11 Some introductory remarks Re-privatization of (Partially & Wholly) Nationalized Banks Jerzy...
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Some introductory remarks
Re-privatization of (Partially & Wholly) Nationalized Banks
Jerzy Pruski
2010 IADI Annual Conference Financial Safety-Nets Going Forward
Tokyo, 27-28 October 2010
Bank Guarantee Fund Poland
2010 IADI Annual Conference 3
Scale of losses
Cumulative peak losses as a percentage of risk-weighted assets at the start of the crisis
Financial crises in last 15 years
huge losses
Source – Bank of England
2010 IADI Annual Conference 5
Recapitalization in the EU
Capital raised by financial institutions (2007-2010) in EUR billions
0 10 20 30 40 50 60 70 80 90
Austria
Belgium
Cyprus
Germany
Spain
Finland
France
Greece (GR)
Ireland
Italy
Luxembourg
Malta
Netherlands
Portugal
Slovenia
Slovakia
UK
EUR bn
2009 2008 2007
Source - ECB
EUR billions
2010 IADI Annual Conference 6
Recapitalisation Amounts by Issue Date
0,000
20,000
40,000
60,000
80,000
100,000
2007 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 Q3 09 Q4 09 Q1 10 Q2 10 Q3 10
(mill
ion
eu
ros)
Banks under restructuring Non restructured banks
Recapitalization in the EU
Recapitalisation Amounts by Member States
0,000
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
UK DE NL IE FR BE ES DK AT IT EL LU SE LV SI HU
Banks under restructuring Non restructured banks
Capital raised by EU financial institutions (2009-2010)
0,000
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
Q1 09 Q2 09 Q3 09 Q4 09 Q1 10 Q2 10 Q3 10
(millio
n e
uro
s)
State_capital Market_raised
Capital raised by financial institutions (2009-2010)
Recapitalization by issue date
Recapitalization in different countries
Source: EU Commission Services
2010 IADI Annual Conference 7
Government capital injections into UK banks and building societies2007-2010
Recapitalization in the EU
Huge fiscal cost for the UK
Sources – HM Treasury, Bank of England
2010 IADI Annual Conference 9
Barrier 1 – scale and concentration
Complexity and scale of international banking groups
Concentration of US banking system and average assets relative to GDP of US commercial banks
Sources – FDIC, Bank of EnglandSource – Bank of England
2010 IADI Annual Conference 10
Banking sector size and concentration
Banking sector size to GDP (% )
478
373
360
354
329
312
168
75
502
0 100 200 300 400 500
Poland
Italy
Spain
Ireland
Belgium
France
Germany
UK
Netherlands
%
Differentiations
- banking sector asset size
- proportion of potential risk to banking sector asset size
- proportion of potential risk to GDP in different states
Sources: ECB, Banks Annual Reports (2009), ‘’Credit Writedowns” (June 2010), ”The Forbes Global 2000” ranking (2010)
12% 16%27%
39%
63% 66%
95%108% 109%
121%
170%
203%
332%
309%325%
269%243%
158%
120%107%
91%
39%43%28%
0%
50%
100%
150%
200%
250%
300%
350%
Poland
USA
South
Kor
ea
Japa
n
Germ
any
Italy
Spain
Franc
e
Irelan
dUK
Belgium
Nethe
rland
s
Assets of the largest bank group to GDPAssets of 3 largest banking groups to GDP
38%
68%65% 64%
35%39%
36%33%
28%29%
25%
15%17%
26%
46%
82%
65%63%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Poland
Germ
any
UK
Franc
e
Spain
Irelan
dIta
ly
Nethe
rland
s
Belgium
Assets of the largest bank group to banking sector balance sheet totalAssets of 3 largest banking groups to banking sector balance sheet total
2010 IADI Annual Conference 11
Banking sector size and concentration
-1
Assets of 3 largest banks, deficit and debt (% of GDP)
USA
Spain
Ireland
UK
France
Germany
Poland
Italy
Belgium
Netherlands
0%
50%
100%
150%
200%
250%
300%
350%
400%
40 50 60 70 80 90 100 110 120
Public debt (2009, % GDP)
Assets of 3 largest banks
(% of GDP)
Banking sector size
(2009)Debt growth
(2010 forecast)
USA
Netherlands
Belgium
Italy
Poland
Germany
France
UK
Ireland
Spain
0%
50%
100%
150%
200%
250%
300%
350%
400%
0 2 4 6 8 10 12 14 16
Government deficit (2009, % GDP)
Assets of 3 largest banks
(% of GDP)
Banking sector size (2009)
Deficit growth/fall
(2010 forecast)
2010 IADI Annual Conference 12
Barrier 2 – lack of capital among big banking groups required for acquisitions
Source: Bank of England
Liabilities (2001 = 100) and leverage of banks
and building societies by size in the UK (a)
High leverage level of big banks
2010 IADI Annual Conference 14
Nationalization – positive and negative factors
Strong factors
Critical financial functions - maintained
Depositors and good debtors - protected
Prevented systemic risk by protecting financial contracts
Negative factors
Injection of huge amount of public money
Risk that part of the money will not be recovered even after privatisation
Risk of moral hazard
OBA and Nationalization remain among optional tools to maintain financial stability
Temporary solution
2010 IADI Annual Conference 15
Public Funds Injection
Total
$ Amount_1 - α
$ Amount_2 + β
Indirect
- α
+ β
+ β
Direct
$ Amount_1
$ Amount_2
$ Amount_3
Equity/ Contribution
OBA
$ Amount_3 + β
Liquidation
P&A
Payoff
CostType
Background for the OBA/Nationalization decision
α – Amount expected to be recovered by selling sharesβ – Loss to the national economy α is the most critical in decision process
Source: KDIC Korea
2010 IADI Annual Conference 16
Recovery as a result of efficient nationalization and privatization
Strict conditions and procedures are required to avoid moral hazard
Full and clean exit is crucial when re-privatizing – sell all government shares and remove all risks such as contingent liability
Resolution cost
RestructuringState
1
Futureowner
Restructuring agreement
Definition of Exit Conditions
Restructuringagreement targets
Restructuringagreement overview
Final results
Amount recovered
2 3
+
Final recovery
Bank under nationalization Re-privatization process
2010 IADI Annual Conference 17
3,6%
0,2%0,2%
1,4%
2,1%
1,2% 0,3% 0,2%
14,0% 0,8%
5,2%
0
20
40
60
80
100
120
140bn EUR
Nationalization cost to countries GDP
Costs of nationalization of selected banks for public finance:• in nominal terms• in proportion to GDP
Public costs of nationalization
Data sources: Official bank websites, Eurostat, Reuters, European Commission
EUR billions
Nationalization costto GDP