crises - ebrd.com file1992‐2002, the “golden age” of systemic crises Finland, Norway Sweden...
Transcript of crises - ebrd.com file1992‐2002, the “golden age” of systemic crises Finland, Norway Sweden...
Systemic crises appear suddenly, evolve chaotically. ◦
Small, apparently minor shocks trigger a vicious cycle of crisis. ◦
Systemic crises then evolve along unforeseen paths ◦
Once started, developments can seem chaotic, almost random
Preparation more effective than predict a crisis. ◦
Early warning systems, stress testing supervisory tools◦
In a crisis, limited data, changing conditions, uncertainties. ◦
Policy responses are often outside the normal range◦
Political crises can merged with the economic crisis.
1992‐2002, the “golden age”
of systemic crises
Finland, Norway Sweden (1992), Indonesia Korea Malaysia Thailand
(1998), Russia (1998), Turkey (2001), Argentina (2002).
Crises due to both macroeconomic and microeconomic factors
“Golden age”
because policy options were greater.
Recent global crises: new challenges, more limited policy options
Outline of Presentation
Impact of Systemic Crises
Policies for Managing a Systemic Crisis
Recent Global Crisis
Lessons for Crisis Planning
Objective of Presentation
Describe the policy environment that allows bank
restructuring to proceed effectively and at least cost.
Indonesia
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
1986 1989 1992 1995 1998 2001 2004
Source: WEO.
Trend GDPGDP
Thailand
0
1,000
2,000
3,000
4,000
5,000
6,000
1986 1989 1992 1995 1998 2001 2004
Source: WEO.
Trend GDPGDP
Real GrowthMalaysia
0
50
100
150
200
250
300
350
1986 1989 1992 1995 1998 2001 2004
Source: WEO.
Trend GDPGDP
Real GrowthKorea
100,000
200,000
300,000
400,000
500,000
600,000
700,000
800,000
1986 1989 1992 1995 1998 2001 2004
Source: WEO.
Trend GDPGDP
Crisis Period Gross Outlay Recovery Net Cost Assets 1/
Chile 1981-83 52.7 19.2 33.5 47.0Ecuador 1998-2001 21.7 0.0 21.7 41.3Indonesia 1997-present 56.8 4.6 52.3 68.1Korea 1997-2000 31.2 8.0 23.1 72.4Malaysia 1997-2000 7.2 3.2 4.0 130.6Sweden 1991-93 4.4 4.4 0.0 102.4Thailand 1997-2000 43.8 9.0 34.8 117.1Turkey 2000-present 29.7 1.3 30.5 71.0
Source: IMF.
Notes:1/ Assets of deposit money banks in the eyar before the first crisis year.
Bank resolution requires comprehensive policy framework
A consensus on framework design has emerged
Based on experience of last two decades
Forms the foundation for planning
Clarifies decisions made in anticipation and decisions in the heat of the
crisis
That framework canEase implementationReduce costsShorten the crisis
Phase 1 – Address Liquidity Shocks
Phase 2 – Stabilize Creditor Expectations
Phase 3 – Restructure and Reorganize Banks
Phase 4 – Manage Impaired Assets
Systemic crisis almost always began as a liquidity problem
Illiquidity spreads crisis, worsens panic and most be reversed
Measures:All countries extended emergency liquidity
Required minimum or no conditions
Announce a medium-term restructuring program
Be transparent in policies to regain confidence
Argentina Finland IndonesiaKorea Malaysia NorwayRussia SwedenThailand Turkey
Argentina 24.3Finland 5.5Indonesia 53.8Korea 28.9Malaysia 12.2Norway 6.2Russia 31.5Sweden 9.4Thailand 25.9Turkey 22.16
Priority policy objective
Measures:Protect depositors, possibly with a blanket guarantee
Government support critical for credibility
Guarantees cannot solve the crisis
Combine with revised macroeconomic program
Combine with medium-term restructuring program
Be transparent in policies to regain confidence
Blanket guaranteeFinland Sweden Thailand Indonesia Korea Malaysia Turkey
No blanket guaranteeArgentinaNorwayRussia
Deposit FreezeArgentina
No deposit freezeFinland Sweden Thailand Indonesia Korea Malaysia TurkeyNorwayRussia
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
Diagnosing viability
More than meeting current regulatory capital
Focus on medium term viability (ability to generate
profits)
Three stages:1. Examined current information on capital, liquidity 2. Conduct forward-looking assessment
How business model will meet changing conditions
Determine how long to meet fully prudential requirements 3. Agree on operational plan, additional
Restructuring and resolution options
Monitored forbearance to allow time to restructure
Different resolution tools used
Private sector options
Mergers and acquisitions
Recapitalization or salesPublic sector options
Purchase and assumption
Bridge banks
Public sector capital support
Liquidation
ForbearanceArgentinaFinlandIndonesiaKorea
MalaysiaNorwayRussia Thailand Turkey
No forbearanceSweden
Argentina Finland IndonesiaKorea Malaysia NorwayRussia SwedenThailand Turkey
Use of mergersFinland IndonesiaKorea
Malaysia NorwayRussia
SwedenThailand Turkey
No mergersArgentina
Bank closuresIndonesiaKorea NorwayRussia Thailand Turkey
No bank closuresArgentinaFinland Malaysia Sweden
New AgencyArgentina Finland IndonesiaKorea Malaysia NorwayRussia SwedenThailand
No New AgencyTurkey
Provision of Liquidity Central banks provided liquidity on demandConditions for access eased
Stabilize Creditor ExpectationsBlanket guaranteesCovering all creditors including depositors
Restructure and Reorganize BanksDiagnosis in medium term contextVariety of resolution tools
Manage Impaired Assets
Banks “new”
funding model failed
Not traditional crisis—securities not loan portfolio
Real estate collapse created losses in securities
Creditor fear spread to ALL securities
Core funding from securitization failed
Banks’
capital levels deteriorated
Assets were marked to market
Procyclical capital requirements hit
Created a credit crunch, economic slowdown
Creditor panic
Policy response broadly consistent with standard
Significant provision of liquidity
Extension of guarantees to all creditors
Public funds to stabilize asset markets
Public funds to stabilize firms
However, some important differences
Recapitalization with preferred shares not public ownership
Limited diagnosis or evaluation
Few conditions on use of public funds
Lessons for Crisis Planning
Past experiences provide crisis management framework
Provide liquidity
Remove incentives for creditor runs
Evaluate medium term viability as well as current balance sheet position
Have an adequate tool kit for bank restructuring and resolution exists.
But crises are unpredictable so early planning essential
Have a institutional setting for policy coordination in place.
Have resolution options prepared in advance
Information sharing agreements
Manuals and procedures prepared (even if unlike to be used)
Criteria for selecting resolution option
Policy consensus about use of public resources
Conditionality for public support
Test alternative scenarios to identify and fix gaps
Lessons for Crisis Planning
Planning under uncertainty◦
Have the legal authority to act◦
General plans, not specific scenarios◦
Make crisis preparations part of routine
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.
Lessons for Crisis Planning contd…
A Word of Caution
No “right”
model of crisis management
Preparation as well as prevention
Thank
you