Financial Safety Net Conference 2015
20 May 2015
Stockholm, Sweden
Gail L. Verley
Secretary General
International Association of
Deposit Insurers
International Association of Deposit Insurers (IADI) –
Mission, History and IADI’s Global Presence
Deposit Insurance System – Functions and System
Mandates
Resolution of Non-systemic Banks – Definition, Statistics
of Bank Failures, Methods and Issues
Purchase and Assumption – Concept, Strength and
Weakness, Types of Transaction
The Role of Deposit Insurers – Core Principles for Effective
Deposit Insurance Systems and Key Attributes for Resolution
1. International Association
of Deposit Insurers (IADI)
• Introduction to IADI
• Deposit Insurance Systems (DIS) Worldwide
• IADI Representation in DIS Worldwide
Mission
 To contribute to the enhancement of deposit insurance effectiveness by
promoting guidance and international cooperation
History
Key Advancements
 Established in 2002 with 25 Founding Members
 Membership in 2015 – 79 Members, 7 Associates and 13 Partners
 Secretariat located at the BIS in Basel, Switzerland
 Core Principles for Effective Deposit Insurance Systems (CP) – issued in
2009 and revised in 2014, included in the Compendium of Key
International Standards of Financial Stability
 CP has been incorporated into the Financial Sector Assessment Program
(FSAP) of IMF & World Bank and FSB’s Country Peer Reviews
Guidance & Research
Training & Capacity Building
 Biennial Research Conference in Basel, 3-4 June 2015
 IADI Annual Survey and ad Ad hoc surveys – 102 respondents in 2014
 To issue papers and manage database related to deposit insurance
 Global/Regional conferences, seminars and workshops
 Website and On-line tutorials to provide members with various information
Financial Crisis of 2007~2008
Founding 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
(Number of Respondents)
Jurisdictions with Explicit DIS*
84
87
90
93
94
95
97
102
103
105
107
110
112
113
IADI Members
25
26
34
35
42
46
48
52
54
62
63
65
72
79
- Jurisdictions with Members
24
25
33
34
41
45
47
51
53
61
62
64
70
76
-
4%
31%
3%
20%
10%
4%
8%
4%
15%
2%
3%
11% 10%
29%
29%
37%
37%
44%
47%
48%
50%
52%
58%
58%
58%
63% 67%
Membership Growth Rate
Jurisdiction Coverage**
* The number of jurisdictions may include multiple DIS.
** The percentage of the total number of jurisdictions with IADI Members compared to the total number of jurisdictions with explicit DISs

IADI Membership has tripled and the coverage has doubled since its inception

A number of countries recognised the importance of an explicit deposit insurance
system after Global Financial Crisis of 2007-2008
Regional Breakdown of IADI Membership
Region
Africa
Americas
Asia
Europe
Oceania
Total
Number of Members
8
22
20
28
1
79
(Geographical Classification based on ‘United Nations Geoscheme’)
2. Deposit Insurance System
• Why Should a DIS Be Explicit?
• Functions of a Deposit Insurance Agency
• Mandates of Deposit Insurance Systems
Financial Consumer Protection
Confidence and Stability
 To protect unsophisticated,
retail and/or smalldepositors in case of a bank
failure.
 Depositors are far less
likely to have ‘runs’ on
banks in the event of a
failure
Fair Competition
 Both smaller and newer, as
well as larger, banks would
be seen as safe places for
depositors to store their
funds
Advantages
of Explicit DIS
Greater Certainty
 Precise coverage and
scope limits enable DIS
to avoid potentially
enormous cost for
‘blanket guarantees’
 Authorities design safety net given local conditions
 Role of deposit varies widely across jurisdictions
Risk
Minimiser
 A full suite of resolution powers and prudential
Loss
Minimiser
 Actively engages in selection/funding of resolution
Paybox plus
Paybox
oversight
strategies
 Reimbursement plus a limited role in resolution
(e.g. financial support)
 Only responsible for the reimbursement of insured
deposits
(%)
Risk Minimiser
12,3
Loss Minimiser
52,6
30
2009
39
40
Pay-box
17,5
(Number of DIAs)
50
2014
37
30
17,5
20
Pay-box+
13
10
10
13
10
7
(%)
Risk Minimiser
0
12,7
Loss Minimiser
12,7
Pay-box
Pay-box+
Loss
Minimizer
Risk
Minimizer
Pay-box
38,2
36,3
Pay-box+
 Pay-box+ DIAs have increased since 2009 due to
the entry of Survey participants and recognition of
the critical role of DIA in resolution
 The number of Loss/Risk Minimisers is on a
gradual increase while Pay-box is still dominant
(Source: IADI Annual Survey 2009/2014)
3. Resolution of
Non-Systemic Banks
• Definition of “Resolution”
• Liquidation and Deposit Reimbursement
• Open Bank Assistance (OBA)
• Bridge Bank
• Bank Failures since Deposit Insurer’s Inception
• Preferred Method for Resolution
• Changing Trend in Resolution Method
 Liquidation and depositor reimbursement
 Transfer and/or sale of assets and liabilities
(Purchase and Assumption)
 The establishment of a temporary bridge institution
 The write-down of debt or conversion to equity (Bail-in)
 The application of procedures under insolvency law to parts
of an entity in resolution, in conjunction with the exercise of
resolution powers
 A jurisdiction’s resolution regime may involve multiple resolution authorities.
 The specific resolution powers assigned to a Deposit Insurer vary depending on its
mandate.
What it is
Reasons
• Payment of depositors
of the failed institution
the amount of their
insured deposits (either
directly or through an
agent)
• Court decision on
forcible bank liquidation,
or a wind-up order has
been made with limited
time to use alternate
resolution
• No liabilities are
assumed and no assets
are purchased by
another institution
• Least cost resolution
Issues
• Entails bank closure,
potential loss of
continuity/critical
functions
• Depositors do not have
access to funds for a
brief period
• Limited franchise value
of failed bank
 European Deposit Guarantee Scheme Directive (DGSD) is aiming to reduce the
payout time of EU Members from 20 to 7 working days by 2024
What it is
Reasons
Issues
• An insured bank in
danger of failing receives
assistance in the form of
a direct loan,
contribution, an assisted
merger, or a purchase of
assets
• To minimize the cost of a
failing bank to the
deposit insurance fund
• Shareholders and other
creditors of the failing
institution benefited
from the assistance
provided by the
government
• To maintain public
confidence and banking
services to a community
• To avoid a serious threat
to the stability of the
financial system and
national economies
• May not be seen
favourably by public,
who do not agree with
this use of taxpayer
funds.
 In 2008, OBA was used with Citigroup and Bank of America in the United States (US)
 The Dodd-Frank Law enacted in July 2010 eliminated this option for use within the
United States thereafter
What it is
Reasons
Issues
• Temporary bank
established and
operated by DIA or
Financial Regulator to
acquire the assets and
assume the liabilities of a
failed bank until a final
resolution can be
accomplished
• Bank with an attractive
franchise is in danger of
failing
• The bank is too large to
fund for reimbursement
• Not enough time to
market the bank’s assets
to potential acquirers
• To maintain daily
operations
• Government
involvement in longer
restructuring of bank
requires dedicated
resources.
• If a bridge bank fails to
wind down its
operations within the
limited time, DIA is
forced to liquidate it as a
receiver.
 FDIC (US) is authorized to operate a bridge bank for a period of up to three years,
until a buyer can be found for its operations
 EU Bank Recovery and Resolution Directive (BRRD) also allows authorities to put
banks into an orderly resolution in which their critical functions would be preserved by
a sale to a third party or the creation of a bridge bank
(Total number of failures in each region,
to the year end of 2013)
North
America
7 726
Caribbean
9
Latin
America
Europe
Eurasia
655
4
Middle-East &
North Africa
9
Africa
AsiaPacific
1 845
297
170
 Worldwide, the total number of bank failures since DIAs’ inception is 10,715
while North America makes the largest portion of failures (72.1%)
 Philippines (618), Korea (541), India (350) and Nigeria (257) experienced a large
number of bank failures next to FDIC (4,071) and NCUA (3,582) in the United States
(Source: IADI Annual Survey 2014)
North America
(Number of times used in each region,
Including multiple answers for dual methods)
Europe
Eurasia
3 723
7
28
106
615
FDIC (1,886)
NCUA (1,827)
914
1 098
1 146
458
4
4
192
Caribbean
21
2
1 433
5
9
Latin America
Asia-Pacific
Middle East &
North Africa
24
34
Africa
9
361
42
57
32
60
2
6
4
34
934
Purchase and Assumption (P&A)
Open Bank Assistance (OBA)
Bridge Bank
Depositor Reimbursement
Liquidation
 Purchase and Assumption has been the most frequently used method by FDIC
(1,886 times, 46.3%) and NCUA (1,827 times, 51.0%) since their inceptions
 Excluding these two DIAs, Depositor Reimbursement (2,003 times, 50.6%) is the
most preferred method for bank resolution by DIAs worldwide
(Source: IADI Annual Survey 2014)
(Number of DIAs, Multiple answers)
87
63
74
49
36
40
74
82
45
35
36
26
 Liquidation (87) and Deposit Reimbursement (82) are most common tools
available for bank resolution to DIAs worldwide
 P&A and Bridge Bank methods are recognised as a key tool and promoted by
FSB’s “Key Attributes of Effective Resolution Regimes for Financial Institutions”
(Source: IADI Annual Survey 2013/2014)
4. Purchase and Assumption
• What Is “Purchase and Assumption (P&A)”?
• The Strengths of P&A
• The Weaknesses of P&A
• Types of P&A Transactions
• Basic, Whole Bank and Optional Shared Loss
• Statistics of FDIC’s Failed Banks Resolution
 A resolution transaction in which a healthy institution
(Acquiring Institution or ‘AI’) purchases some or all of
the assets of a failing institution and assumes some of
the liabilities, including all insured deposits.
 Can vary based on factors such as,
 amount of time available to arrange the
transaction
 location and size of the financial institution
 the nature of its deposits
 the assets available for sale.
 Structure of P&As has evolved to incorporate
procedures and incentives to entice potential Acquirers
to assume more assets of the failed institution.
 Designed to provide flexibility, since each potential
Acquirer has different interests and market conditions
change over time.
 Acquirer retains the bank locations of the failed bank
to enable customers to continue bank services at
same location.
 P&A often covers all depositors, the timing of cash
obligations can be stretched out and it may preserve
some jobs of the failed bank.
 Often the least expensive and disruptive resolution
approach.
 May not require any additional funds from Resolution
Authority.
 P&A can minimise market disruptions as transference
of assets can be executed in a very short period.
 Allows customers access to their deposits and they do
not suffer any shortcomings in service.
 Potential difficulty finding an Acquirer when economic
circumstances or the banking system is weak.
 Possible loss of significance of Deposit Insurance limit
when all depositors are covered.
 Private investors are typically not interested in
acquiring an insolvent bank; therefore, in order to
attract an Acquirer, funding may be required from
Resolution Authority to cover losses associated with
assets of the failed bank.
 DI faces arduous task of facilitating the early valuation
of assets and liabilities of the failing institution as it
endeavours to maintain secrecy.
 Not all P&A transactions involve acquiring all deposit
liabilities, so not all (100%) of depositors are always
fully protected.
1
• Basic P&A
2
• Whole Bank P&A
3
• P&A with Optional Shared Loss
 Some assets are purchased outright while others may be subject to an exclusive
purchase option by Acquirer depending on the type of P&A
 The Whole Bank P&A with optional asset pools is the most common method in
those jurisdictions that use P&A for the resolution of failed banks
 The loss sharing transactions are considered specialised P&A
 The premises of failed institutions (including furniture, fixtures, and equipment)
are often offered to Acquirers on an optional basis.
 Liabilities assumed by Acquirers will include the portion of the deposit liabilities
covered by deposit insurance and may also include all deposits.
 Customers with insured
deposits suffer no loss in
service and interest on
their accounts.
 Uninsured depositors may
or may not suffer losses.
Drawback
 Acquirers have an
opportunity for new
customers.
 DIA left with mostly bad
assets to liquidate since
Acquirers would cherrypick assets with values
above book values.
 DIA can use this method
when there is not enough
time to complete due
diligence.
 Receivership must
liquidate the majority of
the failed institution’s
assets.
Benefit
 Bidders are asked to bid for all assets of the failed institution on an “as is“
discounted basis (with no guarantees).
 The highest whole bank bid is less costly than a Depositor Reimbursement.
 Franchise value of the
failed bank is clearly
evident by Acquirer.
Drawback
 Customers can continue
banking business with the
new bank.
 The initial cash outlay by
DIA is minimised.
 The amount of assets held
by deposit insurer or
liquidator for liquidation is
greatly reduced.
Benefit
 Bidders tend to bid very
conservatively to cover all
potential losses.
 Acquirers are reluctant to
purchase commercial
credits without credit
enhancements even if
assets are purchased at a
discount.
 Shared loss assets are distressed portfolio of the failing institution that otherwise
might not appeal to potential Acquirers without some sort of incentive or
protection from losses.
 Shared loss assets are typically single-family residential loans, commercial loans,
commercial real estate loans and owned real estate.
 DIA reimburses Acquirer a substantial percentage (i.e. 80%) of defined losses
and expenses.
 Reduced risk for the
Acquirer
 Can lower the DIA’s cost
 Reduces the DIA’s
immediate funding needs
 Assets remain in the
private sector
 It is operationally simpler
 Moves assets quickly into
the private sector
Drawback
Benefit
 Additional administrative
duties are required for
both the Acquirer and DIA.
 Time consuming as
agreements generally last
8 to 10 years.
 DIA does not control the
assets, yet retains a large
portion of the potential
losses.
(Number of failed banks, USD Million)
Transaction
Type
P&A
Subtotal: P&A
P&A Insured Deposits (ID)
only
Subtotal: P&A ID only
Pay-out
(Deposit Reimbursement)
Subtotal: Pay-out
Subtotal: Failure
Assistance
Subtotal: Assistance
Total (Average)
Year
‘05~’13
’14
‘05~’13
’14
‘05~’13
’14
‘05~’13
’14
Number of
Failed banks
(A)
453
18
471
13
0
13
26
0
26
510
13
0
13
523
Total
Deposits
(B)
459,768
2,691
462,459
27,687
0
27,687
13,888
0
13,888
504,034
1,371,125
0
1,371,125
1,875,160
Total Assets
(C)
632,681
2,914
635,594
40,357
0
40,357
15,901
0
15,901
691,852
3,223,524
0
3,223,524
3,915,377
Estimated
Loss (D)
57,679
439
58,118
15,043
0
15,043
4,434
0
4,434
77,595
n/a
n/a
n/a
77,595
Average
Deposits
(B/A)
1,015
150
982
2,130
0
2,130
534
0
534
988
105,471
0
105,471
3,585
Average
Assets
(C/A)
1,397
162
1,349
3,104
0
3,104
612
0
612
1,357
247,963
0
247,963
7,486
Average Resolution
Loss
Cost Ratio
(D/A)
(D/C, %)
127
24
123
1,157
0
1,157
171
0
171
152
n/a
n/a
n/a
148
9.1
15.1
9.1
37.3
0.0
37.3
27.9
0.0
27.9
11.2
n/a
n/a
n/a
2.0
(Source: FDIC ‘Historical Statistics on Banking’)
 FDIC used ‘P&A’ 484 times (94.9%) and ‘Deposit Reimbursement’ 26 times (2.5%)
during the recent 10 years while only ‘P&A’ has been used 18 times in 2014
 Open Bank Assistance (OBA) was used 13 times for significant bank failures with
a large amount of assets (avg. assets of failed banks: USD 247,963 mm)
 ‘P&A of the Insured Deposits only’ method (37.3%) shows higher resolution cost
compared to ‘P&A’ (9.1%) or ‘Deposit Reimbursement’ (27.9%)
For Reference: Mr. Kenneth Blincow (Kblincow@fdic.gov)
Assistant Director, Division of Resolutions & Receiverships
Federal Deposit Insurance Corporation (USA)
5. The Role of Deposit Insurer
• Core Principles for Effective Deposit Insurance
Systems
• DIA's Role for Resolution Decision
• DIA’s Involvement Handling a Systemic Crisis
• IADI’s Assistance Program
Definition on “Resolution”
• “Resolution” refers to the disposition plan and process for a non-viable bank.
Resolution may include the liquidation and reimbursement of insured deposits,
the transfer and/or sale of assets and liabilities, the establishment of temporary
bridge institutions, and the write-down and/or conversion of debt to equity of the
non-viable institution. Resolution may also include the application of procedures
under insolvency law to parts of a firm in resolution, in conjunction with the
exercise of resolution powers.
Principle 14 – FAILURE RESOLUTION
• An effective failure resolution regime should enable the deposit insurer to
provide for protection of depositors and contribute to financial stability. The legal
framework should include a special resolution regime.
Essential Criteria
• 1. The deposit insurer has the operational independence and sufficient
resources to exercise its resolution powers consistent with its mandate.
• 2. The resolution regime ensures that all banks are resolvable through a broad
range of powers and options.
• 3. Where there are multiple safety-net participants responsible for resolution, the
legal framework provides for a clear allocation of objectives, mandates, and
powers of those participants, with no material gaps, overlaps or inconsistencies.
Clear arrangements for coordination are in place.
Europe
Eurasia
20
3
(Number of DIAs in each region)
North America
4
1
8
3
8
1 1
7
1
Asia-Pacific
Middle East &
North Africa
Caribbean
8
2
3
Latin America
2
Africa
1
6
2
3
4
3
3
3
1 2
Sole Decision
1
1
Contribute to a Decision
No Input or Responsibility
No input but to Participate in Resolution Funding
Other
 6 DIAs make a sole decision and 30 DIAs contribute to the decision for the
resolution of failing member banks/institutions
 36 DIAs have no input or responsibility in the decision-making process and the
other 14 DIAs only participate in resolution funding
(Source: IADI Annual Survey 2014)
Eurasia
Europe
(Number of DIAs in each region)
North America
3
15
8
19
2
9
1
Caribbean
12
2
7
3
2
Latin America
Asia-Pacific
Middle East &
North Africa
2
6
4
2
Africa
3
2
Yes
No
Other
 50 DIAs worldwide are involved in the process of handling a systemic crisis
 DIAs in North and Latin America play more active role dealing with a systemic
crisis than DIAs in other regions
(Source: IADI Annual Survey 2014)
First issued in Jun 2009,
updated in Oct 2014.
Collaborated with BCBS,
IMF, World Bank, EFDI
and European Commission.
IADI Research Conference,
Basel, Jun 2015
FSI-IADI Joint Seminar,
Basel, Sep 2015
Annual Conference,
Kuala Lumpur, Oct 2015
 Core
Principles
for Effective
Deposit
Insurance
Systems
 Conference,
Training and
Seminars
 Research &
Guidance
Papers
 Capacity
Building
Program
Enhanced Guidance
Papers and
30 Research/Discussion
Papers are available at
IADI website
(www.iadi.org)
For deposit insurers,
financial authorities and
government officials
seeking to develop,
strengthen or make a
transition to deposit
insurance schemes
Gail L. Verley
Secretary General
International Association of Deposit Insurers
c/o Bank for International Settlements
Centralbahnplatz 2, CH 4002 Basel, Switzerland
E-mail: Gail.Verley@iadi.org
Disclaimer of Warranties/Accuracy and Use of IADI Annual Survey Data
Although the survey data found using IADI Survey tool (iFOST) have been produced and processed
from IADI members, associates and sources believed to be reliable, no warranty expressed or implied
is made regarding accuracy, adequacy, completeness, legality, reliability or usefulness of any
information. IADI provides this information on an "AS IS" basis. All warranties of any kind, express or
implied are disclaimed. Changes may be non-periodically added to the information. These changes may
or may not be incorporated in any new version of the publication. Data can also subject to change as
IADI carries out validation of the survey result. It is recommended that the user pay careful attention to
the contents of this presentation material and any metadata associated with IADI Annual Survey.