## 1pryea2022003

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### Preface — mission background and objectives
- At the request of the Central Bank of Paraguay (BCP), a joint technical assistance (TA) mission from the IMF’s Monetary and Capital Markets Department (MCM) and the Legal Department (LEG) provided offsite TA between June 15 and July 8, 2021 on options to enhance the existing resolution framework and the Deposit Guarantee Fund (DGF).
- Mission participants: Miguel Otero (MCM), Luis Cortavarría-Checkley (MCM Expert), Mario Tamez (LEG), and Ignacio Caparroso (LEG Expert).
- Objective: provide input on enhancing Paraguay’s bank resolution framework, the DGF, and crisis preparedness in line with modern international practices.
- Context: built on the Financial System Stability Review (FSSR) completed by MCM staff in October 2017.

### Executive Summary — crisis preparedness and coordination: main findings
- Paraguay’s financial system: 390 financial institutions; as of end-2020, assets equivalent to 91 percent of GDP (70 percent for the banking sector).
- Concentration: five out of 17 licensed banks (3 foreign and 2 domestically owned) account for almost two-thirds of the banking sector assets and are classified as systemically important.
- Cooperative sector: 8 percent of financial system assets; three largest cooperatives account for about 40 percent of cooperative sector assets.
- Since 2004: only three small, non-systemic bank failures.
- As of end-May 2021: “watch out” loans (including nonperforming, rescheduled, refinanced, and restructured loans, net of provisions) accounted for more than one-third of total loans or 1.3 times banks’ equity (from one-fifth of total loans or 0.7 times banks’ equity as of March 2020).

### Executive Summary — crisis preparedness: recommendations (highlights)
- Institutional arrangements:
  - Evaluate benefits of a sound legal regime with a clear mandate and better delineation of roles and responsibilities for the Financial Stability Committee (FSC) and the “Crisis Committee”.
- Recovery and resolution planning:
  - BCP should consider developing an ongoing process of recovery and resolution planning and underpin it in its regulatory framework.
  - All banks under SB supervision should develop recovery plans, proportional to size and complexity, to be assessed by the SB.
  - Once established, the resolution authority (RA) should develop resolution plans for all systemic banks.
- Cross-border coordination:
  - Coordinate with members of the financial safety net of other jurisdictions, given significant presence of international banking groups.
- Communications:
  - Adopt a one-voice method of communication with the public; prepare communications in advance.

### Executive Summary — bank resolution framework: main findings
- Current resolution legal framework presents gaps, including lack of objectives for the RA.
- SB currently hosts resolution functions under Law No. 2334/03; the only resolution tool available is the purchase and assumption (P&A).
- Recent efforts to update and modernize the law have not been finalized.

### Executive Summary — resolution framework: recommendations (highlights)
- Statutory objectives:
  - Codify statutory objectives for the RA to guide actions and ensure predictability.
- Operational independence:
  - RA should be operationally independent from SB supervision.
  - Establish governance arrangements to ensure adequate decision making and preparation for resolution functions, independent of supervisory decisions.
- Resolution toolkit:
  - Strengthen P&A effectiveness.
  - Grant explicit powers to create temporary banks (bridge banks).
  - Grant RA power to require banks to hold liabilities that absorb losses in resolution.
- Legal safeguards:
  - Legal protection for RA and staff against liability for actions and omissions made in good faith; consider indemnities for litigation costs.
- Resolution funding:
  - Stipulate clear and expeditious access to temporary funding where private sector funding has been exhausted.
  - Allocate losses to equity holders and, as appropriate, to unsecured and uninsured creditors in accordance with creditor hierarchy and ex post recovery from the industry.
  - Introduce framework to guide use of public resources, minimize losses and future risks, and ensure transparent accountability within a reasonable time.

### Executive Summary — deposit insurance legal framework: main findings
- DGF’s legal mandate, powers, operational framework, and institutional arrangements require clarification and enhancements to align with modern practices.

### Executive Summary — deposit insurance: recommendations (highlights)
- Legal mandate and objectives:
  - Revised law should specify the DGF’s legal mandate as “pay box plus” and ensure consistency with powers to contribute to P&A transactions, subject to least-cost criteria.
  - Specify the DGF’s two main public policy objectives as protecting depositors and contributing to financial stability.
- Coverage and funding:
  - Consider introducing back-up sources of alternative liquidity funding in legislation.
  - Consider excluding specific types of deposits from DGF coverage (e.g., interbank deposits; deposits of government ministries and departments; deposits of regional, provincial, and municipal governments; and other public bodies).
  - Shorten maximum reimbursement period to seven working days.
  - Consider removal of the set-off mechanism before payouts (if kept, limit it only to past-due claims and matured loans).
- Institutional arrangements:
  - Overhaul DGF’s institutional arrangements to ensure operational independence and protection against external interference.
  - Clarify DGF’s role in preparatory stages of resolution and in decision-making for resolution of troubled banks.

### Key recommendations (selected Table 1 highlights)
- 1. Consider establishing legal provisions to ground the Financial Stability Committee and ‘Crisis Committee” mandate. — High — Medium term — All.
- 2. Implement a “one-voice” method of communication with the public, whereby all the authorities would use the same set of agreed upon facts and assumptions. — Medium — Short term — All.
- 3. Require all banks to develop recovery plans, focusing first on the largest. — Medium — Short term — Supervision and resolution.
- 4. Elaborate resolution plans for all systemic banks. — Medium — Medium term — Resolution.
- 5. Consider codifying statutory objectives for the RA. — High — Medium term — Resolution.
- 6. Establish an operationally separate unit within the BCP to fulfill the RA functions, with adequate resources to fulfill its mandate and scope to manage any conflict of interests. — High — Medium term — Resolution.
- 7. Revise legal provisions and statutory powers to enhance further the effectiveness of the use of P&A as a resolution tool. — High — Medium term — Resolution.
- 8. Adopt legal provisions and statutory powers for the effective application of new resolution tools, notably, bridge banks. — High — Medium term — Resolution.
- 9. Introduce legal protection for the RA and its staff, supported by indemnifications for litigation costs. — High — Medium term — Resolution.
- 10. Include safeguards in the regime for access to public funding in systemic cases and prepare contingency planning, along with a framework to guide the use of such resources while minimizing moral hazard. — High — Medium term — Resolution.
- 11. Assess the possibility of setting up an ex post resolution funding scheme, comprised of temporary public funding and a recovery mechanism. — High — Medium term — Resolution.
- 12. Establish a “paybox plus” mandate for the DGF in the law, and fully align the powers that the DGF currently has to contribute to a resolution process, subject to the least cost criteria. — High — Medium term — Deposit Insurance.
- 13. Enhance the DGF’s independence and increase its capacity to address potential conflicts of interest. — High — Medium term — Deposit Insurance.
- 14. Remove the automatic setting-off mechanism for debts owed by insured depositors with a failing bank. — High — Medium term — Deposit Insurance.
- 15. Shorten the reimbursement period for insured deposits to seven working days. — Medium — Medium term — Deposit Insurance.
- 16. Exclude specific types of government deposits from DGF coverage. — Medium — Medium term — Deposit Insurance.
- Timeframe notation: Short term = less than one year; Medium term = 1–2 years; Long term = More than two years.

### Deposit funding and DGF coverage — key statistics and issues
- Banking system funding: almost 90 percent by deposits.
- Only 15 percent of the system deposits are protected by the DGF.
- Household and corporate deposits are insured up to about five times income per capita.
- Law No. 2334/03: deposits insured amount to 75 times the minimum monthly salaries, equivalent to about US$24,000 per insured deposit in each financial institution.
- Ratio of bank deposits to GDP rose from 40 percent at end-2017 to 51 percent at end-2020.
- Regulatory practice: banks required to set-off all loans owed by depositors before the DGF reimburses deposits — described as uncommon and a risk to the purpose of the DGF.
- As of end-May 2021: the DGF amounts to the equivalent of US$790 million, which represents 4.7 percent of total deposits against a target level of 10 percent of total deposits.
- More than one-third of the DGF’s resources are invested in long-term debt securities.

### Crisis preparedness and coordination — detailed recommendations
A. Institutional arrangements
- Multiple functions (supervision, resolution, deposit guarantee) concentrated in the BCP, creating potential conflicts of interest.
- Recommendations:
  - Create a clear legal framework allocating roles and tasks; explore a comprehensive institutional setup with clear task definitions and homogeneous operating rules.
  - Establish a sound legal foundation for the FSC (created by Decree No. 2 114/2019). Current FSC composition: members of the BCP (including the Superintendent of Banks, the Director of the UAFGD, and the Superintendent of Insurance Entities), the Ministry of Finance (MoF), the Securities Exchange Commission (CNV), and the Supervisor of Credit Cooperatives (INCOOP).
  - Note: FSC is chaired by the President of the BCP in normal times; when FSC declares a systemic crisis, the “Crisis Committee,” chaired by the Minister of Finance, replaces the FSC.
  - Provide clear legal objectives, functions, powers, and procedures for information exchange.

B. Recovery and Resolution Planning (RRP)
- BCP has not introduced an RRP framework.
- Recommendations:
  - Require all financial institutions under SB supervision to develop recovery plans; SB to assess plans and require changes as necessary.
  - Recovery plans are “living” documents to be revised at least annually.
  - RA should develop resolution plans for systemic banks, including resolution strategy and resolvability assessments; BCP should have power to require removal of impediments.
  - Resourcing: SB and RA need sufficient human and technology resources; consider phased deployment focusing on largest institutions; training and technical means essential.

C. Cross-border coordination
- Paraguay hosts international banking groups (mostly subsidiaries; some branches); three systemic banks are foreign owned.
- Current actions: SB and UAFGD have signed several MoUs; SB is a member of two supervisory colleges but not of other supervisory colleges for some large cross-border groups.
- Recommendations:
  - Maintain continuous dialogue and seek engagement on recovery planning.
  - RA should obtain legal capacity to exchange information and sign cross-border cooperation agreements.
  - Participation in regional crisis-simulation exercises encouraged.

D. Communications
- Effective communications critical to crisis management.
- Recommendations:
  - Develop a communications strategy for coordination among key public bodies (especially BCP and MoF).
  - Use simple, consistent language; adopt a “one-voice” approach; prepare press releases and FAQs in advance.
  - Build trust and relationships with media during normal times; plan to use various media channels and web-based platforms.

### Bank resolution framework — tools, safeguards, and funding
P&A transactions — observations and principles
- Current framework allows transfers of assets and liabilities to solvent institutions through a competitive process or via securitization.
- Concerns:
  - Framework may not provide RA sufficient flexibility to act swiftly and minimize destruction of value.
  - Securitization option may introduce additional risks to the DGF because new losses may arise during the instrument’s lifetime.
- Recommended principles:
  - Conduct least-cost approaches using most recent market data on recovery rates.
  - Initiate preparatory resolution work when a bank is subject to early intervention by the SB; prioritize organized loan and collateral documentation and identifying IT risks.
  - Allow independent firms to assist RA in valuing assets to speed up bidding.
  - Ensure acquiring banks hold sufficient capital and liquidity; consider incentives for highly rated, well-capitalized banks.
  - Include requirements to quickly ensure viability of post-merger entities.

Bridge banks — powers and operational requirements
- Consider explicitly granting BCP power to create temporary banks (bridge banks).
- Purpose: transfer high-quality assets and eligible liabilities (deposits) when no private acquirer exists; remaining assets and non-eligible liabilities liquidated.
- Typical lifespan: between 1–3 years (may be longer).
- Key requirements:
  - Advanced preparation: license a new bank on short notice; pre-drafted bridge bank charter; identify potential managers meeting fit-and-proper criteria.
  - Prudential requirements: expedite licensing; comply with prudential requirements from the start.
  - Ownership and governance: government ownership with adequate governance; MoF could transfer representation to a professional holding company.
  - Valuation and transfer: RA should undertake prudent valuation before transfers.
  - Reverse transfer powers (put-back option): time-limited and restricted to exceptional cases.
- Practice recommendation: restrict bridge bank use to systemic banks only.

Bail-in tool — considerations and design
- Explore bail-in only after assessing feasibility of establishing loss-absorbing capacity and addressing operational challenges.
- Potential benefits: minimize taxpayer-funded bail-outs by involving private creditors.
- Trade-offs: may increase funding costs or contagion risks.
- Design considerations:
  - Introduce administrative powers to write down and convert creditors’ claims into equity.
  - RA may require banks to hold liabilities eligible for bail-in, considering the amount and type of debt issued and holder types.
  - Use bail-in with other resolution powers to ensure viability.
  - Sequence of write-down and conversion should be clear; respect creditor hierarchy and pari passu treatment, with limited departures explained.
  - Equity absorbs losses first; no loss on senior creditors until subordinated debt and regulatory capital instruments written off entirely.
  - Provide clear safeguards, valuation obligations, and NCWO (no creditor worse off) protection.

Legal safeguards and judicial review
- Resolution regimes should establish:
  - Transparent creditor hierarchy.
  - Right to compensation when a creditor is treated worse off than in liquidation (NCWO).
  - Respect for legal remedies.
  - Legal protection of resolution measures and limits on courts’ powers to reverse measures.
- Recommendations:
  - Include protections for authority and staff against liability for actions and omissions made in good faith, including actions supporting foreign authorities.
  - Extend protection to directors, officers, and staff against civil litigations relating to actions taken in good faith in accordance with domestic and foreign resolution authorities’ decisions.
  - Make legal protection operational, including coverage of legal costs.
  - Allow postponement or temporary waiver of public disclosure requirements where necessary; coordinate powers among regulators.

Resolution funding — principles and framework
- Funding needs: facilitate liquidity to solvent entities, support P&A, recapitalize systemic institutions.
- Consensus: primary source of funding should be private sector; central bank balance sheets should be protected from resolution losses; public funds may be unavoidable in systemic crises.
- On resolution funds:
  - Adequate ex ante funding of deposit insurance advisable, but a separate ex ante resolution fund entails large opportunity costs.
  - Less costly alternative: an ex post scheme comprised of temporary public funding and a recovery mechanism.
- Framework to guide public resources:
  - Establish a high-level group to deal with crises; delineate roles and restrict political body participation where possible; consider non-objection mechanisms for political support.
  - Write down equity before releasing public funds; allocate losses to unsecured, uninsured creditors; consider claw-back powers and pursue claims for damages.
  - Identify bank losses and capital needs early via independent, market-forward valuations.
  - Inject resolution fund resources only after assessing financial projections for 2–3 years and restructuring plans showing break-even or full capitalization within that horizon.
  - Prefer cash over government bonds for recapitalization; price government bonds at market value at inception.
  - Allow public funds as common shares or other instruments (preferred shares, convertible debt, subordinated debt) consistent with capital requirements and viability.
  - Condition government participation on financial stability being at risk, exploration of private recapitalization options, and allocation of losses to equity and subordinated debt holders.
  - Ensure arm’s-length MoF participation with commercial ownership and management principles.
- Accountability:
  - BCP should develop mechanisms to ensure transparent accountability on use of resolution fund resources within a reasonable time period (e.g., 30–90 days after bank recapitalization).

### Deposit Guarantee Fund (DGF) — legal mandate, coverage, role in crisis management
A. Legal mandate, objectives, and powers
- Findings:
  - Best international practices (CP 1) indicate deposit insurance should have two main public policy objectives: (i) protecting depositors; and (ii) contributing to financial stability.
  - Law No. 2334/03 does not establish public policy objectives for the DGF.
  - DGF is hosted within the BCP, creating potential conflicts of interest.
  - Current legal framework states DGF is managed by BCP and DGF funds should only be used for purposes established in law and are not BCP assets.
- Recommendations:
  - Include the two objectives in the revised law and ensure operational independence.
  - Evaluate assigning clear responsibilities to the UAFGD in law or regulation.
  - Separate supervision, resolution, and deposit guarantee functions with dedicated staff and different reporting lines.
  - Strengthen governance arrangements and ensure UAFGD has capacity and resources.
  - Clarify DGF features in law and permit hiring independent advisors.
  - Grant DGF explicit powers to request information directly from banks and to be informed about proposals to use its funds.

B. Coverage and funding
- Findings:
  - Current scope does not exclude many deposits typically ineligible.
  - Law No. 2334/03 enables DGF to set-off all reciprocal debts of each insured depositor before payout.
  - DGF as of end-May 2021: US$790 million = 4.7 percent of total deposits; target level 10 percent of total deposits.
  - More than one-third of DGF resources invested in long-term debt securities.
- Recommendations:
  - Narrow coverage by excluding interbank deposits; deposits of government departments and subnational governments; and deposits of persons responsible for deterioration.
  - Consider eliminating set-off before payout; if maintained, restrict to past-due claims and matured loans and limit use in least-cost calculations.
  - Increase short-term investments to reduce reliance on BCP discount lines.
  - Consider introducing a risk-based premium component; current law: ex ante quarterly flat rate of 0.12 percent based on average deposits during previous quarter.
    - Note: risk-based component could raise premia for domestic banks and is complex to design; phased-in implementation advisable.
  - Allow DGF to require extraordinary contributions or increase premiums and enter into emergency funding arrangements.
  - Shorten reimbursement period: current law maximum 15 natural days; revised CP 15 recommends seven working days. If immediate compliance not possible, develop a plan to meet target within a relatively short timeframe (e.g., within two years).

C. Role in crisis management
- Findings:
  - Article 1 of Law No. 2334/03 establishes a paybox mandate, conflicting with Article 2(2) which allows providing funds to P&A transactions.
  - UAFGD participation in P&A requires alignment of mandate and powers.
  - UAFGD has MoUs with SB and BCP Operations Department; these should be extended to include future RA.
- Recommendations and operational guidance:
  - Revise law to stipulate DGF’s legal mandate as a “pay box plus,” aligning powers to contribute to P&A and bridge banks (CP 2).
  - Align UAFGD practices with least-cost criteria; if set-off removed, reflect in least-cost calculations; if retained, only net past-due loans of depositors transferred to acquiring entity.
  - Ensure close coordination between UAFGD, SB, and future RA in normal times and distress (CP 4); ensure fluent, timely information flow.
  - Cooperation arrangements should ensure:
    - (i) UAFGD is informed and involved in resolution decision-making;
    - (ii) use of DGF resources is transparent, documented, and follows least-cost criteria;
    - (iii) acquiring entity is solvent and viable, limiting DGF exposure; and
    - (iv) use of DGF funds is subject to independent audit and ex post review.

### Resolution information, group analysis, and appendices (high-level)
- Key elements of resolution information and analysis:
  - Overall group structure diagram.
  - High-level understanding of economic functions of each significant legal entity.
  - Breakdown of group balance sheet by legal entity.
  - Understanding of major financial dependencies and interconnectedness with other banks.
  - Operational and other dependencies.
- Appendix II — governance arrangements in other jurisdictions that host RA within central bank:
  - Illustrative cases: Brazil, Cyprus, Italy, United Kingdom.
  - Two approaches: differentiated reporting lines to Deputy Governors (Central Bank of Brazil, Bank of England) or direct reporting line to Governing Board/Governor (Banca d’Italia, Central Bank of Cyprus).
- Appendix III — bridge banks in practice:
  - FDIC used bridge banks including IndyMac (US$30 billion thrift failed July 2008): FDIC managed portfolios nine months; losses imposed on US$2.6 billion of uninsured deposits; failure generated US$12.4 billion loss to deposit insurance fund.
  - Cross-country experiences: Portugal (Banco Espirito Santo, 2014), Denmark (Andelskassen J.A.K. Slagelse, 2015), Italy (2015 regional banks), Ghana (2018–2019) — summarized operational challenges, costs, and outcomes.

*Source: Preface and Executive Summary and selected chapters of the IMF TA report to the Central Bank of Paraguay (joint MCM‑LEG mission, June 15–July 8, 2021).*

### Preface  _________________________________________________________________________ 5

### Preface

### Mission background and participants
- At the request of the Central Bank of Paraguay (BCP), a joint technical assistance (TA) mission from the IMF’s Monetary and Capital Markets Department (MCM) and the Legal Department (LEG) provided offsite TA between June 15 and July 8, 2021 on options to enhance the existing resolution framework and the Deposit Guarantee Fund (DGF).
- The mission comprised Miguel Otero (MCM), Luis Cortavarría-Checkley (MCM Expert), Mario Tamez (LEG), and Ignacio Caparroso (LEG Expert).
- The mission conducted several participatory workshops with Q&A sessions and engaged with BCP management and staff.
- Remote meetings included: Liana Caballero, Diego Duarte Schussmuller, and Fernando Filártiga (BCP Board members); Hernán Colmán (Superintendent of Banks, SB); Edgar Paredes (Director, Administration Unit of the Deposit Guarantee Fund, UAFGD); Aldo Rodriguez (Director, Legal Department for Financial Institutions); Antonella Torio (Supervision Manager, SB); María Elena Acevedo (Intendent of Regulations, SB); Carlos Ayala (Head of Division, Department of Supervision); Natalia Valinotti (Head of Division, Intendency of Regulations); Maria Stael Herrera (Head of Accounting, UAFGD); Ana Franco (Head of Investments, UAFGD); Ana Vazquez (Senior Analyst, Legal Department); and Griselda Figueredo (Senior Analyst, Legal Department).
- The mission expressed gratitude to the BCP’s Board, management, and staff for their cooperation during the virtual TA mission.

### Context and objectives
- The TA built on the Financial System Stability Review (FSSR) completed by MCM staff in October 2017.
- Objective: provide input on enhancing Paraguay’s bank resolution framework, the DGF, and crisis preparedness in line with modern international practices.

### Key financial system facts (overview)
- Paraguay’s financial system comprised 390 financial institutions that, as of end-2020, held assets equivalent to 91 percent of GDP (70 percent for the banking sector).
- Five out of the 17 licensed banks (3 foreign and 2 domestically owned) account for almost two-thirds of the banking sector assets and are classified as systemically important.
- The cooperative sector represents the second largest group of financial institutions (8 percent of financial system assets); the three largest cooperatives account for about 40 percent of the cooperative sector assets.
- Since 2004, Paraguay experienced only three small, non-systemic bank failures.
- As of end-May 2021, “watch out” loans (including nonperforming, rescheduled, refinanced, and restructured loans, net of provisions) accounted for more than one-third of the total stock of loans or 1.3 times banks’ equity (from one-fifth of the total stock of loans or 0.7 times banks’ equity as of March 2020).

### Structure of the report
- Section II: Overview of Paraguay’s financial system.
- Section III: Crisis Preparedness and Coordination (institutional arrangements; recovery and resolution planning; cross-border coordination; communications).
- Section IV: Bank Resolution Framework (scope and objectives; resolution authority and features; resolution tools; legal safeguards and judicial review; resolution funding).
- Section V: Deposit Insurance Legal Framework (legal mandate, objectives, powers; coverage and funding; recoveries; DGF’s role in crisis management).

---

### Executive Summary — Crisis preparedness and coordination

### Main findings on crisis preparedness
- The mission identified several areas where the existing DGF and bank resolution framework could be enhanced and provided input on crisis preparedness.

### Recommendations (crisis preparedness and coordination)
- Institutional arrangements:
  - The authorities should evaluate the benefits of providing a sound legal regime that includes a clear mandate and better delineation of roles and responsibilities for the Financial Stability Committee (FSC) and the “Crisis Committee”.
- Recovery and resolution planning:
  - The BCP should consider developing an ongoing process of recovery and resolution planning and underpin it in its regulatory framework, in line with international modern practices.
  - All banks under SB supervision should develop recovery plans, proportional to their size and complexity, which will be assessed by the SB.
  - Once established, the resolution authority (RA) should develop resolution plans for all the systemic banks.
- Cross-border coordination:
  - Coordination with members of the financial safety net of other jurisdictions is key, given the significant presence of international banking groups in Paraguay.
- Communications:
  - A one-voice method of communication with the public should be considered; advance preparation for communications in a crisis is paramount.

---

### Executive Summary — Bank resolution framework

### Main findings on resolution regime
- The current resolution legal framework presents gaps, including a lack of objectives for the resolution authority (RA).
- The SB currently hosts resolution functions under Law No. 2334/03 and the only resolution tool available is the purchase and assumption (P&A).
- Recent efforts to update and modernize the law have not been finalized.

### Recommendations (resolution framework)
- Statutory objectives:
  - Codify statutory objectives for the RA to guide actions, provide benchmarks, and ensure predictability.
- Operational independence:
  - The RA should be operationally independent from the supervisory functions of the SB.
  - Establish governance arrangements to ensure adequate decision making and preparation for resolution functions, independent of supervisory decisions, while maintaining independent reporting lines.
- Resolution toolkit:
  - Strengthen the resolution toolkit by enhancing the effectiveness of P&A transactions.
  - Grant explicit powers to create temporary banks (bridge banks) to transfer certain assets and eligible liabilities with public support to a temporary “good bank”.
  - Grant the RA power to require banks to hold a certain amount of liabilities that would absorb losses in resolution.
- Legal safeguards:
  - Complement the regime with legal protection for the RA and its staff against liability for actions taken and omissions made in good faith while discharging duties.
  - Consider indemnities for costs incurred as a result of litigation.
- Resolution funding:
  - Stipulate clear and expeditious access to temporary funding, based on financial stability considerations, where private sector funding has been exhausted or cannot achieve resolution objectives.
  - Allocate losses to equity holders and, as appropriate, to unsecured and uninsured creditors, in accordance with creditor hierarchy and with ex post recovery from the industry of any residual costs.
  - Introduce a framework to guide the use of any public resources, minimize losses and future risks, and ensure transparent accountability within a reasonable time.

---

### Executive Summary — Deposit insurance legal framework

### Main findings on the DGF
- The DGF’s legal mandate, powers, operational framework, and institutional arrangements require clarification and enhancements to align with modern practices.

### Recommendations (deposit insurance)
- Legal mandate and objectives:
  - The revised law should specify the DGF’s legal mandate as “pay box plus” and ensure consistency with powers to contribute to P&A transactions, subject to the least-cost criteria.
  - The DGF’s two main public policy objectives should be specified as protecting depositors and contributing to financial stability.
- Coverage and funding:
  - Consider introducing back-up sources of alternative liquidity funding in the legislation.
  - To foster market discipline, consider excluding specific types of deposits from DGF coverage (e.g., interbank deposits; deposits of government ministries and departments; deposits of regional, provincial, and municipal governments; and other public bodies).
  - Shorten the maximum reimbursement period to seven working days.
  - Consider removal of the set-off mechanism before payouts (if kept, limit it only to past-due claims and matured loans).
- Institutional arrangements:
  - Overhaul the DGF’s institutional arrangements to ensure operational independence and protection against external interference, with safeguards to avoid and mitigate conflicts of interest.
  - Clarify the DGF’s role in preparatory stages of resolution (including contingency planning) and in the decision-making process for resolution of troubled banks.

---

### Key recommendations (Table summary highlights)
- Table 1 in the report lists 16 numbered recommendations with Priority and Timeframe designations. Selected highlights preserve original phrasing and priorities:
  - 1. Consider establishing legal provisions to ground the Financial Stability Committee and ‘Crisis Committee” mandate. — High — Medium term — All.
  - 2. Implement a “one-voice” method of communication with the public, whereby all the authorities would use the same set of agreed upon facts and assumptions. — Medium — Short term — All.
  - 3. Require all banks to develop recovery plans, focusing first on the largest. — Medium — Short term — Supervision and resolution.
  - 4. Elaborate resolution plans for all systemic banks. — Medium — Medium term — Resolution.
  - 5. Consider codifying statutory objectives for the RA. — High — Medium term — Resolution.
  - 6. Establish an operationally separate unit within the BCP to fulfill the RA functions, with adequate resources to fulfill its mandate and scope to manage any conflict of interests. — High — Medium term — Resolution.
  - 7. Revise legal provisions and statutory powers to enhance further the effectiveness of the use of P&A as a resolution tool. — High — Medium term — Resolution.
  - 8. Adopt legal provisions and statutory powers for the effective application of new resolution tools, notably, bridge banks. — High — Medium term — Resolution.
  - 9. Introduce legal protection for the RA and its staff, supported by indemnifications for litigation costs. — High — Medium term — Resolution.
  - 10. Include safeguards in the regime for access to public funding in systemic cases and prepare contingency planning, along with a framework to guide the use of such resources while minimizing moral hazard. — High — Medium term — Resolution.
  - 11. Assess the possibility of setting up an ex post resolution funding scheme, comprised of temporary public funding and a recovery mechanism. — High — Medium term — Resolution.
  - 12. Establish a “paybox plus” mandate for the DGF in the law, and fully align the powers that the DGF currently has to contribute to a resolution process, subject to the least cost criteria. — High — Medium term — Deposit Insurance.
  - 13. Enhance the DGF’s independence and increase its capacity to address potential conflicts of interest. — High — Medium term — Deposit Insurance.
  - 14. Remove the automatic setting-off mechanism for debts owed by insured depositors with a failing bank. — High — Medium term — Deposit Insurance.
  - 15. Shorten the reimbursement period for insured deposits to seven working days. — Medium — Medium term — Deposit Insurance.
  - 16. Exclude specific types of government deposits from DGF coverage. — Medium — Medium term — Deposit Insurance.
- Timeframe notation in Table 1: Short term = less than one year; Medium term = 1–2 years; Long term = More than two years.

---

*Source: Preface and Executive Summary of the IMF TA report to the Central Bank of Paraguay (joint MCM‑LEG mission, June 15–July 8, 2021).*

### 8.      While the banking system is largely funded by deposits (almost 90 percent of

### 1pryea2022003 - 8.      While the banking system is largely funded by deposits (almost 90 percent of

### Deposit funding and deposit guarantee coverage
- Banking system funding: almost 90 percent by deposits.
- Only 15 percent of the system deposits are protected by the DGF.
- Household and corporate deposits are insured up to about five times income per capita.
- Law No. 2334/03: deposits insured amount to 75 times the minimum monthly salaries, equivalent to about US$24,000 per insured deposit in each financial institution.
- Ratio of bank deposits to GDP rose from 40 percent at end- 2017 to 51 percent at end-2020.
- Regulatory practice: banks required to set-off all loans owed by depositors before the DGF reimburses deposits — described as uncommon and a risk to the purpose of the DGF.

### Crisis preparedness and coordination — overview
- Three areas needing improvement in crisis preparedness and coordination are identified.
- Emphasis on legal frameworks, institutional design, resource allocation, and cross-border cooperation.

### A. Institutional arrangements in crisis situations
- Multiple functions (supervision, resolution, deposit guarantee) are concentrated in the BCP, creating potential conflicts of interest between supervision, resolution, and deposit guarantee.
- Need for a clear legal framework allocating roles and tasks to enhance effectiveness and accountability.
- BCP Board has established several ad hoc committees with heterogeneous frameworks; recommendation to explore a comprehensive institutional setup with clear task definitions and homogeneous operating rules.
- Establishing a sound legal foundation for the recently established FSC (created by Decree No. 2 114/2019) is advisable.
  - Current FSC composition: members of the BCP (including the Superintendent of Banks, the Director of the UAFGD, and the Superintendent of Insurance Entities), the Ministry of Finance (MoF), the Securities Exchange Commission (CNV), and the Supervisor of Credit Cooperatives (INCOOP).
  - FSC is chaired by the President of the BCP in normal times; when FSC declares a systemic crisis, the “Crisis Committee,” chaired by the Minister of Finance, replaces the FSC.
  - Lack of sound legal grounds for FSC could hinder effectiveness: need clear legal objectives, functions, and powers consistent with an advisory role, and procedures for information exchange among participants.

### B. Recovery and Resolution Planning (RRP)
- The BCP has not introduced an RRP framework; recommendation to evaluate banks’ own preparedness and establish clear roles for each bank, the SB, and the RA.
- RRP characteristics:
  - “Living” documents to be revised at least annually and whenever deemed necessary by the BCP.
  - Contents must be robust, credible, and actionable.
- All financial institutions under SB supervision should be required to develop a recovery plan.
  - Each bank responsible for its own recovery plan; SB to assess plans as part of supervisory tasks.
  - Comprehensiveness and detail commensurate with size and complexity.
  - SB should have power to require changes and use recovery plans during early intervention.
  - Prioritize assessment starting with largest systemic institutions.
- Once established, the RA should develop resolution plans for Paraguay’s systemic banks.
  - Resolution plans to enable addressing failure of systemic institutions without severe disruption and to minimize use of taxpayers’ money.
  - Plans should include resolution strategy and resolvability assessments to identify impediments; BCP should have power to require removal of impediments.
  - RA should take a gradual approach: start with largest systemic banks, then other systemic banks, considering proportionality and capacity constraints.
- Resourcing:
  - SB and RA need enough human and technology resources; consider budgetary allocations and phased resource deployment focusing first on largest institutions.
  - Training and technical means are essential.

### C. Cross-border coordination
- Paraguay hosts several international banking groups (mostly subsidiaries; some branches); three systemic banks are foreign owned.
- Cross-border coordination is essential for recovery, resolution planning, and resolution activities.
- Current actions:
  - SB and the UAFGD have signed several MoUs with relevant home authorities.
  - SB is a member of two supervisory colleges but not of other supervisory colleges for some large cross-border groups; recommendation to maintain continuous dialogue and seek engagement on recovery planning.
- RA should obtain legal capacity in revised law to:
  - Have formal exchanges of information and sign cross-border cooperation agreements with foreign authorities for planning and coordinated resolution measures.
- Participation in regional crisis-simulation exercises encouraged; Paraguay recently participated in one.

### D. Communications
- Effective communications are key to crisis management.
- Recommendations:
  - Develop a communications strategy for coordination among key public bodies (especially BCP and MoF).
  - Use simple and consistent language explaining problems found and solutions identified.
  - Adopt/ensure a “one-voice” approach to facilitate consistency and transparency; coordinate spokespersons closely.
  - Emphasize actions taken in the best interests of depositors and to restore banking system stability.
  - Advance preparation: draft press releases and Frequently Asked Questions (FAQs) prepared in advance for different problem types and solutions.
  - Build trust and relationships with media during normal times; plan to use various media channels and web-based platforms.

### Bank resolution framework — key recommendations
- Resolution regimes should include all banks; systemic nature should guide use of specific powers and tools (KA 1.1).
- No comparable framework exists for nonbanks (e.g., cooperatives); relevant resolution features should be extended to nonregulated operational entities within financial groups.
- Legal resolution framework lacks clear statutory objectives for the RA; recommended statutory objectives and functions to include:
  (i) pursuing financial stability and ensuring continuity of systemically important financial services and payment, clearing, and settlement functions;
  (ii) protecting, where applicable and in coordination with relevant insurance schemes and arrangements, depositors as covered by such schemes and arrangements;
  (iii) avoiding unnecessary destruction of value and seeking to minimize overall costs of resolution and losses to creditors; and
  (iv) duly considering potential impacts of resolution actions on financial stability in other jurisdictions.
- Clear statutory objectives provide legal certainty for authorities, shareholders, depositors, creditors, counterparties, and the financial system.

### The Resolution Authority (RA) — mandate, separation, governance, and resourcing
- RA should have a clear legal mandate to preserve financial stability and a broad range of resolution powers to achieve objectives.
- Operational separation of RA from supervisory functions is recommended to reduce conflicts of interest and enable focused planning and execution of resolution powers; RA and SB may remain under BCP umbrella but should have operational separation and close coordination.
- BCP should develop special governance arrangements, structures, and processes to ensure independent decision making on resolution matters and avoid supervisory–resolution conflicts; independent reporting lines to BCP Board and/or BCP president recommended.
- RA tasks in normal times:
  - Develop and maintain resolution plans for systemic banks.
  - Conduct resolvability assessments.
  - Ensure information-sharing and cooperation with RAs in other jurisdictions.
  - Participate in domestic and regional crisis-simulation exercises.
- RA role in distress: implement resolution strategy for nonviable systemic institution(s) while safeguarding financial stability.
- RA requirements:
  - Adequate staff with necessary skills and technical equipment.
  - Autonomy in three dimensions:
    (i) institutional autonomy (procedures and safeguards against undue political or industry influence);
    (ii) personal autonomy (independent appointment procedures, conflict of interest rules, qualifications, incompatibilities, dismissal criteria, and remuneration protection);
    (iii) financial autonomy (separate budget with sufficient resources).
  - Consideration of a “pop-up” design: relatively small core team preparing resolution plans and building operational capacity, with ability to mobilize additional resources from other BCP functions and external service providers if stress materializes.

*Source: 1pryea2022003 - 8.      While the banking system is largely funded by deposits (almost 90 percent of (PDF).*

### 32.      In the upcoming legal review, efforts should be made to enhance further the

### 32. In the upcoming legal review, efforts should be made to enhance further the effectiveness of P&A transactions

### P&A transactions: observations and recommended principles
- Current legal framework provides for transfers of assets and liabilities, implemented directly or via a securitization, to solvent institutions through a competitive process.
- In practice, the framework may not provide the RA with sufficient flexibility to act swiftly to ensure that critical functions are not disrupted, and to minimize the potential destruction of value.
- The securitization option may introduce additional risks to the DGF (in comparison with a traditional P&A), because new losses may arise during the lifetime of the instrument used in the securitization; any potential dispute between the acquiring institution and the DGF at a later stage would affect the credibility of the original transaction.
- Recommended principles for the resolution framework:
  - The least-cost approach should be conducted using the most recent market data on recovery rates for distressed assets that are available, instead of outdated information provided by lengthy judicial liquidation processes.
  - Preparatory resolution work should be initiated when a bank is subject to early intervention measures by the SB, and in close coordination with that office. That work should prioritize:
    - (i) ensuring that loan and collateral documentation is well organized and updated; and
    - (ii) identifying potential IT risks, such as program documentation, backup controls, and ownership of IT services.
  - Independent firms should be allowed to assist the RA in finding a good range of references about the market value of assets to be transferred to protect authorities responsible for bank resolution and to incentivize and speed up participation in the bidding process.
  - Ensure that banks participating in P&A transactions hold sufficient capital and liquidity to absorb the operation being acquired; legislation could introduce provisions to incentivize participation by banks that hold the highest credit rating categories and have ample capital and liquidity.
  - Include requirements to quickly ensure the viability of the entity resulting from a potential merger.

### Bridge banks: powers, design, and operational requirements
- Consideration should be given to explicitly granting powers to the BCP to create temporary banks (bridge banks).
- Purpose: enable transfer of high-quality assets and eligible liabilities (deposits) from the failing bank in the absence of a private sector acquirer, while remaining assets and non-eligible liabilities are liquidated as part of the failing institution.
- Typical intended lifespan: between 1–3 years, though a bridge bank may remain under public ownership for longer periods.
- Key requirements to make a bridge bank operational:
  - Advanced preparation: authorities should be able to license a new bank on short notice and transfer assets and liabilities quickly; the RA should draft in advance a bridge bank charter and identify potential managers meeting fit-and-proper criteria.
  - Prudential requirements: supervisors should expedite granting a banking license to the bridge bank, which should comply with prudential requirements from the start.
  - Ownership and governance: the bridge bank should be owned by the government, with adequate governance arrangements; the MoF could consider transferring representation of such investments to a holding company run professionally and according to a transparent relationship agreement with the government.
  - Valuation and transfer: the RA should undertake a prudent valuation of all assets and liabilities of the failed bank before transferring part of them to the bridge bank.
  - Reverse transfer powers (put-back option): powers to transfer assets and liabilities back to the entity in liquidation should be subject to a time limitation and restricted to exceptional cases.
- Practice recommendation: restrict the use of bridge banks to systemic banks only.

### Bail-in resolution tool: considerations and design elements
- Authorities could explore introducing the bail-in resolution tool only after careful assessment of feasibility of establishing necessary loss-absorbing capacity and addressing operational challenges, including legal framework and capital markets development.
- Potential benefits and trade-offs:
  - Bail-in could minimize the risk of taxpayer-funded bail-outs by involving private creditors in loss absorption and recapitalization.
  - Benefits must be weighed against potential increases in funding costs and/or contagion risks.
- Design and operational considerations:
  - Align design with modern international practices: introduce administrative powers to write down and convert into equity creditors’ claims as necessary to absorb losses.
  - The RA should be allowed to require banks to hold a certain amount of liabilities eligible for bail-in, but exercise of this power should consider:
    - (i) the amount of debt liabilities currently issued by banks (some banks in Paraguay have issued contractual convertible bonds, but the volume is still small); and
    - (ii) the type of holders of the debt (retail, institutional, or other financial institutions), as these aspects could make the bail-in tool ineffective or pose contagion effects.
  - Enable use of bail-in in conjunction with other resolution tools and powers (e.g., replacement of senior management, temporary stays on early termination rights, adoption of a new business plan) to ensure bank viability.
  - The sequence of write-down and conversion powers should be clear and transparent; the exercise of bail-in powers should respect the hierarchy of claims and equal (pari passu) treatment of creditors of the same class, while providing flexibility to depart from pari passu with clear explanations (e.g., financial stability considerations or franchise-value maximization).
  - Stipulate clearly that equity would absorb losses first, and no loss would be imposed on senior creditors until subordinated debt (including all regulatory capital instruments) has been written off entirely.
  - Provide clear safeguards to protect rights of shareholders and creditors, including clear obligations concerning valuation of assets and liabilities of the bank under resolution (provisional valuation could be foreseen) and valuation of the treatment shareholders and creditors would have received if the institution had been liquidated under normal insolvency proceedings to respect the NCWO safeguard.

### Legal safeguards and judicial review
- Resolution regimes should balance intrusive resolution measures to safeguard financial stability with protection of legitimate rights of shareholders and creditors.
- Resolution regimes should establish:
  - a transparent creditor hierarchy;
  - the right to receive compensation when determined that a creditor has been treated worse off than in liquidation (NCWO safeguard);
  - adherence to and respect of legal remedies; and
  - legal protection of resolution measures and restrictions to courts’ powers to reverse resolution measures.
- Paraguay’s current regime includes provisions to suspend legal action during resolution and constrains reversal of resolution measures.
- Further consideration: possibility of including statutory provisions allowing departure from the hierarchy of claims in cases of public interest (e.g., financial stability), subject to adequate safeguards to prevent undue use.
- Legal protection recommendations:
  - Include protections for the authority and its staff against liability for actions and omissions made in good faith while discharging duties, including actions supporting decisions by foreign authorities (KA 2.6).
  - Scope of legal protection for directors, officers, and staff of the bank in resolution should extend to civil litigations relating to all actions taken in good faith when acting in accordance with, or giving effect to, decisions and instructions of domestic and foreign resolution authorities where such decisions have effects in the jurisdiction under review.
  - Consider operational arrangements to make legal protection effective, including coverage of legal costs.
- Disclosure:
  - Legal framework should allow postponement of public disclosure requirements; resolution authorities should have power to temporarily waive or suspend regulatory disclosure requirements (e.g., regular and ad hoc disclosures under market reporting and listing rules) of the nonviable financial institution.
  - Authorities could evaluate introducing legal provisions clearly granting these powers and ensuring coordination among different regulators (RA, securities regulator).

### Resolution funding: principles and framework
- Funding is required in different phases of a banking crisis: facilitate liquidity to solvent financial entities, support P&A transactions, and recapitalize systemically important institutions.
- A sound framework should give authorities clear and expeditious access to funding.
- Consensus: primary source of funding should be the private sector; central banks’ balance sheets should be protected from bank resolution losses. In systemic crises, private participation is often elusive and public funds may become unavoidable.
- On resolution funds:
  - Although adequate ex ante funding of a deposit insurance scheme is advisable, establishing a separate resolution fund financed by ex ante contributions entails large opportunity costs.
  - The ultimate purpose of a resolution fund should be to cover potential financing gaps that may arise in resolution of a systemic banking crisis after contribution by the DGF has been made.
  - A less costly alternative: an ex post scheme comprised of temporary public funding and a recovery mechanism, especially when scarce national savings are better deployed elsewhere.
- Framework to guide use of public resources to minimize losses and moral hazard should seek to:
  - Establish a high-level group to deal with the crisis; Paraguay’s current framework provides for an FSC, which in systemic crisis situations will be replaced by a “Crisis Committee” chaired by the Minister of Finance. A sound legal framework should delineate roles and responsibilities and avoid or restrict participation of political bodies where possible; consider mechanisms for political support such as non-objection to the high-level group’s plan.
  - Write down bank equity before releasing public funds, allocate losses to unsecured, uninsured creditors, and hold directors and senior management accountable. Consider powers to recover variable remuneration already paid or reduce/prevent payment of deferred elements (claw-back powers) and pursue claims for damages in judicial proceedings.
  - Identify bank losses and capital needs as early as possible, based on an independent asset valuation with a market forward-looking approach to uncover hidden losses.
  - Select the most suitable resolution or restructuring option after assessing viability and business projections based on different proposals; injection of resolution fund resources should only be made after assessing financial projections for 2–3 years and restructuring plans showing the institution will reach break-even and/or remain fully capitalized within such time horizon, using macroeconomic assumptions provided by the authorities.
  - Timely identify and address main sources of the bank’s failure and trigger legal prosecution of those responsible for wrongdoing where appropriate.
  - To the extent possible, rely on cash rather than government bonds to recapitalize troubled banks; banks must price government bonds at market value at inception, which may nominally increase resolution costs and expose restructured banks to excessive sovereign risk and currency and interest rate mismatches.
  - Allow public funds to be injected not only as common shares but also in exchange for other financial instruments (preferred shares, convertible debt instruments, subordinated debt) where consistent with capital requirements and long-term viability.
  - Facilitate private participation in bank restructuring processes by conditioning government participation on: (i) financial stability being at risk; (ii) all private recapitalization options explored; and (iii) bank losses allocated to equity and subordinated debt holders. Require arm’s-length participation by the MoF on its equity participations with sound commercial ownership and management principles.
- Accountability:
  - The BCP should develop mechanisms to ensure a transparent accountability process on the use of resolution fund resources within a reasonable time period (e.g., 30–90 days after a bank recapitalization has been completed) to help deal with moral hazard and limit activation of the systemic risk chapter to well-defined circumstances.

*Source: 1pryea2022003 - Chapter content (paragraphs 32–43, and supporting boxes) from the provided PDF.*

### 44.      In relation to the DGF, the mission focused on the following areas.

### 1pryea2022003 - 44.      In relation to the DGF, the mission focused on the following areas.

### A. Legal Mandate, Objectives, and Powers
- Findings and assessments:
  - Best international practices (CP 1) indicate a deposit insurance system should have, at least, two main public policy objectives: (i) protecting depositors; and (ii) contributing to financial stability.
  - Law No. 2334/03 does not establish any public policy objectives for the DGF.
  - The DGF is hosted within the BCP, which also carries supervision and resolution functions, creating potential conflicts of interest.
  - Current legal framework explicitly states the DGF will be managed by the BCP and that the DGF’s funds should only be used for the purposes established in law and should not be considered BCP’s assets.
- Policy recommendations:
  - Include the two objectives (protecting depositors; contributing to financial stability) in the revised law so the DGF is guided by them when exercising its powers, including contributing to P&A transactions and to the implementation of bridge banks.
  - Ensure the DGF is operationally independent without external interference and address potential conflicts of interest.
  - Evaluate assigning clear and explicit responsibilities to the UAFGD in the legal or regulatory framework (e.g., internal resolutions).
  - Put in place arrangements that adequately separate supervision, resolution, and deposit guarantee functions, with staff dedicated to each task and different reporting lines (e.g., UAFGD staff reporting directly to the Director of UAFGD, who reports to the BCP Board).
  - Strengthen governance arrangements (internal rules, policies, codes of practice) and decision-making procedures within the BCP to manage conflicts and ensure different perspectives are considered.
  - Ensure the UAFGD has capacity and resources (human resources, operating budget, adequate salary system) to support operational independence and mandate fulfillment.
  - Clarify key DGF features in law and evaluate need for amendments to primary legislation to hire independent advisors (valuation experts, financial, or legal firms).
  - Develop a framework to enable entering into agreements quickly and effectively in situations of a bank’s potential failure.
  - Grant the DGF explicit powers to request information directly from banks (based on public law powers) and ensure it is informed about proposals to use its funds and able to voice its views in deliberations.

### Box 2 — Some Features of Resolution Funds (summary)
- Context:
  - Resolution funds are less widely used than deposit guarantee funds; only a few countries have separate resolution funds with differing approaches to funding (ex ante or ex post), governance, and safeguards.
- Ex ante resolution funds:
  - Pros: Allow gradual building of resolution funds through periodical contributions from the private industry that would be always available to deal with a systemic situation.
  - Cons: May allocate a large amount of resources extracted from the financial sector and kept “frozen”; may be subject to political interference; gross funding needs may be large so industry contributions should be backstopped by a government credit line.
- Ex post resolution funds:
  - Pros: Aim to recover from the private sector, as much as feasible, the resolution costs covered by the state, avoiding immobilization of significant resources.
  - Cons: May require a sudden and large call on public resources, potentially affecting the sovereign’s debt position and the cost of sovereign borrowing; recovery mechanisms may be more procyclical, especially if applied shortly after a period of stress.

### B. Coverage and Funding
- Findings and assessments:
  - The current scope of deposit coverage does not exclude many types of deposits typically considered ineligible (in addition to deposits held by employees, related persons, or derived from fraud or illegal actions).
  - Law No. 2334/03 enables the DGF to set-off all reciprocal debts (due and current) of each insured depositor with the failing bank before payout.
  - As of end-May 2021, the DGF amounts to the equivalent of US$790 million, which represents 4.7 percent of total deposits against a target level of 10 percent of total deposits.
  - More than one-third of the DGF’s resources are invested in long-term debt securities.
- Policy recommendations:
  - Narrow scope of deposit coverage by excluding, for example: interbank deposits; deposits of government departments, and of regional, provincial, and municipal governments and other public bodies; and deposits of individuals regarded as responsible for the deterioration of an institution.
  - Consider eliminating the set-off mechanism before payout. If maintained, restrict it only to past-due claims and matured loans and limit its use in calculating least-cost thresholds.
  - Increase short-term investments in the DGF portfolio to reduce reliance on BCP discount lines (which are already agreed) and to minimize potential conflicts of interest.
  - Consider introducing a risk-based component into the premium structure. Current law establishes ex ante contributions of a quarterly flat rate of 0.12 percent, based on the average of the deposits held by the institution during the previous quarter. Notes on implementation:
    - A risk-based component could raise premia for domestic banks given significant presence of international banks in Paraguay.
    - A risk-based component is complex to design and would require a phased-in implementation schedule.
  - Enable the revised law to allow the DGF to:
    - require extraordinary contributions or increase premiums to recover losses when events deplete its resources; and
    - enter into emergency funding arrangements (typically government-backed sources of liquidity).
  - Shorten the period for reimbursement of insured deposits: current law sets payout within a maximum of 15 natural days; revised Core Principles (CP 15) recommend reimbursement of most insured depositors within seven working days. If the DGF cannot meet this target immediately, develop a plan to do so within a relatively short timeframe (e.g., within two years) supported by relevant laws.

### C. Role in Crisis Management
- Findings and assessments:
  - Law No. 2334/03 currently establishes in Article 1 a paybox mandate for the DGF, which conflicts with powers attributed in Article 2(2) to provide funds to contribute to a P&A transaction.
  - UAFGD participation in P&A transactions necessitates clear alignment of mandate and powers.
  - The UAFGD is part of the financial safety net and currently has MoUs with the SB and the BCP’s Operations Department; these should be extended to include the future RA when created as a separate unit within the BCP.
- Policy recommendations and operational guidance:
  - Revise the law to stipulate the DGF’s legal mandate as a “pay box plus,” ensuring consistency with powers to contribute to P&A transactions and implement bridge banks (CP 2).
  - Align UAFGD practices with international best practices when determining the least-cost threshold to contribute to a P&A. If set-off mechanism is removed, reflect that in least-cost calculations; if retained, only net past-due loans of depositors being transferred to the acquiring entity.
  - Ensure close coordination between the UAFGD, the SB, and the future RA in “normal times” and in times of financial distress (CP 4). Internal arrangements should ensure a fluent and timely flow of information between all components of the financial safety net.
  - Cooperation arrangements between UAFGD and RA (particularly when P&A is used as a resolution tool, CP 9) should ensure:
    - (i) the UAFGD is informed and involved in the resolution decision-making process;
    - (ii) the use of the DGF’s resources is transparent and documented and is clearly and formally specified following least-cost criteria;
    - (iii) the acquiring entity is solvent and viable, limiting the DGF’s exposure with respect to transferred deposits; and
    - (iv) the use of the DGF’s funds is subject to an independent audit and all related resolution actions and decisions are subject to ex post review.

*1pryea2022003 - 44. In relation to the DGF, the mission focused on the following areas.*

### 2. Ultimately, resolution information and analysis will allow the authorities to commit

### 2. Ultimately, resolution information and analysis will allow the authorities to commit

### Key elements
- Overall group structure diagram.
- A high-level understanding of the economic functions performed within, or in some way dependent on, each significant legal entity.
- A breakdown of group balance sheet by significant legal entity.
- An understanding of major financial dependencies between legal entities.
- An understanding of the firm’s interconnectedness with other banks.
- Operational dependencies.
- Other dependencies.

### Appendix II. Governance arrangements in other jurisdictions to host the resolution authority within the central bank
- Four illustrative cases: Brazil, Cyprus, Italy, and the United Kingdom.
- In all four cases the central bank (CB) is both the supervisory authority and the resolution authority (RA).
- Two prevailing approaches:
  - Differentiated reporting lines to different Deputy Governors (Central Bank of Brazil and Bank of England).
  - A direct reporting line of the Resolution Unit/Department to the Governing Board/Governor of the CB (Banca d’Italia and Central Bank of Cyprus).
- Jurisdictional organizational references (as presented):
  - Central Bank of Brazil: Department of Resolution; Departments under the Deputy Governor for Supervision; Resolution Directorate.
  - Bank of England: Resolution Unit; Prudential Supervision.
  - Banca d’Italia: Department of Resolution; Directorate General of Financial Supervision.
  - Central Bank of Cyprus: Department of Resolution; Division of Supervision.

### Appendix III. Bridge banks in practice
- The FDIC has used bridge banks as temporary solutions while evaluating, marketing, and transferring assets and selected liabilities of a failed institution to a third party.
- Since 2007, the FDIC has used a bridge bank structure in three instances, including for IndyMac, a US$30 billion thrift that failed in July 2008, without any loss-absorbing unsecured debt.
- For IndyMac:
  - The FDIC managed the institution’s portfolios over a nine-month period.
  - Losses were imposed on US$2.6 billion of uninsured deposits.
  - The failure generated a loss of US$12.4 billion to the deposit insurance fund and was the costliest failure in the FDIC’s history.
- Cross-country experiences and challenges operating and divesting bridge banks:
  - Portugal (Banco Espirito Santo, 2014):
    - A bridge bank resolved the third largest bank in the country at that time.
    - The scheme involved transfer of selected assets and liabilities and resources raised by the newly created resolution fund from the government and going-concern banks.
    - An initial privatization effort collapsed in 2015.
    - A 75 percent stake in the bank was sold to a U.S. private equity firm in March 2017—albeit with additional costs for the resolution fund in the form of a capital infusion and various guarantees.
  - Denmark (Andelskassen J.A.K. Slagelse, 2015):
    - The Danish Resolution Authority, Finansiel Stabilitet, used a bridge bank structure.
    - A competitive tender for divestiture initially resulted in a sales agreement with a company associated with the Norwegian Netfonds Bank.
    - The transaction fell apart in October 2016 when the envisaged acquirer failed to obtain supervisory approval, prompting an orderly wind-down.
  - Italy (2015 regional banks):
    - Banca d’Italia relied on bridge banks in 2015 to resolve Banca Marche, Banca dell’Etruria e del Lazio, Cassa di Risparmio di Ferrara, and Cassa di Risparmio della Provincia di Chieti.
    - These banks had been placed under administration and struggled to identify effective rehabilitation options.
    - The resolution scheme imposed a substantial cost on the Italian resolution fund (which provided the necessary capital contributions), as senior creditors, including uninsured depositors, were effectively protected.
    - The eventual divestiture of the bridge banks in 2016 generated further outlays for the fund in the form of capital contributions and guarantees.
  - Ghana (2018–2019):
    - The clean-up of the banking system used bridge banks; assets and liabilities of multiple banks, including UniBank, were amalgamated during 2018 and 2019 into the newly created Ghana Consolidated Bank.
    - As assets were insufficient to cover all the assumed liabilities, the bank received contributions of almost 3 percent of GDP in the form of special government securities that were, in part, subsequently monetized via the Bank of Ghana.
    - The Ghana Consolidated Bank’s assets comprise 80 percent bonds; aided by cost-cutting and returns on its bond holdings, the bank realized modest profits in 2019 and 2020.

*Source: 1pryea2022003 - 2. Ultimately, resolution information and analysis will allow the authorities to commit*

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_Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1pryea2022003.pdf_