July 2015
IADI Research and Guidance Committee
Subcommittee on Purchase & Assumption (P&A)
Draft Research Plan
Request for Comments and Submissions
Deposit insurers (DI) and other interested parties are asked to provide their
experience on purchase and assumption transactions of the financial industry in
their jurisdictions. Individuals and organizations that would like to submit
materials on the issues raised in this research plan are requested to contact Mr.
Hayden Hyunseok Kim at kyhyunseok@kdic.or.kr by 15 August 2015.
Purpose
A deposit insurer with failure resolution functions must resolve a failed financial
institution in a manner that would minimize losses to the depositors and its fund
while preserving the stability of financial markets. For that purpose, a range of
resolution methods including, Open Bank Assistance (OBA), Mergers and
Acquisitions (M&A), and Purchase and Assumption (P&A) have been used to
resolve failed financial institutions. More recently, the P&A method has grown in
use as many countries viewed it as the least costly and least disruptive of all the
options available.
This study aims to carry out a comprehensive review of all types of P&A
transactions used by deposit insurers around the world, through analysis of
existing literature, a survey and case studies. Specific topics for this study
include: types of P&A transactions currently in use; the mechanisms for
determining the resolution method; the structure and process of a P&A
transaction, which is the main focus of this study; and any issues or challenges
raised in the execution of P&As and possible solutions.
In drafting this study, we expect to facilitate the sharing of P&A experiences
among IADI member countries and provide technical information on the P&A
methods currently used, thereby contributing to the development of effective
resolution regimes.
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Background
The recent global financial crisis brought failure resolution to the center stage of
worldwide discussions. This is because the disorderly collapses of many financial
institutions, including Lehman Brothers, during the crisis did not only cause great
losses to individual financial consumers but also wreaked social and economic
havoc by disrupting the financial system and requiring a massive injection of
public funds to mitigate systemic risk.
In response, governments around the world and international organizations, in
particular the Financial Stability Board (FSB), began to rethink how to address
challenges in developing orderly and effective resolution regimes. As a result, in
the United States, the Dodd-Frank Act introduced the Orderly Liquidation
Authority while in the United Kingdom, a Special Resolution Regime was
established under the Banking Act of 2009. Also, the FSB published the Key
Attributes of Effective Resolution Regimes for Financial Institutions, setting out
essential features that should be part of any resolution regime.
Meanwhile, to deal with the effects of the global financial crisis, deposit insurers
in many countries took action to prevent bank runs and maintain financial
stability such as, increasing the scope or limit of coverage and shortening the
payout period. Importantly, many of them were given a bigger mandate from a
simple pay box to a system with extensive responsibilities including certain
resolution functions. Furthermore, the IADI, in cooperation with the Basel
Committee on Banking Supervision, developed the Core Principles for Effective
Deposit Insurance Systems (the Core Principles) in 2009, later to be revised and
re-published in November 20141. The Core Principles were included in the FSB’s
Compendium of 12 Key Standards for Sound Financial Systems in 20112 and are
used by the International Monetary Fund and the World Bank in the context of
the Financial Sector Assessment Program. The Core Principles encourage deposit
insurers to have an effective resolution regime that ensures prompt and accurate
reimbursements and minimization of resolution costs and market impact, which
is seen as a useful guideline for designing a deposit insurance system with
resolution functions.
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Following the global financial crisis and as a result of work by a Joint Working Group consisting of
representatives from the Basel Committee on Banking Supervision (BCBS), European
Commission (EC), European Forum of Deposit Insurers (EFDI), FSB, IMF, World Bank and IADI.
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Later to be replaced by the Revised Core Principles
2
There have been a range of resolution options that can be largely grouped into
two categories: open and non-open 3 . The non-open methods include: P&A,
bridge bank, and bankruptcy/liquidation. Among them, the P&A method is
considered to have advantages over other alternatives because it is less
disruptive to the communities than bankruptcy/liquidation and helps reduce the
risk of the acquirer falling into insolvency as the acquirer usually assumes only
good assets and liabilities from the failed financial institution. Further,
it has
been shown that P&A is a more efficient option for resolving small and medium
sized firms, which have a greater chance of failure and have actually failed more
often than large ones. For these reasons, there is a growing demand for research
on P&A providing technical information for practical use.
Therefore, the P&A Subcommittee intends to study current practices, look at
different country examples, examine the processes and problems related to P&A
and provide technical and practical information on the P&A resolution method.
Issues to be Addressed
1. Overview of Resolution Regimes around the World
A. Legal Framework

Governing laws and regulations for, and structure of resolution
regimes, roles of Resolution Authority(ies) and their relationships

Any legal provisions specific for P&A transactions
B. Resolution Methods and Procedures

Resolution options available and the mechanisms for determining the
resolution method, and

Overview of resolution procedures (focusing on P&A)
C. Past Experiences of Failure Resolution

Past experiences of resolution of failed financial institutions including
resolution methods used, resolution costs, outcome, and other issues
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The difference between open and non-open is while open occurs when a distressed financial
institution remains open, non-open options close it in the process of resolution. Open includes the
option of open bank assistance (OBA).
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2. Theory and Practice of P&A
A. Theory of P&A

Background for the adoption of the P&A method including main
characteristics of the financial market, advantages and disadvantages
of P&A vis-a-vis other resolution options, and review of theoretical
research on P&A
B. Practice of P&A

Types, structures and procedures of P&A transactions, timeframes of
the P&A process, and issues to be considered in different steps of the
P&A process
3. Key Issues Related to P&A

Issues to be examined when conducting P&A such as,

the risk of a bank run

the basis for transferring contracts to another (or a bridge) bank

due diligence issues

valuation method used

types of assets and liabilities transferred

legal priority in the transfer of assets and liabilities

special incentives for acquiring entities

estimation of the cost to the deposit insurer

potential violation of property rights

dispute types and other constraints

effects
of
P&A
to
criminal/fraud
cases
initiated
by
the
regulator/resolution authority/deposit insurer

consent of the creditors on the valuation

hair-cut and transfer of assets

amendment of the original contracts in the process of transferring
contracts
4. Summary and Conclusion

Technical and practical information for effective P&A in the future will
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be provided based on a comprehensive analysis of country cases,
theoretical and practical aspects of P&A and other issues of
importance.
Methodology
A. Literature Reviews

The work plan will be modified as necessary, followed by a review of
literature and case studies.
B. Survey

A survey will be conducted to gather data and information in order to
address issues identified by the P&A Subcommittee with the Data and
Survey Committee of the IADI.
C. Preparation for the Research Paper

A draft technical paper will be prepared by Subcommittee members.
After circulating the completed draft to IADI Members and concerned
external parties, reviews and comments received will be incorporated
into the paper.
Tentative Schedule
Date
Activities
Oct. 2014
 Approval of establishment of the Subcommittee by the RGC
and the Executive Council, Chairman’s approval
Nov. ~ Dec. 2014
 Selection of Subcommittee members
Jan. ~ Feb. 2015
 Preparation and circulation of the draft research plan to
Subcommittee members
Mar. ~ May 2015
 Revision of the research plan, and preparation and circulation
of the survey questionnaire
Jun. 2015
 A meeting of the Subcommittee (at the time of the 45th IADI
EXCO)
- Presentation of the research plan and the objectives of the
survey
 Approval of the research plan by the RGC
Jul. ~ Aug. 2015
 Public consultation about the research plan
 Distribution of the survey, response gathering and literature
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review
Sep. ~ Oct. 2015
 Analysis of responses gathered
 Preparation and circulation of the draft research paper (ver.
1.0)
Oct. 2015
 A meeting of the Subcommittee (at the time of the 14th IADI
AGM)
- Presentation of the survey results and the draft research
paper
Nov. ~ Dec. 2015
 Feedback gathering and drafting of a revised version of the
research paper (ver. 2.0)
Jan. ~ Feb. 2016
 Circulation of the revised version (ver. 2.0) to Subcommittee
members
Feb. 2016
 A meeting of the Subcommittee (if necessary)
- Presentation of the second revised paper (ver. 3.0)
Feb. ~ Mar. 2016
 Feedback gathering and drafting of the third revised paper
(ver. 4.0) and resolution by the Subcommittee
Mar. ~ Apr. 2016
 Submission to the RGC for review
 Drafting of the forth revised paper (ver. 5.0) taking into
account the RGC’s opinions
May ~ Jun. 2016
 Request for BIS editing (ver. 6.0)
 Circulation to Advisory Panel members
Jun. 2016
 Submission to the Executive Council and approval for public
consultation
Jul. ~ Aug. 2016
Sep. 2016
 Public consultation
 Drafting of the final paper and incorporation of feedback from
public consultation
Oct. 2016
 Submission
to
the
publication
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Executive
Council
and
approval
for
Members of the Sub-committee
No
Name
Jurisdiction
e-mail
1
Yangig Cho (Chair)
Korea
yicho@kdic.or.kr
2
Ayla Kucukoglu Keles
Turkey
akeles@tmsf.org.tr
3
Bakyt Kogulov
Kazakhstan
bkgulov@kdif.kz
4
David Hoelsher
U.S.A.
david.s.hoelscher@gmail.com
5
Fernan Ulate
Colombia
Fernan.Ulate@fogafin.gov.co
6
Hajra Kumudini
India
kumudini@rbi.org.in
7
Joanna Smolarek
Poland
Joanna.Smolarek@bfg.pl
8
John Chikura
Zimbabwe
mchingosho@dpb.co.zw
9
Jong Deok Youn
Korea
Jdyoun04@kdic.or.kr
10
Juan Carlos Quintero
Colombia
Juan.Quintero@fogafin.gov.co
11
Kuanyshbek Abzhanov
Kazakhstan
kabzhanov@kdif.kz
12
Margaret Chuang
Taiwan
c190@cdic.gov.tw
13
Mohamud M.A.
Kenya
MohamudMA@centralbank.go.ke
14
Nilo Aldrin M.Lucinario
Philippine
nmlucinario@pdic.gov.ph
15
Noel Nunes
Trinidad Tobago
Nnunes@dictt.org
16
Rossana V. Castalla
Philippine
rvcastalla@pdic.gov.ph
17
Sanjeeve Sharma
IADI
sanjeeve.sharma@iadi.org
18
Seungkon Oh
Korea
shkoh@kdic.or.kr
19
Takashi Onozuka
Japan
takashi-onozuka@dic.go.jp
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