Managing Systemic Banking
Crises
David S. Hoelscher
Assistant Director
Money and Credit Markets Department
Introduction
Systemic banking crises of
unprecedented scale:
Argentina, East Asia, Ecuador, Mexico, Turkey and
Venezuela
ƒ These crises were due to a mixture of
macroeconomic and microeconomic factors
ƒ Recent crises introduced new challenges not seen
in the Asian banking crises of the late 1990s
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Outline of Lecture
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What are systemic banking crises?
Origins of a crisis
Costs of banking crises
Standard model of crisis management
Complicating factors for the standard model
Conclusions and lessons
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What are systemic banking crises?
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A loss of confidence in a substantial portion of the
banking system
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Serious enough to generate significant negative
effects on the real economy
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Disruptions to the payments system, to credit flows,
and from the destruction of asset values
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Banking Problems Worldwide 1980-2003
Banking Crisis
Significant Banking Problems
No Significant Banking Problems/Insufficient Information
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Origins of crisis
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Irrespective of origin, a crisis first emerges as a
liquidity problem in one, or some, or all banks
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Liquidity problems and deposit withdrawals are
symptoms of underlying problems
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Causes can be microeconomic or
macroeconomic, or a combination of both
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Origins of crisis
Microeconomic
ƒ Typically a result of poor banking practices in
combination with poor regulatory/supervisory
practices:
o
o
Lax lending practices
Weak risk control systems
o
Lead to balance sheet deficiencies (mismatches,
poor asset control)
Banks with such deficiencies are vulnerable to any shock
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Origins of crisis
Macroeconomic
ƒ Macroeconomic imbalances build up strains in the
banking system
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Impact depends on balance sheet structure:
¾
¾
¾
¾
Large exposure to government
High degree of dollarization
Unhedged borrowers
High and volatile interest rates
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Costs of Banking Crises
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Fiscal cost of restructuring
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Impact on lending and deposits
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Impact on economic growth
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Fiscal Costs Of Selected Banking Crises
(In Percent Of GDP)
Crisis Period
Chile
Ecuador
Indonesia
Korea
Malaysia
Sweden
Thailand
Turkey
1981-83
1998-2001
1997-present
1997-2000
1997-2000
1991-93
1997-2000
2000-present
Gross Outlay
Recovery
Net Cost
Assets 1/
52.7
21.7
56.8
31.2
7.2
4.4
43.8
29.7
19.2
0.0
4.6
8.0
3.2
4.4
9.0
1.3
33.5
21.7
52.3
23.1
4.0
0.0
34.8
30.5
47.0
41.3
68.1
72.4
130.6
102.4
117.1
71.0
Source: IMF.
Notes:
1/ Assets of deposit money banks in the eyar before the first crisis year.
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Impact on Deposits and Loans
(In real terms and billions of local currency)
Argentina
Ecuador
1,000
1,000
250,000
250,000
Loans
800
Loans
800
200,000
600
600
150,000
150,000
400
400
100,000
100,000
200
200
50,000
50,000
0
1990
Deposits
0
1992
1994
1996
1999
2001
0
1990
200,000
Deposits
0
1992
1994
1996
1999
2001
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Source: IMF.
Impact on Deposits and Loans
(In real terms and billions of local currency)
Indonesia
Mexico
5,000,000
5,000,000
7,000
4,000,000
6,000
Loans
Deposits
4,000,000
1994
1996
1999
2001
Deposits
4,000
4,000
3,000
3,000
1,000,000
2,000
2,000
0
1,000
1990
1,000
2,000,000
1992
6,000
5,000
3,000,000
1,000,000
1990
Loans
5,000
3,000,000
2,000,000
7,000
1992
1994
1996
1999
2001
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Source: IMF.
Impact on Deposits and Loans
(In real terms and billions of local currency)
Turkey
Venezuela
20,000,000
20,000,000
40,000
16,000,000
30,000
12,000,000
12,000,000
20,000
20,000
8,000,000
8,000,000
10,000
10,000
4,000,000
1990
4,000,000
Loans
Loans
16,000,000
Deposits
1992
1994
1996
1999
2001
0
1990
40,000
Deposits
30,000
0
1992
1994
1996
1999
2001
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Source: IMF.
Impact on Real Growth
In billions of local currency
Indonesia
Indonesia
Finland
2,500,000
Trend GDP
GDP
150
150
600,000
600,000
Trend GDP
2,000,000
Trend GDP
GDP
125
1,500,000
200,000
1995
100,000
1998
2001
2004
100,000
2001
50
1998
2000
1992
1996
1992
1989
1988
1984
1980
200,000
1995
75
0
1986
Source: WEO.
300,000
1992
500,000
50
300,000
100
1,000,000
75
400,000
1989
100
500,000
400,000
1986
125
GDP
500,000
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Source: IMF.
Impact on Real Growth
Thailand
6,000
5,000
Trend GDP
GDP
4,000
3,000
2,000
1,000
0
1986
1989
1992
1995
1998
2001
2004
Source: WEO.
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Impact on Real Growth
Korea
Malaysia
350
800,000
Trend GDP
300
700,000
TrendGDP
GDP
GDP
250
600,000
200
500,000
150
400,000
100
300,000
50
200,000
0
100,000
1986
1986
1989
1989
1992
1992
1995
1995
1998
1998
2001
2001
2004
2004
Source: WEO.
Source: WEO.
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Impact on Real Growth
In billions of local currency
Ecuador
300
300
Trend GDP
GDP
275
275
150
150
2001
175
1999
175
1997
200
1995
200
1993
225
1991
225
1989
250
1987
250
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Source: IMF.
“Standard Model” of Crisis Management
Phase 1 - Containing the Crisis
Phase 2 - Bank Restructuring
Phase 3 – Management of Impaired Assets
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Phase 1: Containing the Crisis
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Policy priority: To stabilize the situation and
restore public confidence
Accommodate bank liquidity needs
¾ Emergency liquidity assistance
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Excess liquidity must be sterilized
Identify and address the causes of the crisis
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Phase 1 – Containing the Crisis
Measures:
¾ Protect depositors (possibly with a blanket guarantee)
¾ Establish credible macroeconomic policies
¾ Take measures to stop capital outflows
¾ Close clearly unviable institutions
¾ Announce a medium-term restructuring program
¾ Be transparent in policies to regain confidence
¾ If all this fails: resort to administrative measures as a
very last resort
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“Standard Model” of Crisis Management
Phase 1 - Containing the Crisis
Phase 2 - Bank Restructuring
Phase 3 – Management of Impaired Assets
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Phase 2 - Bank Restructuring
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Policy priority: Restore viability and efficiency of
the sector at minimum fiscal costs
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Institutional and legal arrangements
¾ Laws and institutions that facilitate bank intervention
¾ Laws regulating asset valuation and transfer
¾ Accounting and auditing rules
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Bank Resolution
Yes
Yes
Diagnosis
Viable?
Fulfill?
Restructuring
Plan
(MOU)
Release from
special regime
No
No
Public assisted
P&A
Yes
Yes
Yes
Private
offers?
Restructure
Sale
Nationalization
Resolution
Least cost
resolution
Systemic?
Purchase and
assumption
(P&A)
No
Sale?
No
Liquidation
No
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Phase 2 - Bank Restructuring
Diagnosis of banks
¾ Uniform criteria
¾ Focus on medium term viability (ability to
generate profits)
¾ Role of special audits
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Phase 2 - Bank Restructuring
Bank Resolution:
Viable, undercapitalized banks:
¾ present time-bound restructuring plans, private
recapitalization
¾ Be subject to intensive reporting and monitoring
Insolvent, unviable banks:
¾ Should be intervened and resolved as soon as
possible
¾ Should be passed to agency responsible for
resolution
¾ Deposits should be transferred to sound banks
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Phase 2 - Bank Restructuring
Use of public funds for recapitalization:
¾ May be justified under special circumstances
¾ Could be designed to encourage private
sector contributions
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“Standard Model” of Crisis Management
Phase 1 - Containing the Crisis
Phase 2 - Bank Restructuring
Phase 3 – Management of Impaired Assets
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Phase 3 – Management of Impaired Assets
Policy priority: Resolution of Nonperforming Loans
Institutional framework for dealing with impaired assets
- centralized versus decentralized
- narrow mandate of broad mandate
- speed versus value
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Phase 3 - Management of Impaired Assets
DECENTRALIZED
CENTRALIZED
NARROW
Private AMCs
Private resolution trusts
Rapid resolution vehicles
(US RTC, Thai FRA)
BROAD
MANDATE
INSTITUTIONAL ARRANGEMENT
Bank workout units
Private resolution trusts
Broad mandate CAMCs
(Danaharta, KAMCO, Securum)
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Phase 3 – Management of Impaired Assets
Linkages to corporate restructuring
¾ Importance neglected
¾ Two sides of the same coin
¾ Highly complex operation
¾ In parallel as much as possible
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Phase 3 – Management of Impaired Assets
NPLs in Asia, End -2001
In billions of USD
Country
China
Japan
S. Korea
Indonesia
Malaysia
Philippines
Thailand
% of Total Net
USD Billion
Loans
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346
8
4
14
6
9
25
9
4
12
11
17
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Source: McKinsey & Company's Asia Financial Institutions and
Corporate Finance & Strategy practices (2003), Banking in Asia
Acquiring a Profit Mindset (2nd Edition).
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Post-Crisis Management
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Exit from blanket guarantee, or
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Exit from administrative measures
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Exit from government ownership
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Continue corporate restructuring to avoid
“second-wave crisis”
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Complicating Factors for Standard Model
Debt Sustainability and Bank Resolution
Dollarization
Safety Net/Depositor Protection
Issue of Political Support
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Debt Sustainability and Bank Resolution
Debt sustainability may limit restructuring options.
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High debt levels and high resolution costs can force
policy tradeoffs
¾ Less depositor protection
¾ Less capacity to restructure banks
¾ Shift of burden sharing from government to
shareholders and creditors
¾ Lower post crisis financial intermediation
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The policy challenge is identifying measures to
improve debt sustainability while reducing resolution
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costs to a minimum.
Debt Sustainability and Bank Resolution
Debt sustainability depends on inflation, growth and
the budget deficit:
Change in d = (primary deficit/GDP) – (seigniorage/GDP)
+ d (real interest rate – growth rate)
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Debt declines with high growth, low inflation, and low
deficits
Debt increases with large deficits and high real
interest rates
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Dollarization
Dollarization-use of another country’s currency–
poses special problems
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Makes it difficult to stop disintermediation once
runs occur
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Makes it difficult to recognize the size of the
problem
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Imposes severe constraints on the availability of
policy tools
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Dollarization
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Traditional tools are limited or must be ruled
out:
¾ There is no unlimited lender of last resort in
foreign currency
¾ A blanket guarantee may not be credible
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Administrative limits may be needed:
¾ Securitization of deposits
¾ Extension of deposit maturities
¾ Other restrictions on deposit withdrawals
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Dollarization
The framework for crisis prevention and
management needs to be adapted :
ƒ Added safeguards in terms of bank liquidity,
soundness
ƒ Higher levels of international reserves
ƒ Continual monitoring of macro and micro
conditions
ƒ Emphasis on prevention actions
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Safety Net/Depositor Protection
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A blanket guarantee can stabilize depositor
expectations
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But if a large portion of the system is insolvent:
¾ bank resolution costs rise, and
¾ public debt dynamics may become
unsustainable.
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Safety Net/Depositor Protection
What options?
ƒ Depositor confidence is essential in managing
systemic crises
ƒ Ensure bank restructuring combines with
sustainable fiscal policies
ƒ Ensure only eligible depositors are protected
(excluding shareholders, offshore deposits)
ƒ Remove insolvent banks before introduction of a
protection program
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Issue of Political Support
Political support is needed:
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To break vested interests
To bear the fiscal burden
To shepherd the restructuring program through
the legislative process
To maintain confidence
To keep the process transparent
To ensure close international coordination and
communication
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Conclusions and Lessons
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Supportive legal and institutional framework should
be in place before crisis hits
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Make sure official safety nets are well designed
(LOLR, Deposit Insurance, Blanket Guarantee)
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Aim for quick resolution, when momentum is there
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Transparency in government actions is essential
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Pay attention to corporate restructuring
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Last but not least: Need for political leadership and
coordination
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Conclusions and Lessons
A Word of Caution
No “right” model of crisis management
Principles, not steps.
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