Indonesian Deposit Insurance Corporation International Seminar

Transcription

1 Indonesian Deposit Insurance Corporation International Seminar BANK RESTRUCTURING AND RESOLUTION - 20 YEARS OF ASIAN FINANCIAL CRISIS: STRENGTHENING INFRASTRUCTURES FOR FINANCIAL CRISIS RESOLUTION Imansyah Senior Adviser Otoritas Jasa Keuangan Jakarta, 28 February 2018

2 AGENDA What is Recovery Plan (RP)? POJK concerning Recovery Plan Point of Concerns to Implementation Final Thoughts #2

3 What is Recovery Plan (RP)? Recovery Plan (RP) A plan to resolve any financial problem that a systemic bank potentially experience, both in normal or distress condition that may endanger its business sustainability, in order that the bank can undergo its business on going concern basis to maintain the financial system stability. Elements of Recovery Plan (RP) Business Model and strategy analysis Identification and analysis of critical functions and business lines Linkage to recovery options, indicators and governance Business model and strategy analysis Recovery options A wide range of recovery measures Prioritization of measures applied in a single scenario based on scenario analysis Recovery Indicators (Early) warning indicators for continuum of increasing distress Indicators to activate the implementation of the Plan Triggers reflecting particular vulnerabilities beyond regulatory ratios Recovery scenarios A wide range of scenarios causing significant hardship up to near default point. As a tool to test effectiveness of recovery options and adequacy of recovery indicators Governance and communication Clear escalation and decision making process, key people, roles and responsibilities Integration into existing risk management system Remediation measures Actions including structural changes to improve credibility and effectiveness of the recovery plan Include targeted completion dates and estimated costs #3

4 Implementation of RP in FSB members (2016) #4

5 The Context Taken from A. Mohan, #5

6 The Context for Indonesia CAR SIB, CB, CCB Risk Profile 8% Bank has to define internal triggers (quantitative & qualitative), other than regulatory triggers set by the supervisor Bank under intensive supervision (BDPI) Bank under special surveillance (DDPK) Financial System Stability Committee (KSSK) 4% 1 2 Supervisory Action by supervisor (Art 37 Banking Act) RP Activation RP Phase1 RP Phase 2 RP Phase 3 3 If RP Phase 2 ineffective Due Dilligence by LPS [Art 21 (2) PPKSK Act] Inform to LPS 4 Call for meeting For further action by KSSK Find Bank P&A [Art 21 (3) PPKSK Act] 5 Resolution by LPS 6 #6

7 AGENDA What is Recovery Plan (RP)? Regulation on Recovery Plan Point of Concerns to Implementation Final Thoughts #7

8 Regulation on Recovery Plan Act No. 9 of 2016 concerning Prevention and Resolution of Financial System Crisis (PPKSK Law) Banking and Systemic Bank Legislating list of follow-up regulations in time of 1 year after. 2 Presidential Decree 1 Government Regulations Coverage of Insured Deposit Premium for Banking Restructuring Program Rule of Write-offs Government Regulations BI Regulation Purchasing LPS owned Government Bond by Bank Indonesia 3 4 OJK Regulations Defining DSIB and Capital Surcharge Recovery Plan (RP) Bank Supervisory Follow-up Actions Regulation of Bridge Bank 5 LPS Regulations Procedure of Resolving Solvency issues; Bridge Bank; Resolution for Nonsystemic Banks; Asset Management #8

9 Regulation on Recovery Plan Article 18 (PPKSK Law) A systemic bank is required to fulfill specific regulation on capital adequacy and liquidity ratio, as well as to develop Recovery Plan (RP) Article 2 (POJK No. 14/POJK.03/2017) A systemic bank has to prepare and submit Recovery Plan to OJK. To complement and strengthen existing supervisory tools To shore up a bank s risk management and stress testing capability To enhance governance processes during normal and distressed periods To minimize economic and fiscal costs given bank failure #9

10 Regulation on Recovery Plan 1 General Provisions 1. A mandatory for a systemic bank to prepare a Recovery Plan 2. Responsibility of bank management (Board of Directors and Board of Commissioners) a. Board of Directors Prepare a realistic and comprehensive RP Deliver the RP to shareholders meeting for approval Communicate the RP to all levels of staffs within the bank Implement the RP in effective and timely manner. Evaluate and test the RP periodically b. Board of Commissioners Approve the RP Monitor the RP implementation Evaluate the RP implementation 3. RP is signed by the president director, the executive commissioner and the controlling shareholder. In case the PSP is a legal entity, RP will be signed as well by the ultimate shareholders. 2 RP Guideline Covers procedure of RP implementation (parties involved, decision making process, special unit or task force (crisis management group), good corporate governance principles applied, and robust management information system) #10

11 Regulation on Recovery Plan 3 RP Coverage Recovery Option (RO): Defined option of actions will be exercised by bank as to respond to any financial shocks to prevent and resolve bank financial condition and maintain its viability. 4 Recovery Option (RO) 1. RP Indicators Trigger level 2. Recovery option Other Provisions 1. RP Indicators (among others) Indicators Capital CAR Common Equity Tier 1 (CET 1) ratio Liquidity Reserve Requirement in IDR Liquidity Coverage Ratio (LCR) Net Stable Funding Ratio (NSFR) Profitability ROA ROE Efficiency Ratio (BOPO) Asset Quality NPL/NPF ratio (gross and net) 2. Setting trigger level for each indicator aim to: a. Bank is able to prevent and maintain the ratio equal or higher than the prevailing regulations b. Bank is not violating the ration in accordance to the prevailing regulation. c. Bank is able to safeguard its business sustainability Bank and other indicators (qualitative) : Bank may set other qualitative indicators, accordingly may endanger bank financial condition significantly. Bank set Recovery Options for qualitative indicators. 3. Recovery Option (RO) RO set in detail with realistic implementation sequences, based on indicator and trigger level: Selecting the sequence of RO implementation Assessment the feasibility of every RO Assessment the impact of every RO Assessment the time relevant Systemic bank is required to submit RP initially by end of Dec 2017 Systemic bank is required to have bail-in instruments at the latest by end of Dec #11

12 AGENDA What is Recovery Plan (RP)? Regulation on Recovery Plan Point of Concerns to Implementation Final Thoughts #12

13 Point of Concerns To Implementation CAPITAL Bank includes reduction of provisioning scope. Ordering recovery actions by stage of distress is useful provided that the bank also does analysis of recovery options by stress types (market vs bank-specific; fast moving vs gradual) Note that recovery indicators framework defines the point of escalation. The crisis management will decide on selection of options after an appropriate escalation process is started. It is thus possible that the crisis committee deploys what was originally envisaged as opsi pencegahan. Recovery plan should be implemented without extraordinary assistance or intervention by public authorities, hence no awaiting for supervisor instructions.. Consider issuing bail-in bond with trigger point higher than 5.125% LIQUIDITY Bank should be aware of non-linear nature of stress progression and prepared for threshold effects (when risks crystalize and become harder to manage), especially when it comes to liquidity crisis Bank should be aware of cross effects of taken options Options should be presented in terms of type of scenarios (market and bank-specific) and speed (fast and prolonged) Bank uses liquidity gap approach for its liquidity risk management framework/stress testing/risk appetite statement, not rely mainly to LCR/NSFR for recovery indicators PROFITABILITY Bank develops mode detail plan to improve asset quality and reduce provisioning (CKPN) Consider cross effects to other recovery areas (e.g. solvency), or impacts from options in other areas to profitability recovery Quantify how the recovery options could return the bank to sustainable profitability path Distinguish between stress scenario types and speed #13

14 Point of Concerns To Implementation ASSET QUALITY Bank intends to raise provisioning, unlike in the case of solvency and profitability sections beware of cross effects from other recovery options. Measures to reduce credit (growth) will raise NPL ratio due to decrease of the denominator In addition, NPL resolution is hard to do. As a result, NPL ratio is likely to remain in a regulatory breach (< 5%) for a long time even if the bank has already restored its solvency and profitability Additional requirements for recovery planning at a systemic bank Understand the systemic risk associated with its core businesses and critical operations, including the way in which it currently aggregate/manage risk Identify the key financial and operational dependencies between legal entities and banking products/services that could restrict recovery optionality and resolution flexibility Understand the bank s interconnectedness and contagion effects relating to the overall banking system and market infrastructure #14

15 AGENDA What is Recovery Plan (RP)? Regulation on Recovery Plan Point of Concerns to Implementation Final Thoughts #15

16 Italy Banca Monte dei Paschi di Siena: a lesson learned 1. Third-largest and most precarious bank in Italy. Due to its financial conditions, its 10.6 billion liquidity position would expectedly run out in 11 months, but said then that it would run out in 4 months. The bank continues to try to raise private money in a 5 billion recapitalization effort. The ECB has given it until the end of 2016 to raise the money and dispose of 27.7 billion in bad loans the net value of which is estimated at 9.2 billion. It has threatened to wind Monte dei Paschi down if it fails to do so. On December 9, the central bank rejected a request for a three-week extension, yanking Monte dei Paschi's shares down by nearly 11%. The Italian government (Dec 7, 16) preparing to take a controlling stake of up to 40% in Monte dei Paschi (so called a "de-facto nationalization ). The 2 billion injection in the form of bond purchases by the Treasury: retail investors numbering around 40,000 would receive face value for their bonds, which the government would then convert to shares in the bank. December 21, Italy's parliament approved a 20 billion rescue package. #16

17 Final Thoughts RCAP Investment Grade 2. Downside risks (global economy growth, AE and US economies, geopolitics, commodity prices etc.) may affect EMs and trigger distress and shocks to financial system stability. Asia Financial Crisis ( ) and Global Financial Crisis (2008) PPKSK Act Prevention is more constructive that resolution: 1. coordination between KSSK members; 2. undertaking periodically Stress Test (Bottom Up and Top Down); 3. crisis simulation (thematic); and 4. Finalisation regulation on Banking Restructuring Program 3. Time to consider to implement RP for D-SIFIs as concept on financial conglomerates and financial holding company becoming more relevant in addressing the systemic risk. #17

18 Thank you...