Bank liquidation is a critical process that can impact both individual and corporate account holders. In Puerto Rico, as in many other jurisdictions, there are specific laws and procedures governing bank liquidations. Understanding the bank liquidation process in Puerto Rico is essential for foreign account holders who want to manage their expectations and safeguard their funds. By learning about the differences between corporate and bank liquidation, the rationale behind bank liquidation, and the specific laws and procedures governing this process, foreign account holders can better navigate the potential risks and implications of bank liquidation in Puerto Rico.

Corporate liquidation refers to the process of winding up a business by selling its assets, paying off its debts, and distributing the remaining assets to shareholders or owners. In contrast, bank liquidation is the process of closing a bank, selling its assets, and using the proceeds to pay off depositors and other creditors. The primary difference between the two is the type of entity being liquidated and the regulatory oversight involved. While corporate liquidations fall under general insolvency and bankruptcy laws, bank liquidations are governed by specific banking regulations due to the systemic risk banks pose to the financial system.

Bank liquidation usually occurs when a bank becomes insolvent or is deemed unable to meet its financial obligations. The rationale behind this process is to protect depositors, maintain financial stability, and prevent contagion effects on other financial institutions. Bank liquidations can have both positive and negative impacts on society. On the one hand, they protect depositors by ensuring that their funds are returned, albeit partially, and help restore confidence in the banking system. On the other hand, bank liquidations can lead to job losses, reduced access to credit, and economic disruption.

In Puerto Rico, banks may be liquidated or penalized based on several factors, including the severity of their financial issues, the level of risk they pose to the financial system, and the likelihood of recovery through other means. Banks with relatively minor issues or infractions may be penalized through fines, restrictions on their activities, or requirements to raise additional capital. In contrast, banks that are insolvent or pose a significant risk to the stability of the financial system may be subject to liquidation.

Laws Governing Bank Liquidation in Puerto Rico

Bank liquidation in Puerto Rico is primarily governed by the Office of the Commissioner of Financial Institutions of Puerto Rico (OCIF) and the Federal Deposit Insurance Corporation (FDIC) for insured banks. The OCIF operates under the Banking Act of Puerto Rico, which sets forth the rules and procedures for the liquidation of banks. Additionally, the FDIC follows the Federal Deposit Insurance Act (FDIA) for the liquidation of insured banks, aiming to protect depositors and maintain the stability of the financial system. Before a bank is liquidated in Puerto Rico, several procedures are followed:

  • Monitoring and Supervision: The OCIF and the FDIC continuously monitor banks’ financial condition and compliance with regulations.
  • Corrective Actions: If a bank is found to have financial issues or regulatory violations, the regulators may impose corrective measures, such as fines or restrictions on the bank’s activities.
  • Resolution Planning: In cases where a bank’s problems are severe or systemic, the OCIF or FDIC may require the bank to develop a resolution plan outlining the steps it will take to address its issues or wind down its operations in an orderly manner.
  • Liquidation Order: If the bank fails to address its issues or its financial condition deteriorates further, the OCIF or FDIC may issue a liquidation order. This order triggers the commencement of the liquidation process, during which the bank’s assets are sold, and the proceeds are used to pay off depositors and other creditors.

Bank Liquidation in Puerto Rico

During bank liquidation, the assets of the distressed bank are valued to determine their market value. This valuation process may involve engaging independent appraisers or valuation experts to assess the fair market value of various assets, such as real estate, loans, and securities. Assets may be written down to reflect their current market value, and the write-downs can impact the total amount available for distribution to creditors.

Collecting foreign assets during bank liquidation can be challenging due to differences in jurisdictional laws, regulatory frameworks, and the need for international cooperation. These difficulties can lead to longer timeframes for the liquidation process and may result in lower repayment percentages for creditors, as the costs associated with foreign asset collection can reduce the overall proceeds available for distribution.

In Puerto Rico, the appointment of a liquidator occurs after the Office of the Commissioner of Financial Institutions (OCIF) or the Federal Deposit Insurance Corporation (FDIC) issues a liquidation order. The liquidator, typically an experienced professional in banking and insolvency matters, is responsible for managing the liquidation process, including the sale of assets, distribution of proceeds, and resolution of claims.

The liquidator is responsible for distributing the bank’s assets to creditors following the applicable priority of claims and creditor hierarchy. This distribution process typically begins with the payment of secured creditors, followed by unsecured creditors, and finally, shareholders if any assets remain.

Creditors seeking to recover their investments must submit a Proof of Debt to the liquidator, providing documentation and evidence of their claim. The submission process and deadlines are usually outlined in the liquidation notice issued by the liquidator. Failure to submit a Proof of Debt within the specified timeframe may result in the creditor’s claim being disallowed.

In Puerto Rico, the priority of claims and creditor hierarchy is outlined under the Puerto Rico Bankruptcy Act and the Banking Act of Puerto Rico. The hierarchy generally follows this order:

  • Administrative expenses, such as the liquidator’s fees and other costs associated with the liquidation process.
  • Secured creditors, whose claims are backed by collateral.
  • Unsecured creditors, including depositors, bondholders, and suppliers.
  • Shareholders, who receive any remaining assets after all other claims have been satisfied.

Secured creditors are paid first during the distribution of assets, as their claims are backed by collateral. Once secured creditors have been paid, the remaining assets are distributed to unsecured creditors on a pro-rata basis, depending on the size of their claims and the total assets available for distribution.

The duration of the liquidation process in Puerto Rico can vary depending on the complexity of the case, the size of the distressed bank, and the challenges encountered in collecting and selling assets, both domestic and foreign. Generally, the liquidation process can take several months to several years to complete.

Creditors can expect to receive payouts after the liquidator has completed the valuation and sale of assets, resolved claims, and determined the applicable distribution percentages based on the creditor hierarchy. It is essential for creditors to understand that the exact timing of payouts depends on the specific circumstances of each case, and the amount they receive may be less than their original claim due to asset write-downs and the availability of funds after covering administrative expenses and higher-priority claims.