Transcript Slajd 1 - Bankowy Fundusz Gwarancyjny

Financial Crisis: The Role of Deposit Insurance
Session 3
Bank Resolution
Jerzy Pruski – President of the Bank Guarantee Fund
Basel, 9th June 2011
1
Resolution
Crisis Containment Costs and Instruments Used
Basel
8-9th June 2011
2
Crisis Containment Costs
The capacity to minimize crisis containment costs is shaping up to be a major challenge for developed nations
The financial crisis of 2008-2009 has shown that crisis containment costs are on the rise, particularly for taxpayers
Public debt to GDP relation (%)
% GDP
90
EA
USA
UK
TREND
80
70
60
50
Source:
IMF – Crisis management
and resolution
40
30
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
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3
Resolution as a Way of Limiting Crisis Response Costs
Fiscal burden and systemic repercussions of actions taken against insolvent banks
based on Čihák & Nier (2009)
Fiscal Costs
Bailout
Benefits of resolution process
1. Reduction of the systemic risk of potential
bankruptcy
Traditional
Solutions
2. Regulators assume control
3. Reduction of burden on taxpayers
4. Costs borne by existing shareholders
Disorderly
Bankruptcy
5. Reduces moral hazard and increases market
discipline
Resolution
Systemic Risk
(instability)
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Possibilities and restrictions in instrument use
Possibility of using
private sector solution
Risk associated with
resolution
Deposit Insurance
Fund
Empirical evidence of
resolution
High
Many potential buyers
on the market
Available
Possible to accumulate
the required funds
within the DGS
Considerable
Broad experience of the
FDIC in the US market,
though other countries
have also employed
similar solutions
Low
Ability to carry out the
process quickly and
efficiently. It does not
generate any systemic
risk for the country in
question
National,
systemically
significant
Depends on the
conditions prevalent in
the given country and its
financial markets
Limited capacity
High cost of
accumulating the
required funds
Limited
Some FDIC experience
in the US and limited
experience in selected
countries
Limited
Depends on the way it
is carried out. May
result in systemic risk
for the country in
question
Multinational
Very limited
Can only be taken over
by a larger financial
institution (if such
exists), leading to a rise
in systemic risk
No scope for
accumulating them
Required amounts
exceed the capacity of a
single country
Almost non-existent
The most common
solution was
nationalization
High
Generates systemic risk
in the home country, but
also causes turbulence
in international markets
Size of bank
Small local
According to FDIC resolution can be an effective process to reduce negative results of multinational
banks insolvency
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Austria
X
Belgium
X
Selected Asset Relief Measures
X
Nationalizations
Guarantees
during Recent and Past Crises – European market
Asset purchase
Significant restructuring
Country
Extensive liquidity support
Instruments used in instances of insolvency
X
X
X
X
Denmark
X
X
X
Germany
X
X
X
Iceland
X
X
X
X
Ireland
X
X
X
X
Latvia
X
X
X
Luxemboug
X
X
X
X
Netherlands
X
X
X
X
Ukraine
X
X
UK
X
X
X
X
X
USA
X
X
X
X
X
Type of
Measure
Country
X
AMCs /
asset
purchases
Asset Types
Amount
($ bln)
Amount
(% of
GDP)
Belgium
Dexia
KBC
Fortis
Structured Assets
10,5
33,5
29,4
2,2
7,1
6,2
Germany
West LB
Bayern LB
LBBW
Structured Assets
7,0
6,7
21,7
0,2
0,2
0,6
Netherlands
ING
RMBS, mortgage
loans
35,1
4,4
UK
RBS
Lloyds
Pools of assets
524,0
483,0
24,0
22,2
Belgium
Fortis
Structured Assets
28,7
6,0
Germany
West LB
Toxic and non-toxic
Assets
107,8
3,2
Belgium
Fortis
Structured Assets
28,7
6,0
Ireland
Banks
Distressed real
estate-related
98,7
44,0
UK
Northern Rock
Bradford&Bingley
Mortgage loans and
other loans
121,6
79,3
5,6
3,6
Asset
quarantees
“Bad
banks”
Beneficiaries
Source : IMF
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Containment and Resolution Policies
past crises*
Bank holidays
recent crisis**
Asset Management
Companies
Deposit Freezes
Increase in deposit
guarantees
Bank Recapitalization
with Public Funds
Significant addtional
guarantees
Nationalizations
All liabilities guaranteed
Asset Purchases
Asset guarantees
**Recent crisis (2007-2009) – 12 countries:
Austria, Belgium, Denmark, Germany, Iceland,
Ireland, Latvia, Luxembourg, the
Netherlands, Ukraine, the United Kingdom, and
the United States.
Source : IMF
Basel
*Past crises (1991-2002) – 17 countries:
Finland, Norway, Sweden, Brazil, Mexico, and
Jamaica, Indonesia, Japan, Korea, Malaysia,
Thailand, Colombia, Ecuador, Russia, Turkey,
Argentina and Uruguay.
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Resolution of small banks
Multifaceted importance
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Concentration of the US banking sector
Liczba
Number
ofbanków
banks
Udział
SharewinPKB
GDP
12,6%
7 581
(99,0%)
53
(0,7%)
Suma assets
bilansowa
mld $ $
Total
in wbillion
7,4%
1 853
(13,9%)
12,0%
10
(0,13%)
3 252
(24,4%)
4
(0,05%)
(0,1%;0,5%>
Average
total
assets
in billion
$$
Średnia
suma
bilansowa
w mld
>5,0%
1 343
(1,0%;5,0%>
195,1
(0,5%;1,0%>
(0;0,1%>
35,0
0,4
0
Basel
400
36,6%
(0,5%;1,0%>
(1,0%;5,0%>
5 370
(40,3%)
>5,0%
• The number of banks with assets amounting to less than 0.01%
of GDP exceeds 7 500. These banks are distributed throughout
the region.
• These banks’ assets comprise nearly 25% of the total assets of
the entire US banking sector, therefore:
109,0
(0,1%;0,5%>
1 756
(13,2%)
31,3%
9
(0,12%)
(0;0,1%>
1 090
(8,2%)
800
1 200
1 600
− the likelihood is high of a case of insolvency emerging
among this group,
− the financial ramifications of the degree of effectiveness of
managing bank liquidations among this group are
significant
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The problem of insolvency among US banks
• In the US, resolution of small state banks is carried out effectively thanks to the extensive experience and
institutional competence of the FDIC
• In terms of big banks, there was a lack of adequate tools and experience – hence public funds were employed
Remaining banks
Banks supervised by the FDIC
The FDIC has at its disposal both tools and competencies with
respect to liquidating small banks
160
Resolution
Lack of ready solutions to carry out a resolution process. One of
two solutions is possible:
140
350
120
300
100
250
80
341,6
60
40
3
2,6
assets: $639 billion
150
100
170,9
20
Bankruptcy
200
157
140
Lehman Brothers
400
Average assets: $0.9 bn*
96,7
27
0
50
Using public
funds
American International Group
Citigroup
Bank of America
0
2007
2008
Number of closed banks
2009
2010
Average assets: $1200 billion
Assests of closed banks ($ bn)
*Excluding Washington Mutual Bank
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Opportunities for resolution
with respect to small banks in Europe
35
Germany
Number
of banks
1000
Number of banks
per 10 bn EUR of
GDP
(1819; 30 600)
outside the
scale range
900
Cyprus
(72,7; 21 700)
outside the
scale range
Ireland
30
Luxem. (28,4;
Lithuania
82 100)
800
Austria
Austria
Poland
700
outside the
scale range
25
Italy
Large
number of
banks
France
600
Poland
20
FinlandSector is
Hungary
500
Ireland
fractionalized
Latvia
15
400
Finland
300
Spain
Hungary
200
Romania
Bulgaria
Lithuania
Czech Rep.
Malta
Denmark
Sweden
Cyprus
Luxem.
(118; 82 100)
outside the
scale range
Belgium
Greece
0
0
Latvia
10 000
20 000
Estonia Slovakia Slovenia
Portugal
Bulgaria
UK
Portugal
100
10
Netherlands
30 000
40 000
50 000
Estonia
5
Romania
Germany
Denmark
Netherlands
Italy
Sweden
Spain
France Concentration
Slovenia
Malta
Czech Rep.
Slovakia
Greece
0
0
10 000
GDP per capita (EUR)
20 000
of big banks
Belgium
UK
30 000
40 000
50 000
GDP per capita (EUR)
• The financial sector in many European countries is significantly fractionalized
• A large number of small banks operate in these markets
• As in the US, there is economic justification for employing resolution tools to liquidate these types of banks in
the event of insolvency
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Big Bank Risks
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Location of the biggest banks
40 largest world banks assets by country
0
1000
2000
3000
4000
5000
6000
7000
8000
USA
EUR bn
UK
France
Japan
The problem of big banks is a primarily European
problem
China
Germany
Italy
Europe
Northern America
Asia
Other
Switzerland
Spain
Netherlands
The majority of the 40 biggest banks in the world
are situated in Europe
Australia
Belgium
Canada
Sweden
Source: "Forbes Global 2000" rank, consisting of 40 largest world banks
Largest banks assets to GDP
0%
50%
100%
150%
200%
250%
300%
350%
400%
450%
Switzerland
The assets of Europe’s biggest
banks markedly exceed the GDP of
their home countries
UK
Assets/GDP
France
Belgium
Netherlands
Sweden
Australia
Spain
Europe
Northern America
Asia
Other
Italy
Germany
Japan
In non-European countries, the assets of the biggest
banks do not exceed the GDP of those countries
Canada
USA
China
Source: "Forbes Global 2000" rank, consisting of 40 largest world banks
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Changes in the banking system
The period preceding the financial crisis of 2008-2009 was characterized by a systematic rise in the
risk of insolvency of big banks, mainly European ones
Rise in leverage
Basel
Rapid rise in both regular assets and non
credit-obligation assets
8-9th June 2011
Liquid Assets / short term non-Deposit
Liabilities
14
Funding Risk
Consolidated International claims of reporting BIS banks
vis-à-vis banks, immediate borrower basis (trillions of US$)
$10T
Funding structure
Commercial paper, medium-term notes, asset-backed
commercial paper, a-b securities, repurchase
agreements, total return swaps, hybrid and repos, ABS
CDOs etc
all countries
Shadow bank Liabilities
developed countries
5 years
Europe
x3
$8T
$6T
$4T
Traditional bank Liabilities
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009 2010
Source : IMF
The development of the international market for funding
instruments should remain under tight supervision
The market for wholesale funding instruments has surpassed the
traditional market of financing banking activities
The size of the market is conducive to transferring country risk and
financial market risk between different geographical regions
By contrast with traditional liabilities, these new instruments
introduce significant risk to the banking sector
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Funding Risk (2)
Net Stable Funding Ratio
• The high risk associated with operational
funding is generated by large European banks
• These banks have a limited pool of stable
sources of funding
• For a large proportion of this group, the credit
volume exceeds the volume of deposits by a
factor of 2.5
• Operational funding is carried out by means of
wholesale financing
NSFR
Net Stable Funding Ratio (NSFR) is a ratio of available to required
stable funding
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Poor capital base
Equity/assets
14
2009
2009
Equity/Assets
2,0
ROA
ROA
2009
2009
Malta
1,8
Bulgaria
13
Low risk
Hungary
1,6
12
Czech Republic
1,4
Poland
11
Malta
1,2
10
Slovakia
9
Bulgaria
1,0
Romania
0,8
Czech Republic
8
Slovenia
Italy
Poland
High risk
Latvia
Hungary
7
Estonia
Austria
Greece
Portugal
Spain
6
outside the
scale range
Netherlands
Cyprus
Finland
Lithuania
Luxembourg
(5,4; 23,0)
Ireland
France
5
0,6
Belgium
0,4
Cyprus
Spain
Luxembourg
(0,4; 23,0)
Portugal
Italy
0,2
Austria
Slovenia
France
UK
outside the
scale range
Sweden
Greece
Netherlands
0,0
Denmark
4
Slovakia
Finland
Romania
UK
Germany
Sweden
…
Germany
Denmark
Belgium
-0,2
3
Ireland
-1,7
-0,4
0
2
4
6
8
10
12
0
2
4
Assets/GDP
• the size of the banking sector relative to GDP
• poor capital security of banks
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Assets/GDP
Assets/GDP
A significant source of risk is the confluence of two
threats:
6
Assets/GDP
Materialization of risk
Large banking sectors with a concomitant low capital
security demonstrated the lowest capacity to
withstand the financial crisis
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Limited capacity to employ public funds
Relying on public funds in the event of insolvency of Europe's biggest banks is practically impossible due to the
fiscal condition of the countries involved
3 largest banks assets, deficit and debt (% of GDP)
Banking
sector size
400%
Debt growth
(2010 forecast)
350%
400% 3 largest banks
assets (% GDP)
350%
Netherlands
UK
Belgium
300%
Netherlands
300%
UK
Belgium
Ireland
Ireland
250%
Banking
sector size
Deficit
growth/fall
(2010 forecast)
3 largest banks
assets (% GDP)
-1
250%
France
France
200%
200%
Spain
Spain
150%
150%
Italy
Germany
100%
Poland
50%
Germany
100%
Italy
50%
USA
USA
Poland
Public debt (% GDP)
Government deficit (% GDP)
0%
0%
40
50
60
70
80
90
100
110
120
0
2
4
6
8
10
12
14
16
Used data - 2009
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25th May
June2011
2011
18
Conclusions
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Mitigating the risk: „too big to fail”
Need for healthy public finances
Regulatory framework
Macroprudential
Minimizing the cost of insolvency
Increased capital requirements
Special Resolution Regime
Increased liquidity requirements
Prevention
Early intervention
Resolution
The problem of „too big to fail” remains
Mitigating the risk of negative impact
of business on the country and on
markets
Basel
Balance sheet restructurization and re-engineering
individual banks to ensure a secure business model
Creating a secure structure for the banking sector
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DGS: a leading institution in banking resolution
Resolution
Economies
of scale
Positive international empirical evidence
Homogenous
responsibility
Strengthening of the
economic growth
Cost reduction
of bank failure
Employment
of crises
management tools
Common public interest
Strengthening of the
financial stability
(one fund smaller than
the sum of two
separate funds)
Higher protection of
consumers
Deposit Insurance
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Robust domestic stability network
as prerequisite for effective cross-border safety net
Ministry of
Finance
Central
Bank
Financial
Services
Authority
Basel
Central
Bank/ ?
Macroprudential
strong & complete
domestic
financial stability system
Deposit
Guarantee
Scheme
8-9th June 2011
Resolution & pay-box
22
Discussion
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