CLAIMS AND RECOVERIES 

Abstract 

The capacity to manage the assets and liabilities of a failed bank is an essential part of 

all effective safety-net systems. In the broadest sense, it involves disposing of the 

bank’s assets and resolving the bank’s liabilities for the benefit of creditors with bona

fide claims against the bank. This paper considers the major objectives, 

organisational and resource requirements, and strategies of the claims-and-recoveries 

function that arise after a failure-resolution strategy has been adopted. 

The optimal strategy for effectively and efficiently managing the claims-andrecoveries function is situational, and reflects different economies, safety-net 

structures, insolvency regimes, and financial, legal and political systems. However, 

the claims-and-recoveries function is subject to common management processes. 

These include a feedback loop of analysis, planning, and execution. In addition, 

effectiveness and efficiency likely are best achieved through decisive control and 

commercial practice rather than reliance upon legal rights or bureaucratic procedures. 
 

 

 

 

 

 

 

 

 

CLAIMS AND RECOVERIES 

The capacity to manage the assets and liabilities of a failed bank is an essential part of 

all effective safety-net systems.1 In the broadest sense, it involves disposing of the 

bank’s assets and resolving the bank’s liabilities for the benefit of creditors with bona

fide claims against the bank. This paper, which was prepared by the Subgroup on 

Claims and Recoveries, considers the major objectives, organisational and resource 

requirements, and strategies of the claims-and-recoveries function that arise after a 

failure-resolution strategy has been adopted.2 

In bank failures, claims take several forms. 3 In the context of insolvency 

proceedings, for example, creditors file claims. Claims also may encompass matters 

such as legal actions by or against the insolvent bank, or costs and outlays from 

financial assistance provided to the bank by the deposit insurer or another safety-net 

participant. Recoveries on these claims are typically derived from the disposition of 

the bank’s assets, payments by borrowers, and proceeds from legal actions, including 

claims against directors, officers, auditors and other third parties. 

The organisation(s) that actually performs the claims-and-recoveries function varies 

across jurisdictions, and reflects country-specific developments beyond the scope of 

this paper. In most cases, the deposit insurer will have, at a minimum, a mandate to 

advance its claims to recover on deposit insurance payments and possibly other costs. 

Thus, irrespective of whether a deposit insurer is responsible for resolving claims or 

disposing of the failed bank’s assets, it is likely to have an interest in understanding 

and possibly influencing the claims-and-recoveries process in order to achieve its 

goals.4 

The optimal strategy for effectively and efficiently managing the claims-andrecoveries function is situational, and reflects different economies, safety-net 

structures, insolvency regimes, and financial, legal and political systems. However, 

the claims-and-recoveries function is subject to common management processes. 

These include a feedback loop of analysis, planning, and execution. In addition, 

1

 The Subgroup is comprised of representatives from Canada (coordinator), Hungary, Mexico, 

Philippines, and the United States. 

2

 See the paper on failure resolution, which describes the main issues relating to the resolution of 

troubled banks. 

3

 Definitions of bank failure tend to be country-specific. In this paper, bank failure may be considered 

to have occurred when one or more of the following circumstances obtain: the institution’s liabilities 

exceed its assets, it has been placed in administration or liquidation, or it has voluntarily sought to 

wind-up its affairs. 

4 There is considerable variation in the claims-and-recoveries role played by deposit insurers and other 

safety-net participants. Where deposit insurance payments are made upon the liquidation of a bank, 

the deposit insurer usually is subrogated to the rights of the insured depositors, and is likely to file and 

actively manage the claim arising from the deposit insurance payment. In some instances, deposit 

insurers have broader roles in risk-minimisation or recovery processes, for example as lender, creditor, 

or possibly as receiver. In other cases, these functions are the responsibility of other entities, including 

central banks. 
 

 

 

 

 

effectiveness and efficiency likely are achieved best through decisive control and 

commercial practice rather than reliance upon legal rights or bureaucratic procedures. 

Objectives of the Claims-and-Recoveries Function 

In most countries, claims and recoveries typically involve at least some of the 

following objectives: (i) maximisation of recoveries from the assets of the failed 

bank; (ii) minimisation of the costs associated with the failed bank’s liabilities and 

those arising from the failure resolution; (iii) determination of the most cost-effective 

strategies; (iv) contribution to financial-system stability; (v) timely and equitable 

payment to creditors; and (vi) contribution to system discipline by such measures as 

instituting legal action against errant officers, directors, auditors, and other parties. 

Some objectives may conflict with other objectives. For example, a mandate to 

return assets to market promptly may be conditional upon minimising adverse 

economic effects. Similarly, pursuing professional-liability actions for system 

discipline may be subject to considerations regarding the financial benefits of 

reaching early compromise. Ideally, such trade-offs are considered and agreed upon 

in the development of the claims-and-recoveries function in order to facilitate 

consensus and coordination on, and commitment to, the necessary action steps and 

priorities involved in dealing with a failed bank. 

Conditions Precedent 

A number of factors affect the performance of the claims-and-recoveries function. As 

with any bankruptcy process, bank-insolvency resolution requires clear and 

enforceable priority-of-claim rules. These establish seniority of various classes of 

claimants, including depositors’ claims. Also important are bank-liquidation and 

asset-disposition procedures, open-marketing and effective conveyance processes, 

and an effective and transparent judiciary with expertise in the liquidation of banks. 

The powers provided to the organisations responsible for performing the claims-andrecoveries function also have considerable effect on overall performance. These 

powers include control over the assets, contract rights, and privileges of the failed 

bank. The ability to allow or disallow claims, stay litigation, enforce or repudiate 

certain contractual obligations, and challenge fraudulent transfers, affect the 

performance of the claims-and-recoveries function. Finally, fiduciary responsibilities 

may limit the ability of those performing the claims-and-recoveries function to fulfil 

other responsibilities and goals. 

Strategies for Management of the Failed Institution’s Assets and Liabilities 

Although the precise nature of the claims-and-recoveries strategies vary from country 

to country, in each case the strategies should be consistent with (i) the objectives of 

the safety net, (ii) the economic and legal environment in which claims-andrecoveries activities are conducted, and (iii) the organisational form and resources 
 

 

 

 

 

 

 

available. In the absence of a country-wide political consensus on the steps to be 

undertaken, claims-and-recoveries activities may be lengthy, inefficient and 

ineffective. 

The benefits of explicit rules and procedures for handling various aspects of the 

claims-and-recoveries function may be particularly significant in enhancing 

credibility, increasing market discipline, prompting action, and thereby minimising 

costs arising from delay. For example, regularly updated memoranda of 

understanding among participants in the financial safety net help protect the claimsand-recoveries function from political interference.5

 In the event of a failure, explicit 

policy statements that authorities will not protect creditors and shareholders beyond 

pre-specified commitments, also may help manage expectations. 

By contrast, discretion may be beneficial in certain circumstances in order to achieve 

public-policy objectives, such as financial-system stability. Discretion also may be 

useful in providing a degree of flexibility that otherwise may be lost when too many 

aspects of the claims-and-recoveries function are made explicit. 

Organisation and Resources for the Claims-and-Recoveries Functions 

The determination of whether the claims-and-recoveries function should be 

performed by public, private, or hybrid organisation(s) is country-specific. However, 

it may be guided by an evaluation of which form is expected to be more efficient and 

effective in handling claims and recoveries, and by rigorous application of 

commercial criteria with incentives for efficiency. Likewise, the choice of 

outsourcing or developing the internal capacity to fulfil the functions of the claimsand-recoveries function may be facilitated by a consideration of the frequency, scale, 

and cyclical nature of projected failures, and the mandates and objectives of the 

deposit insurer and other safety-net participants.6 

The identification and development of the capabilities and skills involved in claimsand-recoveries activities are ongoing processes. In most countries, professionals are 

drawn from the insolvency, accounting, banking, real-estate, information-technology 

and legal professions. Although projecting staffing requirements for future failures is 

problematic, it is important that those responsible for the claims-and-recoveries 

function have both the funding to remunerate and access—internally or through 

standby arrangements with external suppliers—to professionals capable of dealing 

with projected failures. Inadequate funding will lead to delay and increased costs. 

Planning Claims-and-Recoveries Activities 

Business plans are a key element of the claims-and-recoveries process. They provide 

a strategic framework within which financial and non-financial performance 

5

 Coordination between safety-net participants is the subject of a paper on interrelationships. 

6

 A more comprehensive review of this subject, as it pertains to deposit insurance systems, may be 

found in the paper on structure and organisation. 
 

 

 

 

 

information is developed and evaluated. Plans articulate the strategy for maximising 

the recovery of assets (including litigation) on a net present-value basis; for 

employing effective resources in the liquidation; and for establishing benchmarks for 

assessing performance. The goal is efficiency and consistency, with reliable 

estimates based on timely, verifiable information and assumptions. 

Ideally, business plans should be updated regularly and cover all major areas of the 

claims-and-recoveries function, including claims processing, asset management and 

disposition, and forensic-litigation management. To address large failures and/or 

multiple failures, it also is essential to develop contingency plans that mobilise the 

resources of internal staff and contractors, as well as coordinate activities of the 

safety-net participants.7 

Maximising Recoveries from Asset Management and Disposition 

Asset management and disposition is typically the most visible and the most 

expensive activity of the claims-and-recoveries function, and usually has the greatest 

effect on recoveries. To ensure that appropriate strategies are adopted, it is important 

to evaluate the assets, in much the same manner as the medical procedures of a 

hospital emergency ward, where victims are first classified for treatment on a priority 

basis. 

On this basis, healthy or performing (“good-bank”) assets may be separated from 

nonperforming (“bad-bank”) assets. The good bank may be retained as part of a 

“going-concern” solution, or otherwise marketed as soon as possible, as they have no 

“upside” potential. The disposition of the bad bank may be more problematic in the 

event of a large overhang of similar assets, such as unsold real estate, held by other 

banks and market participants. In such circumstances, the bad bank may be “worked 

out” under professional management with a mandate to maximise recoveries, after 

operational and financial costs, precisely because there is an “upside.” 

Efficient and effective asset-management strategies reflect the type and quality of 

assets being realised, and include tools to validate valuation assumptions employed in 

the asset valuation/appraisal process and business plans. Risks relating to interest 

rates, market fluctuations, particular asset-disposition strategies, and asset-specific 

and legal issues need to be identified, evaluated, quantified, managed or hedged. Use 

of discounted cash-flow analysis or another appropriate valuation technique is 

required to ensure that approaches to claims and recoveries recognise the time value 

of money, as well as the risks associated with hold versus sell decisions. 

Consideration also might be given to the estimated value of the assets to potential 

purchasers, each of whom values the assets differently because of different plans and 

different financing costs. 

Once the assets have been examined and categorised, the timing and method of 

disposition may be considered in light of the nature of the assets being disposed of 

7

 For an elaboration on this point, see the paper on interrelationships. 
 

 

 

 

 

 

 

 

 

and the condition of the markets into which they are being sold, with a view to such 

objectives as maximisation of recoveries on a net present-value basis. Other 

considerations may have to be balanced against such objectives, including 

environmental implications or legislatively mandated policy requirements. 

Selling assets at resolution or immediately thereafter has the advantage of returning 

assets to the market quickly, as well as replenishing the deposit insurance fund and 

minimising government involvement with the assets. These advantages should be 

considered against the risk of lower recoveries and potential resistance from creditors 

who stand to benefit from a more lengthy realisation process. 

It is vital to maintain the value of those assets that cannot be sold immediately, or that 

have been selected for longer-term workout, through clear asset-management 

procedures. Even performing loans tend to lose value unless managed actively. 

Clearly, the risks of holding for later sale and the availability of skilled assetmanagement practitioners need to be factored into any application of this approach. 

As well, internal information and operations systems and procedures will be required 

to catalogue and track the assets. 

Transparency and access to information are key factors in asset management and 

disposition, since marketing the assets to qualified and interested potential purchasers 

is likely to stimulate competition and thereby increase recoveries. The quality of 

information available to potential purchasers has an important bearing on prices, so 

effort is needed to arrange information in as orderly and complete as possible a 

manner to generate greater buyer interest and thereby maximise value. 

Marketing methods 

There is a wide range of methods for marketing the assets of failed banks, including 

(i) asset-by-asset sales on a commercial basis; (ii) auctions; (iii) portfolio sales; (iv) 

securitisation; (v) workout/ restructuring; and (vi) equity partnerships: 

i. On the premise that retail prices are higher than wholesale, it may be better to 

sell certain assets individually, particularly nonperforming assets where the 

security interest has been realised. This permits their sale as appropriate with a 

marketing program tailored to the asset in question. The purchaser may be the 

end user who is often more willing to pay a higher price than the “middleman” in 

a bulk sale. One potential downside to an asset-by-asset sale is higher 

transaction costs. 

ii. Auctions by outcry or sealed written bids—including tender bids and expressions 

of interest—have been utilised to facilitate bulk or individual-asset sales, 

sometimes with enhancements such as seller financing, representations and 

warranties. The advantages of auctions, which can significantly accelerate the 

speed of recoveries, should be considered against the risks of few bidders and 

low bids. 
 

 

 

 

 

 

iii. Marketing assets that have been combined into pools may facilitate quick sale, 

generate market-value returns, and significantly reduce both the assets under 

administration and the resources required to manage the assets. As is the case 

with auctions, consideration should be given to the risks of few bidders and low 

bids. 

iv. Securitisation involves packaging similar assets and selling portions with rights 

to cash flows identified by contract, in some cases with credit enhancements. As 

is the case with portfolio sales, securitisation may be advantageous in enhancing 

asset recovery values and expediting asset sales. To date, the application of 

securitisation has been most effective in well-developed markets with existing 

markets for asset-backed securities. 

v. Asset-management companies can serve as rapid asset-disposition vehicles for 

bundling and securitising or portfolio sales, and as longer-term restructuring or 

workout agencies to deal with nonperforming assets. They also enable a 

consolidation of skills, resources, and uniform workout practices within one 

agency, thereby providing efficiencies in recovering maximum possible value. 

vi. Equity partnerships have been an effective method of disposing of portfolios of 

underperforming, nonperforming, and owned real estate. In these joint ventures, 

the agency responsible for recoveries provides the assets and financing, and the 

partners/investors contribute equity and assume responsibility for management 

and disposition of the partnership’s assets. 

In some instances, the method of marketing may be enhanced with vendor take-back 

(seller) financing and limited guarantees. Seller financing may be particularly 

advantageous in dealing with hard-to-sell assets, but should be part of a well-thoughtout exit strategy. Guarantees against loss—as well as related put agreements by 

which a buyer has the option of returning assets for a refund within a specified period 

of time—may be of assistance in completing a transaction. Although guarantees have 

the disadvantage of creating contingent liabilities, such disadvantages can be 

mitigated by limiting their duration and total value. 

Factors affecting asset management and disposition performance include general 

economic conditions, the quality of the assets of the failed bank, depth of secondary 

markets, assets subject to competing creditor claims, and litigation or other 

proceedings that complicate realisations. Similarly, the ability to market assets 

promptly may be problematic where a failure is sudden, such as failure caused by a 

rapid lack of liquidity, where failure occurs across multiple jurisdictions, or where an 

asset-valuation review and pricing of assets cannot be accomplished in advance of 

failure. 

The absence of specialised human resources for the handling of insolvency issues, 

including distressed assets, is a challenge for many countries. Contracting out tasks 
 

 

 

 

 

 

 

 

 

 

 

 

 

relating to claims and recoveries raises the “principal-agent” risk that the agent will 

not act in the principal’s interest, resulting in below-expectation returns. Where 

practical, this risk may be addressed explicitly with measures to align the interests of 

the agents with those of the deposit insurer or other relevant safety-net participant. 

Measures designed to align interests include negotiating incentive plans with 

receivers or other entities to increase the probability that net realisations will be in the 

upper range of projections, measured on a net present-value basis. Other measures 

may specify that the liquidation of assets will be completed by a specific date, that the 

liquidation management will focus on the need to minimise costs, and that existing 

management expertise will be retained to completion of the plan. 

Maximising Recoveries from Claims and Litigation 

Claims and litigation advanced against other parties by the failed bank or relevant 

safety-net participants represent a potentially important asset on which recoveries 

may be realised. In some cases, these activities also are an important tool in fostering 

greater discipline in the financial-services sector. For these reasons, potential claims 

should be identified and investigated carefully to determine the appropriateness and 

potential for recovery (cost/benefit) before being pursued . Consideration of whether 

to pursue an action might include an analysis of the possible defenses, counterclaims, 

or claims-over that may be made by the defendants. Once commenced, activities may 

be refined or curtailed at appropriate times. 

Among the more important claims pursued are professional-liability claims. These 

arise in circumstances where the deposit insurer, failed bank, or another safety-net 

participant has suffered damages, and there is information that raises a reasonable 

case of negligent or wilful misconduct or wrongdoing by directors, officers, or 

auditors, or by other relevant parties. In cases of fraudulent or otherwise patently 

egregious behaviour, the results of an investigation also may raise the possibility of 

potential criminal proceedings—typically pursued by the state as opposed to a deposit 

insurer or other safety-net participants. 

Minimisation of Liabilities 

In addition to depositor claims, failed banks typically have a number of liabilities, 

such as environmental problems associated with real estate or businesses owned by 

the bank, indemnifications or other guarantees, off-balance-sheet liabilities, and 

claims against the failed bank. 

The claims-and-recoveries function likely will require that claims against the failed 

bank are resolved in a fair and cost-effective manner. This will involve notifying 

potential claimants of the claims process, reviewing and resolving asserted claims, 

distributing dividends to proven claimants, and transferring unclaimed dividends to 

the appropriate state authority. 
 

 

 

 

The resolution of claims against a failed bank can add significantly to the cost and 

duration of a liquidation. Such claims may involve a creditor taking security before 

failure of a bank; higher ranking or priority claims;8

 multi-jurisdictional insolvency 

issues; complications arising from a parent/affiliate pursuing significant claims; and 

reviewable transactions entered into before failure resolution. 

A particularly important source of cost and delay arises from litigation instituted by 

creditors, shareholders, or other claimants and plaintiffs against the failed bank or the 

agency that performs the claims-and-recoveries function. This is the negative side of 

the possibility of realising recoveries from litigation, and a crucial aspect of liability 

management for those charged with handling claims and recoveries. For this reason, 

it is advisable to conduct regular evaluation of the claims in order to quantify 

appropriate reserves, estimate the potential liability exposure, and consider alternative 

means for resolution. 

Measuring Performance and Managing Knowledge 

One of the key strategies to be applied to the claims-and-recoveries function is the 

creation of a framework to measure and credibly demonstrate performance, as well as 

promote continuous learning. Performance measurement is likely to focus on such 

criteria as the least-cost criteria of resolution, as well as on the quality of management 

processes, including performance against management’s plans, and performance 

against quantitative and qualitative industry standards.9 

To be meaningful, performance measures reflect the country-specific claims and 

recoveries’ objectives, the institutional framework, and characteristics of the bank 

failures. Moreover, precisely because the claims-and-recoveries function is countryspecific, it is important to ensure that the knowledge and experience gained be both 

captured and disseminated. In particular, an analysis of each bank failure may be 

beneficial in providing guidance for future liquidations and thereby potentially 

reducing costs to both the safety net and other creditors. 

Conclusions 

The effectiveness of the claims-and-recoveries function depends on understanding the 

problems, matching appropriate strategies with goals and country-specific conditions, 

and the level of commitment to achieve such goals. Above all, careful planning and 

analysis need to be complemented by decisive action and the discipline of 

commercial practice. 

8

 Creditor ranking is discussed more fully in the paper on depositor priority. 

9

 Qualitative benchmarks might include performance in closure of the bank, management of cash, 

claims processing, and litigation. Quantitative benchmarks likely would focus on such issues as speed 

of asset disposition, yield on asset realisations, overhead costs, and the net present value of 

recoveries/losses. 
 

• The claims-and-recoveries function benefits from clear and enforceable 

priority-of-claim rules, and well-developed bank liquidation and assetdisposition procedures supported by the legal system. Uncertainty or 

inequality of treatment of creditor groups may jeopardise confidence in the 

financial system, with attendant costs. 

• Coordination among safety-net participants plays an important role in 

contributing to the efficiency and effectiveness of the claims-and-recoveries 

function. Where those functions are not consolidated in the hands of the 

deposit insurer, memoranda of understanding among financial safety-net 

participants becomes even more critical in facilitating coordination. 

• Once a bank has failed, liquidation of its assets should be pursued on the basis 

of the economic merits. Other considerations—such as concern for systemwide stability, or a determination to pursue professional-liability actions to 

enhance business standards of conduct—may introduce conflicting objectives 

and pose trade-offs that will need to be addressed. 

• Success depends upon sufficient organisational, funding, and human resources 

to conduct efficient and effective claims-and-recoveries activities. These 

resources should be consistent with the structure of the financial-services 

sector, and with the frequency and cyclical nature of failures. Inadequate 

funding can lead to delay in completing asset dispositions or claims-resolution 

activities, and to a significant extent increases in costs. 

• Plans are a key element of the claims-and-recoveries process. Plans articulate 

the strategy for maximising the net present-value recovery of assets; ensure 

the employment of effective resources in the liquidation; and establish 

benchmarks for assessing progress and performance. 

Regular review and reporting to stakeholders on the efficiency and effectiveness of 

claims-and-recoveries activities provide a feedback loop for identifying steps to 

strengthen supervision and standards of bank management, and, to validate or revise 

practices relating to claims and recoveries as well as failure-resolution 

methodologies.