own value on assets they may
purchase and therefore those assets can be
sold “as is.”
Due Diligence
• When due diligence is not used, assets can
be sold to the assuming bank with putback
options. That is, if an asset is not of the
quality that has been represented, the
assuming bank can sell it back at the
purchase price, within a limited time period
(usually 90 days).
Bid Acceptance
• After all potential acquirers have finished due
diligence, they will submit their bids.
• The bid amount (or Premium) is the price a
potential acquirer puts on the value of the
transaction (asset purchase options, deposit
base, branch network, etc.)
Bid Acceptance
• The winning bidder should be notified and a
meeting to sign contracts should be scheduled.
A reminder of the confidentiality of the process is
appropriate at this point.
• Losing bidders should also be notified; however,
the identity of the winning bidder should not be
disclosed. The winning bidder is referred to as
the “Assuming” Bank
Contract Signing
• To provide a comfort level to both parties to
the transaction, the P&A contracts are signed
several days prior to the actual closing of the
bank. This eliminates last minute conditions
or demands by either party.
• Authorized representatives from the
Authorities and the Assuming Bank will sign
the Purchase and Assumption Agreements.
Both parties will also sign the Escrow
Contract Signing
• The Escrow Agreement merely states that the
aforementioned documents were signed and put
into escrow until the stipulated date.
• The Assuming Bank receives only a copy of the
Escrow Agreement. The other signed
Agreements will be delivered to the Assuming
Bank at the time of the bank closing.