Reimbursement

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					Reimbursement and liquidation


     Presentation for Session IV:
    “Guidance on Bank Resolution”
          by Daniel Janossy



IADI 3rd Annual Conference, October 26, 2004
                    Criteria that determine reimbursement
                               Legal background
Trigger criteria for reimbursing:
    • unavailability of deposits during X days (5 days in case of Hungary)
    • withdrawal of the banks‟ licence (closure)
Eligibility, separate insurance capacities
     • individuals‟ and business accounts
     • excluded depositors
     • trust accounts, joint deposits, etc.
Insured products
     • only registered deposits
     • unambiguous definition of deposit is important (e.g. CD‟s, bonds included)
     • deposit register might be useful
Other issues
    • problem of incoming transfers during the five days after closure
    • set-off against debts (expired debts only or debts regardless of expiry)
    • deposits used as collateral
    • withholding deposits for any reasons
          Criteria that determine reimbursement (cont’)
                       Procedures and data


 Regulation of reimbursement procedure flexibly adjusted to each case
 Pre-audited data-processing system (software)
 Regular examination of the member-institutions‟ deposit record keeping
 Access to the failed banks depositors‟ records ASAP
 (immediately after closure, at latest)
               Summary of the pay-out procedure

 backup of the bank‟s records immediately after closure
 press release
 receiving of the depositors‟ claim applications (optional)
 cross-checking of submitted claims and the bank‟s records (optional)
 verification and calculations of the compensation according to the
  provisions of the law (e.g. “cutting off” the sum exceeding the
  coverage limit)
 preparation of a settlement on the sum of compensation
 reimbursement
 follow-up, complaint management
                       Key issues of the Reimbursement
Timeframe:
   Reimbursement starts within X days after the closure
           (e.g. 15 days in case of Hungary)
   End of reimbursement within Y days
           (e.g. 90 days according to the EU-directive)

Interest payment: optional during the time until reimbursement
Claim required from the depositor if justified due to
   inaccurate, out of date data in the records
   preferred methods of payment (money transfer, deposit insurance card) that need prior
    contact to the depositor
Methods of payment:
  Cash through an agent bank
  Transfer to a requested bank account
  Cheque
  Cash withdrawal through ATM‟s and POS‟
  Postal transfer or direct payment from the deposit insurers account (exceptionally)
                       Key steps of the Reimbursement


Verification, reconciliation

Cross-checking of the claims and records:
        • depositors‟ data
        • deposits‟ data

Aggregation of all deposits of the same depositor

„Cutting off‟ the amount exceeding the coverage limit and the amount of coinsurance

Preparation of the settlement on the amount
         • to be paid to the depositor
         • to be claimed from the liquidator
                        Special issues of reimbursement

Set-off
The claim of a creditor (e.g. depositor) in a closed bank is deducted from a claim of the
bank (e.g. a loan) against the same creditor

Rules of set-off deposits against debts
  set-off only on the notification and request of the liquidator or
  set-off by the deposit insurer on its own right (data-processing implications)
  set-off against debts due or in default only or against all debts (performing ones
    included which might destabilize viable business)

Blocked deposits
Dealing with deposits used as collateral, security
   ban on reimbursement
   lifting the ban only on the notification of the liquidator or the agency that ordered
    the blocking
                      PR, Communication, Complaints

Press releases, posters:
        • immediately after closure
        • before starting payment

Continuous dissemination of information on reimbursement during the whole
reimbursement process

Direct mail:
        • depositor is notified on the availability of the money
        • settlement enclosed

Inquiries, hot line, complaints, goodwill
        • direct mail
        • goodwill-intervention (if justified)
                     Criteria that determine the liquidation
                          Legal background in general

Who can be appointed to liquidator of a bank?
  any competent market-player
  pre-qualified market-players
  a non-profit company established (exclusively) for such purpose
  the deposit insurer itself

Guiding rules of liquidation
   general rules and/or specific rules for credit institutions
   rules for starting and controlling the liquidation (role of the supervisor and of the court)
   reporting duties of the liquidator
   interest representation of the creditors (for example by a creditors electorate)
   time-frame: legal deadline and reality

Guiding priority law in liquidation
   creditors rank equally and receive pro-rata shares of recoveries or
   groups of creditors (e.g. depositors) are accorded superior rights to share in recoveries (they
    must be paid in full before others are compensated)
      Criteria that determine the statute of the deposit insurer in
                              liquidation
                            Specific rules
Guiding subrogation rule:
   The deposit insurer steps into the shoes of the compensated depositors in the liquidation
    process

Major factors that determine the recovery in liquidation
  Does the deposit insurer enjoy a priority ranking or not?
  Time-frame: negligence of the legal deadline can erode the priority ranking
  Exposure of the deposit insurer to legal procedures might delay the recovery

Set-off rules that
   might redistribute the administrative (data processing, communication, etc.) costs between
     the deposit insurer and the liquidator
   might have implications on the recoveries of the creditors

Collateralization of claims (if possible) might create priority statutes for some creditors at the
expense of others
           Social implications of reimbursement and liquidation
             Contribution to and risking of the social stability

       Contribution to social stability if              Hungarian experience
   reimbursement is timely and high quality positive
   continuous flow of information during the
    reimbursement process                     positive
   liquidation is timely and fair            Mixed (rather negative):
                                                 slow and full of debates, legal
                                                   procedures;
                                                 improvement in average rate of
                                                   recovery

Interrelationship between deposit insurance and liquidation
    Efficient reimbursement by the deposit insurer might „disburden‟ the liquidation (that is
     lessen the social risk of a lengthy liquidation process with tens of thousands creditors
     involved)
    Priority ranking, although financially beneficial for the deposit insurer, might cause social
     tension if there are many uninsured creditors
                 Lessons of Reimbursement and Liquidation
History of bank-crises, reimbursement and liquidation was a continuous learning process in case
of Hungary:

     Problems, concerns, lessons                                   Response
Many depositors suffered losses in the     The summary of the typical cases was presented to the
bankruptcy of a savings cooperative        member institutions in order to support adjustments in
due to unawareness of deposit              their front- and back –office policies
insurance rules                            Changes in the law were initiated with regard to
                                           specific compensation rules
Recovery rate was 0. p. c. partly due to   On the deposit insurer‟s initiative the law was
negligence of creditors‟ interest by the   amended: credit institutions are liquidated exclusively
liquidator                                 by a non-profit company owned by the supervisor since
                                           then
Reimbursement for a large number of        Next time pay-out accomplished through a special debt
depositors country-wide in case of a       card in cooperation with the largest retail bank
medium size bank
Very long liquidation process:
recovery after 4 years instead of the                               ???
legal deadline of 2 years

				
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posted:10/11/2011
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