Cross Border Resolution: Recent Progress & Update

Transcription

1 Cross Border Resolution: Recent Progress & Update Didik Madiyono Executive Director of Research, Surveillance, and Examination Voyage to Indonesia s International Seminar on Bank Restructuring and Resolution: 20 Years of Asian Financial Crisis: Strengthening Infrastructures for Financial Crisis Resolution Indonesia Deposit Insurance Corporation Lembaga Penjamin Simpanan February 28, 2018

2 Outlines Indonesian Banking Landscape Financial System Stability Framework The Establishment and Development of IDIC New Roles & Mandates for IDIC: The PPKSK Act No. 9/2016 Bank Resolution in Indonesia Bank Regulation in Indonesia: Foreign Ownership Cross Border Resolution Gap: Why should we care? IADI Core Principle: Cross Border Issues FSB Key Attributes: Cross Border Resolution Cross Border Issues in Indonesia MOU with other DICs on Cross Border Resolution Conclusion 2

3 Indonesian Banking Landscape (1/3) Commercial Banks: Conventional Banks Number Total Assets (billion IDR) 5,410,189 5,915,724 6,475,618 7,099,598 Total Loans (billion IDR) 3,526,364 3,903,936 4,199,713 4,548,155 Total Deposits (billion IDR) 3,943,697 4,238,349 4,630,352 5,050,984 Sharia Banks Number Total Assets (billion IDR) 204, , , ,027 * Total Financing (billion IDR) 147, , , ,880 * Total Deposits (billion IDR) 170, , , ,393 * Total Commercial Banks Number Total Assets (billion IDR) 5,615,150 6,129,147 6,729,802 7,387,625 Total Loans (billion IDR) 3,674,308 4,057,904 4,377,195 4,738,035 Total Deposits (billion IDR) 4,114,420 4,413,244 4,836,758 5,289,377 Rural Banks: Number 1,643 1,636 1,633 1,619 Total Assets (billion IDR) 89, , , ,945 Total Loans (billion IDR) 68,391 74,807 81,684 89,482 Total Deposits (billion IDR) 58,750 67,266 75,725 84,861 * Temporary numbers. Source: BI, OJK, and LPS 2017 Market share of Total Assets (%) Commercial Banks: 98.42% 98.37% 98.34% 98.32% Conventional Banks 94.83% 94.94% 94.63% 94.49% Sharia Banks 3.59% 3.43% 3.71% 3.83% Rural Banks 1.58% 1.63% 1.66% 1.68% Total 100% 100% 100% 100% Market share of Total Loans or Financing (%) Commercial Banks: 98.17% 98.19% 98.17% 98.15% Conventional Banks 94.22% 94.46% 94.19% 94.21% Sharia Banks 3.95% 3.73% 3.98% 3.93% Rural Banks 1.83% 1.81% 1.83% 1.85% Total 100% 100% 100% 100% Market share of Total Deposits (%) Commercial Banks: 98.59% 98.50% 98.46% 98.42% Conventional Banks 94.50% 94.60% 94.26% 93.99% Sharia Banks 4.09% 3.90% 4.20% 4.44% Rural Banks 1.41% 1.50% 1.54% 1.58% Total 100% 100% 100% 100% 3

4 Indonesian Banking Landscape (2/3) The Market Share of Commercial Banks Total Assets based on Ownership Type (%) State Owned Banks 37.0% 37.7% 39.6% 39.1% Foreign Exchange Commercial Banks 39.2% 38.5% 39.7% 40.1% Non-Foreign Exchange Commercial Banks 3.3% 3.1% 1.1% 1.1% Regional Development Banks 7.8% 7.8% 7.9% 7.9% Joint Venture Banks 5.0% 5.1% 4.7% 4.7% Foreign Bank Branches 7.7% 7.7% 7.0% 7.1% Total Market Share of Assets 100.0% 100.0% 100.0% 100.0% The Number of Commercial Banks based on Ownership Type State Owned Banks Foreign Exchange Commercial Banks Non-Foreign Exchange Commercial Banks Regional Development Banks Joint Venture Banks Foreign Bank Branches Total Number of Commercial Banks Source: BI, OJK, and LPS 4

5 Indonesian Banking Landscape (3/3) Commercial Banks having Foreign Controlling SH.* Assets in billion IDR. % Market share is relative to the Commercial Bank Industry s Total Assets Country Mean CF Right Total Assets %Mkt.Share Singapore , % Malaysia , % Japan , % United Kingdom , % Australia , % Taiwan , % South Korea , % China , % Saudi Arabia , % Qatar , % France , % Germany , % India , % Uni Emirate Arab , % Total 2,014, % Branches of Foreign Bank. Assets in billion IDR. % Market share is relative to the Commercial Bank Industry s Total Assets Country Number of Banks Total Assets %Mkt.Share Japan 1 147, % United States 3 106, % United Kingdom 2 76, % Germany 1 30, % Thailand 1 29, % China 1 26, % Total 9 417, % Total Mkt Share of Foreign Presence = 32.8% Source: LPS, Bloomberg (Dec 2017) CF right = Cash Flow Right (e.g. La Porta et al., 1999 JF) *The Controlling Shareholder definition follows OJK Regulation No. 39/POJK.03/2017, i.e. those shareholders having at least 25% ownership 5

6 Financial System Stability Framework 6

7 The Establishment and Development of IDIC IDIC was established after the 1997/1998 Asian Financial Crisis with the following missions: To provide an effective deposit insurance in order to protect depositors; To conduct effective and efficient bank resolutions; To resolve crisis through effective and efficient bank restructurings; and To actively promote and maintain national financial system stability. The PPKSK Act No. 9/2016 The IDIC Act no. 24/2004 Operationally effective 7

8 New Roles & Mandates for IDIC: The PPKSK Act No. 9/2016 Early Intervention Resolution preparation for a systemic bank when the bank is classified as a Bank under Intensive Supervision (due diligence) by the OJK. When a bank is classified under a Special Supervision status by the OJK, IDIC may market the bank for a P&A transaction. When a bank is classified under a Special Supervision status by the OJK, IDIC requires the bank to maintain its financial conditions to prevent material changes. IDIC s New Roles & Mandates Bank Resolution Method Purchase & Assumption (P&A) by transferring a troubled bank s asset and liabilities to a receipient bank. Bridge bank is formed by IDIC to accept troubled asset and liabilities. IDIC will pay the deficit between assets and liabilities of the troubled bank. Banking Restructuring Program IDIC is given a special authority to conduct BRP once the President declares a financial crisis; BRP Assets and Liabilities are managed in a separate balance sheet from IDIC s main balance sheet. IDIC reports BRP implementation to FSSC. 8

9 Bank Resolution in Indonesia No Description Up to Jan-18 Total 1 No. of Liquidated Banks Total Assets (IDR bn) Total Deposits (IDR bn) 1, , Liquidation Completed (No. of Banks) Proceeds from liquidation (IDR bn) Liquidation Cost (IDR bn) Surplus (deficit) liquidation (IDR bn) Recovery Rate 30.97% 45.25% 40.13% % Source: LPS *Note: Most of the liquidated banks are rural banks, except one commercial bank named PT Bank IFI, which was liquidated in There was also one commercial bank that received an OBA, named PT Bank Mutiara, which was successfully resolved and sold to J Trust Co.Ltd in

10 Bank Regulation in Indonesia: Foreign Ownership No max limit of foreign ownership BI Regulation No. 14/8/PBI/2012 BI Regulation No. 14/24/PBI/2012 OJK Regulation No. 56/POJK.03/2016 OJK Regulation No. 39/POJK.03/2017 Max. ownership for commercial bank: Financial institution: 40% Nonfinancial institution: 30% Individual shareholder: 20% (Conventional); 25% (Sharia) Exceptions: Central government Resolution authority Qualified bank with BI approval Controlling shareholder of commercial banks has: at least 25% ownership; or less than 25% ownership but has material control over the bank, directly or indirectly Each shareholder can only be a controlling shareholder of a bank. Otherwise: (1) bank merger; (2) formation of a BHC; or (3) formation of a Holding function. Max. ownership for commercial bank: Financial institution: 40% Nonfinancial institution: 30% Individual shareholder: 20% (Conventional); 25% (Sharia) Exceptions: Central government Resolution authority Qualified bank with OJK approval Controlling shareholder of commercial banks has: at least 25% ownership; or less than 25% ownership but has material control over the bank, directly or indirectly Each shareholder can only be a controlling shareholder of a bank. Otherwise: (1) bank merger; (2) formation of a BHC; or (3) formation of a Holding function. 10

11 Cross Border Resolution Gap: Why should we care? ~ Empirical studies show that the probability of default between parent banks and their subsiaries are closely related ~ Anginer, Cerutti, & Peria (2017 JFI) 11

12 Cross Border Resolution Gap: Why should we care? Avgouleas, Goodhart, & Schoenmaker (2013 JFS) Bank Resolution Plans (Living Wills) should help with the resolution of systemically important financial institutions (SIFIs) in distress. Living Wills could also prove the right regulatory instrument to achieve two further innovations in the resolution of SIFIs with crossborder presence. They could incorporate burden sharing arrangements between countries enabling burden sharing on an institution by institution basis. However, incompatibility of national insolvency regimes remain exists. Cerutti & Schmieder (2014 JFS) presents a framework to integrate ring fencing and regulatory differences (e.g., minimum capital requirements) into cross-border bank stress tests. Case studies show how some forms of ring fencing home or host regulators limiting flows of capital and income within a group could significantly increase banks capital needs. Karolyi & Taboada (2015 JF) Regulatory arbitrage Acquisition flows involve acquirers from countries with stronger regulations than their targets ( race-tothe-bottom ). Bertay, Demirguc-Kunt, & Huizinga (2016 JFI) Bank interest expenses rise relatively more with internationalization if the bank is underperforming or headquartered in a country with weak public finances, and especially at times of weak world output growth. 12

13 IADI Core Principle: Cross Border Issues Essential criteria: Where there is a material presence of foreign banks (i.e. foreign bank subsidiaries or branches), formal information sharing and coordination arrangements are in place among relevant deposit insurers and relevant safety-net participants, subject to confidentiality provisions. In circumstances where a deposit insurer is responsible for coverage of deposits in a foreign jurisdiction, or where more than one deposit insurer is responsible for coverage in a jurisdiction, bilateral or multilateral agreements exist to determine which deposit insurer(s) is/are responsible for the reimbursement process, setting levies and premiums, and public awareness. 13

14 FSB Key Attributes: Cross Border Resolution Statutory mandate to act to achieve a cooperative solution with foreign resolution authorities Legislation and regulation that trigger automatic action to achieve domestic stability The resolution authority should have resolution power over local branches of foreign firms and the capacity to use its powers National laws and regulations should not discriminate against creditors on the basis of their nationality, the location of their claim or the jurisdiction where it is payable Jurisdictions should provide for transparent process that support the resolution measures taken by the foreign home resolution authority The resolution authority should have the capacity in law, subject to adequate confidentiality requirements and protections for sensitive data, to share information, including Recovery and Resolution Plans (RRPs) Jurisdictions should provide for confidentiality requirements and statutory safeguards for the protection of information received from foreign authorities 14

15 Cross Border Issues in Indonesia (1/2) In anticipation that some Indonesian banks will likely expand their foreign presence in the years to come, and that foreign banks presence in Indonesia is likely to become more systemically significant. The need for explicit power to cooperate establish or participate in institution-specific supervisory colleges for financial institution groups with material cross-border operations; share information both bilaterally and through colleges of supervisors; develop a framework for cross-border crisis cooperation and coordination as well as a group resolution plan with the relevant host supervisory and resolution authorities; and consult and alert the relevant supervisory and resolution authorities from both home and host countries when taking recovery or resolution measures. 15

16 Cross Border Issues in Indonesia (2/2) The power to cooperate with its foreign counterparts The framework for cooperation should apply not only for recovery but also for resolution planning. Established the Crisis Management Groups (CMGs) to facilitate cross-border coordination for systemically important banks. In the absence of coordination, the resolution authority should be able to take action to preserve domestic stability. Coordination between jurisdictions should include payment and settlement system aspects of a bank resolution between home and host jurisdictions. It may also be necessary with securities market regulators. Establish MOU involving related authorities The responsibilities of each authority in both jurisdictions in respect of all stages of crisis preparedness and resolution; and agreed processes for information exchange, cooperation and coordination. Arrangements in respect of recovery planning, resolvability assessments and resolution planning. They should provide for more detailed bank-specific resolution plans to be agreed by way of separate documentation. These would likely include how both Single Point of Entry (SPE) and Multiple Points of Entry (MPE) recovery and resolution options would be implemented. 16

17 MOU with other DICs on Cross Border Resolution (1/2) Korea Deposit Insurance Corporation (KDIC) Related scope: The participants will coordinate the cross border resolution of a failing bank with respect to branch offices or subsidiaries. This coordination will be detailed further if a separate agreement is deemed necessary by the participants. Tripartite with Malaysia Deposit Insurance Corporation (MDIC) & Deposit Protection Agency (DPA)-Thailand Related scope: Developing cross border arrangements and providing assitance on cross border issues in respect of operational matters directly relating to protection schemes, to the extent permitted by each country's law, rules and regulations. Esisuisse, Swiss Related scope: The participants will coordinate the cross border resolution of a failing bank with respect to branch offices or subsidiaries. This coordination will be detailed further if a separate agreement is deemed necessary by the participants. Phillippine Deposit Insurance Corporation (PDIC) Related scope: Assisting each other on cross border issues that are relevant to each participant, to the extent of permitted by each country's law, rules and regulation. Source: IDIC s Corporate Secretary 17

18 MOU with other DICs on Cross Border Resolution (2/2) Federal Deposit Insurance Corporation (FDIC) Related scopes: Enhancing cooperation through the analysis of cross border resolution issues, including the identification of legal or operational impediments, to improve preparation for managing a cross border bank resolution; Increase bilateral communication in the event of a cross border bank failure involving an institution engaging in financial service activities in the United States and Indonesia. Deposit Insurance of Vietnam Related scope: Assisting each other on cross border issues that are relevant to each participant, to the extent of permitted by each country's law, rules and regulation. Saving Deposit Insurance Fund of Turkey Related scope: Upon a participant s reasonable request, the participants will exchange research reports or other information on DIS experience to the extent permitted by their domestic law, confidentiality requirements, or their internal policies. Deposit Insurance Corporation of Mongolia (DICOM) Related scope: When needed, facilitating timely exchange of information and experience through the exchange of senior level visit. The Depositor Protection Fund of The Lao People's Democratic Republic Related scope: Exchanging views and experiences on deposit insurance and resolution of financial institutions, including but not limited to, deposit insurance policies, legal issues, risk supervision, premium assessment, public awareness issues, and payout procedure. Source: IDIC s Corporate Secretary 18

19 Conclusion To strengthen each country s resilience on financial crisis, Cross-Border Resolution should become one of the primary and immediate agendas for all countries. Indonesia, through the IDIC, has been proactively endorsing cross-border research and is following up with more technical approaches on Cross- Border Resolution. IDIC encourages Cross-Border Resolution policies that follow IADI Core Principles and FSB Key Attributes. Let s join our hands together to make our countries stronger to face any upcoming financial crisis! 19

20 References Anginer, D., Cerutti, E., & Pería, M. S. M. (2017). Foreign bank subsidiaries' default risk during the global crisis: What factors help insulate affiliates from their parents?. Journal of Financial Intermediation, 29, Avgouleas, E., Goodhart, C., & Schoenmaker, D. (2013). Bank Resolution Plans as a catalyst for global financial reform. Journal of Financial Stability, 9(2), Cerutti, E., & Schmieder, C. (2014). Ring fencing and consolidated banks stress tests. Journal of Financial Stability, 11, Bertay, A. C., Demirgüç-Kunt, A., & Huizinga, H. (2016). Should cross-border banking benefit from the financial safety net?. Journal of Financial Intermediation, 27, Financial Stability Board (2014). Key Attributes of Effective Resolution Regimes for Financial Institutions. IADI (2014). IADI Core Principles for Effective Deposit Insurance Systems, Karolyi, G. A., & Taboada, A. G. (2015). Regulatory arbitrage and cross border bank acquisitions. The Journal of Finance, 70(6), La Porta, R., Lopez de Silanes, F., & Shleifer, A. (1999). Corporate ownership around the world. The Journal of Finance, 54(2),