Winding-up of banks as the ultimate way to meet/settle creditors’ claims

M.N.Tatibekova,

the Chief Specialist of the Unit for Arrangement of Liquidation Processes of

the Department of the Liquidation Control of

the Committee on Regulation and Supervision of Financial Market and Financial Organizations of the National Bank of Kazakhstan

“Being satisfied means to agree”, Theodor Adorno.

RK Banking legislation provides a number of tools enabling to work with failing banks, which include the following:

-  acquisition of shares in a failing bank by the state represented by the Government of the Republic of Kazakhstan;

-  compulsory acquisition of shares;

-  restructuring of failing bank assets;

-  conducting operations through simultaneous transfer of assets and liabilities of a failing bank to another bank;

-  winding-up of a bank.

In order to liquidate the effects of the global financial crisis of 2008-2009, the above tools, except the last, have been adopted for the fist time by the State in relation to large commercial banks.

The ultimate tool that has been used since the formation of the national banking system is the winding-up of a bank.

In handling winding-up of a bank, it is necessary to ensure that:

-  the bank’s current business is completed;

-  all debts before creditors and shareholders are settled.

In accordance with the Banking Law, banks may be liquidated through voluntary or compulsory winding-up.

Voluntary winding-up should be made at the decision of a Bank’s shareholders. When the General Meeting of Shareholders makes its decision about their Bank’s voluntary winding-up, the Bank should take measures to payout or transfer retail depositors’ accounts to another bank, which is a member of a system of deposits compulsory insurance. Also, prerequisite authorization for voluntary winding-up is availability of sufficient funds enabling a bank to meet all its obligations.

Compulsory winding-up of a bank is carried out at the court’s decision in cases of:

a) bankruptcy of a bank;

b) withdrawal of a bank’s licenses to conduct banking transactions on the grounds provided by banking legislation of the Republic of Kazakhstan;

c) lodging applications/claims by state authorized bodies, legal entities or individuals to cease the activities of a bank on other grounds stipulated by legislative acts.

As noted above, the said tool was used extensively in the Republic of Kazakhstan since the formation of the national banking system. For example, in 1998-2000, the National Bank of Kazakhstan carried out a series of reforms aimed at radically improving the system of banking supervision and ensuring the compliance of tier two banks with international standards for effective banking supervision.

Since the formation of the banking system and up to the present (1 April 2013), it was eliminated 114 tier two banks through voluntary or compulsory winding-up.

Herewith, the National Bank of Kazakhstan applied mainly the tool of bank’s compulsory winding-up. I would like to go into detail on the bank’s compulsory winding-up after withdrawal of licenses to conduct banking transactions on the grounds provided for by RK banking laws in cases when the rights and interests of creditors, particularly retail depositors, were affected and violated. Meanwhile, prerequisite for granting permission by the authorized body for the bank’s voluntary winding-up is satisfaction of claims of creditors of a bank in voluntarily liquidation.

After cancellation of the bank’s license and coming into the force of the court decision on the bank’s liquidation the Committee on Regulation and Supervision of Financial Market and Financial Organizations of the National Bank of Kazakhstan appoints a Liquidation Committee, which is a body performing immediate winding-up of a bank and reaching the main objectives of the bank winding-up: completion of the current business of the bank and settlement of the debts before creditors and shareholders.

The whole process of winding-up of a bank is under the close supervision of the authorized body i.e. the Committee on Regulation and Supervision of Financial Market and Financial Organizations of the National Bank of Kazakhstan.

Also, the control is performed through approval of the interim balance sheet at winding-up and the register of a bank’s creditors.

Satisfaction/settlement of creditor’ claims should be carried out through the following mechanisms:

a)  creditors submit their claims to the bank in liquidation;

b)  in case when the last recognizes creditors’ legal claims, they are included in the Bank’s Creditors Register which is subject to approval of the authorized body;

c)  further the bank payout its debts to creditors according to the principles of priority and proportionality. Herewith, repayment is carried out within the winding-up the estate, which is a set of assets (money, own property, accounts receivable, etc.).

In order to fully satisfy the creditors’ claims and thus replenish the liquidation estate required to make payments to creditors of a bank in liquidation, the Bank’s Liquidation Committee carries out activities to collect receivables from debtors of the bank in liquidation, and to sale the bank’s own and pledged property.

The work of the Liquidation Committee on main directions of its activities (collection of receivables from debtors of a bank in liquidation, sale of a bank’s own and pledged property) is frequently complicated by a number of significant problems that have arisen during the period of activities of a bank, namely, a) absence of a proper accounting in a bank; b) withdrawal of bank’s assets through affiliated companies; c) lack of a significant amount of credit histories or warranty deeds for a bank’s own and pledged property; d) lack of proper registration with authorized bodies of warranty deeds to the property of a bank, of mortgage agreements; e) a significant amount of a bank’s debtors in all regions of the Republic.

Full repayment of the claims of all creditors of a bank is the ideal ratio of bank assets to its liabilities. After satisfaction of all claims lodged by a bank’s creditors and shareholders, the report on the bank’s winding-up and balance sheet at liquidation should be submitted for approval by the court that made its decision to liquidate the bank. The institutions of justice shall register the bank as being liquidated and withdraw it from the National Registry of Business-Identification Numbers.

The Civil Law states that all obligations shall be deemed as fulfilled in full upon winding-up of a legal entity/bank.

Thus, the winding-up of banks is the final way to meet/settle claims of creditors of the bank in liquidation.

In the study of international experience one can draw attention to the following. After the global financial crisis the largest U.S. investment banks were on the verge of bankruptcy (Merrill Lynch, Bear Stearns, Goldman Sachs and Morgan Stanley), and one of the oldest U.S. banks Lehman Brothers ceased to exist.

In 2009 UK Banking Act introduced a) a number of provisions for creating a special regime in dealing with the banks that are in a difficult financial situation; b) the possibility of stabilizing the banks before the official insolvency procedures. Among other ways, such stabilization may be reached through:

-  transfer of all or part of a bank’s business to a private buyer/bank;

-  transfer of a bank into temporary public ownership.

Besides, there were introduced bank insolvency procedures which had not been introduced before in the UK.

Thus, the bank insolvency procedures are intended to ensure rapid payments to depositors of a bank or to transfer their accounts to other banks, thereby achieving the best results for meeting the claims of all creditors of the bank.

One of the countries, belonging to the European Union and most affected by the global financial crisis, is Spain. In view of this, the Government of Spain has entered amendments into its legislation extending the supervisory functions of the Central Bank of the country: in particular, the regulator will be able to start earlier in the study of potential “problem” banks and, if necessary, to revoke their licenses. These measures were dictated by the European Union.

On 15 November 2012, it was also adopted a bill to regulate the processes of temporary administration, restructuring and recovery of credit institutions. The bill establishes the legal status of the Fund for Orderly Bank Restructuring (FROB), the ultimate purpose of which is to ensure the stability of the financial system as a whole.

Under the new bill, any actions of the Bank of Spain must be approved by the FROB, which will receive quarterly reports from the Central Bank.

FROB will also be empowered to liquidate any banks that are not able to return (within the specified period) to the state money allocated for its recovery. Furthermore, FROB is entitled to determine the value of a bank, to transfer such bank’s assets or liabilities to the bridge bank, which can then be sold. FROB will be under the direct control of the Ministry of Economy of Spain.

Spanish banks, in particular this applies to systemically important banks such as Santander, BBVA, Popular, La Caixa and Bankia, were required to improve their solvency position by 8-9% before 31 December 2012.

In conclusion I would like to note that satisfaction of creditors’ claims runs through the entire system of protection of the rights of creditors of banks in liquidation (financial services consumers). And existing in the world practice mechanisms in stabilization/liquidation of problem banks, such as in the UK and Spain enable better coordinate a work with problem banks. Spain’s experience suggests that the existence of FROB that is directly involved in stabilization and winding-up of banks will protect fully the problem bank’s creditors and apply the so-called principle of “one umbrella” under which protection will be problem bank’s creditors, starting from the beginning of its problems and until its complete liquidation.