Financial Regulator Can Force Troubled Banks to Change Owners

Kazakhstan’s financial regulator has approved new rules for dealing with troubled banks. It will be able to force a change of ownership, write off some liabilities and transfer customer accounts to another bank. Deposits held by individuals will not be subject to restructuring, Orda.kz reports.

The Agency for Regulation and Development of the Financial Market must first declare a bank insolvent or at risk of insolvency and determine that it can be rescued without liquidation.

Shareholders will absorb losses first: the bank’s capital will be reduced by the amount of its actual and expected losses. If that is insufficient, investors holding the bank’s riskiest securities, including subordinated bonds, will be next.

The regulator may write off these liabilities in full or in part, change their terms or interest rates, or convert the bank’s debt into shares. It will not need the consent of investors or creditors. Other creditors will be affected only if these measures are insufficient.

Deposits held by individuals cannot be converted into shares or used to cover the bank’s losses. Protection provided by the Kazakhstan Deposit Insurance Fund will also remain in place.

If the bank can still be rescued, the authorities will look for a new owner. The temporary administration will value the bank, accept applications and sign the sale agreement on behalf of its shareholders. They will not be able to block the transaction. Foreign investors will also be allowed to buy troubled banks.

Under another option, customer accounts, loans and assets needed to keep the bank operating may be transferred to a more stable bank. Depositors and borrowers will not need to give their consent, but the terms of their contracts will remain unchanged. Customers will not have to reopen their accounts: the new bank will assign new account details and notify them.

If a buyer cannot be found immediately, the regulator may establish a temporary stabilization bank. Deposits and operating assets will be transferred there so that customers can continue using their accounts, making transfers and receiving banking services. The temporary bank, or the portfolio transferred to it, will then be sold to an investor.

Under any of these scenarios, the regulator must ensure that depositors and creditors do not lose more than they would under ordinary liquidation. Specialists will value the bank’s assets and compare the expected payments under rescue and liquidation.

Original author: Alexander Zhdanov

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