Why your bank will soon have to write its own will

Kenya Deposit Insurance Corporation Chief Executive Mohamud Mohamud. [File, Standard]

Banks will soon be required to submit plans detailing how they could be safely closed, sold or dissolved in case they run into a crisis so that customers can access their deposits faster.

The plans — called living wills — will detail a contingency plan for how every bank will sell off assets or be liquidated in a manner that does not create chaotic aftershocks to the financial system.

Every lender will be required to submit their living wills to the Kenya Deposit Insurance Corporation (KDIC) in a move that is modelled on the practice in many European markets.

KDIC is now looking for a consultant to develop templates that will guide banks in writing down their wills in a first for Kenya, as the insurance agency seeks to ensure customers get their money much faster in case of a bank failure.

KDIC Chief Executive Mohamud Mohamud said the contingent plans will serve as a reminder to banks that they, too, can “die,” hence the need for a framework for orderly resolution when in distress.

“We want to develop and implement a resolution plan framework, which will facilitate the documentation of an individual member institution’s living will,” said Mr Mohamud.

“This is another level of defence for us and caution to banks to be careful with the business and not to assume that they cannot die.”

Kenya’s banking sector holds more than Sh4.332 trillion in deposits spread out in more than 69.8 million deposit accounts.  

At least 25 banks collapsed between 1993 and 2016, with the latest being Dubai, Chase and Imperial banks. The living wills will capture the intents of every bank’s shareholders, board and management, in regard to the resolution options in the event of challenges that threaten the ability to continue operating.

Banks will provide details of their shareholding structures, firms related to them, governance structures, their business activities and operations as well as the expected impact in case of collapse.

Other information to be given include distress scenarios, distress indicators, failure scenarios, recovery options and resolution options, such as selling of subsidiaries.

The process is fashioned on the practice of individuals who create living wills to guide the next of kin through final decisions, including medical care at critical stages, such as when sickness impairs one’s decision-making.

The living wills are seen as a way to avoid a split between shareholders and the board on resolution options as was seen when banks such as Imperial and Dubai Bank collapsed.