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Institute for the Protection of Banking
Savings Mexico
Use of outsourcing in situations where internal
resources are insufficient
September 2008
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Introduction

• General Guidance for the Resolution of Bank
  failures, addresses operational and
  administrative issues among its four key guidance
  points. The use of outsourcing by the deposit
  insurance system in situations where internal
  resources are insufficient should be considered
• Deposit insurers should have the authority to
  contract outsourcing services for specialized
  consultation, valuation or appraisals (or CPA
  firms with capability to assist) in carrying out
  the independent valuation and sales of assets and
  liabilities of the failing/failed bank or payment
  processes. The process of selecting outsourcing
  vendors should be transparent and well managed.

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Introduction

• When facing banking failures and/or financial
  crisis, Deposit Insurers have to confront
  situations where, in a short period time, its
  activities and personnel requirements will
  significantly increase
• Analyze the failing or failed bank financial,
  administrative and legal situation, as well as if
  the institution poses systemic risk.
• Determine with the financial authorities the most
  appropriate / less cost resolution process.
• Assume the institution resolution process and
  contain the bank assets deterioration.
• For IPAB, contracting specialized services from
  third parties has made a difference.

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Confronting a crisis

• As a result of the 1995 Mexican economic crisis
  and its effects
• 25 banks and 5 brokerage houses participated in a
  resolution process (financial assistance,
  intervention, provisional administration or
  liquidation with, in some cases, payment of
  guaranteed obligations).
• IPAB, which began operating in May 1999,
  participated directly in determining the
  resolution process for 10 banks.
• The initial inventory of assets assumed by the
  IPAB totals MXN 357,133 million (approx. USD
  34.57 billion1/).
• 53 of the assets received were loan portfolios,
  8 real estate and moveable assets and 39
  corporate assets, that, in general, were
  deteriorating within the institution and/or held
  administrative or legal problems.

1/ To May 30, 2008.
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Confronting a crisis

• From 1999 to 2007, 443,318 loans and rights have
  been sold in packages or assigned to an asset
  manager for subsequent loan sale and/or
  collection (51 auction processes were executed).
• As of January 2008, 23,376 real estate assets
  have been sold (through 608 sales processes, in
  package or individually) as well as 637,932
  moveable assets of a varied nature (through 64
  auction processes).
• 12 other package sales involving 10,382 real
  estate, moveable and rights assets were carried
  out.
• 260 corporate credits and 91 corporate stocks
  have been recovered through specific processes,
  depending on their characteristics, situation,
  value and country-strategic importance.
• Most recently, IPABs stake in Aeromexico, one of
  the largest Mexican Airlines, was sold.

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Bank resolutions

• Currently, the Mexican banking system is solid,
  competitive and sound, with high capitalization
  levels. Financial authorities have been working
  to enhance mechanisms to handle financially
  troubled banks.
• 3 successive stages are considered in function of
  the banks level of regulatory capital
  deterioration.

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Use of outsourcing

• If the banking institutions fail to address their
  solvency and liquidity problems, they would fall
  into a Resolution Process.
• IPAB should evaluate undertaking a technical
  study to decide on a resolution method for the
  bank.
• The technical study may be carried out by
• IPAB (with its own personnel) or
• through specialized third parties, with proven
  experience
• (in which case, IPAB has a reserve in its
  expenditure budget).

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Use of outsourcing

• In the case of the liquidation of a bank, IPAB
  can implement the payment of guaranteed
  obligations, which consider principal and
  accessories up to an amount equivalent to 400,000
  UDIs (price-adjusted units of account) per
  natural or legal person and per bank.
• In order to handle the process of paying
  guaranteed obligations, which has to be concluded
  within 90 days after assuming the role of
  liquidator, IPAB may require support from a
  banks structure.
• For medium sized (100,000 to 1.5 million
  guaranteed accounts) to large banks (1.5 to 12.6
  million guaranteed accounts), IPAB does not have
  the resources to honor such a payment.
• Outsourcing the services of a financial
  institution --including a bank in liquidation--
  by using its branches and employees, will allow
  IPAB to speed up the payment process to insured
  depositors.

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Use of outsourcing

• Deposit Insurers, such as IPAB, are not obligated
  to have the required employees and infrastructure
  to undertake directly asset recovery in medium or
  large institutions.
• However, counting with the right number of
  experienced employees who hold links with the
  financial, accounting and legal network has
  proven to enhance efficiency.
• According to it's law, IPAB may opt to entrust
  the administration, recovery and sell of assets
  to the supported / intervened institution or to
  specialized third parties.
• For the sale processes coordinated by IPAB or for
  specific asset recoveries, there might be need to
  hire the services of legal and accounting
  advisors, valuation or appraisal firms, companies
  which specialize in preparing and marketing loan
  portfolios, as well as investment banks.

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Use of outsourcing

• At any time, IPAB must aim at obtaining the
  highest possible asset-recovery value in the
  shortest possible timeframe, taking into account
  prevailing economic and financial conditions.
• Independent asset valuations and legal opinions
  are important elements for determining a course
  of action and giving transparency to any process.
  
• Institutions and/or the third parties shall be
  supervised. In order to fulfill transparency
  issues, IPAB generally hires external accounting
  and/or auditing firms to review the management
  and the compliance of the asset managers.

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Use of outsourcing

• In any banking resolution process, legal support
  is crucial to take decisions, to analyze legal
  frameworks and existing contracts with third
  parties, to face possible contingencies and to
  solve specific legal issues that impede the
  conclusion of the process.
• The Deposit Insurer might have its own legal
  department for the day- to-day operation and
  internal needs.
• IPAB hires specialized firms with the expertise
  and means to deal with legal actions taken
  against IPAB or its employees, as well as to
  face third parties or creditors.
• Receiving the legal opinion from a third party
  regarding the situation of any given asset (i.e.
  corporate, fiscal, labor) provides clarity and/or
  support for its resolution, as well as
  transparency to the decisions taken by Deposit
  Insurers.

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Concluding remarks

• Bank resolutions are complex processes, each one
  with its own characteristics and particularities.
  
• Maintaining a heavy structure of specialized
  personnel can be inefficient and expensive.
  However, employees that have taken part in
  resolutions processes are important resources to
  the Deposit Insurer.
• Deposit insurers should keep contact and
  relationship with third parties that understand
  and know the financial system.
• Outsourcing should be considered as a
  complementary tool for Deposit Insurers wishing
  to have access to the know-how and experience of
  independent third-parties in order to face any
  situation regarding banking or asset resolution
  processes.

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Institute for the Protection of Banking
Savings Mexico
Use of outsourcing in situations where internal
resources are insufficient
September 2008