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Resolution framework for distressed banks

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The word “curatorship” and its close cousin “curator” evoke painful memories for a vast swath of the Zimbabwean banking public.

During the turbulence of the 2003/2004 banking crisis they featured so prominently in the public consciousness that they became part of an enduring negative stimuli often associated with that banking era.

In Zimbabwe, a curatorship has never been truly embraced as the solution that it is meant to be, primarily because it is designed for an inherently unpopular purpose. Curatorship has become symbolic with financial loss in all its conceivable forms – temporary loss, permanent loss, loss of value, loss of time and loss of momentum.

Ominously, with the exception of Royal Bank Zimbabwe Limited and Trust Bank Corporation, most financial institutions previously placed under the management of a curator are currently not in operation — at least not in their original form.

Understandably, when curatorship rears its “ugly” head once more in the relatively calmer waters of 2011 — as it recently did at ReNaissance Merchant Bank Limited — it is a time to be afraid for those that still bear the scars of the past.

Enough ink has been spilt in recent weeks and adequate acres of space devoted to the subject of why and how ReNaissance ended up under the management of a curator, so we are not going to go there.

We will instead concern ourselves with seeking a better understanding of what curatorship is really all about. But first things first, what does a curator do?

This is in essence, a manager or overseer who is granted the powers to administer the affairs of an individual who — at law — is no longer capable of doing so himself. The curator takes control of the institution and is expected at all times to act in the best interests of all key stakeholders — the institution itself, depositors, and creditors.

Generally, the appointment of a curator will result in the suspension of the powers of every director, officer and shareholder of the institution under scrutiny, except to the extent that the curator may permit them to exercise such powers at his discretion.

The Reserve Bank will usually direct that the institution be temporarily closed for a specified period of time in order to prevent the uncontrolled withdrawal of funds, usually referred to as a “run on deposits”, in order to preserve the institution’s financial resources.

Before a bank is placed under curatorship, the Reserve Bank will usually have served it with a corrective order, which is basically a plan requiring the institution to correct deficiencies identified during a scheduled/routine or ad hoc inspection.
A corrective order will usually specify the actions required to be taken, the persons responsible for taking those actions and the timelines in which they must be taken.

A bank that fails to adhere to the provisions of a corrective order is either placed under the management of a curator or placed under liquidation if the extent of ill-health is clearly terminal.

The essence of a curatorship is to protect the interests of depositors and creditors in order to avert “collateral damage”. During the period of curatorship, the curator is expected to determine the full extent of the problems besetting the institution.

A curatorship can also serve the purpose of protecting the stability of the broader financial system, in addition to its primary purpose of preserving the assets of the troubled financial institution.

More often than not, other market players would be exposed to the affected institution and an unplanned resolution of such an institution pauses serious systemic risk to the generality of the banking sector.

Once a financial institution has been placed under curatorship, it becomes immune to legal proceedings unless the High Court authorises the execution of writs, warrants and summons against it.

After the expiry of the period of curatorship, the curator presents his/her findings and recommends the best way of resolving the institution’s situation.
If the institution is found to be insolvent or no longer viable on a sustainable basis, the Reserve Bank will cancel its licence and apply to the High Court for the institution to be placed under liquidation.

Liquidation is the process under which a company is brought to an end, enabling its assets and property to be sold in order to pay creditors and/or depositors after which any residual value is distributed amongst shareholders according to their ranking. Liquidation is also sometimes referred to as winding-up or dissolution.

l Please weigh in with your insights on omen.muza@gmail.com.
Omen N Muza is a banker and managing Director of TFC Capital (Zimbabwe) (Pvt) Ltd. He writes in his personal capacity.

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