## _cr16112

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---

### A. Introduction
- Resolving the level of banks’ nonperforming loans (NPLs) is one of the hardest challenges San Marino is facing.
- As of September 2015:
  - NPLs amounted to 46 percent of Sammarinese banks’ total loans, including inter-bank loans.
  - Excluding interbank loans (only banks’ loans to customers), 52 percent of the total portfolio was impaired.
  - The stock of NPLs is equivalent to about 140 percent of GDP.
- High NPLs reduce banks’ profitability (lower remunerating assets; higher loan loss provisions and borrowing costs), weaken capital generation, and can increase risk aversion that reduces lending and economic activity.
- Paper structure (sections summarized in this overlay): causes; stylized facts; international experience; recent measures; legal and tax impediments; conclusions and policy recommendations.

### B. What Caused San Marino’s Current Problems?
- Key drivers:
  - Long-standing tax haven and bank secrecy status, favorable taxation, light regulatory burden, and free movement of capital attracted substantial funds from nonresidents (mainly Italian residents).
  - System total assets were boosted to more than 600 percent of GDP by end-2008.
  - Some banks expanded into foreign markets (example: Cassa di Risparmio della Repubblica di San Marino—CRSM—established a subsidiary in Italy (Delta Financial Group) and bought Banka Kovanica in Croatia).
  - Carry-trade opportunities and weak supervisory oversight contributed to weakening lending standards and cross-border lending (mainly to Italy).
- International pressure and crisis effects:
  - 2008: critical AML/CFT assessment by MONEYVAL.
  - April 2009: OECD put San Marino on the “gray list” of tax haven countries.
  - September 2009: Italy launched a tax amnesty.
  - July 2010: inclusion extended impact with a “black list” effect.
  - Result: massive deposit outflows, relocation of Sammarinese companies to Italy, weak external demand, and a deep prolonged recession.
- Judicial and institutional shocks:
  - 2008–09: Italian judicial investigations led to arrest of top management of two Sammarinese banks (including CRSM) on various criminal charges; arrests were later revoked but investigations continued.
  - Bank of Italy revoked authorization for CRSM as shareholder of Delta and placed Delta under special administration in 2009.
  - Losses for CRSM were substantial; CSRM needed four recapitalizations equivalent to 16 percent of San Marino’s GDP to comply with minimum capital requirements.

### C. Where Does San Marino Stand? — Asset Quality and Exposure
- Comparative asset quality:
  - The burden of NPLs is second only to Cypriot banks among the countries compared.
  - Loan-loss-provision coverage is one of the lowest among European banks (data drawn from the EBA transparency exercise).
- Nonresident exposure:
  - More-than-half of NPLs is vis-à-vis nonresidents.
  - Impaired loans vis-à-vis nonresidents accounted for more than three-quarters of NPLs of the system as a whole, although total lending is more evenly distributed.
  - Excluding CSRM, the share of NPLs vis-à-vis nonresidents remains slightly above 50 percent.
- Collateral and coverage:
  - 36 percent of NPLs is secured.
  - Banks report that the total value of the collateral would cover about 40 percent of total secured loans.
  - This raises the total coverage ratio (provision plus value of the collateral) to 127 percent for secured loans.
  - Composition of collateral:
    - About half of the value of collateral is represented by guarantees.
    - 46 percent by real estate (24 percent of real estate collateral is located abroad).
    - Remaining collateral consists of cash deposits and other financial instruments.

### D. Concentration of Impaired Loans and Key Statistics (end-2015)
- Concentration:
  - On average, a bank’s five largest exposures represent about 70 percent of total NPLs.
  - If CRSM is excluded, the share declines to about 41 percent of total problem loans.
  - Targeting those large exposures would substantially mitigate the problem; corresponding coverage of total NPLs would therefore be equal to 61 percent.
- Loan and NPL breakdown (end-2015) — preserved exactly as reported:
  - Total Loans - Breakdown by Residence: 50.4% Resident; 49.6% Non-resident.
  - Total Loans excl.CRSM - Breakdown by Residence: 68.61% Resident; 31.39% Non-resident.
  - Total Loans to Residents - Breakdown by Sector (in percent of total): 2.5% Publ.sect.; 17.2% Fin.comp.; 18.4% Ind.sect.; 6.2% Constr.; 23.8% Services; 0.0% Other NFC; 30.0% Household; 1.9% Others.
  - Total Loans to Residents excl. CRSM - Breakdown by Sector (in percent of total): 2.6% Publ.sect.; 20.1% Fin.comp.; 17.9% Ind.sect.; 5.9% Constr.; 23.9% Services; 0.0% Other NFC; 27.6% Household; 2.1% Others.
  - Total Loans to Non-Residents - Breakdown by Sector (in percent of total): 0.0% Publ.sect.; 12.5% Fin.comp.; 19.8% Ind.sect.; 13.9% Constr.; 29.8% Services; 1.2% Other NFC; 22.8% Household; 0.1% Others.
  - Total Loans to Non-Residents excl. CRSM - Breakdown by Sector (in percent of total): 0.5% Publ.sect.; 5.4% Fin.comp.; 9.6% Ind.sect.; 10.4% Constr.; 53.7% Services; 0.5% Other NFC; 19.9% Household; 0.1% Others.
  - Total NPLs - Breakdown by Residence: 22.5% Resident; 77.5% Non-resident. (NPL=52.6%)
  - Total NPLs excl. CRSM - Breakdown by Residence: 47.22% Resident; 52.78% Non-resident. (NPL=36.2%)
  - Total NPLs to Residents - Breakdown by Sector (in percent of total): 0.0% Publ.sect.; 14.1% Fin.comp.; 18.6% Ind.sect.; 10.5% Constr.; 36.7% Services; 0.0% Other NFC; 18.5% Household; 1.5% Others.
  - Total NPLs to Residents excl. CRSM - Breakdown by Sector (in percent of total): 0.0% Publ.sect.; 15.6% Fin.comp.; 17.7% Ind.sect.; 11.5% Constr.; 36.6% Services; 0.0% Other NFC; 16.9% Household; 1.7% Others.
  - Total NPLs to Non-Residents - Breakdown by Sector (in percent of total): 0.0% Publ.sect.; 4.3% Fin.comp.; 5.7% Ind.sect.; 11.2% Constr.; 59.0% Services; 0.4% Other NFC; 19.4% Household; 0.0% Others.
  - Total NPLs to Non-Residents excl. CRSM - Breakdown by Sector (in percent of total): 0.0% Publ.sect.; 12.7% Fin.comp.; 14.7% Ind.sect.; 17.8% Constr.; 28.8% Services; 1.2% Other NFC; 24.7% Household; 0.2% Others.

### E. Lessons from Other Small-Country Crisis Cases (Iceland, Ireland, Cyprus)
- Common features across cases:
  - Relatively small economies (though not as small as San Marino).
  - Banking sector expanded disproportionally, exceeding fiscal capacity to support the sector.
  - Weaknesses in prudential regulation and supervision, domestically and cross-border.
  - Liquid capital markets mispriced potential risks, prompting unprecedented borrowing and lending and fueling domestic real estate booms.
  - All experienced banking crises of systemic proportions, leading to significant downsizing of domestic banking sectors and massive deterioration of asset quality.
- Crucial difference for San Marino:
  - San Marino lacks the backup of a lender-of-last-resort facility.
- Summary of approaches (high level):
  - Iceland: “Domestic/foreign” bank approach, internal work-out; capital controls; creditors accepted debt-to-equity swaps; new banks held large NPLs (45 percent of total loans in late 2008).
  - Ireland: Asset Management Company (NAMA), internal work-out, outright sale of NPLs; Personal Insolvency Act enacted December 2012; NAMA transferred loans with an average discount of 57% (Loan balances transferred Total 74.0; Transfer value Total 31.8; Realized loss Total 42.2).
  - Cyprus: Internal work-out; bail-in of uninsured depositors; Laiki Bank split into good/bad banks; sector-wide arrears management framework and code of conduct.

### F. What San Marino Has Done So Far and Shortcomings
- Consolidation of the banking sector:
  - Between 2009 and 2015, number of credit institutions declined from 12 to 7.
  - Number of financial and fiduciary companies dropped from 48 to 8 over the same period.
  - One of the remaining credit institutions effectively operates as a “bad bank” for another credit institution.
  - Central Bank of San Marino (CBSM) played a key role by quickly and effectively intervening in small institutions in difficulty.
- Internal NPL management and closed funds:
  - Banks have managed NPLs internally; three closed funds have been established to deal with impaired assets of weak banks absorbed by other Sammarinese credit institutions.
  - 2013 law (DL, June 27, 2013, n.72) allowed the State to provide a tax credit (deferred tax asset—DTA) to compensate for the difference between assets and liabilities at transfer time.
    - Recipient bank can use the DTA over a period of eight years (up to 15 percent per annum in the first six years and 5 percent per year in the remaining period) against corporate income tax or other payments to the State.
    - Amount of DTA may vary over time to offset: (i) losses incurred following settlement of transferred assets; (ii) additional loan loss provisions that the recipient bank—in agreement with the supervisory authority—needs to make within 12 months from the transfer date; and (iii) changes in the market value of the fund’s share (i.e., its net asset value).
- Shortcomings:
  - Risk-weight arbitrage:
    - Transfer allows some arbitrage for calculation of risk-weighted assets of transferring banks: NPLs carry a risk-weight of 150 percent, while investment in closed funds is weighted at 100 percent, although transferring banks remain the sole owners and their risk profile has not changed.
    - Because the transfer does not imply full derecognition of bad assets, if accounts were fully consolidated, no capital release would ensue.
  - DTA inclusion in regulatory capital:
    - Inclusion of the DTA in regulatory capital overstates banks’ financial soundness.
    - Benefits associated with the DTA can be realized only when banks earn taxable income; when banks experience tax losses—like Sammarinese banks currently—the DTA loses value.
    - Since the DTA capital loses value precisely when the bank needs capital to offset losses, it represents a potentially fragile buffer.
    - Inclusion of DTA in regulatory capital has been revised in the Basel III/EU Capital Directive framework.
    - DTA reduces the amount of (potentially) income-earning assets thereby reducing future profitability.

### G. Joint AMC, Debt Collection, and Enforcement
- Joint AMC and NPL pooling:
  - The three largest banks are in the process of setting-up a joint AMC; however, difficulty in agreeing on common valuation criteria for transferred assets means the AMC is expected to comprise a separate fund for each of the banks.
  - A more effective pooling of the NPL portfolios would:
    - help achieving larger economies of scale,
    - consolidate debtor positions,
    - could attract potential foreign investors.
  - Any capital release for transferring banks should be avoided, since they retain full ownership of the funds.
- Debt collection and enforcement:
  - Judicial and enforcement processes are generally assessed as efficient and speedy; San Marino allows out-of-court mortgage and pledge enforcement.
  - Judicial enforcement options:
    - summary proceedings: short and streamlined, allow enforcement measures, generally take a few months to complete; initiation is subject to documentary requirements and higher costs due to notarization requirements, public registry taxes and other court fees;
    - ordinary proceedings: allow additional documentary flexibility but involve lengthy court proceedings and are rarely used.
  - Since 2012, the court system saw a sizeable increase in judicial enforcement cases:
    - average summary proceedings filed by banks increased from 45 cases annually in 2007–2011 to 240 cases annually in 2012–2015.
  - Cross-border debt recovery challenges:
    - large stock of NPLs with cross-border elements (predominantly collateral located in Italy) requires coordination of domestic and foreign legal actions, recognition and implementation of foreign court decisions;
    - such cases are associated with longer resolution time, higher costs, and lower recovery rates;
    - existing treaty between San Marino and Italy on judicial cooperation dates back to 1939 and does not reflect recent legal developments.
  - Real estate market constraints impede recovery through asset sales:
    - public auctions mechanism exists but weak market conditions make auctions poor instruments for value maximization;
    - banks have started leasing repossessed properties in expectation of a market rebound; real estate management and leasing has reportedly been profitable for some banks.
  - Regulation limits time banks can hold foreclosed real estate:
    - 36 months for occupied properties,
    - 24 months for unoccupied properties;
    - extensions subject to CBSM approval.
    - CBSM suspended those time limits until the end of 2016 to provide additional time to dispose foreclosed properties.
  - Recommendation: incentivize recovery of viable debtors via insolvency regime enhancements to speed resolution and preserve value via rehabilitation rather than liquidation.

### H. Insolvency Regime — Weaknesses and Reform Priorities
- Key characteristics and weaknesses:
  - insolvency statute dates back to 1917; lacks many features of modern systems;
  - law applies equally to companies and individuals and does not provide a fresh start for individuals or entrepreneurs (no debt relief without creditors' consent), meaning individuals could continue to carry pre-insolvency debt for an unlimited time.
  - regime functions largely as court-supervised asset liquidation; certain public creditors (e.g., tax authorities) retain super-priority status and are satisfied in full ahead of secured creditors.
- Limited tools for pre-insolvency settlements and reorganizations:
  - concordato (debtor-initiated restructuring) is allowed but very rare and often entails liquidation plans;
  - creditors cannot file or propose restructuring plans;
  - secured and privileged creditors are excluded from concordato approval voting (participation extinguishes priority rights), and plan approval requires full repayment of special priority and secured creditors;
  - secured creditors' claims are considered secured for the full amount outstanding (not limited to collateral value), preventing haircut/rescheduling of secured debt without consent.
- Usage statistics:
  - in 2006–2015 courts reported 13 requests for opening concordato proceedings with 9 restructuring agreements concluded (5 other cases proceeded into liquidation); only 3 of the 9 envisaged continuation of business activity.
  - since introduction of special moratorium law in 2006, only three cases of moratorium have been registered.
- Special moratorium regime (introduced 2006, amended 2015):
  - allows companies, upon court approval, up to two years' stay on creditors' actions under court-appointed trustee supervision; amendment in 2015 grants priority protection to new financing during the moratorium but not over privileged creditors (tax authorities, social security).
- Gaps addressed by banks:
  - July 2015 Code of Conduct signed by banks to promote voluntary workouts for debtors with financial debt exceeding €1 million, following INSOL/London Approach principles and allowing temporary stay on enforcement.
- Reform recommendations (selected, preserved exactly as phrased where numeric):
  - introduce legal tools allowing cram down of dissenting creditors to bind restructuring outcomes achieved in voluntary negotiations;
  - introduce pre-insolvency/pre-packed procedures and allow out-of-court negotiated agreements to be submitted for court approval;
  - allow creditors to file insolvency cases for restructuring and propose restructuring plans;
  - increase flexibility of concordato by considering:
    - expanding protection of new financing (pre- and post-filing) to ensure priority, including over public creditors;
    - providing for participation of all creditors, including secured and public creditors, in restructuring;
    - allowing creditor-proposed plans and flexible terms (pre-packed sales, debt-to-equity swaps);
    - ensuring secured creditor claims for voting purposes are limited to market value of collateral with remaining debt treated as unsecured;
    - introducing measures to preserve business value (treatment of contracts in pre-insolvency/insolvency; prioritization of key contractual relationships; protection from claw-back in pre-insolvency).
  - revisit traditional super-priority status for tax authorities: consider providing explicit legal basis for tax administration participation in restructuring and insolvency subject to clear guidance.
- International guidance cited:
  - UNCITRAL Legislative Guide recommends minimizing priorities, especially priorities over secured claims.
  - World Bank’s Principles state public interests generally should not be given precedence over private rights.
- Design considerations:
  - tailor reforms to microstate-specific needs, avoid overly complex/costly procedures that encourage protracted liquidations;
  - given SME-dominated corporate sector and concentration of NPLs among a few large debtors, introduction of pre-insolvency/pre-pack mechanisms appears particularly appropriate.

### I. Tax Disincentives Affecting NPL Resolution
- Tax deductibility of loan loss provisions:
  - subject to an annual cap of 5 percent of the total outstanding loan portfolio at the end of the fiscal year; the rule discourages provisioning and limits banks' ability to timely discount losses and clean balance sheets.
- Tax deductibility of loan loss write-offs:
  - subject to strict conditions requiring evidence of “certain and clear loss” (e.g., enforcement, insolvency procedures or legal opinion);
  - in cases of debtor insolvency, write-off losses can be deducted only over a limited period (before the end of the year subsequent to the year in which the insolvency was initiated);
  - losses on loans of €2,500 or less are deductible six months after reaching maturity.
  - recommendation: replace current legal requirements on write-offs with supervisory guidance on conditions and timing to facilitate and encourage expedient resolution.
- Tax authorities’ role in restructuring:
  - tax office can grant restructuring of tax claims limited to extension of maturities and does not allow tax debt forgiveness; rescheduling is subject to guarantees/collateral;
  - early application for tax debt restructuring allows preventing tax penalties;
  - recommendation: explore additional flexibility for tax authorities to participate in debt restructuring, including temporary measures to allow partial debt relief (at least penalties and interest) in insolvency and out-of-court arrangements.
- Transfer tax on NPLs:
  - transfer tax of 0.1 percent of the nominal debt amount applies on all transfers of NPLs, including transfers into AMCs in which the transferring bank holds participation;
  - this tax increases costs of NPL resolution via AMCs and third-party sales;
  - recommendation: consider removal of the transfer tax.

### J. Comprehensive Strategy and Policy Recommendations
- Overarching design:
  - International experience suggests that a comprehensive strategy is needed to deal effectively with the sheer amount of NPLs plaguing San Marino’s banking sector.
  - The strategy should involve close coordination and cooperation among supervisors (CBSM), the government, the private sector (both banks’ and enterprises’ representatives) and the judiciary, for instance through a working group.
  - The strategy should:
    - identify clear objectives;
    - be accurately communicated to the public; and
    - be transparently implemented.
- Balance Sheet Repair:
  - A forward-looking AQR for all banks is critical to reduce uncertainty on banks’ asset quality, including the adequacy of collateral evaluation and provisions.
  - The CBSM should require banks to quickly meet any need for additional provisions in order to bring the currently relatively low NPL coverage ratios to adequate levels.
  - Should capital shortfalls emerge, the CBSM should demand weak banks time-bound market-based recapitalization plans.
  - Public support for systemically important banks may be needed.
- NPL Management:
  - Creation of a joint AMC may benefit San Marino’s banks, preferably with participation of independent specialized investors.
    - Participating banks would acquire shares of the AMC based on the value of the transferred assets.
    - The transfer price should be set by an independent expert, based on the market value, and in accordance with a common methodology.
    - The supervisor should ensure that nonconsolidated accounting for banks’ NPLs transferred to the AMC could be allowed only under the condition that no individual bank retains de jure or de facto control of the AMC, with each participating bank holding an equitable share in the profits and losses of the AMC.
    - Where these requirements are not met the transferred assets should continue to be reflected on the bank’s balance sheet.
  - Securitization could be a helpful instrument to better segregate different risks exposures and target specialized investors where there is an intention to facilitate distressed assets sales.
- Legal framework priorities (selected):
  - allow pre-packed filing of the out-of-court restructuring agreements;
  - enhance the concordato mechanism by providing for greater flexibility of its terms, while ensuring equitable participation of all creditors in the concordato approval; and
  - ensure protection of new financing provided in the context of pre-insolvency and insolvency procedures by according it priority status in subsequent insolvency procedures, including over tax and other public debt.
  - Reconsider the super-priority ranking of tax authorities over secured creditors for the purposes of insolvency.
    - If priorities are deemed important from a policy perspective, priorities (e.g., ahead of unsecured creditors) should be limited to the tax claims within a specified period of time (e.g., last 12 or 24 months) while interest and penalties should be treated as unsecured (or subordinated) claims.
  - Evaluate the need for a special framework for consumer and entrepreneur insolvency to allow conditional debt relief (i.e., a fresh start) within a reasonable time period (e.g., three years).
- Taxation:
  - Reconsider tax disincentives to provisioning, write-offs and debt transfers:
    - the 5 percent cap on deductibility of loss provisioning;
    - the limited period for write-offs of tax deductibility in insolvency; and
    - the 0.1 percent tax on debt transfer.
  - Expand the scope for the tax authority’s participation in restructuring schemes by temporarily allowing them further flexibility in tax debt restructuring and write-offs, subject to predefined criteria.
- Institutional and Judicial Enforcement:
  - Further streamlining and electronic automatization of court submission filings should be considered, potentially through a centralized electronic system to save resources and facilitate processes.
  - Ensure that taxes and fees related to judicial enforcement do not excessively raise costs of enforcement.

### K. Code of Conduct and Selected Comparative Reforms (Boxes)
- Box 1 — Code of Conduct for Management of Debt Restructuring Negotiations (July 2015):
  - All seven Sammarinese banks subscribed to a voluntary Code of Conduct to facilitate debt restructuring of financially distressed borrowers with debt exceeding 1 million euro.
  - Two-step procedure:
    - First stage: preliminary assessment/negotiation with all financial creditors; provisions for full financial disclosure; suspension of prejudicial acts; meeting to appoint coordinator.
    - Second stage: qualified majority of creditors (representing at least 60 percent of debtor’s financial debt) may agree to proceed; restructuring agreement can be concluded if it receives support of creditors holding at least 60 percent of debtor’s financial debt.
  - Restructuring agreement concluded under the Code is binding only upon the creditors signing such agreement.
  - Guiding principles:
    - recognize the priority of creditors providing new financing as part of the restructuring plan;
    - dissenting creditors are expected to enter into bilateral temporary moratorium agreements with the debtor, taking into account the terms of the restructuring agreement.
- Box 2 — Recent Reforms in Selected European Countries (summary):
  - Italy: restructuring agreements need court approval and approval by creditors representing at least 60 percent of claims; rescue plans aim to restore financial health and protect rescue actions against claw-back; rules on post-petition financing and priority of new financing emphasized.
  - Germany (2012 amendments): protective shield proceedings for imminent insolvency, pre-packaged restructuring within three months under court monitoring, debtor-in-possession features with mediator (“Sachwalter”).
  - Slovenia (2013 amendments): increased control by financial creditors, ability to propose plans, write-down of collateral to market value with conversion of unsecured portions into unsecured claims, inclusion of secured creditors in compulsory settlement with pooling of collateral, and recognition that requisite majorities can reduce principal on unsecured debt.

*International Monetary Fund — Republic of San Marino staff report excerpts (sections and figures preserved as provided).*

### References ____________________________________________________________________________ 28

### _cr16112 - References ____________________________________________________________________________ 28

### A. Introduction
- Resolving the level of banks’ nonperforming loans (NPLs) is one of the hardest challenges San Marino is facing.
- As of September 2015:
  - NPLs amounted to 46 percent of Sammarinese banks’ total loans, including inter-bank loans.
  - Excluding interbank loans (only banks’ loans to customers), 52 percent of the total portfolio was impaired.
  - The stock of NPLs is equivalent to about 140 percent of GDP.
- High NPLs reduce banks’ profitability (lower remunerating assets; higher loan loss provisions and borrowing costs), weaken capital generation, and can increase risk aversion that reduces lending and economic activity.
- Paper structure:
  - Section B: overview of causes of impaired assets.
  - Section C: stylized facts on nature and composition of problem loans.
  - Section D: experience of Iceland, Ireland, and Cyprus.
  - Section E: recent Sammarinese measures.
  - Section F: legal and tax impediments.
  - Section G: conclusions and policy recommendations.

### B. What Caused San Marino’s Current Problems?
- Key drivers:
  - Long-standing tax haven and bank secrecy status, favorable taxation, light regulatory burden, and free movement of capital attracted substantial funds from nonresidents (mainly Italian residents).
  - System total assets were boosted to more than 600 percent of GDP by end-2008.
  - Some banks expanded into foreign markets (example: Cassa di Risparmio della Repubblica di San Marino—CRSM—established a subsidiary in Italy (Delta Financial Group) and bought Banka Kovanica in Croatia).
  - Carry-trade opportunities and weak supervisory oversight contributed to weakening lending standards and cross-border lending (mainly to Italy).
- International pressure and crisis effects:
  - 2008: critical AML/CFT assessment by MONEYVAL.
  - April 2009: OECD put San Marino on the “gray list” of tax haven countries.
  - September 2009: Italy launched a tax amnesty.
  - July 2010: inclusion extended impact with a “black list” effect.
  - Result: massive deposit outflows, relocation of Sammarinese companies to Italy, weak external demand, and a deep prolonged recession.
- Judicial and institutional shocks:
  - 2008–09: Italian judicial investigations led to arrest of top management of two Sammarinese banks (including CRSM) on various criminal charges; arrests were later revoked but investigations continued.
  - Bank of Italy revoked authorization for CRSM as shareholder of Delta and placed Delta under special administration in 2009.
  - Losses for CRSM were substantial; CSRM needed four recapitalizations equivalent to 16 percent of San Marino’s GDP to comply with minimum capital requirements.

### C. Where Does San Marino Stand?
- Comparative asset quality:
  - The burden of NPLs is second only to Cypriot banks among the countries compared.
  - Loan-loss-provision coverage is one of the lowest among European banks (data drawn from the EBA transparency exercise).
- Nonresident exposure:
  - More-than-half of NPLs is vis-à-vis nonresidents.
  - Impaired loans vis-à-vis nonresidents accounted for more than three-quarters of NPLs of the system as a whole, although total lending is more evenly distributed.
  - Excluding CSRM, the share of NPLs vis-à-vis nonresidents remains slightly above 50 percent.
- Collateral and coverage:
  - 36 percent of NPLs is secured.
  - Banks report that the total value of the collateral would cover about 40 percent of total secured loans.
  - This raises the total coverage ratio (provision plus value of the collateral) to 127 percent for secured loans.
  - Composition of collateral:
    - About half of the value of collateral is represented by guarantees.
    - 46 percent by real estate (24 percent of real estate collateral is located abroad).
    - Remaining collateral consists of cash deposits and other financial instruments.

*Source: IMF staff report excerpt (April 21, 2016) for the Republic of San Marino.*

### 10.      Impaired loans are also relatively concentrated. On average, a bank’s five largest

### _cr16112 - 10.      Impaired loans are also relatively concentrated. On average, a bank’s five largest

### Concentration of impaired loans
- On average, a bank’s five largest exposures represent about 70 percent of total NPLs.
- If CRSM is excluded, the share declines to about 41 percent of total problem loans.
- This implies that a targeted approach aimed at resolving those large exposures would already mitigate the problem substantially.
- The corresponding coverage of total NPLs would therefore be equal to 61 percent.

### San Marino: loan and NPL breakdown (end-2015) — key statistics preserved from figures
- Total Loans - Breakdown by Residence: 50.4% Resident; 49.6% Non-resident.
- Total Loans excl.CRSM - Breakdown by Residence: 68.61% Resident; 31.39% Non-resident.
- Total Loans to Residents - Breakdown by Sector (in percent of total): 2.5% Publ.sect.; 17.2% Fin.comp.; 18.4% Ind.sect.; 6.2% Constr.; 23.8% Services; 0.0% Other NFC; 30.0% Household; 1.9% Others.
- Total Loans to Residents excl. CRSM - Breakdown by Sector (in percent of total): 2.6% Publ.sect.; 20.1% Fin.comp.; 17.9% Ind.sect.; 5.9% Constr.; 23.9% Services; 0.0% Other NFC; 27.6% Household; 2.1% Others.
- Total Loans to Non-Residents - Breakdown by Sector (in percent of total): 0.0% Publ.sect.; 12.5% Fin.comp.; 19.8% Ind.sect.; 13.9% Constr.; 29.8% Services; 1.2% Other NFC; 22.8% Household; 0.1% Others.
- Total Loans to Non-Residents excl. CRSM - Breakdown by Sector (in percent of total): 0.5% Publ.sect.; 5.4% Fin.comp.; 9.6% Ind.sect.; 10.4% Constr.; 53.7% Services; 0.5% Other NFC; 19.9% Household; 0.1% Others.

- Total NPLs - Breakdown by Residence: 22.5% Resident; 77.5% Non-resident. (NPL=52.6%)
- Total NPLs excl. CRSM - Breakdown by Residence: 47.22% Resident; 52.78% Non-resident. (NPL=36.2%)
- Total NPLs to Residents - Breakdown by Sector (in percent of total): 0.0% Publ.sect.; 14.1% Fin.comp.; 18.6% Ind.sect.; 10.5% Constr.; 36.7% Services; 0.0% Other NFC; 18.5% Household; 1.5% Others.
- Total NPLs to Residents excl. CRSM - Breakdown by Sector (in percent of total): 0.0% Publ.sect.; 15.6% Fin.comp.; 17.7% Ind.sect.; 11.5% Constr.; 36.6% Services; 0.0% Other NFC; 16.9% Household; 1.7% Others.
- Total NPLs to Non-Residents - Breakdown by Sector (in percent of total): 0.0% Publ.sect.; 4.3% Fin.comp.; 5.7% Ind.sect.; 11.2% Constr.; 59.0% Services; 0.4% Other NFC; 19.4% Household; 0.0% Others.
- Total NPLs to Non-Residents excl. CRSM - Breakdown by Sector (in percent of total): 0.0% Publ.sect.; 12.7% Fin.comp.; 14.7% Ind.sect.; 17.8% Constr.; 28.8% Services; 1.2% Other NFC; 24.7% Household; 0.2% Others.

### Lessons from other small-country crisis cases (Iceland, Ireland, Cyprus)
- Common features across the cases:
  - Relatively small economies (though not as small as San Marino).
  - Banking sector expanded disproportionally, exceeding fiscal capacity to support the sector.
  - Weaknesses in prudential regulation and supervision, domestically and cross-border.
  - Liquid capital markets mispriced potential risks, prompting unprecedented borrowing and lending and fueling domestic real estate booms.
  - All experienced banking crises of systemic proportions, leading to significant downsizing of domestic banking sectors and massive deterioration of asset quality.

- Crucial difference for San Marino:
  - San Marino lacks the backup of a lender-of-last-resort facility.

- Summary of approaches applied by crisis countries (from Table 1):
  - Iceland: Flexible exchange rate; crisis trigger—Freeze of wholesale capital markets; Main portfolio affected—Commercial real estate/property developers, mortgages, small-medium enterprises (*domestic portfolio only); Main approach applied—“Domestic/foreign” bank approach, internal work-out.
  - Ireland: Euro; crisis trigger—Burst of the real estate bubble; Main portfolio affected—Commercial real estate/property developers, mortgages, small-medium enterprises; Main approach applied—Asset Management Company, internal work-out, outright sale of NPLs.
  - Cyprus: Euro; crisis trigger—Burst of the real estate bubble and losses on Greek sovereign bond holdings; Main portfolio affected—Retail, small-medium enterprise, corporates, commercial real estate/property developers; Main approach applied—Internal work-out.

### Country case highlights and mechanisms
- Iceland
  - Split failed banks along domestic/foreign lines; carved out deposits and domestic assets to new state-owned banks while old banks were placed into winding-up.
  - Capital controls imposed.
  - New banks held a large amount of NPL (45 percent of total loans in late 2008).
  - Creditors of old banks agreed to debt-to-equity swaps, effectively bailing them in.
  - Banks retained and managed problem loans; high capitalization and conservative asset valuation supported comprehensive debt-relief program for firms and households.
  - Recovery supported by sound policies, favorable external developments, capital controls, and deleveraging.

- Ireland
  - Created National Asset Management Company (NAMA) to transfer property-related loans in excess of €20 millions at a discount in exchange for NAMA bonds.
  - Measures included blanket guarantee, capital injections, mergers, nationalizations, stress tests, supervisory targets for loan resolution, and personal insolvency regime reform (Personal Insolvency Act enacted in December 2012).
  - NAMA objectives:
    - Free banks from managing and recovering problem loans.
    - Replace problem loans with sound, marketable assets to mobilize liquidity.
    - Unlock value via specialized staff and economies of scale.
  - NAMA challenges:
    - Establishing correct transfer price to avoid unwarranted windfalls; NAMA used real (or “long-term”) economic value (REV).
    - Upfront crystallization of losses for banks when impaired assets not adequately provisioned.
    - Need for special resolution mechanisms to deal with institutions unable to meet regulatory requirements after transfers.
    - Governance arrangements must ensure independence, clear mandate, transparency, and market-discipline preservation.
    - Success depends on development of a market for distressed assets.
  - NAMA loan acquisition summary (figures):
    - Loan balances transferred: Allied Irish Banks 20.4; Anglo Irish Bank 34.1; Bank of Ireland 9.9; Educational Building Society 0.9; Irish Nationwide Building Society 8.7; Total 74.0.
    - Transfer value: 9.0; 13.4; 5.6; 0.4; 3.4; Total 31.8.
    - Discount: 56%; 61%; 43%; 57%; 61%; average 57%.
    - Realized loss: 11.4; 20.7; 4.3; 0.5; 5.3; Total 42.2.

- Cyprus
  - First European country to bail in uninsured depositors to restore solvency.
  - Laiki Bank split into good/bad bank; uninsured deposits and other assets to be wound down; Bank of Cyprus recapitalized via equity conversion of uninsured deposits.
  - Strategy has continued to rely on banks’ internal workout; policies guided by sector-wide arrears management framework and code of conduct.

### Cross-country policy lessons on NPL resolution
- Reducing NPLs is complex and lengthy: cross-country evidence shows that, after reaching their peak, it takes between three to five years—and in some cases even longer—for NPLs to return to a downward path.
- Managing NPLs requires a thorough restructuring of the banking sector; unless adequately provisioned, resolution of NPLs translates into bank losses and capital shortfalls.
  - Important that supervisors have instruments to deal with weak banks and that authorities devise a clear plan to restore solvency.
- Adequate legal framework is crucial:
  - Well-functioning judicial system, insolvency regime, and debt enforcement procedures are essential.
  - In a context of debt overhang, an efficient debt-restructuring framework, encompassing potential debt relief, would allow viable borrowers to resume investment and consumption, supporting economic recovery.

### What San Marino has done so far
- Consolidation of the banking sector:
  - Between 2009 and 2015, number of credit institutions declined from 12 to 7.
  - Number of financial and fiduciary companies dropped from 48 to 8 over the same period.
  - One of the remaining credit institutions effectively operates as a “bad bank” for another credit institution.
  - Central Bank of San Marino (CBSM) played a key role by quickly and effectively intervening in small institutions in difficulty.

- Internal NPL management and closed funds:
  - Banks have managed NPLs internally; three closed funds have been established to deal with impaired assets of weak banks absorbed by other Sammarinese credit institutions.
  - 2013 law (DL, June 27, 2013, n.72) allowed the State to provide a tax credit (deferred tax asset—DTA) to compensate for the difference between assets and liabilities at transfer time.
    - Recipient bank can use the DTA over a period of eight years (up to 15 percent per annum in the first six years and 5 percent per year in the remaining period) against corporate income tax or other payments to the State.
    - Amount of DTA may vary over time to offset: (i) losses incurred following settlement of transferred assets; (ii) additional loan loss provisions that the recipient bank—in agreement with the supervisory authority—needs to make within 12 months from the transfer date; and (iii) changes in the market value of the fund’s share (i.e., its net asset value).

### Shortcomings of San Marino’s current approach
- Risk-weight arbitrage:
  - Transfer allows some arbitrage for calculation of risk-weighted assets of transferring banks.
  - NPLs carry a risk-weight of 150 percent, while investment in closed funds is weighted at 100 percent, although transferring banks remain the sole owners and their risk profile has not changed.
  - Because the transfer does not imply full derecognition of bad assets, if accounts were fully consolidated, no capital release would ensue.

- DTA inclusion in regulatory capital:
  - Inclusion of the DTA in regulatory capital overstates banks’ financial soundness.
  - Benefits associated with the DTA can be realized only when banks earn taxable income; when banks experience tax losses—like Sammarinese banks currently—the DTA loses value.
  - Since the DTA capital loses value precisely when the bank needs capital to offset losses, it represents a potentially fragile buffer.
  - Inclusion of DTA in regulatory capital has been revised in the Basel III/EU Capital Directive framework.
  - DTA reduces the amount of (potentially) income-earning assets thereby reducing future profitability.

*Source: IMF staff compilation from the provided chapter content.*

### 22.      The three largest banks are in the process of setting-up a joint AMC.  However, given

### _cr16112 - 22.      The three largest banks are in the process of setting-up a joint AMC.  However, given

### Joint AMC and NPL pooling
- The three largest banks are in the process of setting-up a joint AMC; however, difficulty in agreeing on common valuation criteria for transferred assets means the AMC is expected to comprise a separate fund for each of the banks.
- A more effective pooling of the NPL portfolios would:
  - help achieving larger economies of scale,
  - consolidate debtor positions,
  - could attract potential foreign investors.
- Any capital release for transferring banks should be avoided, since they retain full ownership of the funds.

### Debt Collection and Enforcement
- Judicial and enforcement processes are generally assessed as efficient and speedy; San Marino allows out-of-court mortgage and pledge enforcement.
- Judicial enforcement options:
  - summary proceedings: short and streamlined, allow enforcement measures, generally take a few months to complete; initiation is subject to documentary requirements and higher costs due to notarization requirements, public registry taxes and other court fees;
  - ordinary proceedings: allow additional documentary flexibility but involve lengthy court proceedings and are rarely used.
- Since 2012, the court system saw a sizeable increase in judicial enforcement cases:
  - average summary proceedings filed by banks increased from 45 cases annually in 2007–2011 to 240 cases annually in 2012–2015.
- Private stakeholders report an excessively bureaucratic and paper-based nature of court and administrative filings; measures to streamline processes (e.g., replacing paper submission with electronic ones) could be warranted.
- Cross-border debt recovery challenges:
  - large stock of NPLs with cross-border elements (predominantly collateral located in Italy) requires coordination of domestic and foreign legal actions, recognition and implementation of foreign court decisions;
  - such cases are associated with longer resolution time, higher costs, and lower recovery rates;
  - existing treaty between San Marino and Italy on judicial cooperation dates back to 1939 and does not reflect recent legal developments.
- Real estate market constraints impede recovery through asset sales:
  - a public auctions mechanism applies to out-of-court foreclosure and judicial sales and is controlled by creditors; auction rules allow flexibility on timing and pricing but weak market conditions make auctions poor instruments for value maximization;
  - lack of buyers and banks' unwillingness to sell at large discounts significantly slow resolution.
- Banks have started leasing repossessed properties in expectation of a market rebound; real estate management and leasing has reportedly been profitable for some banks.
- Regulation limits time banks can hold foreclosed real estate:
  - 36 months for occupied properties,
  - 24 months for unoccupied properties;
  - extensions subject to CBSM approval.
- CBSM suspended those time limits until the end of 2016 to provide additional time to dispose foreclosed properties.
- Incentivizing recovery of viable debtors via insolvency regime enhancements could speed resolution and preserve value via rehabilitation rather than liquidation.

### Insolvency Regime: weaknesses and reform priorities
- Key characteristics of the current regime:
  - insolvency statute dates back to 1917; lacks many features of modern systems;
  - law applies equally to companies and individuals and does not provide a fresh start for individuals or entrepreneurs (no debt relief without creditors' consent), meaning individuals could continue to carry pre-insolvency debt for an unlimited time.
- The regime functions largely as court-supervised asset liquidation:
  - liquidation deadlines in statute are relatively short but duration can be extended due to disputes resolved through ordinary court procedures;
  - certain public creditors (e.g., tax authorities) retain super-priority status and are satisfied in full ahead of secured creditors.
- Limited tools for pre-insolvency settlements and insolvency-protected reorganizations:
  - concordato (debtor-initiated restructuring) is allowed but very rare and often entails liquidation plans;
  - creditors cannot file or propose restructuring plans;
  - secured and privileged creditors are excluded from concordato approval voting (participation extinguishes priority rights), and plan approval requires full repayment of special priority and secured creditors;
  - secured creditors' claims are considered secured for the full amount outstanding (not limited to collateral value), preventing haircut/rescheduling of secured debt without consent.
- Usage statistics of concordato and moratorium:
  - in 2006–2015 courts reported 13 requests for opening concordato proceedings with 9 restructuring agreements concluded (5 other cases proceeded into liquidation); only 3 of the 9 envisaged continuation of business activity.
  - since introduction of special moratorium law in 2006, only three cases of moratorium have been registered.
- The special moratorium regime (introduced 2006, amended 2015) allows companies, upon court approval, up to two years' stay on creditors' actions under court-appointed trustee supervision; amendment in 2015 grants priority protection to new financing during the moratorium but not over privileged creditors (tax authorities, social security).
- Gaps addressed by banks:
  - July 2015 Code of Conduct signed by banks to promote voluntary workouts for debtors with financial debt exceeding €1 million, following INSOL/London Approach principles and allowing temporary stay on enforcement.
- Reform recommendations to enhance restructuring effectiveness:
  - introduce legal tools allowing cram down of dissenting creditors to bind restructuring outcomes achieved in voluntary negotiations;
  - introduce pre-insolvency/pre-packed procedures and allow out-of-court negotiated agreements to be submitted for court approval;
  - allow creditors to file insolvency cases for restructuring and propose restructuring plans;
  - increase flexibility of concordato by considering:
    - expanding protection of new financing (pre- and post-filing) to ensure priority, including over public creditors;
    - providing for participation of all creditors, including secured and public creditors, in restructuring;
    - allowing creditor-proposed plans and flexible terms (pre-packed sales, debt-to-equity swaps);
    - ensuring secured creditor claims for voting purposes are limited to market value of collateral with remaining debt treated as unsecured;
    - introducing measures to preserve business value (treatment of contracts in pre-insolvency/insolvency; prioritization of key contractual relationships; protection from claw-back in pre-insolvency).
  - revisit traditional super-priority status for tax authorities: consider providing explicit legal basis for tax administration participation in restructuring and insolvency subject to clear guidance.
- International guidance:
  - UNCITRAL Legislative Guide recommends minimizing priorities, especially priorities over secured claims.
  - World Bank’s Principles state public interests generally should not be given precedence over private rights.
- Design considerations for San Marino reforms:
  - tailor reforms to microstate-specific needs, avoid overly complex/costly procedures that encourage protracted liquidations;
  - given SME-dominated corporate sector and concentration of NPLs among a few large debtors, introduction of pre-insolvency/pre-pack mechanisms appears particularly appropriate.

### Tax Disincentives affecting NPL resolution
- Tax deductibility of loan loss provisions:
  - subject to an annual cap of 5 percent of the total outstanding loan portfolio at the end of the fiscal year; the rule discourages provisioning and limits banks' ability to timely discount losses and clean balance sheets.
- Tax deductibility of loan loss write-offs:
  - subject to strict conditions requiring evidence of “certain and clear loss” (e.g., enforcement, insolvency procedures or legal opinion);
  - in cases of debtor insolvency, write-off losses can be deducted only over a limited period (before the end of the year subsequent to the year in which the insolvency was initiated);
  - losses on loans of €2,500 or less are deductible six months after reaching maturity.
  - recommendation: replace current legal requirements on write-offs with supervisory guidance on conditions and timing to facilitate and encourage expedient resolution.
- Tax authorities’ role in restructuring:
  - tax office can grant restructuring of tax claims limited to extension of maturities and does not allow tax debt forgiveness; rescheduling is subject to guarantees/collateral;
  - early application for tax debt restructuring allows preventing tax penalties;
  - recommendation: explore additional flexibility for tax authorities to participate in debt restructuring, including temporary measures to allow partial debt relief (at least penalties and interest) in insolvency and out-of-court arrangements.
- Transfer tax on NPLs:
  - transfer tax of 0.1 percent of the nominal debt amount applies on all transfers of NPLs, including transfers into AMCs in which the transferring bank holds participation;
  - this tax increases costs of NPL resolution via AMCs and third-party sales;
  - recommendation: consider removal of the transfer tax.

*Source: IMF staff report content as provided in the supplied excerpt.*

### 41.      International experience suggests that a comprehensive strategy is needed to deal

### _cr16112 - 41.      International experience suggests that a comprehensive strategy is needed to deal

### Comprehensive strategy
- International experience suggests that a comprehensive strategy is needed to deal effectively with the sheer amount of NPLs plaguing San Marino’s banking sector.
- The strategy should involve close coordination and cooperation among supervisors (CBSM), the government, the private sector (both banks’ and enterprises’ representatives) and the judiciary, for instance through a working group.
- The strategy should:
  - identify clear objectives;
  - be accurately communicated to the public; and
  - be transparently implemented.

### Balance Sheet Repair
- A forward-looking AQR for all banks is critical to reduce uncertainty on banks’ asset quality, including the adequacy of collateral evaluation and provisions.
- The CBSM should require banks to quickly meet any need for additional provisions in order to bring the currently relatively low NPL coverage ratios to adequate levels.
- Should capital shortfalls emerge, the CBSM should demand weak banks time-bound market-based recapitalization plans.
- Public support for systemically important banks may be needed.

### NPL Management
- Creation of a joint AMC may benefit San Marino’s banks, preferably with participation of independent specialized investors.
  - Participating banks would acquire shares of the AMC based on the value of the transferred assets.
  - The transfer price should be set by an independent expert, based on the market value, and in accordance with a common methodology.
  - The supervisor should ensure that nonconsolidated accounting for banks’ NPLs transferred to the AMC could be allowed only under the condition that no individual bank retains de jure or de facto control of the AMC, with each participating bank holding an equitable share in the profits and losses of the AMC.
  - Where these requirements are not met the transferred assets should continue to be reflected on the bank’s balance sheet.
- Securitization could be a helpful instrument to better segregate different risks exposures and target specialized investors where there is an intention to facilitate distressed assets sales.

### Legal Framework
- Key reform priorities to modernize and enhance the insolvency system to provide a wider range of features for rehabilitation:
  - allow pre-packed filing of the out-of-court restructuring agreements;
  - enhance the concordato mechanism by providing for greater flexibility of its terms, while ensuring equitable participation of all creditors in the concordato approval; and
  - ensure protection of new financing provided in the context of pre-insolvency and insolvency procedures by according it priority status in subsequent insolvency procedures, including over tax and other public debt.
- Reconsider the super-priority ranking of tax authorities over secured creditors for the purposes of insolvency.
  - If priorities are deemed important from a policy perspective, priorities (e.g., ahead of unsecured creditors) should be limited to the tax claims within a specified period of time (e.g., last 12 or 24 months) while interest and penalties should be treated as unsecured (or subordinated) claims.
- Evaluate the need for a special framework for consumer and entrepreneur insolvency to allow conditional debt relief (i.e., a fresh start) within a reasonable time period (e.g., three years).

### Taxation
- Reconsider tax disincentives to provisioning, write-offs and debt transfers:
  - the 5 percent cap on deductibility of loss provisioning;
  - the limited period for write-offs of tax deductibility in insolvency; and
  - the 0.1 percent tax on debt transfer.
- Expand the scope for the tax authority’s participation in restructuring schemes by temporarily allowing them further flexibility in tax debt restructuring and write-offs, subject to predefined criteria.

### Institutional and Judicial Enforcement
- Further streamlining and electronic automatization of court submission filings should be considered, potentially through a centralized electronic system to save resources and facilitate processes.
- Ensure that taxes and fees related to judicial enforcement do not excessively raise costs of enforcement.

### Box 1. Code of Conduct for Management of Debt Restructuring Negotiations
- In July 2015, all seven Sammarinese banks subscribed to a voluntary Code of Conduct to facilitate debt restructuring of financially distressed borrowers. Banks committed to follow a common set of rules in negotiating debt restructuring of either companies or individuals whose debt exceeds 1 million euro.
- The Code provides for a two-step procedure to debt restructuring negotiations that may be initiated by the qualifying debtor or one of the creditor banks:
  - First stage: preliminary assessment/negotiation procedure in which all financial creditors participate; nonfinancial creditors participation is allowed subject to the consent of the debtor and the majority of participating financial creditors.
    - This stage provides for: (i) full financial disclosure of the financial and business situation of the debtor and his relationship with each of the creditors; (ii) suspension of any act on behalf of the debtor or creditors that may prejudice other creditors, including debt enforcement/insolvency actions; and (iii) a meeting of all financial creditors allowing appointment of a coordinator for the negotiations.
    - During this stage, creditors assess the general state of debtor’s distress and decide whether restructuring is warranted.
  - Second stage: based on assessment, the qualified majority of creditors (representing at least 60 percent of debtor’s financial debt) may agree to proceed with the debt restructuring. During this stage, the debtor and his creditors prepare a restructuring plan intended to bring the business back to viability.
    - The restructuring agreement can be concluded if it receives the support of the creditors holding at least 60 percent of debtor’s financial debt.
- The restructuring agreement concluded under the Code is binding only upon the creditors signing such agreement. Two guiding principles for participating financial creditors:
  - recognize the priority of those creditors providing new financing as part of the restructuring plan;
  - dissenting creditors are expected to enter into bilateral temporary moratorium agreements with the debtor, taking into account the terms of the restructuring agreement to allow viability of such agreement.

### Box 2. Recent Reforms to Corporate Restructuring Techniques in Selected European Countries (summary)
- Italy (reforms between 2009 and 2015, another major reform under consideration):
  - Restructuring agreements need court approval and approval by creditors representing at least 60 percent of claims; an expert opines on feasibility; approving creditors are bound while dissenting creditors need full payment.
  - Rescue plans aim to restore financial health and protect rescue actions against claw-back in subsequent insolvency.
  - Restructuring agreements with financial institutions: if a company has more than 50% of outstanding debts with financial institutions and 75 percent of financial creditors agree, remaining financial creditors are bound; non-financial creditors need to be paid in full.
  - Emphasis on rules for post-petition or bridge financing, priority of new financing and protection against claw-back actions.
- Germany (2012 amendments):
  - Protective shield proceedings available to debtors in imminent insolvency (not actual illiquidity), allowing debtor-in-possession status.
  - Debtor prepares a pre-packaged restructuring plan within a maximum of three months under court monitoring and with assistance of a mediator (“Sachwalter”) and a creditors’ committee.
  - Judge may permit debtor to create administrative claims (e.g., borrow new funds) for subsequent formal insolvency; feasible prepackaged plans may be confirmed in subsequent insolvency proceedings with voting, cram-down, and minority protection.
- Slovenia (2013 amendments):
  - Changes to reorganization procedures (compulsory settlement) include:
    - increased control of proceedings by financial creditors, ability to initiate proceedings, introduce a plan that takes precedence over debtor’s plan, and take management control in certain cases;
    - an absolute priority rule eliminating debtor equity if equity value is zero;
    - corporate restructuring features including debt/equity swaps and corporate spin-offs;
    - inclusion of secured creditors in the compulsory settlement process with ability to pool collateral under a settlement plan;
    - write-down of collateral to market value with conversion of unsecured portions into unsecured claims permitted;
    - recognition that requisite majorities of creditors can agree to reduce principal on unsecured debt, and to extend maturity and/or reduce interest rate for both secured and unsecured debt.

*International Monetary Fund — Republic of San Marino staff report excerpts (sections 41–Box 2).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16112.pdf_