Deposit protection, resolution of bank failures
GLOBALLY, regulatory and prudential supervision frameworks institute parameters for limiting risk-taking by banks while problem bank resolution frameworks are designed to remove failing and failed banking institutions without undermining the systemic safety and soundness of the banking system.
The deposit protection component of the financial safety net curtails uncertainty regarding the reimbursement of deposits to those depositors without the means or sophistication to understand or monitor risk build-up in the system.
The severity of the global financial crisis, however, underscored the view that the traditional approach was too narrow as maintenance of financial system stability called for a more integrated approach to the operations of the financial safety net to strengthen efficiency. This resulted in the evolution in the role of the safety net and the relationship among elements of the safety net.
Lessons drawn from the global financial crisis suggested the need for deposit protection systems to be more fully embedded in the financial safety net framework. Achieving financial stability requires a well coordinated safety net framework where deposit protection, bank supervision, failure resolution, and lender of last resort functions effectively cooperate and coordinate their activities not necessarily just when focusing on protecting depositors. Adequacy of deposit protection design features cannot be judged in isolation from the rest of the safety net system. This, therefore, goes beyond just information sharing but to revamp the overall safety net framework by putting in place consistent revisions in deposit insurance, supervision and expanding the toolkit for bank resolution.
Resolution options for bank failures
Since its establishment in 2003, the Deposit Protection Corporation (DPC) has resolved AfrAsia Bank, Genesis Investment Bank, Interfin Bank, Royal Bank, Allied Bank, Tetrad Investment Bank, Trust Bank and some other member banks that went into liquidation prior to the multi-currency period. The multi-faceted resolution methods available to deposit insurers in resolving failed banks are outlined hereunder and vary based on the mandate and powers of the deposit insurer.
a) Reimbursement (payout) of insured depositors
A depositor reimbursement or payout resolution is normally used by DPC when it pays depositors directly their insured balances or by transferring the accounts to another bank that makes the insured balances available to the depositors.
The DPC has mainly used the reimbursement tool to compensate depositors of the above mentioned institutions. In addition, the DPC is still in the process of reimbursing depositors of AfrAsia, Allied, Trust and Interfin.
Depositors who have not yet claimed their money are encouraged to contact the DPC. The bank is often closed and the assets and uninsured claims are transferred to a receiver for liquidation and settlement. Reimbursement allows for prompt and timely reimbursement of insured depositors and can help prevent a contingent systemic crisis.
b) Purchase and Assumption (P&A)
A purchase and assumption transaction or resolution is one in which a healthy bank or group of investors assume some or all of the obligations, and purchase some or all of the assets, of the failed or failing bank. Adopting a purchase and assumption resolution is considered to be less disruptive compared to a payout, the resolution is considered to be in the best interest of the bank’s depositors and would aid in the reconstruction of the bank or the disposition of its assets in an expeditious manner. Following amendments to the Banking Act in 2015, the DPC where possible may use the purchase and assumption to resolve a failed bank.