PIDM's Resolution Approach

“Divide each difficulty into as many parts as is feasible and necessary to resolve it.” ~ Rene Descartes
 

What is resolution in the context of a member institution?

  • Resolution is a way to manage the failure of a bank or an insurance company in an orderly manner that minimises costs to the financial system. 
  • PIDM may undertake a gone concern as well as going concern resolution.
  • In general, going concern resolution is an option for the resolution authority to deal with a failure if a liquidation (or gone concern resolution) will bring harm to public interests and cause financial system instability.
  • As a resolution authority, PIDM has at its disposal a wide range of legislative powers (loss mitigation & failure resolution powers) to resolve member institutions in order to minimise impact on depositors, policy owners, financial markets, other financial institutions and ultimately, to preserve public confidence and ensure financial system stability.
 
 
PIDM’s loss mitigation powers:
When a member institution is showing signs of distress, the loss mitigation powers allow PIDM to undertake early intervention actions on the member institution with the objective of reducing or averting a risk to the financial system or a threatened loss to PIDM.
 
PIDM’s failure resolution powers:
Once BNM issues the non-viability notice, PIDM may exercise its wide range of resolution powers to resolve the failed member institution in a prompt and orderly manner and in a manner that minimises costs to the financial system. These include powers to appoint an administrator or appointed person to assume control of and to manage or restructure the failed member institution; powers to transfer assets and liabilities to an existing entity, bridge bank or asset management company; powers to temporarily stay early termination rights or proceedings; powers to close and liquidate the failed bank with timely reimbursement of insured deposits to the depositors, and so on.
 

What we do if a member institution fails?

  • In general, a failed member institution can be resolved either via a going concern resolution or a gone concern resolution.

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What is going concern resolution?

  • The going-concern approach ensures that a member institution can remain open and continue to provide vital banking services (e.g. critical functions) to the depositors and the economy, despite being in resolution. This way, disruptions and impact to the people, financial system and economy are minimised.
  • The resolution tools under the going-concern approach include the following:
  1. Transfer to a private sector purchaser: This is the preferred option as it allows customers and depositors to have continued access to financial services, and the responsibility for continuing the business remains in the private sector. The transfer may take the form of a transfer of all or part of the business of the failing member institution or its equity holdings. PIDM may facilitate the transfer through the provision of financial support, which could be in the form of loans/financing or guarantees.
  2. Transfer assets and liabilities to a bridge institution: When there is no viable private buyer, the bridge institution tool is used to transfer all or part of the business of a failing member institution into the bridge institution. This is so that the failing member institution’s business can be stabilised, restructured and continue to operate on a temporary basis, while alternative and exit strategies, e.g. sale to a private sector purchaser, are being worked out to maximise franchise value. A bridge institution is a subsidiary of PIDM and is deemed licensed to carry on business as a licensed bank or a licensed Islamic bank.
  3. Transfer to an asset management company ("AMC"): A transfer of identified assets to an asset management company from a failing member institution aims to maximise the value of the assets through an eventual sale or orderly wind-down. The asset management company could either be a subsidiary of PIDM or a private sector entity. This tool is commonly used in conjunction with another going-concern tool.
  4. Recapitalisation and restructuring: PIDM may apply to the High Court to cancel the share capital of the failing member institution that is lost or unrepresented by available assets. This may then be followed by a recapitalisation of the failing member institution by PIDM and the necessary restructuring of the business of the member institution in order to make it more marketable for an eventual sale.

What is gone concern resolution, then?

  • Gone concern resolution contemplates undergoing a winding up or a liquidation process. Under the gone-concern approach, the primary aims are to ensure a prompt and orderly dissolution of the member institution and protection of insured deposits.
 

Winding-up of the member institution and Deposit reimbursement: PIDM may apply to the High Court to wind up and liquidate a failing member institution. Insured deposits will be reimbursed by PIDM and to facilitate a prompt and secure reimbursement, PIDM has in place DuitNow (referencing depositors’ proxy of national identification number and business registration number) as a preferred payment channel. This is in addition to inter-bank transfer and cheque payment. The member institution’s business and assets will be liquidated by the liquidator. Proceeds from the liquidation of the assets are then paid to creditors in accordance to the creditor hierarchy in liquidation. [click here for Deposit Insurance System]
 


What are our resolution objectives?

  • In selecting these options, PIDM is guided by the following resolution objectives:
  1. Promote or contribute to the stability of the Malaysian financial system, including continuing the performance of critical functions
  2. Maintain public and market confidence
  3. Minimise cost and disruption to the financial system
  4. Protect against loss of deposits, insurance and takaful benefits covered by PIDM
  5. Minimise loss to public funds
 
Schematic view of PIDM’s resolution approach:
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So when does PIDM step in to resolve a troubled member institution?

  • In the event the member institution’s own recovery efforts and options are no longer feasible in restoring its long-term viability, the focus would then switch to achieving a prompt and orderly resolution of the failing member institution.
  • Upon notification by BNM that a bank or an insurance company has ceased to be viable or is likely to cease to be viable (“non-viability notice”), PIDM’s resolution powers are activated.