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Legal Document

Title: Prudential Regulation No. CBL/SD/02/2005 On Supervision of Distressed Banks
Type: Regulation
Issuing Agency: Central Bank of Liberia
Responsible Agency: Central Bank of Liberia
Issuing Date: 15-02-2005

 

1.0 INTRODUCTION

Pursuant to the authority vested in it by Section 55 of the Central Bank of Liberia

Act of 1999 (CBL Act), and Sections 25, 32, 39, 40 and 47-55 of the New

Financial Institutions Act (New FIA) of 1999, the CBL hereby prescribes, makes,

regulates and sets forth as follows:

2.0 DEFINITIONS

(a) Distressed Bank – Financial Institution - Is a bank-financial institution that

shows one or more weaknesses, including undercapitalization, illiquidity,

poor management practices and/or unsafe banking practices.

(b) Adequate Capitalization and/or Capital Adequacy - A bank-financial

institution is said to have adequate capitalization when it has a Capital

Adequacy Ratio (CAR) of 8% and maintains a net worth of US$2M or its

equivalence in Liberian Dollars.

(c) Undercapitalization – A bank-financial institution is said to be

undercapitalized if it has a capital adequacy ratio (CAR) that is less than

8% and/or has a net worth of less than US$2M or its equivalence in

Liberian Dollars.

(d) Significantly Undercapitalized - This is a worsened state of

undercapitalization at/in which a bank-financial institution’s capital is so

impaired that it has a capital adequacy ratio (CAR) equal to or greater than

2% but less than 7% and/or has a net worth of less than US$ 1M or its

equivalence in Liberian Dollars.

(e) Critically Undercapitalized -This is a worsened state of undercapitalization

at which a bank financial institution’s capital is so impaired that it has

capital adequacy ratio (CAR) of less than 2% and/or maintain a net worth

of less than U$0.5M or its equivalence in Liberian Dollars.

(f) Inadequately liquid - A bank-financial institution is said to be inadequately

liquid if it has a liquidity ratio below the statutory minimum of 15%.

(g) Significantly illiquid - This is a condition when a bank-financial institution

records a liquidity ratio less than 10% but greater than 5%; when it suffers

clearing operations losses for five (5) consecutive days; and/or has an

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unsecured overdrawn account with the CBL for three (3) consecutive

days.

(h) Critically illiquid - This is a condition when a bank-financial institution

records a liquidity ratio of less than 5%; when it has an unsecured

overdrawn account with the CBL for five (5) or more business days and/or

is unable to meet maturing obligations.

(i) Non-compliant - A bank financial institution is said to be non-compliant if

(1) it is illiquid or undercapitalized, or (2) it neglects, refuses or fails to

comply with provisions of the New FIA, CBL Regulations and Directives,

and/or an agreement signed with the CBL.

(j) Unsafe and Unsound Banking Practices - Unsafe and unsound banking

practices, as defined herein, refer to any banking activities or banking

practices not consistent with the New FIA, or regulations and directives

issued by the CBL or in accordance with generally acceptable banking

practices. It specifically includes a bank that CBL determines, at its sole

discretion, to be in willful or negligent disregard of supervisory instruction

and/or banking regulation.

3.0 SUPERVISION OF NON-COMPLIANT BANK

3.1 All operating banks determined to be undercapitalized, illiquid or engaged in

unsafe and unsound banking practices shall be subject to concrete and targeted

progressive enforcement actions, including direct supervisory intervention, that

are reasonably time-bound and measurable, as specifically provided herein below.

3.2 All operating and non-operating banks that are determined after final viability

assessments to lack the resources or other requirements of CBL will be subject to

prompt final resolution, as specifically provided herein below at Section 5.0 of

this Regulation.

4.0 RESTRUCTURING AND RESOLUTION OF NON-COMPLIANT BANKS

4.1 Effective upon the adoption of this policy, the CBL, through the Bank

Supervision Department (BSD), will promptly apply specialized enforcement

actions to any bank found to be critically undercapitalized, critically illiquid or in

willful or negligent disregard for supervisory authority.

4.2 The first step in specialized enforcement shall be for BSD to develop detailed

Supervisory Strategy for each bank, outlining its viability and, if it is viable, its

Alternatives for recapitalization or achieving regulatory compliance.

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4.3 Based on the detailed Supervisory Strategies to be developed for each operating

bank in accordance with Section 4.2 above, CBL will take one of the following

actions:

4.3.1 Banks determined not to be viable will be subject to seizure followed by

compulsory reorganization through Provisional Administration and/or

Liquidation. These steps will be implemented within a maximum period

of sixty (60) days of such determination and concluded within twenty-four

(24) months thereafter.

4.3.2 Banks determined to be viable will be granted a formal Regulatory

Forbearance by the CBL following the adoption of a written undertaking

(execution of a written MOU with the CBL) signed by every member of

the Bank’s Board of Directors and executed within thirty (30) days of such

determination. Provisions of the written Agreement (MOU) will be

established at the sole discretion of the CBL and will specify both timebound

corrective measures and risk management controls that are further

defined in this Regulation.

4.3.3 If a Bank otherwise eligible for Formal Regulatory Forbearance

fails/neglects to agree or execute within seven days a written undertaking

or MOU as described in Section 4.3.2, or having executed such written

undertaking fails to implement or achieve the corrective measures and risk

management control within the time specified, it shall be immediately

subject to final resolution through seizure, Provisional Administration

and/or Liquidation. These steps would be implemented within sixty (60)

days of such determination and concluded within twenty-four (24) months

thereafter.

4.4 The corrective actions that the CBL determines to be necessary to bring the bank

into capital, liquidity and/or other prudential or regulatory compliance will be

comprised as follows:

4.4.1 Mandatory elements comprised of Direct Supervisory Intervention as

further described in Section 4.4.3 of this Regulation; adoption and

implementation of a Corrective Action Plan; suspension of branch

applications; suspension of dividend payments; suspension of any new or

renewed credit contract, or investment transaction with insiders; and

freezing of all insider depository accounts.

4.4.2 Optional elements may include but not be limited to: suspension/removal

of management officials and board members; limitations on deposit

growth and lending; restriction on investment activity; and either

restriction of withdrawal right of off shore banks accounts or transfer of

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off-shore correspondent account balances to an account held in favor of

the Bank at the CBL.

4.4.3 Direct Supervisory Intervention (DSI) shall consist of an enforcement

activity through which the CBL rescinds some or all of the delegated

authority it has provided through a banking license to shareholders,

directors, and management and simultaneously vests same instead in a

CBL representative whose responsibility it will be to provide direct

supervision through the bank’s Board and Management in order to bring

the Bank within regulatory compliance.

4.4.4 Every bank that is granted a formal Regulatory Forbearance shall

simultaneously be extended a maximum period of nine months within

which to achieve all of the corrective actions required by the CBL,

including recapitalization and/or reorganization.

4.5 Consistent with the New FIA, a bank that is seized pursuant to this Regulation

shall generally be placed under a Provisional Administration. The principal focus

of Provisional Administration, as contemplated herein, will consist of three

actions.

4.5.1 The first will be to complete the corrective actions identified by BSD as

conditions for Regulatory Forbearance, and agreed to be implemented by

the bank in a signed written MOU to restore the safety and soundness of

the bank.

4.5.2 The second will be to recapitalize the bank through reorganization,

solicitation of investors interest, and similar efforts, in which role the

Provisional Administrator will function independently, preserving the

supervisory oversight role of the CBL.

4.5.3 The third focus will follow if the first two efforts fail, and shall consist of

preparing the bank for final liquidation. In all of its activities, the

Provisional Administration shall prioritize cost containment, collection of

problem assets, regulatory compliance and protection of depositors’

interests.

4.6 Any non-operating bank with inadequate capital or inadequate financial,

managerial, and governance resources will be placed in liquidation in accordance

with the liquidation procedures contained in the New FIA. The CBL will file

each petition for liquidation within thirty (30) days of completion of a final

viability assessment.

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4.7 Non-operating banks with potentially adequate financial, managerial, and

governance resources shall be considered for re-licensing as de novo banking

institutions. In addition to rigorous due diligence of governance capacity, CBL

will require any potentially eligible non-operating bank to discharge all

obligations to existing depositors before re-licensing will occur. Shareholders

will also be required to deposit in an account at CBL funds for recapitalizing.

CBL will grant a recapitalization period of up to one hundred eighty (180) days

following the completion of the final viability assessment referred to in 3.0 and

4.0 above.

5.0 PENALTY FOR VIOLATION

A licensed bank found in violation of these regulations shall be liable to pay a fine

of not less than Two Hundred thousand Liberian Dollars (L$200,000) for each

infraction and/or be subject to immediate supervisory sanctions.

Issued this 15th day of February, A.D. 2005 in the City of Monrovia, Republic of

Liberia.

BY ORDER OF THE PRESIDENT

MINISTER OF FOREIGN AFFAIRS

MINISTRY OF FOREIGN AFFARIS

MONROVIA, LIBERIA

FEBRUARY 2005

Member Area

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