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Omar Zaki - Senior Associate - Banking and Finance
The new Egyptian Central Bank and Monetary Sector Law No. 194 of 2020 ‘“Banking Law‘) as issued and published in the official gazette on 15 September, 2020 which became effective on 16 September, 2020, has set significant supervisory parameters and expanded the role of the Central Bank of Egypt (the ‘CBE‘) in the context of operations of financially distressed and insolvent banks.
In this article, we will shed light on the procedures required to be undertaken by banks and by the CBE in order to restructure financially distressed and insolvent banks and to safeguard the interests of the depositors of banks in question on the microeconomic level as well as protect and maintain the stability of the banking sector on the macroeconomic level.
It should be noted that the Banking Law explicitly excludes the application of the Bankruptcy Law No. 11 of 2018 on financially distressed and insolvent banks and applies the provisions of Chapter 12 of the Banking Law to such banks.
It is pertinent at this stage to explore what is perceived by the CBE to be a financially distressed bank. Pursuant to the Banking Law, a bank is considered as financially distressed where:
It is inferred from the above that the CBE has strong discretionary powers in determining whether or not a bank is financially distressed which shall lead to the CBE’s intervention in order to protect the interests of the customers and depositors.
The Banking Law also introduced the concept of early intervention, which mainly gives the CBE authority to oblige banks to undertake certain measures in order to rectify existing problems that may result in the insolvency of the bank or damage the interests of the bank’s clients. The cases which could result in such intervention by the CBE include: (i) banking malpractices conducted by the bank in question; (ii) low quality of the bank’s assets, which would affect the financial soundness of the bank or the interests of depositors; (iii) low level of the profits achieved, which could threaten the continuity of the bank in the medium or long term; and (iv) deficiencies in governance systems, risk management, internal control, or accounting policies.
In such cases, the CBE may intervene in order to oblige the bank in question to undertake any of the following:
In all cases, the CBE’s right to undertake “early intervention” procedures under the Banking Law is not a prerequisite for undertaking any restructuring procedures of distressed banks.
Upon issuance of the CBE’s decision to consider a bank financially distressed, the CBE may undertake a series of measures without obtaining the approval of the shareholders, debtors or creditors of the concerned bank which include the following:
Further, the CBE may set up a plan to schedule all or some of the bank’s obligations, reduce or capitalise them in a way that enhances its ability to continue its operations, according to the following procedures:
The following liabilities should be excluded from such scheduling plan:
The CBE, at its sole discretion, may exclude any other obligations from the scheduling plan to protect the stability of the banking sector.
Pursuant to the Banking Law, the Egyptian Ministry of Finance may, upon request of the CBE, establish a bridge bank to manage the assets and liabilities transferred to it from the distressed bank. The CBE shall determine the activities that the bridge bank may undertake and may, subject to the approval of the CBE, be exempted from any of the regulatory requirements for a period not exceeding one year.
The CBE, in order to restructure distressed banks, may decide to merge the distressed bank with another bank, or transfer the ownership of all or part of its shares to another investor or to a bridge bank, subject to the approval of the other bank or the bridge bank, all in accordance with the rules and procedures determined by the CBE.
In such a case, the bridge bank shall exercise its activity for a temporary period until all or some of its assets and liabilities are transferred to another bank, or the ownership of its shares is transferred to a new buyer or investor, or merged with another bank, in accordance with the exit plan prepared by the bridge bank and approved by the CBE.
The CBE shall revoke the bank’s licence and proceed with its liquidation upon the implementation of the exit plan.
It appears that the CBE, under the new Banking Law, expanded its authority regarding the restructuring of financially distressed and insolvent banks compared to its authorities with regards to the subject matter under the old banking law. Further, the new Banking Law introduced a new concept of “bridge bank” enabling a new form of restructuring of distressed banks with the ultimate objective of safeguarding the depositors’ rights and maintaining the stability of the banking sector in Egypt.