## _cr15292

## Source details

**Canonical URL:** [_cr15292](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15292.pdf)

## Other formats

- [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15292.pdf.md)
- [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15292.pdf.json)

---

### Preface and Executive Summary
- IMF Monetary and Capital Markets Department (MCM) Technical Assistance mission visited Ljubljana, Slovenia from July 9 through July 20, 2015.
- Mission led and solely comprised of Mr. David Parker (MCM).
- Mission met with Bank of Slovenia (BOS) staff; main findings and recommendations presented at a wrap-up meeting on July 20, 2015. An aide-mémoire was left, ad referendum, with the authorities.
- Report is the first follow-up mission focused on the bank resolution framework and the deposit guarantee scheme (DGS); a second follow-up mission on crisis preparedness and management was planned.
- Three necessary requirements for effective bank resolution:
  - (i) a special bank resolution regime (SRR) with irreversible resolution decisions;
  - (ii) advance preparation for bank intervention and resolution;
  - (iii) an adequately funded DGS.
- Status in Slovenia:
  - Banking law provides for SRR.
  - BOS adopted the December 2014 recommendation to create a Resolution Unit.
  - Extant DGS is ex post funded and does not fulfill the ex ante funding requirement.
- Technical assistance emphasized:
  - Early and intensive monitoring of problem banks to prevent asset stripping and gather information.
  - Team-based intervention with controlled discrete functions.
  - Preference for Purchase and Assumption (P&A) transactions as virtually always the least costly form of resolution.
  - Periodic canvassing of potential acquirers in advance.
- DGS recommendations follow DGSD and IADI DICP:
  - Narrow mandate ("paybox plus") ex ante funded DGS contained within BOS but with separate operations, funding, and accounting.
  - Membership compulsory for all banks.
  - EU coverage established at €100,000.
  - Mission recommended adopting a target reserve fund greater than the 0.8 percent of insured deposits mandated by the DGSD.

### Table of Recommendations — Bank Resolution Framework (selected, with timelines)
- Create a Problem Bank Committee (PBC) within the Bank Supervision Department, including the Head of the Resolution Unit and senior manager of the DGS; convene whenever any bank or banks enter problem status. — < 3 months
- Appoint a Temporary Administrator for 4 and 5 CAMELs rated banks as well as for banks lingering in 3 rated status and showing little improvement. — When necessary
- Amend banking law to implement a policy of early intervention in financial institutions before capital deteriorates to zero. — < 6 months
- Appointment of Temporary Administrator will activate the “pop-up” of intervention and resolution teams. — When necessary
- Prefer P&A as resolution tool for non-systemic banks. — < 6 months
- Head of Resolutions Unit to periodically canvas strong domestic and foreign banks for interest in acquiring a failed bank via a P&A transaction. — < 6 months and ongoing
- For purposes of a P&A asset valuation, book value of performing loans can be considered market value. — When necessary
- Develop effective “one-voice” communications plan for bank resolution. — < 6 months
- Implement policy of requiring “least costly” resolution method. — < 3 months
- Amend banking law to place bank bankruptcy as an administrative function under the central bank, superseding company insolvency legislation and eliminating bankruptcy court role. — < 6 months
- Maintain list, with contact information and CVs, of potential professional, qualified bank liquidators. — < 6 months
- Develop a standard bank liquidation manual. — < 6 months
- Require periodic reports from Liquidator. — When necessary
- Amend banking law to require rules-based periodic distribution of recoveries on liquidated assets from Liquidator to claimants according to legal priority. — < 6 months

### Deposit Guarantee Scheme (DGS) — Recommendations (selected, with timelines)
- Enshrine the DGS’s public policy objectives in legislation or regulation. — < 6 months
- Grant the DGS a separate legal personality; ensure DGS’s accounting and funds remain separate from BOS’s. — < 6 months
- Include deposit insurance issues in supervisory MOUs with relevant foreign supervisors. — < 6 months
- Change DGS’s funding from ex post to ex ante. — < 6 months
- Develop and set a target fund range based on clear, consistent and transparent criteria. — < 6 months
- Specifically authorize in legislation that DGS funds can be utilized to facilitate a resolution action (i.e., P&A) but not to exceed that which would have been expended in a liquidation. — < 6 months
- Impose initial contributions on member banks. — < 6 months
- Explore the possibility of “seed” funding from the government. — < 6 months
- Begin imposing periodic risk-based assessments on member banks. — < 6 months
- Provide for the ability to temporarily raise premiums to replenish the fund, if necessary. — < 6 months
- Create a formal investment policy for the DGS’s reserve fund. — < 6 months
- Arrange an emergency line of credit with MoF. — < 6 months
- Ensure DGS outlays are limited to: (1) administrative and operating expenses of the DGS; and (2) reimbursement of insured depositors in the event of a bank failure. — < 6 months
- Undertake a public awareness program. — < 6 months
- Be prepared to counsel insured and uninsured depositors after bank failures. — When necessary

### Problem Bank Resolution — Supervision, Organization, and Temporary Administrator (TA)
- Supervisory approach:
  - Off-site analyses, on-site inspections, and frequent communication with bank administrators are essential.
  - Progressive administrative or enforcement actions should form a formal policy; actions escalate if corrective measures fail.
  - Prevention is preferred to cure.
- Problem Bank Committee (PBC):
  - BOS currently has no formal Problem Bank Unit; mission recommends creating a PBC to convene when banks enter problem status (defined as CAMELS 3, 4, or 5).
  - PBC membership should include Head of the Resolutions Unit and senior-most representative of the DGS to ensure advance information-sharing and preparation.
- Temporary Administrator (TA):
  - BOS should appoint a TA as provided in Article 259 of the banking law to provide intensified supervision and monitoring.
  - Rationale: mitigate asset-stripping risk, document destruction, or other damages by placing a TA on-site full-time.
  - Legal scope in Slovenia: TA performs functions of a member of a bank’s Management Board and consults with the bank’s Management Board, acting as an onsite examiner; TA is not granted all rights and powers of owners/management as in some jurisdictions.
- Core TA responsibilities:
  - Monitor, with authority to approve or block, insider and/or large transactions.
  - Monitor and ensure compliance with outstanding corrective measures.
  - Monitor asset quality.
  - Gather information for advance preparation for intervention and resolution.
- Initial duties of the TA (enumerated):
  - Monitor and approve or block insider transactions.
  - Monitor and approve or block intra-group transactions.
  - Check for unusual compensation arrangements used to avoid taxes.
  - Ensure bank IT can sort and aggregate accounts for deposit insurance calculations and code deposit accounts for exclusion from coverage.
  - Discreetly ascertain from loan officers which major loans are easily collectible.
  - Examine suspected dishonest or fraudulent acts, forgery, misapplication of funds, impropriety in reporting, profiting from insider knowledge, and disclosure of securities transactions.

### Advance Preparation, Intervention Organization, and Roles
- Distinction:
  - Intervention: physically taking over a bank.
  - Resolution: decisive action to resolve a problem bank situation (akin to bankruptcy procedure with fiduciary responsibilities).
- Fiduciary roles:
  - Intervention: control, secure, inventory assets, prepare final financial statements.
  - Resolution: transfer insured deposits to a stronger bank using good assets to offset insured deposit liabilities; receivership for bad assets and claims.
- Appoint a Bank Intervention Manager (BIM) with ultimate responsibility for takeover; develop an Intervention Action Plan and checklists.
- Team-based approach and functional teams (examples):
  - Accounting, Asset management, Branch operations, Deposit operations, Facilities and security, Information technology, Legal.
- Activation:
  - As conditions deteriorate BOS should institute progressively stronger enforcement measures and activate “pop-up” resolution staff, appointing an Intervention Manager and a Resolution Manager (one person may fill both roles depending on size/complexity).

### Purchase & Assumption (P&A) Tool — Principles, Sequence, and Operational Duties
- Guiding principle: least-cost resolution to avoid unnecessary expenditures from taxpayer or DGS funds.
- P&A overview:
  - Another bank (AB) takes certain good assets and assumes insured deposits, acting as paying agent for the DGS.
  - P&A often the most effective tool for non-systemic banks; can be executed quickly with advance preparation (goal of three to five days for prompt reimbursement).
  - Objectives: maximize sale price, ensure fair competition among potential purchasers, prohibit discrimination in solicitation of offers, ensure acquirer is a strong, privately controlled bank.
- Market failed bank widely to potential acquirers (including larger banks at least twice the asset size of the failed bank); use confidentiality agreements where needed.
- Example operational sequence:
  - Initial small intervention team enters bank, presents intervention order, advises of license revocation and appointment of Liquidator.
  - Upon license revocation BOS appoints a Liquidator who delivers pre-negotiated, pre-signed P&A document out of escrow; AB assumes liabilities.
  - Security and IT control: take control of SWIFT/wire facilities; disable ATMs unless AB continues operations.
  - Expanded teams perform accounting, asset control, deposit insurance calculations, facilities, security, IT, and legal functions throughout the weekend.
- Post-weekend operations:
  - Intervention team delivers work product to AB or Liquidator.
  - AB will continue operations at failed bank for at least 90 days and have exclusive option to purchase owned premises at market value or assume leases.
  - AB works off failed bank’s IT, paying deposits per deposit team instructions, but should not pay deposits exceeding insured limits or otherwise frozen.
  - AB may provide interim asset servicing and accounting for the Liquidator.

### P&A — Financial Mechanics, Standard Provisions, and Cost Comparison
- Financial mechanics:
  - If insured deposits exceed assets purchased, DGS advances funds to “fill the hole” but not to exceed amount that would have been expended in straight liquidation.
  - Using failed bank assets to help fund insured deposit assumption lessens impact on DGS reserve, keeps assets in private sector, and minimizes disruption.
- Comparative balance-sheet example (figures preserved):
  - Failed Bank - Original Balance Sheet: Assets total: 1,100; Liabilities total: 1,100.
    - Assets: Cash and bank deposits 154; Investments 185; Loans 710; Fixed Assets 25; Investment in subsidiaries 5; Other Assets 21; Total: 1,100.
    - Liabilities: Deposits 800; Borrowings 70; Other liabilities 110; Subordinated debt 10; Capital 110; Total: 1,100.
  - Failed Bank - Adjusted for Loss: Assets Total: 800; Liabilities Total: 800.
    - Loans reflected as 1/410 (Loss of 300 in Loans); Capital shown as 2/-190 (Charged loss results in insolvency).
  - Example "Split" assuming Bank P&A:
    - AB side Sub-total 430; Cash from State 140; Total: 570.
    - Insured Deposits 550; Other liabilities 2/20; Total: 570.
  - Receivership split: Total Assets 670; Total Claims 670.
- Cost comparison:
  - P&A is generally least costly relative to liquidation because assets transferred continue to be serviced and avoid liquidation servicing costs (conservatively estimated at 15 percent up to recovery realization if liquidated).
  - When loans are passed to AB via P&A, 100 percent of book value (205 in example) is counted as a liquidation recovery, improving recoveries for uninsured depositors and other creditors.
- Standard P&A contractual provisions (selected):
  - Liabilities assumed at book value.
  - AB must pay contract interest rate on deposits for 14 days, after which it may adjust rates; depositors may withdraw without penalty.
  - AB reports monthly to DGS on deposits claimed or ratified; unclaimed deposits returned to DGS after 18 months.
  - Assets purchased at book value with fixed assets adjusted to market value ex post via appraisals (two-appraisal average or third appraisal mediator).
  - Assets passed "as is", with limited warranty/non-recourse.
  - AB may be required to service assets for Liquidator for a fee and may have exclusive option to purchase loan pools.
  - AB obligations include continuation of banking business at each branch for not less than 90 days, continuation of safe deposit/safekeeping business for specified periods, preservation of records for legally mandated periods, indemnification for non-assumed claims, and cooperation with Supervisory Authority, DGS, and Liquidator.
  - Settlement period for errors and omissions not to exceed 180 days.

### Example Balance-Sheet Snapshots and Splits (figures preserved)
- Failed Bank - Original Balance Sheet (Assets / Liabilities):
  - Cash and bank deposits 154 / Deposits 800
  - Investments 185 / Borrowings 70
  - Loans 710 / Other liabilities 110
  - Fixed Assets 25 / Subordinated debt 10
  - Investment in subsidiaries 5 / Capital 110
  - Other Assets 21
  - Total: 1,100 / 1,100
- Failed Bank - Original Balance Sheet - Adjusted for Loss:
  - Cash and bank deposits 154 / Deposits 800
  - Investments 185 / Borrowings 70
  - Loans 1/410 / Other liabilities 110
  - Fixed Assets 25 / Subordinated debt 10
  - Investment in subsidiaries 5 / Capital 2/-190
  - Other Assets 21
  - Total: 800 / 800
  - Notes: 1/ Loss of 300 in Loans; 2/ Charged loss results in insolvency
- "Split" - Assuming Bank P&A (Example):
  - Cash and bank deposits 140 / Insured Deposits 550
  - "Good" Investments 85 / Borrowings
  - "Good" loans 200 / Other liabilities 2/20
  - Other Assets 1/5
  - Sub-total 430 / 570
  - Cash from State 140
  - Total: 570 / 570
  - Notes: 1/ Accrued interest on "Good" loans; 2/ Accrued interest on insured deposits
- "Split" - Receivership (Assets / Claims):
  - Cash 14 / Cash from DGS 140
  - Investments 100 / Uninsured Deposits 250
  - Loans 510 / Borrowings 70
  - Fixed Assets 25 / Other liabilities 90
  - Investment in subsidiaries 5 / Subordinated debt 10
  - Other Assets 16 / Capital 110
  - Total: 670 / 670

### Communications — Pre- and During-Intervention
- Implement a “one-voice” communications policy coordinated with the Resolutions Manager and the DGS; control information through one spokesperson.
- Prepare and deliver a media statement immediately after taking control of a bank, stressing:
  - Authorities have taken forceful action to strengthen the banking sector.
  - Actions are in the best interests of depositors and financial stability.
- Communications guidance:
  - Use simple terms to avert uncertainty and misconception.
  - Prepare press release templates and FAQs well in advance.
  - Anticipate follow-up questions and prepare answers.
  - Share as much information as possible to create and maintain goodwill.
  - Use all available media platforms including print, television, radio, central bank, DGS, and failed bank websites.

### Bank Liquidation — BOS Role, Liquidator Preparedness, and Performance
- Current regime: court-based bank liquidation under company insolvency law.
- Recommendation: change banking law to put bank liquidation under BOS as an administrative function to adopt an advance-preparation resolution policy and avoid Special Management transitional effects that could harm public confidence.
- Liquidator preparedness and operations:
  - BOS should maintain list of qualified bank liquidators and develop a standardized Liquidation manual covering establishment of liquidation office, asset management, and disposition procedures.
  - Aim to maximize recoveries and minimize losses; hire loan collection specialists, real estate/asset sales specialists, and necessary administrative, accounting, IT, and legal staff.
- Loan collection and incentives:
  - Liquidator must collect aggressively; aim to collect full book value and accrued interest, but in some cases accept less guided by business judgment and BOS guidelines.
  - Develop delegations of authority and a credit review committee for settlements below full book value.
- Recordkeeping and reporting:
  - Maintain records to demonstrate liquidation efforts, especially for assets settled below full book value.
  - Reporting examples: gross cash collections by asset type; expense to collection ratio; asset sales; assets in litigation; claims filed; comprehensive periodic financial statements.
- Timing and incentives:
  - Avoid legally mandated strict wind-down timeframes that create perverse incentives.
  - Direct Liquidator to accomplish work “as soon as possible” and provide performance-based incentives (e.g., bonuses tied to gross cash collections).
  - Require Liquidator to make periodic distributions of recoveries to claimants on a pro rata basis according to legal claim priority.

### Deposit Guarantee Scheme (DGS) — Mandate, Governance, Funding, and Operations
- Mandate:
  - “Paybox plus” remit: full protection of insured depositors; “plus” allows funds to facilitate a P&A or deposit transfer as reimbursement on a least-cost basis not to exceed liquidation expenditure.
  - Overall resolution strategy and systemic-stability objectives remain within BOS.
- Legal form and governance:
  - Efficiency and governance served by giving DGS legal personality with an organic law setting out mandate, accountability, and governance.
  - Critical that DGS maintain monetary resources and financial statements separate from BOS.
  - DGS can be constructed as a subsidiary or a separate department with dedicated employees, seconded from BOS as needed.
  - DGS Board could coincide with BOS Board to ensure information access and coordination.
  - Full reporting of DGS activities and financial condition should be part of BOS’s annual report to parliament.
- Membership and coverage:
  - Current DGS complies with DICPs 7 and 8: compulsory membership of all banks and coverage as dictated by DGSD.
  - DGSD coverage level: €100,000.
  - Current exclusion of deposits from large and medium sized corporates should be reconsidered to meet DGSD and international trends.
- Funding and target reserve:
  - Ex ante funded DGS preferred over ex post arrangements.
  - DGSD minimum target: 0.8 percent of eligible deposits.
  - Mission recommendation for Slovenia: target reserve fund range from 5 percent to 6 percent of insured deposits.
    - DGS would not consider rebates or credits until fund exceeded 6 percent; would not automatically raise premiums until fund dipped below 5 percent.
  - Rule-of-thumb: reserve adequate to cover insured deposits at four to six small banks or two to three medium-sized banks.
  - Comparative examples: Macedonia 4 percent; Bulgaria 5 percent; Kazakhstan 5 percent; Bosnia 7 percent.
- Building the fund:
  - Achieving 5 percent–6 percent target in less than 10 years difficult without large up-front contribution.
  - Initial contribution sources may include existing reserves; possible government “seed” contribution or donor support.
  - Premiums must not be reduced until seed contributions repaid in full.
- Premiums and risk-based assessments:
  - Begin with flat-rate premiums during implementation; introduce risk-based premiums only after DGS established and running smoothly for several years.
  - DGSD requires risk-based premiums; BOS’s DGS should adhere to absolute minimum variables to keep implementation simple.
  - Use risk buckets/categories; distinct charges needed to incentivize risk reduction.
- Emergency/back-up funding:
  - DGS legislation should include emergency/back-up funding arrangements (pre-approved line of credit with MoF recommended).
  - DGSD: borrowing arrangement should be same as DGS’s target reserve fund amount.
  - Borrowings must be repaid before banks’ premiums are reduced.
  - DGSD permits DGSs to borrow from one another; explore arrangements with access within two days.
  - DGS should be granted power to temporarily increase premiums to replenish the fund, balancing against procyclical effects.
- Investment policy:
  - Formal investment policy emphasizing safety and liquidity over yield.
  - Invest in high quality, easily liquidated securities; avoid requirement to invest unduly in domestic government securities.
  - Consider very low risk, non-Slovene securities to mitigate negative feedback.
- Uses of funds:
  - Limited to: (1) administrative and operating expenses of the DGS; and (2) reimbursement of insured depositors.
  - P&A or deposit transfer are alternative methods to fulfill reimbursement obligations when least-cost condition demonstrably met.
- Public awareness:
  - Make terms and conditions publicly available; require banks to display membership signs or certificates; provide standardized brochures; feature information on DGS website (or BOS website).
  - In case of failure, provide information on where, how, and when depositors will have access to funds via press releases, FAQs, radio, and television.
- Legal protection and recoveries:
  - DGS directors, officers, and employees should receive legal protection for good-faith actions or omissions.
  - DGS should have right to recover expenditures for insured deposit repayment from liquidation of failed bank assets; DGS subrogated to insured depositors’ preferred claims on receivership estate.
  - Claims priority: insured depositors and thereby DGS enjoy very high priority after secured creditors (only up to collateral value) and receiver’s administrative expenses; uninsured deposits, general unsecured creditors, subordinated debt-holders, and shareholders follow.
  - BOS should direct the liquidator and ensure periodic distributions to claimants.

### Key Concrete Recommendations (selected recap)
- Create Problem Bank Committee (PBC) within Bank Supervision Department; include Head of Resolution Unit and senior DGS manager.
- Appoint Temporary Administrator for CAMELS 4 and 5 banks and CAMELS 3 banks showing little improvement.
- Activate “pop-up” intervention and resolution teams upon TA appointment.
- Prefer P&A as resolution tool for non-systemic banks; head of Resolution Unit to canvass potential acquirers periodically.
- Maintain list of potential Liquidators and develop Liquidation manual; require periodic reports from Liquidator and rules-based periodic distribution of recoveries.
- Develop one-voice communications plan and implement least-cost resolution policy.
- Amend banking law to place bank bankruptcy under central bank administrative authority and phase out court-based liquidation process.
- Change DGS funding from ex post to ex ante; set target reserve fund range of 5 percent to 6 percent of insured deposits; impose initial contributions and consider government seed funding.
- Begin periodic risk-based assessments per EBA guidelines (subject to phased implementation); arrange emergency line of credit with MoF; create formal investment policy.
- Ensure DGS outlays limited to administrative expenses and insured depositor reimbursement; undertake public awareness program and provide depositor counseling after failures.

*Source: IMF MCM technical assistance mission report to the Bank of Slovenia, July 9–20, 2015 (document _cr15292).*

### Preface ................................................................................................................

### _cr15292 - Preface

### Preface
- IMF Monetary and Capital Markets Department (MCM) Technical Assistance mission visited Ljubljana, Slovenia from July 9 through July 20, 2015.
- Mission led and solely comprised of Mr. David Parker (MCM).
- The mission met with various staff of the Bank of Slovenia (BOS); main findings and recommendations presented at a wrap-up meeting on July 20, 2015.
- An aide-mémoire was left, ad referendum, with the authorities.

### Executive Summary
- This report is the first follow-up mission focused on the bank resolution framework and the deposit guarantee scheme (DGS); a second follow-up mission on crisis preparedness and management was planned.
- Three necessary requirements for effective bank resolution: (i) a special bank resolution regime (SRR) with irreversible resolution decisions; (ii) advance preparation for bank intervention and resolution; and (iii) an adequately funded DGS.
- Slovenia’s banking law provides for SRR; BOS adopted the December 2014 recommendation to create a Resolution Unit; the extant DGS is ex post funded and does not fulfill the ex ante funding requirement.
- Technical assistance emphasized: early and intensive monitoring of problem banks to prevent asset stripping and gather information; team-based intervention with controlled discrete functions; preference for Purchase and Assumption (P&A) transactions as virtually always the least costly form of resolution; periodic canvassing of potential acquirers in advance.
- DGS recommendations followed the DGSD and IADI DICP: recommended narrow mandate (paybox plus) ex ante funded DGS contained within BOS but with separate operations, funding, and accounting; membership compulsory for all banks; EU coverage established at €100,000; mission recommended adopting a target reserve fund greater than the 0.8 percent of insured deposits mandated by the DGSD.

### Table 1. Slovenia: Recommendations (as presented)
Bank Resolution Framework
- 1. Create a Problem Bank Committee (PBC) within the Bank Supervision Department, and including the Head of the Resolution Unit and senior manager of the DGS as members, to be convened whenever any bank or banks enter problem status. — < 3 months
- 2. Appoint a Temporary Administrator for 4 and 5 CAMELs rated banks as well as for banks that are lingering in 3 rated status and show little signs of improvement. The Temporary Administrator should, inter alia, monitor insider and large transactions to prevent asset stripping and gather information for advance intervention and resolution preparation. — When necessary
- 3. Amend banking law to implement a policy of early intervention in financial institutions before capital deteriorates to zero. — < 6 months
- 4. Appointment of Temporary Administrator will activate the “pop-up” of intervention and resolution teams. — When necessary
- 5. Prefer P&A as resolution tool for non-systemic banks. — < 6 months
- 6. Head of Resolutions Unit to periodically canvas strong domestic and foreign banks for interest in acquiring a failed bank via a P&A transaction. — < 6 months and ongoing
- 7. For purposes of a P&A asset valuation, book value of performing loans can be considered market value. — When necessary
- 8. Develop effective “one-voice” communications plan for bank resolution. — < 6 months
- 9. Implement policy of requiring “least costly” resolution method. — < 3 months
- 10. Amend banking law to clearly and fully put bank bankruptcy as an administrative function under the central bank, superseding company insolvency legislation, and eliminating bankruptcy court role. — < 6 months
- 11. Maintain list, with contact information and CVs, of potential professional, qualified bank liquidators. — < 6 months
- 12. Develop a standard bank liquidation manual. — < 6 months
- 13. Require periodic reports from Liquidator. — When necessary
- 14. Amend banking law to require rules-based periodic distribution of recoveries on liquidated assets from Liquidator to claimants according to legal priority. — < 6 months

Deposit Guarantee Scheme (DGS)
- 15. Enshrine the DGS’s public policy objectives in legislation or regulation. — < 6 months
- 16. Grant the DGS a separate legal personality; and ensure that DGS’s accounting and funds remain separate from BOS’s. — < 6 months
- 17. Include deposit insurance issues in supervisory MOUs with relevant foreign supervisors. — < 6 months
- 18. Change DGS’s funding from ex post to ex ante. — < 6 months
- 19. Develop and set a target fund range based on clear, consistent and transparent criteria. — < 6 months
- 20. Specifically authorize in legislation that DGS funds can be utilized to facilitate a resolution action (i.e., P&A) but not to exceed that which would have been expended in a liquidation. — < 6 months
- 21. Impose initial contributions on member banks. — < 6 months
- 22. Explore the possibility of “seed” funding from the government. — < 6 months
- 23. Begin imposing periodic risk-based assessments on member banks. — < 6 months
- 24. Provide for the ability to temporarily raise premiums to replenish the fund, if necessary. — < 6 months
- 25. Create a formal investment policy for the DGS’s reserve fund. — < 6 months
- 26. Arrange an emergency line of credit with MoF. — < 6 months
- 27. Ensure that the DGS’s outlays are limited to: (1) administrative and operating expenses of the DGS; and (2) reimbursement of insured depositors in the event of a bank failure. — < 6 months
- 28. Undertake a public awareness program. — < 6 months
- 29. Be prepared to counsel insured and uninsured depositors after bank failures. — When necessary

### I. Background — key points
- December 15–19, 2014 MCM mission recommended creating a separate bank resolution unit within BOS with “pop-up” authority to expand and mobilize when a resolution was pending; BOS has developed an early intervention, resolution and insolvency manual and committed to maintaining readiness.
- Recommendation to adopt a narrow mandate ex ante funded DGS with separate legal personality but operationally housed under BOS; progress mixed—proposed by BOS but unclear if MOF and parliament will endorse.
- Bosnia track record: forceful bank intervention historically—mandated restructuring of four banks, nationalized the two largest Slovene banks, intervened in two small banks to wind them down.
- Imminent need to transpose the EU BRRD and DGSD into national law; directives emphasize swift resolution action, pre-funding, assigning losses to shareholders, avoiding government support, timely deposit payouts, and least costly resolution options.
- BOS proposed as bank resolution authority with a small separate resolution unit; proposed narrow mandate DGS housed within BOS but operationally independent with separate financial accounts.

### II. Problem Bank Resolution — A. Problem Banks
- Supervisory approach:
  - Off-site analyses, on-site inspections, and frequent communication with bank administrators are essential.
  - Progressive administrative or enforcement actions should form a formal policy; actions escalate if corrective measures fail.
  - Prevention is preferred to cure.
- Organizational recommendation:
  - BOS currently has no formal Problem Bank Unit; mission recommends creating a Problem Bank Committee (PBC) to convene when banks enter problem status (defined here as CAMELS 3, 4, or 5).
  - PBC membership should include Head of the Resolutions Unit and the senior-most representative of the DGS to ensure advance information-sharing and preparation.
- Monitoring and activation:
  - PBC should closely monitor CAMELS 4- and 5-rated banks and CAMELS 3 banks that show no improvement.
  - As conditions deteriorate, BOS should institute progressively stronger enforcement measures (e.g., removing personnel; directing the bank to stop certain actions) aiming to recover the bank.
  - BOS management should activate “pop-up” resolution staff and appoint an Intervention Manager and a Resolution Manager to begin advance preparations (one person may fill both roles depending on size/complexity).

*Source: IMF MCM technical assistance mission report to the Bank of Slovenia, July 9–20, 2015.*

### 13.      Concurrent with this, BOS should appoint a Temporary Administrator(s) (TA) for

### _cr15292 - 13.      Concurrent with this, BOS should appoint a Temporary Administrator(s) (TA) for

### Appointment of Temporary Administrator(s) (TA)
- Concurrent with intensified supervision, BOS should appoint a Temporary Administrator(s) (TA) for the bank(s), as provided in Article 259 of the banking law, to provide intensified supervision and monitoring.
- Rationale: mitigate asset-stripping risk, document destruction, or other damages by placing a TA on-site full-time.
- Note on legal scope: The Temporary Administrator in the Slovenian context differs from many countries’ definition of a Temporary Administrator with a Conservator’s role, and from Articles 15 and 29 of the BRRD, in that the Temporary Administrator is not granted all the rights and powers of the bank’s owners and management. Instead, the Temporary Administrator performs the functions of a member of a bank’s Management Board and consults with the bank’s Management Board on certain matters, performing the role of an onsite examiner (or team).

### Core TA responsibilities
- Monitor, with authority to approve or block, insider and/or large transactions.
- Monitor and ensure compliance with any outstanding corrective measures.
- Monitor asset quality.
- Gather information for advance preparation for intervention and resolution, should the bank deteriorate to that point.

### Initial duties of the TA (enumerated)
- Monitor and approve or block insider transactions (approve only legitimate transactions, such as those for payroll of a related business—nothing to directly benefit the insiders).
- Monitor and approve or block intra-group transactions.
- Check for unusual compensation arrangements that may have been utilized to avoid income taxes.
- Ensure that the bank’s IT service has the capacity to:
  - sort and aggregate accounts for deposit insurance calculations; and
  - code deposit accounts (insiders, interbank, etc.) for exclusion from coverage.
- Discreetly ascertain from loan officers which major loans are easily collectible.
- Examine activities with regard to suspected:
  - Dishonest or fraudulent acts (especially with regard to lending);
  - Forgery or alteration of documents;
  - Misapplication of funds or assets;
  - Impropriety in reporting financial transactions;
  - Profiting from insider knowledge;
  - Disclosing securities transactions to others.

### Information gathering for intervention and resolution planning (examples)
- Number of offices:
  - Open; and
  - Not in operation.
- Location of main offices and branch locations:
  - Number of employees at each location;
  - Records maintained on site (at each location);
  - Banking premises owned or leased;
  - Recorded value;
  - Other tenants; and
  - Information system—computerized or manual.
- Loans:
  - Number and value of loans at each location;
  - Name and amount of major debtors;
  - Insider lines (directors, officers, shareholders, affiliates);
  - Location of legal documentation representing indebtedness; and
  - Loan classifications.
- Deposits:
  - Ensure that IT system can:
    - Sort and aggregate accounts for deposit insurance calculations; and
    - Code accounts for exclusion.
  - Number and value of deposits at each location.
  - Name and amount of major depositors.
  - Insider depositors (directors, officers, shareholders).
  - Distribution of depositors.
  - Debtor/depositor relationships—offsets.
- Borrowings: secured or unsecured.
- Subsidiaries.
- Trust Department or activities.
- Ownership structure.
- Enforcement actions pending.
- Litigation—both offensive and defensive.
- Other—leases, etc.

### Early intervention and legislative alignment
- BOS must implement a policy of early intervention in financial institutions before capital deteriorates to zero, as called for by the BRRD.
- Prompt Corrective Action (PCA) style frameworks: assign banks to capital categories and place increasingly stringent restrictions as regulatory capital levels decline; PCA calls for revocation of a bank’s license before capital reaches zero.
- Recommendation: In line with BRRD and KA’s, include early intervention provisions in banking legislation.

### Advance preparation overview
- Resolution Unit should make advance preparations for intervention and resolution as a bank lingers in problem status.
- Distinction:
  - Intervention: physically taking over a bank.
  - Resolution: decisive action to resolve a problem bank situation (akin to a bankruptcy procedure with fiduciary responsibilities).
- Fiduciary roles:
  - Intervention: control, secure, inventory assets, prepare final financial statements.
  - Resolution: transfer insured deposits to a stronger bank using good assets to offset insured deposit liabilities; receivership for bad assets and claims.

### Intervention: organization and roles
- Appoint a Bank Intervention Manager (BIM) with ultimate responsibility for takeover; develop an Intervention Action Plan and checklists.
- Team-based approach; functional teams and advance preparation examples:
  - Accounting: review financial reports and proposed transactional documents (P&A).
  - Asset management: estimate number and composition of assets.
  - Branch operations: identify branches, activities, contact information.
  - Deposit operations: preliminary insurance determination per law.
  - Facilities and security: supplies, official seal, inventory control, coordinate security/police.
  - Information technology: prepare data files, equipment, determine capability for stopping accruals, download files, report generation, delivery logistics, staffing.
  - Legal: draft corrective measures, P&A transactional documents, legal notices, legal orders (appointment of TA or license revocation), and serve notices.

### Resolution principles and the P&A tool
- Guiding principle: least-cost resolution to avoid unnecessary expenditures from taxpayer or DGS funds.
- Purchase & Assumption (P&A) is often the most effective tool for non-systemic banks: another bank takes certain good assets and assumes insured deposits, acting as paying agent for the DGS.
- Objectives for resolution actions:
  - Maximize the price of sale or disposition, consistent with depositor and creditor protection.
  - Ensure fair competition among potential purchasers or merger partners.
  - Prohibit discrimination in solicitation and consideration of offers.
  - Ensure the acquirer or merged entity is a strong bank, majority owned and controlled by private owners.
- Market failed bank widely to potential acquirers (including larger banks at least twice the asset size of the failed bank); use confidentiality agreements where needed.
- Resolutions Manager should select an acquirer and pursue a P&A; examples in other jurisdictions indicate acquirers retain approximately 70 percent of deposits.
- Asset valuation: if time permits, estimate worth of assets using valuation models and statistical sampling; book value of performing loans generally acceptable, with an acceptable discount of 10 percent to 15 percent on performing loans.
- Bid package content: detailed data on assets and liabilities, demographic information, market area, competition, local economy.
- Due diligence: permit as time allows but maintain confidentiality to avoid adverse public signals.
- P&A contracts: sign several days prior to closing and place in escrow; Liquidator and AB sign P&A Agreements and escrow agreement.
- Confidentiality is paramount throughout the resolution process.

### Example P&A transaction (Slovenia): selected balance-sheet snapshots and splits
- Failed Bank - Original Balance Sheet (Assets / Liabilities):
  - Cash and bank deposits 154 / Deposits 800
  - Investments 185 / Borrowings 70
  - Loans 710 / Other liabilities 110
  - Fixed Assets 25 / Subordinated debt 10
  - Investment in subsidiaries 5 / Capital 110
  - Other Assets 21
  - Total: 1,100 / 1,100
- Failed Bank - Original Balance Sheet - Adjusted for Loss:
  - Cash and bank deposits 154 / Deposits 800
  - Investments 185 / Borrowings 70
  - Loans 1/410 / Other liabilities 110
  - Fixed Assets 25 / Subordinated debt 10
  - Investment in subsidiaries 5 / Capital 2/-190
  - Other Assets 21
  - Total: 800 / 800
  - Notes: 1/ Loss of 300 in Loans; 2/ Charged loss results in insolvency
- "Split" - Assuming Bank P&A (Example):
  - Cash and bank deposits 140 / Insured Deposits 550
  - "Good" Investments 85 / Borrowings
  - "Good" loans 200 / Other liabilities 2/20
  - Other Assets 1/5
  - Sub-total 430 / 570
  - Cash from State 140
  - Total: 570 / 570
  - Notes: 1/ Accrued interest on "Good" loans; 2/ Accrued interest on insured deposits
- "Split" - Receivership (Assets / Claims):
  - Cash 14 / Cash from DGS 140
  - Investments 100 / Uninsured Deposits 250
  - Loans 510 / Borrowings 70
  - Fixed Assets 25 / Other liabilities 90
  - Investment in subsidiaries 5 / Subordinated debt 10
  - Other Assets 16 / Capital 110
  - Total: 670 / 670

*Source: _cr15292 - 13. Concurrent with this, BOS should appoint a Temporary Administrator(s) (TA) for*

### 30. Well before any problem bank intervention, the BOS Communications Department

### _cr15292 - 30. Well before any problem bank intervention, the BOS Communications Department

### Communications before and during intervention
- Implement a “one-voice” communications policy: coordinate information with the Resolutions Manager (and the DGS) and control information through one spokesperson.
- Prepare and deliver a media statement immediately after taking control of a bank, stressing:
  - authorities have taken forceful action to strengthen the banking sector;
  - actions are in the best interests of depositors and financial stability.
- All communication should be provided in simple terms to avert uncertainty and misconception.
- Advance preparation should include, inter alia:
  - Press releases should be brief, factually accurate, and as positive as possible.
  - Anticipate possible follow-up questions (frequently asked questions (FAQs)) and prepare answers.
  - Share as much information as possible with the media to create and maintain goodwill.
  - The initial message should describe the action taken and how the resolution will be handled.
- Prepare press release templates and FAQs well in advance.
- Use all available media platforms, including print, television, radio, central bank, DGS, and failed bank websites.

### Final resolution framework and tools
- Background:
  - BRRD and the KAs were developed after the 2008–09 crisis to address deficiencies in bank resolution frameworks, notably inability to take prompt actions and lack of effective resolution tools.
  - Both aim to solve the “too big to fail” problem and enable orderly resolution of systemic banks.
- Applicability to non-systemic bank resolution:
  - Many tools (e.g., AMCs, asset purchases, bail-in, bridge banks) are less effective for non-systemic banks.
  - Two provisions particularly important for non-systemic resolution: SRR (special bank resolution regime) and P&A (purchase and assumption, aka sale of business).
  - SRR and P&A enable swift action, prompt availability of insured depositors’ funds, and potential prevention of contagion and deposit runs.

### Resolution categories and preference
- Resolution broadly in three categories:
  - (i) private — current owners recapitalize, sell, or merge the bank;
  - (ii) assisted transactions — such as a P&A transaction where certain liabilities and certain assets are transferred to a stronger bank;
  - (iii) direct liquidation.
- Preference and principle:
  - Any resolution method should be subject to the “least costly” form of resolution.
  - A basic P&A transaction is highlighted as one of the most effective tools for non-systemic bank resolution:
    - A healthier bank purchases certain “good” assets and assumes insured deposit liabilities (with variations possible).
    - With advance preparation, a P&A can be accomplished quickly (usually over a weekend).
    - P&A has potential to maintain banking services in under-served communities.
  - Note: success of a P&A depends on finding a legitimate third-party acquirer.

### P&A resolution — operational sequence and duties
- Initial intervention:
  - A small initial intervention team enters the bank, meets with the CEO or other key officials.
  - The BIM explains the action, presents the intervention order, advises of license revocation and appointment of a Liquidator, and introduces the Liquidator.
  - By lawful authority, CEO and selected management are relieved of authority and responsibilities and escorted from the premises; intervention notification should be posted prominently on the bank’s door.
- Immediately following license revocation:
  - BOS will appoint a Liquidator.
  - The Liquidator will bring the pre-negotiated, pre-signed P&A document out of escrow, deliver it to the AB, and it will go into effect.
- Security and IT control:
  - Security Function Manager should immediately take control of SWIFT and/or other wire transfer facilities.
  - Security and IT Managers should ensure ATMs are disabled and applicable networks notified unless AB decides to continue operations.
  - Security team should ensure cash and loan documents are controlled pending arrival of the asset team.
- Expanded intervention team entry and coordination:
  - Notify remaining intervention team members to enter in small groups; coordinate entry scheduling and branch operations by phone.
- Function Manager duties (work performed throughout the weekend):
  - Accounting team: ensure work is processed and reconcile subsidiary accounts to the general ledger; produce final financial statements split between AB and Liquidator.
  - Asset team: secure and control assets, especially cash and loan documents; work with accounting to balance asset accounts.
  - Branch team: secure and control branch premises, including assets.
  - Deposit team: perform insured deposit calculations and work with accounting to balance deposit accounts.
  - Facilities team: ensure all teams have adequate supplies and working space.
  - Security team: ensure a contracted security firm is controlling the premises.
  - Information Technology team: ensure processing for final close-out of financial statements is completed promptly; compile and distribute reports as needed.
  - Legal team: ensure intervention notice is posted to assist BIM and Liquidator as needed.
- Post-weekend operations:
  - Intervention team delivers work product to the AB or the Liquidator.
  - The AB will continue operations at the failed bank for at least 90 days and have an exclusive option to purchase owned premises at market value or assume leases of leased premises.
  - The AB should be granted first choice of any failed bank employees they wish to hire.
  - The AB will work off the failed bank’s IT system, paying deposits based on instructions from the deposit team.
  - The AB should not pay deposits exceeding the insured limit or otherwise frozen (e.g., insider deposits, deposits frozen for offset to nonperforming loans).
  - The AB will likely be asked to provide interim asset servicing and accounting for the Liquidator until his/her office is established.

### Bank liquidation — selected issues and recommendations for BOS role
- Current regime and recommendation:
  - Slovenia currently has a court-based bank liquidation regime: insolvent banks must go through bankruptcy court under company insolvency law.
  - BOS can take over an undercapitalized bank and appoint Special Management to replace existing management and suspend rights of shareholders and Supervisory Board; BOS defines Special Management terms (rehabilitation, P&A, or winding-down liquidation).
  - Recommendation: change the banking law to put all bank liquidation under BOS as an administrative function to adopt an advance-preparation resolution policy and avoid the period of Special Management, which could adversely affect public confidence.
- Liquidator preparedness:
  - BOS should maintain a list of professionally qualified financial experts to act as bank liquidators.
  - BOS should develop a standardized Liquidation manual detailing establishment of a liquidation office, asset management, and disposition procedures to liquidate the “rump” of the failed bank.
  - Instructions should aim to maximize recoveries and minimize losses; establish functional office structure and hire loan collection specialists, real estate and assets sales specialists, and other administrative, accounting, IT, and legal staff.
- Loan collection and incentives:
  - Address culture of non-repayment: borrowers must still repay loans despite bank closure; Liquidator must collect aggressively, considering time value of money.
  - Policy aim: try to collect full book value and accrued interest; in some cases accept less in full settlement guided by business judgment and BOS guidelines.
  - Liquidator must develop delegations of authority for settlements below full book value and have a credit review committee.
- Recordkeeping and reporting:
  - Maintain record keeping to demonstrate liquidation efforts, especially for assets settled below full book value and accrued interest.
  - Use auction processes to dispose of movable assets; develop budgets for real property assets.
  - Adhere to reporting system required by BOS; example reports include:
    - gross cash collections by asset type;
    - expense to collection ratio;
    - asset sales;
    - real estate assets sold;
    - assets in litigation;
    - claims filed (approved or disapproved);
    - comprehensive periodic financial statements.
- Timing and performance incentives:
  - Avoid legal requirements that force liquidation wind-down within a strict timeframe (e.g., mandatory two-year completion) that create perverse incentives for borrowers to delay repayment.
  - Direct Liquidator to accomplish work “as soon as possible” and provide performance-based incentives (e.g., bonuses based on gross cash collections, reducing staff).
  - Require Liquidator by legislation/regulation to make periodic distributions of recoveries on asset liquidation to claimants on a pro rata basis according to legal claim priority.

### Concrete recommendations (selected)
- Create a Problem Bank Committee (PBC) within the Bank Supervision Department; include the Head of the Resolution Unit and senior manager of the DGS as members; convene whenever any bank or banks enter problem status.
- Appoint a Temporary Administrator for 4 and 5 CAMELs-rated banks as well as for banks lingering in 3-rated status showing little signs of improvement; Temporary Administrator should monitor insider and large transactions to prevent asset stripping and gather information for advance intervention and resolution preparation.
- Appointment of Temporary Administrator will activate the “pop-up” of intervention and resolution teams.
- Prefer P&A as resolution tool for non-systemic banks.
- Head of Resolutions Unit to periodically canvass strong domestic and foreign banks for interest in acquiring a failed bank via a P&A transaction.
- BOS to maintain list of potential Liquidators.
- For purposes of a P&A asset valuation, book value of performing loans can be considered market value.
- Develop effective “one-voice” communications plan for bank resolution.
- Implement policy of requiring “least costly” resolution method.
- Amend banking law to clearly and fully put bank bankruptcy as an administrative function under the central bank, superseding company insolvency legislation, and eliminating bankruptcy court role.
- Phase out the National Bank Resolution Fund.
- Require periodic reports from the Liquidator.
- Require rules-based periodic distribution of recoveries on liquidated assets from the Liquidator to claimants according to legal priority.

### Deposit Guarantee Scheme (DGS) — mandate and governance (overview)
- DGS envisaged to operate under the auspices of BOS with a “paybox plus” mandate:
  - Role limited to full protection of insured depositors in the event of a bank failure.
  - “Plus” means funds can be used to facilitate a P&A (sale of business) or deposit transfer resolution action as reimbursement, on a least-cost basis, not to exceed expenditure required under straight liquidation.
  - Overall resolution strategy and systemic-stability objectives remain within BOS.
- Public policy objectives (DICP 1):
  - (1) consumer protection to protect small, financially unsophisticated depositors;
  - (2) greater public good to maintain financial stability by making prompt payment to insured depositors to prevent contagion and deposit runs.
  - DGSD specifies coverage of €100,000 and scope of virtually all deposits (including corporate, but excluding certain deposits such as interbank and insider and related parties), limiting room to customize coverage.
  - Slovenia is well positioned for systemic stability objective due to existence of SRR, which provides that no court can reverse a resolution decision (license revocation), permitting prompt resolution actions such as a sale of business.
- Mandate and legal form (DICP 2 and DICP 3):
  - Efficiency and good governance served by giving the DGS legal personality with its own organic law setting out mandate, accountability framework, and governance structure.
  - Critical that DGS maintain monetary resources and financial statements separate from BOS.
  - Alternative of DGS being part of BOS but distinct risks confusion over responsibilities and accountability.
  - Transparency and accountability can be enhanced by including full reporting of DGS activities and financial condition as part of BOS’s annual report to parliament.
  - Given the “paybox plus” remit, DGS should operate within BOS for cost efficiency and operational effectiveness, with features to preserve DGS autonomy:
    - DGS could be a subsidiary or department with dedicated (part-time) employees, seconded as necessary from BOS.
    - DGS Board would coincide with the BOS Board, providing easy access to information and coordination within the financial safety net.
  - Cross-border deposit insurance concerns can be included in supervisory Memorandums of Understanding (MoUs) with other jurisdictions.

*Source: _cr15292 - 30. Well before any problem bank intervention, the BOS Communications Department*

### 55. Best practices regarding governance call for operational autonomy, transparency,

### _cr15292 - 55. Best practices regarding governance call for operational autonomy, transparency,

### Governance, structure, and relationship with BOS
- Best practices call for operational autonomy, transparency, accountability, and insulation from external (e.g., political or industry) influences.
- No active bankers or members of a bankers association should be on the Management Board because of access to confidential information and conflicts of interest.
- Current arrangement of the DGS contained within the central bank (BOS) is acceptable and appropriate.
- Authorities should give the DGS a legal personality to enable smoother operations (e.g., entering into contracts) and to contribute to public confidence.
- DGS can be constructed as a subsidiary or a separate department with dedicated employees, seconded as necessary from BOS (possibly on a part-time basis), with clear assignment of duties and responsibilities.
- Critical requirements:
  - DGS must maintain separate monetary resources and financial statements.
  - Full reporting of DGS activities and condition should be included as part of BOS’s annual report to parliament.

### Operational organization and BOS responsibilities
- Once DGS structure is amended, BOS responsibilities will need revision; only a very “skeletal” DGS structure will be needed at most times.
- Various BOS departments would be involved and report on DGS matters to the common Board:
  - Banking Supervision Department: audit DGS premium payments, test IT systems for insured deposit calculations, and related concerns.
  - Banking Operations Department: manage investment of the DGS reserve fund.
  - DGS staff: contribute materials on DGS operations (e.g., separation of insured from uninsured deposits) to bank intervention and resolution manuals.
- The DGS should compensate BOS for services provided out of its premium income.
- Footnote: The DGS should be billed for the attendant costs.

### Compliance with DICPs and cross-border coordination
- Housing the DGS in BOS helps ensure compliance with DICPs 4, 5, and 6 (Relationships with Other Safety-Net Participants; Cross-border Issues; Deposit Insurer’s Role in Contingency Planning and Crisis Management).
- As a subsidiary unit of BOS, the DGS enjoys access to information and automatic coordination within the financial safety net.
- Cross-border deposit insurance concerns can be included in supervisory MOUs with authorities in other jurisdictions.
- The deposit insurer’s role in contingency planning and crisis management will be limited to a preventive role—providing prompt payment to insured depositors to prevent contagion and deposit runs.

### Membership and coverage
- Slovenia’s current DGS complies with DICPs 7: Membership (compulsory membership of all banks) and 8: Coverage (as dictated by the DGSD).
- Current exclusion: deposits from large and medium sized corporates are excluded; authorities must reconsider this exclusion because the DGSD requires it and international trends favor covering such deposits.
- Extending coverage to large and medium enterprises can facilitate insured deposit calculations and should not substantially increase DGS fund exposure given limited coverage levels.

### Sources and uses of funds — overview
- Funding aspects include: target reserve fund; “seed” funding; member banks’ contributions; emergency funding; uses of assets (including investments).
- Ex ante funded DISs are preferred over ex post arrangements for prompt action and to avoid procyclicality.
- International best practice and the DGSD call for ex ante funding, with a target reserve funded by periodic assessments on member banks.
- Many jurisdictions require an initial contribution (entrance fee) and may use a government “seed” contribution; premiums on banks must not be reduced or eliminated until such “seed” contributions are repaid in full.

### Determining reserve fund size and target range
- Reserve funds are generally based on historical loss data, but lack of failures may require alternative methods.
- Aspects to consider when sizing the fund:
  - (i) the DGS’ exposure (amount of insured deposits system-wide);
  - (ii) how that exposure is distributed (e.g., small, medium, large banks).
- Legislation should define a range for the target (example given: “5 percent to 6 percent of insured deposits”) rather than a specific hard target to provide flexibility and mitigate procyclical premium shocks.
- DGSD minimum target: 0.8 percent of eligible deposits.
- Mission recommendation for Slovenia: a target reserve fund range of from 5 percent to 6 percent.
  - The DGS would not consider rebates or credits until the fund exceeded 6 percent, nor automatically raise premiums until the fund dipped below 5 percent.
- Rule-of-thumb for similar jurisdictions: reserve adequate to cover insured deposits at four to six small banks or two to three medium-sized banks.
- Footnote example (experience in other countries): Macedonia 4 percent; Bulgaria 5 percent; Kazakhstan 5 percent; Bosnia 7 percent.

### Building the fund and initial contributions
- Achieving the 5 percent–6 percent target in less than 10 years may be very difficult without a large up-front contribution.
- Initial contribution sources may include existing reserves for deposit protection purposes that banks already maintain.
- Possible augmentation by a government “seed” contribution or donor agency; premiums on banks must not be reduced until seed contributions are repaid in full.

### Premiums and risk-based assessments
- New DGSs are generally encouraged to begin with flat-rate premiums during implementation.
- Introducing risk-based premiums is a long and complex process; recommended only after the DGS has been established and running smoothly for several years.
- DGSD requires risk-based premiums; BOS’s DGS should adhere to the absolute minimum variables dictated by DGSD to keep implementation simple.
- Importance of categorization:
  - Buckets or categories of risk are as important as a comprehensive risk model.
  - Categories must be distinct enough—with significant differences in charges—to incentivize banks to improve risk profiles and move to less risky categories.

### Emergency/back-up funding and premium flexibility
- DGS legislation should include emergency or back-up funding arrangements for cases where the reserve is depleted or insufficient.
- Expedient arrangement: a pre-approved line of credit with the MoF to avoid market borrowing delays.
  - According to the DGSD, the borrowing arrangement should be the same as the DGS’s target reserve fund amount.
  - Any such borrowings must be repaid in full before banks’ premiums are reduced.
- DGSD permits DGSs to borrow from one another; given Slovenia’s tight fiscal situation, exploring such arrangements is suggested, with access to necessary funding within two days.
- DGS should be granted powers to temporarily increase premiums to replenish the reserve fund, but use of that power must balance rebuilding the fund against procyclical effects on banks.
  - Example scenario: DGS may delay imposing higher premiums for, say, two years after acquiring emergency funding if the financial situation is too stressful.

### Investment policy
- DGS should have a formal investment policy emphasizing safety and liquidity over yield.
- Investments should be high quality, easily liquidated with little to no loss of principal.
- Investment policy should not unduly require the fund to be invested in domestic government securities to avoid negative feedback effects during distress.
- Investment in very low risk, non-Slovene securities would mitigate the danger of negative feedback.

### Uses of DGS funds and resolution tools
- Use of DGS funds should be limited to:
  - (1) administrative and operating expenses of the DGS; and
  - (2) reimbursement of insured depositors in the event of a bank failure.
- Resolution tools such as P&A or deposit transfer are not an expansion of mandate but alternative methods to fulfill reimbursement obligations.
- Provided the least-cost condition is demonstrably met and other creditors are treated equitably, the DGS can contribute to a sale-of-business operation that may make the business more attractive to purchasers.

### Public awareness and depositor communications
- Minimum public awareness activities:
  - Make terms and conditions of deposit insurance publicly available.
  - Provide information regarding payment of insured deposits in the event of a bank failure.
  - Require banks to display signs, seals or certificates of membership in the scheme.
  - Provide standardized brochures for banks to distribute to clients describing coverage and non-coverage.
  - Feature information on the DGS website (or BOS’s if DGS has no separate site).
- In the event of a bank failure, DGS/BOS should provide information on where, how, and when depositors will have access to funds through press releases, “frequently asked questions” online, radio, and television.

### Legal protection, supervision, and recoveries
- DGS directors, officers and employees should receive legal protection for decisions and actions or omissions made in good faith in the normal course of duties (DICP 11).
  - Since DGS will be staffed by seconded BOS employees, they should enjoy the same legal protections as BOS employees.
- DICPs 12–15 (bank supervision and resolution) are out of the control of a narrow-mandate DGS and should be addressed under BOS’s bank supervision and resolution functions with a recommended “paybox plus” mandate.
- Recovery rights:
  - DGS should have the legal right to recover expenditures for insured deposit repayment from liquidation of failed bank assets.
  - By paying insured deposits, DGS should be subrogated to insured depositors’ preferred claims on the receivership estate.
  - International best practice and the BRRD require claims of insured depositors and thereby the DGS, as subrogee, to enjoy very high priority, after secured creditors (only up to value of collateral) and receiver’s administrative expenses.
  - Typical claims priority order: uninsured deposits, general unsecured creditors, subordinated debt-holders, and shareholders would follow.
  - BOS should direct the liquidator and ensure periodic distributions to claimants to avoid perpetuation of the liquidation process.
- Footnote: Some jurisdictions give varying priority levels to employees’ claims and taxes.

### Key recommendations (as listed)
- Enshrine the DGS’s public policy objectives in legislation or regulation.
- Grant the DGS a separate legal personality; and ensure that DGS’s accounting and funds remain separate from BOS’s.
- Include deposit insurance issues in supervisory MOUs with relevant foreign supervisors.
- Change DGS’s funding from ex post to ex ante.
- Develop and set a target fund range based on clear, consistent and transparent criteria.
- Impose initial contributions on member banks.
- Explore the possibility of “seed” funding from the government.
- Begin imposing periodic risk-based assessments on member banks in accordance with EBA guidelines.
- Establish in legislation or regulation the ability to temporarily raise premiums to replenish the fund, if necessary.
- Create a formal investment policy for the DGS’s reserve fund.
- Arrange an emergency line of credit with MoF.
- Ensure that the DGS’s outlays are limited to: (1) administrative and operating expenses of the DGS; and (2) reimbursement of insured depositors in the event of a bank failure.
- Undertake a public awareness program.
- Be prepared to counsel insured and uninsured depositors after bank failures.

*Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15292.pdf*

### 1. A deposit insurance law should specifically permit the DGS to use its funds to

### 1. A deposit insurance law should specifically permit the DGS to use its funds to 

### Purpose and legal basis
- A P&A is a method for the DGS to fulfill its mandate to promptly reimburse insured depositors in the event of a bank failure.
- A liquidated payout likely will not satisfy financial stability objectives and is generally more costly than other resolution methods.
- A deposit insurance law should specifically permit the DGS to use its funds to facilitate a P&A transaction.

### General benefits and objectives of a P&A
- Provides depositors with prompt access to their insured deposits.
- Performing assets of the failed bank are quickly transferred to a healthy bank, so that their value is maintained and they remain in the private sector.
- Promotes and preserves confidence in the banking sector.
- Minimizes disruption to bank customers.
- Preserves financial stability by minimizing the likelihood of a bank run and contagion to the rest of the banking sector.
- The goal is to make insured deposit payments as soon as possible; intense advance preparation for bank intervention and resolution is critical.
- With a special non-judicial bank resolution regime (including depositor preference), and with adequate advance preparation by the supervisory authority and the DGS, a P&A transaction can be executed that will provide for prompt reimbursement of insured depositors, with a goal of three to five days.

### Timing and execution requirements
- The important benefits of a P&A can only be achieved if the transaction can be accomplished without undue delay; if not, insured depositors will not gain prompt access to their funds and the assets of the failed bank will lose value, increasing failure costs.
- Advance preparation by the supervisory authority and the DGS is critical to meet the three to five days goal.

### Financial mechanics of a P&A
- In a P&A, a stronger bank (AB) purchases certain assets and assumes insured deposits of the failing bank.
- If insured deposits exceed the assets purchased, the DGS must advance funds to “fill the hole” and balance the transaction, but not to exceed the amount that would have been expended to reimburse insured depositors in a straight liquidation.
- Using assets from the failed bank to help fund the insured deposit assumption:
  - lessens the impact on the DGS’s reserve fund;
  - keeps assets in the private sector; and
  - minimizes financial disruption.

### Comparative example (balance sheet figures preserved)
- Failed Bank - Original Balance Sheet
  - Assets: Cash and bank deposits 154; Investments 185; Loans 710; Fixed Assets 25; Investment in subsidiaries 5; Other Assets 21; Total: 1,100
  - Liabilities: Deposits 800; Borrowings 70; Other liabilities 110; Subordinated debt 10; Capital 110; Total: 1,100
- Failed Bank - Adjusted for Loss
  - Assets: Cash and bank deposits 154; Investments 185; Loans 1/4 10; Fixed Assets 25; Investment in subsidiaries 5; Other Assets 21; Total: 800
  - Liabilities: Deposits 800; Borrowings 70; Other liabilities 110; Subordinated debt 10; Capital 2/-190; Total: 800
  - Footnotes: 1/ Loss of 300 in Loans; 2/ Charged loss results in insolvency
- Insured Deposit Repayment in a Liquidation Payoff
  - Assets: Cash from DIS 570; Other liabilities 1/20; Total: 570
  - Footnote: 1/ Accrued interest on insured deposits
- Insured Deposit Repayment via an Assuming Bank in a P&A
  - Assets: Cash and bank deposits 154; "Good" Investments 85; "Good" loans 200; Other Assets 1/5; Sub-total 444; Cash from DIS 126; Total: 570
  - Liabilities: Insured Deposits 550; Borrowings; Other liabilities 2/20; Total: 570
  - Footnotes: 1/ Accrued interest on "Good" loans; 2/ Accrued interest on insured deposits

### Cost comparison and recovery considerations
- At first glance, the P&A is clearly the least costly resolution option based on time value of money and the opportunity cost related to impact on the DGS’s reserve fund—the DGS must expend much less in a P&A than in a payoff.
- A P&A is always less costly than a liquidated payout because the costs of servicing assets not transferred to a bank as part of a P&A significantly reduce ultimate recoveries in liquidation.
- If the DGS performs a payoff, loan servicing must be continued or established, incurring significant costs (conservatively estimated at 15 percent up to recovery realization), which directly reduce recoveries through liquidation.
- When loans are passed to an AB via a P&A, then 100 percent of book value (205 in the above example) is counted as a liquidation recovery; uninsured depositors, other creditors, and perhaps others (e.g., subordinated debt holders) are better placed for recoveries on asset liquidation.
- Note: legislated depositor preference permits ease of a P&A transaction because the “no creditor worse off” concept is legally null.

### Standard provisions and obligations in a P&A transaction
- Liabilities assumed at book value.
- AB must pay contract rate of interest on deposits for 14 days, after which it may adjust the interest rate; depositors have the right to withdraw their deposits without penalty.
- AB must report to the DGS on a monthly basis all deposits claimed (withdrawn) or ratified.
- All deposits unclaimed or not ratified must be returned to DGS at the end of 18 months.
- Assets purchased at book value (with stipulation that fixed assets are to be adjusted to market value ex post, following legitimate appraisals).
- Loans fully secured by deposits may also be passed to AB at book value.
- Assets are passed with limited warranty and/or non-recourse (“as is”, “where is”).
- AB may be required to service assets for the liquidator in accordance with reasonable and prudent banking standards for a limited time, for which AB will be entitled to a reasonable fee (for example, to process payments or compute loan payoffs for the liquidator until his office is operational).
- AB may be granted exclusive option to purchase loan pools.
- AB agrees to assumption of certain duties and obligations:
  - Continuation of banking business at every branch location for a specified period of time (not less than 90 days).
  - Continuation of safe deposit boxes business (if any) for a specified period of time.
  - Continuation of safekeeping business (if any) for a specified period of time.
- Fixed assets (bank premises, furniture, fixtures and equipment) shall be adjusted to fair market value.
  - Example method: two appraisals (one by authorities, one by AB); average used as fair market value; if unacceptable discrepancy, a third mutually agreed appraisal mediates.
- May require AB to provide office space for the liquidator.
- AB must pay checks, drafts, and orders as in the normal course of conducting a banking business.
- AB must give notice to depositors within seven days, by mail and by advertising in a newspaper of general circulation, informing of AB’s assumption of failed bank’s deposit liabilities; notice must include instructions to claim deposits and any changes in interest rates and fees which would apply within two weeks after the transfer at the earliest; until such an adjustment fees and interest rates for the failed bank apply.
- All records pertaining to assets purchased by and deposit accounts transferred to AB must be preserved by AB for the legally mandated period of time.
- Any bid amount (premium) that AB agrees to pay is stipulated in the P&A.
- Adjustments for errors and omissions in constructing the pro forma balance sheet, asset purchases (e.g., adjustment for fixed assets from book value to fair market value) shall be paid by either party during a Settlement period (not to exceed 180 days).
- AB agrees to cooperate with the Supervisory Authority and DGS and the liquidator on general matters as well as in conjunction with claims and suits.
- AB is indemnified by receiver/liquidator (or maybe the Supervisory Authority depending on local law) for any claims, not expressly assumed, against the failed bank (e.g., shareholders, creditors, etc.).
- A P&A agreement, along with the rights and obligations, shall be governed by applicable law.

*Source: _cr15292 - 1. A deposit insurance law should specifically permit the DGS to use its funds to*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15292.pdf_