Transcript Stylized facts from recent worldwide experience. Slides to

STYLIZED FACTS FROM RECENT
WORLDWIDE EXPERIENCE
Patrick Honohan
The World Bank
Prepared for the Norges Bank Conference
“Banking Crisis Resolution – Theory and Policy”
Oslo, June 16-17, 2005
Outline
• Features of recent crises
They’re not all the same;
but they’re not all different either
• The broad consensus on resolution principles…
Speed of action
Transparency of cost allocation
Restoration of capital/incentives for safe & sound banking
…should not conceal some areas of debate
Who will provide the capital?
How to clean up the assets?
Depositor hits?
Varied sources of crises
• Unstable macro conditions
– positive feedback loop
– but banking often not causal
– unhedged positions a special feature
• Unraveling of government impositions
– China, Vietnam, Zambia, etc.
– Analysis: Macro easy, politics hard
• Management failures
– “diverted deposits” fraud
Four distinctive features of recent
resolutions
• Skewed distribution of losses
– not all banks fail: the fittest survive
• State-owned as well as private bank losses
– Even in macro-related collapses,
• Turkey=50%, Indonesia=46%
• Information emerges slowly
– One-shot resolution is rare: it’s not over ’til it’s over
• Currency depreciation has often been central
– Sometimes a trigger, sometimes a resolution tool
Post-crisis systemic performance (1)
Variety more striking than commonalities
• GDP growth tends to be adversely affected
– But could be misleading to interpret as causal
• Inflation more often slows than accelerates
• Nominal interest rates more often fall than increase
Regularities for some…but
Index of GDP 1997=100
East Asia: GDP Pre- and Post-1997 Crisis
140
130
120
110
100
90
80
70
60
1991
1992
1993
1994
Indonesia
1995
1996
1997
Korea
1998
1999
2000
Malaysia
2001
2002
2003
Thailand
From Hanson, 2005
2004
LAC: Some exceptions
From Hanson, 2005
LAC: Some exceptions
From Hanson, 2005
GDP growth before and since
10
China
8
Vietnam
6
Lithuania
Ukraine
Cameroon
Latvia
4
After
Costa Rica
Swaziland
Malaysia
Thailand
Bulgaria
CAR
2
Yemen
Korea
Paraguay Argentina
Ecuador
Jamaica
Venezuela
Burundi
Zimbabwe
0
-2
Congo DR
-4
-20
-15
-10
-5
0
Before
5
10
15
Inflation before and after
1.8
1.6
1.4
1.2
After
1.0
0.8
0.6
0.4
Zimbabwe
0.2
Congo DR
Russia
0.0
0.0
0.2
0.4
0.6
0.8
Bulgaria
1.0
-0.2
Before
1.2
Brazil
1.4
1.6
1.8
Post-crisis systemic performance (2)
• Bank lending does tend to be compressed after
crises, even when financial depth increases.
• Long-lived macrodoubts, sometimes fuelled by the
crisis, can cause dollarization to jump.
• Shrinking intermediation spreads have been
correlated with falling concentration rates.
Bank credit to pvt sector before & after (% GDP)
1.6
1.4
China
1.2
Korea
1.0
After
Malaysia
Thailand
0.8
0.6
Croatia
Vietnam
0.4
Ukraine
0.2
0.0
0.0
Philippines
Bulgaria
Indonesia
Ecuador
Mexico
Venezuela
0.2
0.4
0.6
Before
0.8
1.0
1.2
1.4
Deposit dollarization before and after
100
Bolivia
90
80
70
Paraguay
60
After
Ecuador
Bulgaria
50
Zambia
40
Vietnam
30
20
10
0
0
20
40
60
Before
80
100
Spreads (loan-deposit rates) before and after
70
Zimbabwe
60
50
After
40
Paraguay
30
20
Zambia
Croatia
Jamaica
Ecuador
Lithuania
10
Argentina
0
0
10
Ukraine
Bolivia
Bulgaria
Latvia
20
30
Before
40
50
Post-containment phase resists
econometric assessment of alternatives
• Consequences likely to unfold over a decade or more
• Different strategies will affect macro stability, investment,
power structures as well as future financial stability
– Immediate fiscal costs not enough
– Wider economic consequences resist summary
– Obvious correlations absent
• So fall back on broad qualitative experience unavoidable at
present
Containment phase remains contentious
• Differences of opinion center on:
–
–
–
–
–
regulatory forbearance,
liquidity support,
closure policy,
blanket deposit guarantees and
allocation of losses to depositors and other claimants.
• Accommodation along any of these dimension has
been costly (Honohan and Klingebiel, 2003).
Post-containment resolution issues:
Common ground (1)
• Transparent resolution policy; speed of action;
deal also with corporate distress.
• Merits of an all-private resolution; avoid full
socialization of losses
– shareholders & subordinated claimholders should pay
Post-containment resolution issues:
Common ground (2)
• Actual practice follows the consensus -- with
implementation deficiencies:
– Insiders allowed to loot
– Unsuitable new shareholders
– Too optimistic on asset recoverability
(mistaken attempt to protect the budget)
Post-containment resolution issues:
Points of contention
• Capital and ownership
• Recapitalization issues (state-owned banks)
• AMCs: Not the only solution?
• Real value of deposits/exchange rate policy
Capital and ownership: options
• Relying on existing shareholders
– But risk of self-dealing and looting
– Leaves State in poor bargaining position
– Preserves existing power structures (cf Rajan-Zingales)
• Seeking domestic merger partner
– 2 weak banks = 1 strong one?
• Finding other local owners (where?)
• Nationalization (only temporary solution)
• Foreign buyers
Recapitalization: the logical sequence
1.
Inject assets to ensure capitalization and prospective
earnings
–
–
should be with tradable/bankable instruments, not vague IOUs
consistent with safe-and-sound banking
2. Restructure liability structure to protect taxpayer
subject to adequate incentives
3.
Rebalance government debt (maturity etc.)
4.
Sterilize any undesired monetary side-effects
When to recapitalize insolvent
Government-owned banks
• Recapitalization irrelevant under public ownership…
…and could be bad
• Fox and chickens
• Wait until governance is right
• Recapitalization design relevant only in the context of
privatization…
…or at least financial autonomy of the banks
Real value of deposits
• Depositor confidence is important, but also need to set
system on sustainable path
• Impact on financial depth surprisingly low following:
Nominal losses for
local currency deposits (Argentina),
FX deposits (Argentina, Russia);
Real losses for
local currency from devaluation (Turkey, Indonesia)
Monetary depth, selected countries 1990-2004
0.7
0.6
share of GDP
0.5
Argentina
0.4
Indonesia
Russia
0.3
Turkey
0.2
0.1
0
1990
1992
1994
1996
1998
2000
2002
2004
Features of the next crisis?
• Endogenous dollarization (FX deposits and loan)
• Cross-border banking group contagion
• Too big for governments?