Federal Reserve System/IMF/World Bank. Seminar for Senior Bank Supervisors October 19 30, David S. Hoelscher

Transcription

1 Federal Reserve System/IMF/World Bank Seminar for Senior Bank Supervisors October 19 30, 2009 David S. Hoelscher Money and Capital Markets Department International Monetary Fund Typology of Crises Type of shock Single institution Multiple institutions No contagion Small medium bank Sectoral banks Contagion Potential for widespread contagion (Barings, BCCI) Isolated failure (Continental Illinois) (US S&L Crisis) System failure (Nordic crisis East Asia Argentina) 2

2 Systemic Crises A loss of confidence in the banking system Significant negative effects on the real economy Disruptions in payments system, credit flows, and asset values 3 Systemic Crises Then: Argentina, East Asia, Ecuador, Mexico, Russia, Turkey, Uruguay Now: /10 United Kingdom, United States, Europe 4

3 THEN 5 6

4 7 8

5 9 10

6 Origins of Crises Build up of financial weaknesses over time Weak credit underwriting, weak supervision Often triggered by non-systemic event or shock Distress first emerges as a liquidity problem Creditor runs (including depositors) are symptoms of underlying problems Once started, the collapse of confidence feeds on itself 11 Standard Model of Crisis Management Phase 1 Contain Crisis Phase 2 Restructure Banks Phase 3 Manage Impaired Assets Phase 4 Exit from Crisis Mode 12

7 Priority policy objective 1: Containing the Crisis Measures: Protect depositors (possibly with a blanket guarantee) Establish credible macroeconomic policies Take measures to stop capital outflows Announce a medium-term restructuring program Be transparent in policies to regain confidence 13 2: Restructure Banks Resolution in stable financial environment Close interaction of stability elements Resolution of a systemic crisis Innovation and crisis management Sometimes second best solutions 14

8 2: Restructure Banks Principles for Resolution Speedy removal of failing bank Need for finality Specialized courts or bank bankruptcy framework Avoid disruptions of financial system Avoid contagion to other institutions Limit disruption to depositors Treatment of shareholders Ability to impose losses No interregnum when transferring control 15 Tools for resolution 2: Restructure Banks Private sector options Mergers and acquitions Recapitalization or sales Public sector options Intervention authority Purchase and assumption Bridge banks Public sector capital support Liquidation 16

9 2: Restructure Banks Insolvency Triggers Application Thresholds U.K. France Germany Spain United States Australia Hong Kong SAR (i) The bank is unable to pay its debts (ii) the liabilities exceed its assets. The FSA may seek a winding up order by the courts. (i) Inability to meet liabilities or (ii) license has been deleted by order of the Commission Bancaire (i) Illiquidity or (ii) the bank s liabilities exceed its assets. Inability to meet debt service. The threshold is met where insolvency is actual or imminent. (i) The bank s liabilities exceed its assets, (ii) inability to meet obligations or (iv) critically undercapitalized (2 percent or less of equity to total assets. Unable to pay all its debts or APRA considers the bank insolvent and could not be restored to solvency within a reasonable period. Inability of the bank to pay its debts or when a court determines that the winding-up of the bank is in the public interest. 17 2: Restructure Banks Diagnosis Public assisted P&A Yes Private offers? Restructure Sale No Nationalization Viable? Yes No Least cost resolution Restructuring Plan (MOU) Resolution Yes Systemic? No Fulfill? Sale? Yes No Yes No Release from special regime Purchase and assumption (P&A) Liquidation 18

10 Bank Restructuring Diagnosis of banks Uniform criteria Focus on medium term viability (ability to generate profits) Role of special audits 19 2: Restructure Banks In a systemic crisis may need to be creative: Viable, undercapitalized banks: present time-bound restructuring plans, private recapitalization Be subject to intensive reporting and monitoring Insolvent, unviable banks: Should be intervened and resolved as soon as possible Should be passed to agency responsible for resolution Deposits should be transferred to sound banks 20

11 Use of Public Money Use of public funds for recapitalization: May be justified when financial system stability threatened Designed to encourage private sector contributions Principles that limit the public sector exposure: Private participation with government representation. All losses recognized and imposed on existing shareholders. Operational restructuring. Positive net worth to be eligible for public support. Payment for the shares in tradable government bonds. Conversion of Tier 2 capital if the CAR falls below given ratio. 21 Management of Impaired Assets Institutional Arrangements DECENTRALIZED CENTRALIZED MANDATE NARROW BROAD Private AMCs Private resolution trusts Bank workout units Private resolution trusts Rapid resolution vehicles (US RTC, Thai FRA) Broad mandate CAMCs (KAMCO, Securum) 22

12 Manage Impaired Assets Mandate: narrow (min taxpayer losses), as supposed to broad (min fire sale effects), facilitates success; Pricing of asset purchases: current market value Legal backing: strong legal basis needed for transfers of titles; adequate powers to maximize recoveries Funding: adequate capitalization Governance: independent board/private sector participation; disclosure; auditing; reports to parliament 23 Exit from Crisis Exit from blanket guarantee if applied Exit from government ownership of banks Sale of assets taken over Overhaul of regulations to not repeat mistakes Continue corporate restructuring to avoid second-wave crisis 24

13 Costs of Banking Crises Impact on economic growth Fiscal cost of restructuring 25 Impact on Real Growth 2,500,000 Indonesia 2,000,000 Trend GDP GDP 1,500,000 1,000, , Source: WEO. 26

14 Impact on Real Growth Thailand 6,000 5,000 Trend GDP GDP 4,000 3,000 2,000 1, Source: WEO. 27 Impact on Real Growth Malaysia Trend GDP GDP Source: WEO. 28

15 Impact on Real Growth Korea 800, ,000 Trend GDP GDP 600, , , , , , Source: WEO. 29 Fiscal Costs Of Selected Banking Crises (In Percent Of GDP) Crisis Period Gross Outlay Recovery Net Cost Assets 1/ Chile Ecuador Indonesia 1997-present Korea Malaysia Sweden Thailand Turkey 2000-present Source: IMF. Notes: 1/ Assets of deposit money banks in the eyar before the first crisis year. 30

16 Now 31 Not unusual origin Erosion of underwriting practices Fraudulent lending practices Shortcomings in risk management Misuse of investment vehicles Limited data during economic slowdowns Triggered by mortgage defaults 32

17 Outbreak: rolling shocks Credit shock Started with US subprime mortgage market Triggered by rising borrowing costs, falling housing prices Leverage shock Credit shock aggravated by high leverage Funding shifted outside regulated banking (securitization) Concern about mortgage instruments spread to all instruments Funding shock A run on securitized credit Fire sales of hybrid instruments Collapse of markets 33 Differences from past crises Global nature, role of mature economies differentiates this crisis Containment was immediate priority but: Enhanced depositor protection, not blanket Funding guarantees Aggressive bank recapitalization. Recapitalization before diagnosis pre-emptive US$384 billion Sept 2008-Feb US$75 billion between March-June

18 Guarantees 2/ Committed Capital 1/ Injected Asset Protection Total Capital Committed Injected (In billions of US dollars) (In percent of GDP) Argentina Australia Brazil Canada China France Germany India Indonesia Italy Japan Mexico 0 Netherlands Russia Saudi Arabia South Africa South Korea Spain Turkey United Kingdom United States , Total 2,608 1, , Source: Table 1 35 Markets are stabilizing but: dependent on unprecedented public support funding markets impaired Critical crisis measures remain: Coordinating policy responses Establishing plans to exit protection policies; Completing diagnosis of the banking system and Adopting asset management policies. While 36

19 Critical policy directions must be set: Strengthen prudential framework Procyclicality Perimeter of supervision Framework for limiting systemic risk Capital charges for structured credit Capital charges for default risk in trading book Supervise off balance sheet vehicles Clearer identification of ratings for structured products Supervisory tools for risk management Regulatory guidance on stress testing, valuation Disclosure of securitized products, off balance sheet vehicles Risk management for off balance sheet vehicles 37 Lessons 38

20 Lessons for Crisis Planning Planning under uncertainty Legal authority to act General plans, not scenarios Make crisis preparations part of routine Communication policy Most frequently under-prepared Most frequently weakens confidence News/rumors cannot be controlled Be prepared, respond quickly, respond often Needs international dimension as well 39 Lessons for Crisis Planning Cross border differences Significant regulatory differences Creates arbitrage opportunities Stresses need for coordination Plan for failure Surprises will happen. Identify what must be protected; build redundancies. Agility needed in problem identification, decision making Plans should be robust to failure. 40

21 Conclusions and Lessons A Word of Caution No right model of crisis management Principles, not steps. 41 Thank you 42