Deposit Insurance Corporation of Japan
Legal Framework under Limited Coverage
‐Focusing on Players Involved in Failure Resolution‐
Masashi Konno
Deputy Executive Director, Legal Affairs Department
Deposit Insurance Corporation of Japan (DICJ)
Disclaimer
Deposit Insurance Corporation of Japan
•
The views expressed in this presentation do not necessarily reflect those of the DICJ. •
This English presentation is based on the relevant laws and regulations written officially in Japanese. The same terms may be translated into English differently in other publications. •
This presentation focuses on resolution of insured financial institutions; the Orderly Resolution mechanisms for SIFIs are outside the scope of this presentation. 2
Contents
Deposit Insurance Corporation of Japan
1. Overview of Limited Coverage
2. Financial Administrator
3. Bridge Bank
4. Choice of Insolvency Proceedings
5. Pre‐Business Transfer
6. Payment for Deposits
7. Business Transfer
3
Deposit Insurance Corporation of Japan
1. Overview of Limited Coverage 4
Financial Assistance or Insurance Payout
Deposit Insurance Corporation of Japan
Financial Assistance Method
(P&A)
Insurance Payout Method
99 DICJ
pays up to the
Coverage limit: JPY10 million
coverage limit of
9 Claims related to insured JPY10,000,000
9
assistance to assuming banks ‹ deposits shall be transferred to USD125,000
9
the DICJ as the result of Claims
related to insured
deposits
shall be
insurance payout (DI Act §58)
transferred to DICJ as the
‹ The DICJ then joins insolvency result of insurance payout
proceedings as a creditor
(DI Act
§58)
‹
DICJ then joins the bankruptcy
proceedings as a creditor
The DICJ provides financial that take over insured deposits. 9
Five transactions are available (§59(2)) : a) Merger
b) Business transfer
c) Transfer of the insured deposits
d) Acquisition of shares
e) Company split
5
Financial Assistance or Insurance Payout
Deposit Insurance Corporation of Japan
¾ Financial assistance method applies prior to insurance payout method 9 To resolve failed banks in a less costly way
9 To maintain the financial functions of a failed bank preventing any disorder that may accompany the failure 6
Deposit Insurance Corporation of Japan
2. Financial Administrator
7
Financial Administrator
Deposit Insurance Corporation of Japan
¾ Appointed by the FSA (§74(1))
¾ Responsibilities and operations:
9
9
9
9
9
Taking over management of a failed bank soon after the issuance of the “order for management” to prepare for the resumption of operations. Managing and disposing of assets. Working to continue the business of a failed bank. Seeking prompt transfer of the business to an assuming financial institution
Filing civil suits and/or criminal accusations. 8
Players Involved in Failure Resolution
Deposit Insurance Corporation of Japan
FSA
Management Order
by the Commissioner
Appointment of the
Financial Administrator
Financial
Administrator
Failed Bank
DICJ
9
Deposit Insurance Corporation of Japan
3. Bridge Bank
10
Bridge Bank
Deposit Insurance Corporation of Japan
¾ A subsidiary of the DICJ
¾ Primary purpose: 9
9
To succeed to the business of a failed financial institution To provisionally maintain and continue that succeeded business
¾ Bridge Bank as a sponsorship function: 9
Basic agreement regarding business transfer with a failed financial institution immediately after its failure
11
Players Involved in Failure Resolution
Deposit Insurance Corporation of Japan
FSA
Management Order
by the Commissioner
Appointment of the
Financial Administrator
Financial
Administrator
DICJ
Failed Bank
Basic
Agreement
Bridge Bank
12
Deposit Insurance Corporation of Japan
4. Choice of Insolvency Proceedings
13
Choice of Insolvency Proceedings
Deposit Insurance Corporation of Japan
¾ Insolvency proceedings under court supervision are used for the resolution of failed banks under the limited coverage scheme. 9 To prevent an outflow of assets
9 To maintain the equality among depositors and general creditors
14
Choice of Insolvency Proceedings
Deposit Insurance Corporation of Japan
2010.9
Incubator Bank (IBJ)
Corporate Reorganization Proceedings
under the Corporate Reorganization Act
Restructuring-type
Insolvency Proceedings
Civil Rehabilitation Proceedings
Financial Assistance Method
under the Civil Rehabilitation Act
Bankruptcy Proceedings
under the Bankruptcy Act
Liquidation-type
Insolvency Proceedings
Special Liquidation
Insurance Payout Method
under the Companies Act
15
Players Involved in Failure Resolution
Deposit Insurance Corporation of Japan
Court
Applying
Civil Rehabilitation
Proceedings
Petition for the
Commencement of
Civil Rehabilitation
Proceedings
FSA
Management Order
by the Commissioner
Appointment of the
Financial Administrator
Financial
Administrator
DICJ
Failed Bank
Basic
Agreement
Bridge Bank
16
Deposit Insurance Corporation of Japan
5. Pre‐Business Transfer
17
Pre‐Business Transfer
Deposit Insurance Corporation of Japan
¾ Resumption of business
9
The DICJ will resume the reimbursement of insured deposits, payment and settlement services and lending operations from the following Monday in order to prevent confusion at bank counters.
¾ Funding for repaying insured deposits 9
The DICJ may make a decision to lend funds to the limit of the total amount of insured deposits (§127).
¾ Asset valuation 9
9
To evaluate the value as of the time of commencement of rehabilitation proceedings (§124 of the Civil Rehabilitation Act).
To divide the property into sound and bad assets. 18
Players Involved in Failure Resolution
Deposit Insurance Corporation of Japan
Applying
Civil Rehabilitation
Proceedings
Court
Management Order
by the Commissioner
Petition for the
Commencement of
Civil Rehabilitation
Proceedings
Depositors
Borrowers
General Creditors
Continuous
Transactions;
Deposits, Loans, etc.
FSA
Appointment of the
Financial Administrator
Financial
Administrator
DICJ
Failed Bank
Asset
Evaluation
Funding
for Repaying
Insured Deposits
Basic
Agreement
Sound Assets
Bad Assets
Bridge Bank
19
Deposit Insurance Corporation of Japan
6. Payment for Deposits
20
Insured Deposits
Deposit Insurance Corporation of Japan
9
Under civil rehabilitation proceedings, payment of rehabilitation claims is not allowed unless it is provided for in a rehabilitation plan. ™ §85(1) of the Civil Rehabilitation Act
9
Special Act: The Act on Special Treatment of Corporate Reorganization Proceedings and Other Insolvency Proceedings of Financial Institutions
The court may allow a failed bank to reimburse deposit claims up to the insured amount (§473). The DICJ may make a decision to lend funds to the limit of the total amount of insured deposits (§127).
→The DICJ then joins insolvency proceedings as a creditor. Insured deposits which are not reimbursed will be transferred to assuming banks (or a bridge bank if there are no assuming banks) by business transfer. General Rule
Insured
Deposit
Claims?
9
9
9
21
Uninsured Deposits
Deposit Insurance Corporation of Japan
General Rule
The Estimated Proceeds Payment (§70(1))
9
Reimbursed according to the state of the assets of a failed bank as part of rehabilitation proceedings. 9
The DICJ purchases uninsured deposits by paying an amount in light of the estimated amount of the reimbursement. For securing liquidity for depositors at an early date before the reimbursement by a failed bank. 9
Reimbursement to the DICJ
Settlement Payment (§70(2))
9
When the amount the DICJ receives as reimbursement exceeds the total of the estimated proceeds payments, the DICJ pays the surplus to the depositors. 22
IBJ Case
Deposit Insurance Corporation of Japan
The Estimated Proceeds Payment 25%
First Reimbursement to the DICJ
39%
First Settlement Payment
39%‐25%=14%
Second Reimbursement to the DICJ
19%
Second Settlement Payment
19%
From December, 2010, to March, 2011
9About 90% of uninsured depositors applied for this treatment. 93,100 depositors / JPY2.4billion April, 2012
9
First payment upon the rehabilitation plan. Until June 2012
9
The DICJ paid the surplus. September, 2014
9
Second payment upon the rehabilitation plan. Until January 2015
9
The DICJ paid the surplus. 23
IBJ Case
Deposit Insurance Corporation of Japan
Types of Claims
Insured
JPY10mil
When Paid?
Transferr
ed to BB?
Estimated Proceeds Payment?
Any Time
Y
N/A
How Much Were They Repaid?
JPY10mil
Deposit
JPY20mil
JPY15.8mil
Uninsured
JPY10mil
General Claim
JPY20mil
Y
Through Rehabilitation
Plan
JPY5.8mil
N
N
JPY11.6mil
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Deposit Insurance Corporation of Japan
7. Business Transfer
25
Basic Rule
Deposit Insurance Corporation of Japan
9
Sound Assets
Bad Assets
Bridge Bank
The RCC (entrusted by the DICJ)
Business Transfer with Purchase from a Failed Bank Insured Deposits
with the DICJ’s Loan
The financial administrator should get confirmation from the Commissioner of the FSA that the selected assets are appropriate to be held by a bridge bank (§93(1)).
9
The Resolution and Collection Corporation
9 100% subsidiary of the DICJ
*The disposal of assets through a bidding process is also to be considered. 26
The FSA’s Involvement
Deposit Insurance Corporation of Japan
¾ Confirmation of succeeded assets
9
The financial administrator should get confirmation from the Commissioner of the FSA that the selected assets are appropriate to be held by a bridge bank (§93(1)).
¾ Approval for conflict of interest transactions 9
The financial administrator should obtain approval from the Commissioner of the FSA when carrying out, for himself/herself or for a third party, any transaction with a failed financial institution (§84).
¾ Authorization for business transfer 9
No transfer or acquisition of the whole or part of business activities to which a Bank is a party shall be effective without the authorization of the Commissioner of the FSA (§30(3) of the Banking Act).
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Conflict of Interest Transaction
Deposit Insurance Corporation of Japan
DICJ
Financial
Administrator
Conflict of Interest
FSA
DICJ
Subsidiary
Approval
Failed Bank
DICJ
Financial
Administrator
Business Transfer
Conflict of Interest
FSA
Bridge Bank
DICJ
Subsidiary
Approval
Failed Bank
Asset Transfer
RCC
28
The Court’s Involvement
Deposit Insurance Corporation of Japan
¾ Permission for business transfer
9
The court may grant permission only when it finds it necessary for the rehabilitation of the rehabilitation debtor's business (§42(1) of the Civil Rehabilitation Act).
¾ Permission in lieu of approval based on a resolution at a shareholder’s meeting
9
9
Approval by the resolution of a shareholder’s meeting is necessary under the Companies Act (§467(1)).
If the rehabilitation debtor is insolvent, the court may grant permission in lieu of approval based on a resolution at a shareholder’s meeting (§43(1) of the Civil Rehabilitation Act).
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Re‐Succession
Deposit Insurance Corporation of Japan
¾ The DICJ shall conclude the management of a Bridge Bank within two years from the failure (maximum of three years) (§96(1)).
¾ Options for re‐succession (§101(2)) : a) Merger
b) Business transfer
c) Acquisition of shares
d) Company split ¾ The DICJ may provide financial assistance to re‐
assuming entities (§101(1)).
30
Players Involved in Failure Resolution
Deposit Insurance Corporation of Japan
Applying
Civil Rehabilitation
Proceedings
Court
Management Order
by the Commissioner
Petition for the
Commencement of
Civil Rehabilitation
Proceedings
Depositors
Borrowers
General Creditors
RCC
Continuous
Transactions;
Deposits, Loans, etc.
Asset
Transfer
Appointment of the
Financial Administrator
Financial
Administrator
Bad Assets
DICJ
Failed Bank
Asset
Evaluation
Sound Assets
FSA
Funding
for Repaying
Insured Deposits
Basic
Agreement
Financial
Assistance
Temporary
Business
Transfer
Financial
Assistance
Re-Succession
Bridge Bank
Re-Assuming
Entities
31
Deposit Insurance Corporation of Japan
Thank you very much for your kind attention!
masashi‐[email protected]
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