The troubled Federal Bank of the Middle East (FBME) lost its license to operate a branch in Cyprus in 2015, followed by the suspension of the license of the main office in Tanzania in April 2017. The bank can now be liquidated, or a bail in for FBME Bank Cyprus and Tanzania can start after the courts approve the liquidation request. Good news for the customers in Cyprus and Tanzania who are waiting for substantial improvements and finally recover their blocked funds.
The courts now have to decide upon the jurisdiction and location of the accounts. It is obvious that local market accounts in Tanzania (accounts starting with the number 02) are in Tanzania Shilling (TZS) and therefore must be liquidated in Tanzania. Holders of these accounts are advised to contact the Deposit Insurance Board (DIB) in Tanzania for further guidance.
It is no easy task for the judges to issue a clear verdict. Although Tanzania accounts (accounts starting with the number 08) are registered under the umbrella of the main banking license in Tanzania, these accounts and the complete business unit managing these accounts were in Cyprus. Arguments from the Central Bank of Cyprus and FBME Bank are completely contradictory which makes predicting the reasoning of the court difficult.
Very remarkable is that the Central Bank of Tanzania (BoT) and the DIB are represented by the same lawyers as the owners of the bank; a conflict of interest where the court first should advise upon. Under European Law, discrimination and conflicts of interest should be avoided. If the Central Bank does not indicate the appointment of the lawyers and reveals this as a problem, the court probably does not rule on this conflict of interest. Among other things, this appeal must be structured properly and the lack of solid preparation, strong evidence, and reliance on the law instead of a study by a foreign agency is required.
Still, nearly three years after the resolution decree and the closure of the regular banking activities, there are customers who believe, or in fact, hope, that the bank is as liquid as it once was. There are a few reasons that state the opposite.
The first and obvious reason for decreasing liquidity is the imbalance between incoming and outgoing payments. Not only administrators in Cyprus were paid substantial rewards to fulfill their duties. Also in Tanzania, the administrator gets a double salary; his regular paycheck from the central bank and a monthly fee from FBME Bank. Also, salaries and the severance pay to redundant employees, regular operational costs to run a bank and legal fees rapidly decrease the liquidity position.
Another reason for changing liquidity is the number of people who legitimately withdraw their balances in Cyprus via checks and/or a claim to the Deposit Guarantee Scheme. In Tanzania, local market customers had access to the bank and its facilities up to the suspension of the license of the bank, in May 2017. Up to the end of 2014, there were lawyers in Tanzania able to assist in the recovery of customer funds upon recommendation by the administrator of the bank. Exact numbers of depositors that used this backdoor are unclear.
A third indicator that liquidity is different as it seems, is an internal and organizational modus operandi of the bank. The bank used ‘off balance sheet’ activities like trade finance, private placements and repurchase agreements (repos), where cash loans are provided for pledging securities as collateral. Both trade finance and repo transactions contain risk because of the possible fluctuations of the security value. These transactions can, therefore, be subject to haircuts and margin calls.
An example of the risk involved in the trade finance and repo transactions of FBME Bank was revealed recently when the International Bank of Azerbaijan (IBA) filed for Chapter 15 bankruptcy in New York. The list of designated financial indebtedness exposes trade finance borrowings, private placements and, most important, a bilateral loan without maturity from FBME Bank for the amount of 111.615,361 USD. When the indicative restructuring plan for IBA is approved by the Courts, it is uncertain if this loan gets fully repaid and how long this will take.
When a bank fails and goes into liquidation, the court has to appoint a neutral liquidator. The responsibilities of the liquidator are to dismantle the bank in an orderly manner and to safeguard the depositors’ interest. During the first stage of the liquidation, assets and liabilities of the bank are determined and healthy assets of the bank are being offered to other banks to maximize liquidity available for creditors. Troubled assets are often sold to a newly established bad bank, for example, to deal with the non-performing loan (NPL) portfolio. If the bank is a listed company, liquidation is finalized before the stock markets open, often during a weekend, to avoid the common stock value to go to ‘zero’. In 2012 the real estate division of Netherlands-based SNS Bank experienced this situation. Depositors received shares in the bank and the share price dropped to zero, making the shares worthless overnight. Depositors only received their insured account balance of 100.000 Euro.
The case of FBME Bank is different in many ways. Although the value and default risk of the off-balance sheet activities of the bank are unclear, it is realistic to expect a relatively high liquidity ratio compared to other financial institutions, however, far below 100%.
Liquidation is not the only way to move forward because there is also another option, in line with the current international regulatory framework; a bail in for FBME Bank Cyprus and the main office in Tanzania under the same European guidelines.
Bail in or bail out?
There is an extensive availability of literature on bailout mechanisms, where taxpayer money is used to save a financial institution from its collapse and safeguard the financial system. During the global financial crisis, many governments had to intervene and numerous banks and insurers were saved. The risk of contagion must be stopped to avoid a systemic crisis. The willingness of taxpayers to assist in a rescue mission of troubled banks is decreasing. Studies on the subject show that bail out programs and government subsidized deposit protection schemes stimulate a moral hazard where bankers take an excessive risk because they will be saved by the government or taxpayer anyway, in case of default.
The European Systemic Risk Board (ESRB) is responsible for the macro-prudential oversight of the EU financial system and the prevention and mitigation of systemic risk. The ESRB, therefore, has a broad remit, that covers different market players in the financial industry, like banks, insurers, asset managers, shadow banks, financial market infrastructures and other financial institutions and markets. Special resolution regimes in Europe are designed to protect the financial system and minimize exposure to tax payers. A bail in of individual financial institutions where the liquidation, the restart or a reformation is arranged internally, becomes the norm.
The mechanics and consequences of a bail in are revealed in five European case studies of banks in Denmark (2011), Spain (2012), The Netherlands (2012), Cyprus (2012) and Portugal (2014). A bail in for FBME Bank Cyprus means the second extreme measure in short time for a bank in Cyprus. It can have an impact on the creditworthiness of the island and therefore must be handled with extreme care.
Normally, a bail in triggers a cleavage of healthy business units from the non-performing sections to enable a fresh start for the viable parts of the bank. In the case of FBME Bank, there is potentially only one viable business unit; the one in Tanzania that deals with the local market. All other business units have no license to operate as a bank or a branch of a bank and have no access to the technical infrastructure required. Therefore there is no gain in dividing the bank into different parts. FBME Bank Cyprus and FBME Bank in Tanzania can be liquidated under their own business unit, or when the Courts decide that Tanzania accounts managed from Cyprus are in Cyprus, a bail in in Cyprus can commence.
A bail in for FBME Bank Cyprus can be resolved rather quickly. The main reason that depositors have no access to their account balances is that during three years no mutual agreement or solution could be agreed upon by the central bank and the shareholders of the bank.
Consequences of a bail in or liquidation
During a liquidation or creditor bail in, different types of debt are indicated. The difference between junior and senior debt, the quality of the account, and possible subordination of the claim, determine the percentage or even decline of a claim. Depositors must understand that the traditional creditor hierarchy is used and that there is a realistic chance that customers who are perhaps unwillingly subordinated, because their claim cannot be verified, risk losing their money.
The number of fake and/or forged claims to the DGS and Saab Financial is growing. The appointed liquidators, therefore, have to integrate certainty in the claim filing process. Having a claim approved by the DGS is a way to improve the chances of being part of the regular bail in or liquidation.
A bail in scenario often involves the transfer of accounts into shares of the bank. These shares correspond to a specific value and are easier for the liquidator to convert into a pro rata payment. Normally, a shareholder has voting rights. This means that it is wise to consult a professional to deal with this situation. Having different advisors with different ideas can further delay a structured and well-designed restructuring plan and winding up order.
ARE YOU A CUSTOMER OF THE BANK?
The end is near and customers must understand that when they fail to comply with the request of the liquidator, they might miss the opportunity to claim their funds. The Legal Floris Group currently offers fund recovery solutions and services for the following customer groups. Click on one of the links below for detailed information:
CONTACT US NOW TO START THE RECOVERY PROCEEDINGS: You can call us at +357 25 030 666, send an e-mail at firstname.lastname@example.org or complete the contact form below. We will get back to you at the shortest notice.