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Stijn ClaessensWorld Bank

Second World Bank/IMF Financial SectorLiaison Committee Seminar

January 11, 2000

The Why and The Steps Involved

BANKING CRISES MANAGEMENT

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2

Banking crises management

Does it matter?

Why do banks and banking systems go bust?

The steps in resolving banking system distress.

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3

No crisis orinsufficientinformation

Borderline andsmall crisis

Systemiccrisis

Bank insolvency since 1980

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4

US

1980-82

1981-84

1977-83

1994-96

1988-90

1994-97

1991-93

1982-89

1985-88

1984-91

Percent of GDP

Mexico

Chile

Benin

Israel

Venezuela

Finland

GhanaMalaysia

0 10 20 30 40 50 60

Argentina

Costs of selected banking crises

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5

Change in average GDP growth

(percent)

Non-crisiscountries

-1.3

+ 0.2CrisisOECD

countries

CrisisNon-OECDcountries

- 0.8

Insolvency and growth 5 years after crisis

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6

Why do banks go bust?

Macro factors

Micro factors

Legacies

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7

How do banking systems get in trouble?

Macro factors

Micro factors

Poor early intervention

Legacies

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8

Study of 29 cases of banking system crisis:Actual factors cited

Macro Terms of trade drop 20

Recession 16

Asset bubble 7Dutch disease 4

Capital flight 2

Micro Poor supervision/regulation 26Deficient bank management 20

Political Interference 11

Connected Lending 9Fraud 6

Weak Judiciary 2

Bank Runs 2 Legacies Lending to SOEs 6

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9

Phases in resolving banking system distress

Containment Phasewhile the distress is unfolding

critical

Restructuring Phase institutional setup rehabilitation, restructuring, loss-allocation,

recapitalization

Deeper Reform Phase fundamental reformsby nature a long process

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10

Steps in the containment phase

Onset of financial crisisacceleration of bad financing and looting

Open financial crisisbank runs, large liquidity support, currency

crisis, interest spikes

Attempts to limit lossessuspension of weak financial institutions

limits on institutions (conservator, contractualarrangements)government (blanket) guarantee

Stabilization

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11

Steps in the restructuring phase(that is, if restructuring follows)

Diagnose the problem its size and causes (e.g., corporate sector,

governance weaknesses)

Develop proper institutional tools and framework legal framework, powers to intervene institutional focus for restructuring review processesetc.

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12

Steps in the restructuring phase (continued)

Develop strategy for restructuringvision for the financial sector

resolving bad financial institutionssupporting good financial institutions

Loss allocation and government supportwrite-offs, nationalizationclosures, recapitalization, rehabilitationuse of public resources

Re-privatization

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BANKING CRISES MANAGEMENTBANKING CRISES MANAGEMENT

14

Charles EnochIMF


January 11, 2000

Bank Resolutions

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BANKING CRISES MANAGEMENTThe case of Indonesia

Five major sets of interventions: both open bankresolution and bank closures

Situation marked by pervasive deep insolvency

Large number of banks: 224 at outset of crisis(seven state banks held 45% of assets)

Limited managerial capacity

Poor init ial legal and regulatory infrastructure

Little scope for outside acquisit ions

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BANKING CRISES MANAGEMENTThe five major interventions

Closure of 16 banksNovember 1997

IBRA intervention into 54 banksFebruary 1998

IBRA full takeover of seven banks (BTO1) andclosure of seven othersApril 1998

Closure of four banks taken over in April1998August 1998

Closure of 38 banks; IBRA full takeover of 7 banks

(BTO2); joint recapitalization with government ofnine banks (ultimately only seven)March 1999

G C S S G

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BANKING CRISES MANAGEMENTThe 16 banks closuresNovember 1997

Widespread runs on many banks before theclosure announcement

Closures based on initial assessment of deepinsolvency; actual closures a subset of banksoriginally identified

Limited deposit insurance, around $6,000 perdepositor, fully covered over 90% of depositors.Powerful group threatened with losses

Lack of resolve indicated by BIs permission to letowner of a closed bank take over a small bank andtransfer assets to it


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BANKING CRISES MANAGEMENTThe 16 banks closures (continued)

Noncompliance by authorities in major elements ofFund program

Loss of confidence in overall economic policy;flight from currency: runs on banks

Init ial closures handled efficiently; inadequate legal

framework for follow up


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BANKING CRISES MANAGEMENTIBRA InterventionsFebruary 1998

IBRA established end-January 1998; blanketdeposit protection announced (later also made

retrospective) Focus on illiquidity of banks, because of massive

central bank liquidity support and lack of data on

banks solvency 55 banks (comprising 40% of banking system) that

had borrowed more than twice their capital from BIwere brought under IBRAs auspicesi.e., IBRAstaff on premises, supervisory responsibil itymoved to IBRA

Major exercise including over 500 staff; takeoverachieved efficiently; uniform criteria applied


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BANKING CRISES MANAGEMENTIBRA Interventions (continued)

Last-minute refusal to allow publicity hamperedpowers of IBRA staff to control the banks

Little immediate impact on borrowing from BI(these eased in March 1998 after new sanctionswere introduced on such borrowings)

Example of soft open bank resolution

BANKING CRISES MANAGEMENTA il 1998 F ll t k b IBRA d

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BANKING CRISES MANAGEMENTApril 1998Full takeover by IBRA andbank closures

Takeover of seven banks comprising 16% of thebanking system (BTO1 banks) that had each

borrowed at least 2 trill ion rupiah ($240 million);four had borrowed 5 tril lion rupiah ($600 million)

Suspension of shareholder rights, change of

management (except the one state bank) Seven small banks (0.4% of banking system) that

had borrowed over 500% of their capital, and 75%of their assets were closed

Enormous public relations exercise: Pressconferences by Finance Minister and IBRA;commercial PR firm


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BANKING CRISES MANAGEMENTApril 1998 (continued)

Uniform treatment focusing on liquidity criteria;efficient closure process; deposits immediately

available at designated state bank Still a lack of adequate legal powers; IBRA could

only transfer out the assets of the closed banks in

early 1999. Initial runs on some BTO banks tailed off within a

few weeks.

Additional BTO bank (largest private bank) in May1998 in wake of riots


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BANKING CRISES MANAGEMENTClosure of four BTO BanksAugust 1998

Audits by international firms determining true stateof the banks: NPLs among BTO banks estimated to

range from 55% to 90% Leakage of audits to press; sporadic runs on

banks; end of deniability by authorities

Declaration of insolvency of l isted BTO banks

Development of initial bank-by-bank strategy:those banks that might be sold; possible platform

bank; those to be closed


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BANKING CRISES MANAGEMENTClosure of four BTO Banks (continued)

Four banks, including second largest private bank(5% of banking sector), closed. Deposit transfers

carried out efficiently. Open bank resolution, in this case a prelude to

bank closure. Requires full confidence in the

guarantee Strategy evolving as combination of open bank

resolution and closures

BANKING CRISES MANAGEMENT38 bank closures 7 bank takeovers (BTO2) joint

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BANKING CRISES MANAGEMENT38 bank closures, 7 bank takeovers (BTO2), joint-recapitalization schemeMarch 1999

Audits of all banks indicated pervasive deepinsolvency; many of the remaining better-known

private banks had CAR around 10 to 20%. Triage of banks: A CAR above 4%; B 4 to

23%; C worse than 25%. C banks to beclosed; A banks strong enough not to needsupport; B banks eligible for joint recapitalizationwith government under stringent conditions


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BANKING CRISES MANAGEMENT38 Banks closures (continued)

March 13 announcement: 73 banks A category(6% of banking sector); 9 banks B category (10%

of sector) and met recapitalization conditions; 7banks (2% of sector) failed test, but had 80,000depositors and were to be taken over by IBRA(BTO2); 38 banks (5% of sector) were C category

or failed the conditions. Major exercise; much emphasis on uniform

solvency criteria


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BANKING CRISES MANAGEMENT38 Banks closures (continued)

Unfortunately, delays in initiating implementationmeant interventions were not a surprise: worker

resistance; probable management looting. Problems gradually overcome; interventions well

received in the markets and by outsidecommentators.


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BANKING CRISES MANAGEMENTLessons

Resolving banking crisis very complicated.Strategy bound to evolve. Initial steps bound to be

messy as authorities act on limited information. Each crisis different, but there may be a case for

some closures up-front, especially if the banks areknown to be deeply insolvent and riddled withfraud.

The decision when to introduce blanket depositguarantee is critical, and may not be straightforward.


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BANKING CRISES MANAGEMENTLessons (continued)

Open bank resolution may be costly if there is nogood replacement management available and/or

the restructuring agency cannot establish firmcontrol.

In the init ial stages the focus for action is likely tobe on liquidity criteria; later it moves to solvency.

Early introduction of best practice accounting,provisioning, classification rules.

Action should be based on transparent, uniform,simple, and defensible criteria.


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BANKING CRISES MANAGEMENTLessons (continued)

Closure process will lead to reduction in number ofbanks, hence boosting potential profitabili ty of

those remaining. Increase in state ownership likely,at least initially.

State banks may be handled separately (on too-big-to fail grounds ), but likely to be in at least asmuch need of operational restructuring.


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14

Fernando Montes-NegretWorld Bank


January 11, 2000

Mexicos 1994 Banking Crisis

BANKING CRISES MANAGEMENTPreamble to the 1994 Twin Banking and

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BANKING CRISES MANAGEMENTPreamble to the 1994 Twin Banking andCurrency Crises

1982 Bank nationalization: 58 out of the 60 banks inoperation were nationalized;

Consolidation into 18 domestic banks;

Increasing financing of the public sector deficit:Share of private sector in total credit declined from

40% (198081) to 25% in 1986; A lost decade (198292): Loss of skills, systems,

qualified staff and bank supervisors.


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BANKING CRISES MANAGEMENTPreamble (continued)

Rapid financial liberalization (198889): freeing ofinterest rates, abolition of directed credit rules and

drastic reduction of reserve requirements. Misguided bank privatizations (199192): No

foreign entry allowed, new inexperienced bankers,non-transparent licensing (no fit & proper tests),little capital, HLBO, expensive banks: given truecondition of loan portfolios and final sale price(between 2.2 and 3.1 book value).

Main driver: Maximize fiscal revenue (US$ 12.5billion).


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199194 credit boom: Domestic credit grew 8 timesfaster than GDP: asset inflation, over-exposure to

real estate sector and FX-denominated loans; Inadequate accounting and disclosure;

Poor supervision, regulation and enforcement

Distorted incentives: for owners, managers,borrowers, depositors and supervisors (conflicts ofinterest).


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Large current account deficit (7% of GDP) financedwith short-term capital inflows;

BOMs low liquidity: High (Short-term FX Debt/FXR): 2.6 in November, 1994;

BOMs vulnerabili ty to attack on currency by

domestic residents: (M2/FXR) ratio as high as 9prior to the December currency crisis.


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BANKING CRISES MANAGEMENT199394 Pre-crisis crisis

Several mid-size insolvent banks intervened(Union, Cremi): overextended, serious connectedlending and fraud;

Political shocks: Colosios assassination andChiapas uprising;

The December 1994 fiasco : 100% depreciation ofthe Mexican peso in 1Q/95.


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BANKING CRISES MANAGEMENTResponding to the crisis: First phase, 199596

The denial phase was too prolonged in Mexico andexcessive secrecy, discretionality and lack ofaccountability contributed to increase the fiscalcost.

In the presence of very poor accounting standards,the authorities were too lax in givingliquidity/forbearance to insolvent institutions.

BANKING CRISES MANAGEMENTR di t th i i Fi t h 1995 96

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BANKING CRISES MANAGEMENTResponding to the crisis: First phase, 199596 (continued)

Sharp but short contraction in 1995 (real output fell6%) followed by an export-led recovery (help fromthe US locomotive ). Sharp contrast with Asia.

Inadequate incentive framework kept in place fortoo long: for supervisors (conflict of interest, over-

secretiveness, lack of accountability, PRcampaign);

for bank shareholders (non-dilution, several

bailouts, great deals for foreign banks);


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for bank depositors and lenders in the inter-bankmarket (universal deposit insurance)

for bank managers (not replaced or replaced toolate after looting banks-Confia); for borrowers (bailouts and low cost of non-

repayment, contaminating portfolio and

promoting a cultura de no pago under a laxlegal/judicial framework);

for federal budget (small cash outlays).


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Inadequate institutional crisis managementframework (FOBAPROA), compromising prudentialsupervision;

Shaky legal foundations left untouched (SecuredLending Legislation and Bankruptcy Law);

Lack of information to other government agencies,to Congress and the public (FOBAPROAs balancesheet was a state secret until early 1998) in view ofmounting fiscal losses.

Avoidance of bank runs (positive).

BANKING CRISES MANAGEMENTR di t th i i S d h 1997

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BANKING CRISES MANAGEMENTResponding to the crisis: Second phase, 1997

Delays in introducing a comprehensive accountingreform (until 1997), followed by excessive, costlyand untransparent (often case-by-case)forbearance;

The March 1998 reform package: Congress getsinto the picture politicizing the problem(inadequate FOBAPROA audit);

Public shocked at discovering the size of thelosses and the extent of the mismanagement of the

crisis, although with minimal consequences;

BANKING CRISES MANAGEMENTResponding to the crisis: Third phase 1998

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BANKING CRISES MANAGEMENTResponding to the crisis: Third phase, 1998

Approval of IPABs Law after a lost year (1998).

Mounting fiscal cost: from 8.4% of GDP in 1996 to

21.3% of GDP in 1999heavy and lasting fiscalburden in a country with low tax effort (10% ofGDP);

Servicing real interest on IPABs debt will require 1point of GDP per year for the foreseeable future.

BANKING CRISES MANAGEMENTResponding to the crisis: Fourth phase 1999

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BANKING CRISES MANAGEMENTResponding to the crisis: Fourth phase, 1999

Getting IPAB off the ground in May,1999shortcomings;

New found decisiveness: Intervention of the third(Serfin) and fifth (Bancrecer) largest banks.Phasing out universal deposit insurance;

The least cash solution is not the least costsolution: Need for a tax reform in view of low taxeffort;

Accounting tricks, mounting cash-flow needs,profitability problems and ballooning fiscal cost;

BANKING CRISES MANAGEMENTResponding to the crisis: Fourth phase 1999 ( ti d)

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BANKING CRISES MANAGEMENTResponding to the crisis: Fourth phase, 1999 (continued)

Why the medicine ended up killing the patient:FOBAPROAs zero-coupon bonds and negativecarry-carryovers;

Need for legal/judicial reforms;

Economic recovery without domestic credit:

restoring bank lending to the private sector after 5years of real decline.

BANKING CRISES MANAGEMENTThe role of the World Bank

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BANKING CRISES MANAGEMENTThe role of the World Bank

Important TA during early phases of the crisis:Better diagnostics and foreign expertise (FTAL);

Tensions emerge between Bank staff andgovernment: Access to information, differencesabout crisis management and strategy;

Mea culpa: The Financial Sector RestructuringLoan (FSRL) of 199596: A US$1 bill ionunsatisfactory loanover-promises on both sides;under-estimation of the depth of the crisis and lack

of polit ical will to act early;

BANKING CRISES MANAGEMENTThe role of the World Bank (continued)

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BANKING CRISES MANAGEMENTThe role of the World Bank (continued)

Stocktaking of conditions of the Mexican bankingsystem requested by the Banks OperationsCommittee;

Fundamental disagreement with the Mexicanauthorities: extent of the insolvency and actionsgoing forward;

No il lusions: No access to the information, noaction (mid-97mid-99)- no WB lending;

New determination to move towards a financialresolution of the crisis: The Bank RestructuringFacility Loan to IPAB;

Challenges going forward: sale of assets,budgetary pressures and debt management issues.

BANKING CRISES MANAGEMENTReflecting on the major lessons from theMexican crisis

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BANKING CRISES MANAGEMENTMexican crisis

In mid-1997 the official fiscal cost of the crisis was8.4% of GDP. In late 1999 the cost estimate had

jumped to 21.3% of GDP!. What happened?

There are some key important lessons.

BANKING CRISES MANAGEMENTMajor lessons

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BANKING CRISES MANAGEMENTMajor lessons

First, hiding the problem, unfortunately, does notdo away with it. On the contrary, delays in takingeffective action always increases, oftenexponentially, the cost of the crisis for a number ofreasons: there is no cash-flow solution, perverseincentives continue, moral hazard and adverse

selection problems become more acute.

BANKING CRISES MANAGEMENTMajor lessons (continued)

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Second, the main public concern of thesupervisors was to give the impression that thingswere going well and that the banks were improvingtheir financial condition along with the rapidrecovery of the real sector of the economy(199697). A well orchestrated PR campaign was

mounted to influence bank analysts in N.Y.However, the tide did not raise all the boats!:lending to the private sector continued to decreasein real terms and the financial condition of the

banks worsened in 1998.


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Third, ad hoc-ism and case-by-case deals, withouta clear global strategy. It led to unfairness amongbanks, additional costs, particularly in attractingforeign banks, and bad, overly secretive, decisions.Lack of standardization in the debt instrumentsissued by FOBAPROA.


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Major lessons (continued)

Fourth, excessively complex financial engineering solutions to hide the fact that limited cash wasavailable for resolving the crisis ended up kill ingsome banks (which ended up financing thegovernment with a negative carry-over): themedicine killed the patient .


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j ( )

Fifth, the least cash solution is not the least costsolution. Incentives to show a tighter fiscal stanceand poor consolidation of the broad public sectordeficit led to minimize cash transfers to the banks,postponing the financial solution (as opposed tothe accounting solution), resulting often in

continuous negative cash-flows for distressedbanks, raising considerably the fiscal cost of thecrisis. Directly (higher bank losses) and indirectly(welfare loss resulting from lack of credit to a large

group of domestic enterprises).


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j ( )

Sixth, declaring victory too early is a verydangerous strategy: It puts additional constraintsto the actions of the supervisor and often createsincentives to hide past mistakes with additionalsub-optimal decisions.

Seventh, the tendency to identify the size of the

fiscal resources available to the size of the cashneeds of the system leads to incomplete and oftenunsustainable solutions .


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j

Eighth, providing liquidity solutions to cases ofinsolvency almost always increases the fiscal costof the crisis, particularly in cases when the oldowners and managers who brought down the bankremain in place.

Nine, bailouts via several purchases of bad assets

should be avoided (up to three purchases weremade for some banks). It creates perverseincentives and it is often a source of corruption

and increased fiscal costs.


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j

Tenth, delays in the sale of bad assets compoundthe problems of banks and raises the fiscal cost ofthe crisis, since assets lose value through time.

Eleventh, in general, bank managers and ownersresponsible for bringing down their bank should bereplaced. In Mexico the authorities felt partially

guilty and tried to spare some owners not dilutingthem at great cost to the taxpayer.


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Twelve, bank supervisors should not be in chargeof resolving banks, intervening and managingbanks, selling bad assets, etc. In the presence ofconflicts of interests, it is likely that the quality ofsupervision and enforcement might becompromised.

Thirteen, I cannot stress enough the importance ofbetter disclosure.


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14

David ScottWorld Bank

Second World Bank/IMF Financial Sector

Liaison Committee Seminar

January 11, 2000

Governments and Crisis Management

BANKING CRISES MANAGEMENTGovernments response drives the costs

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Slow or partial response increases costcost of carry

good money after bad Stock loss not predetermined

determined by behavior of debtors, creditors,

courts, and governments

Bad practicesoffering bail-outs, permitting theft

Governments often get it wrong

BANKING CRISES MANAGEMENTHow to approach a crisis

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Paradigm fiscal cost finances an investment in salvaging

the system

Goals invest no more than necessary to get the job

donemaximize value of the investment

Approachact like a private sector investor

BANKING CRISES MANAGEMENTInvest no more than necessary

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17

Get on with it rapid debt and bank restructuring

Avoid bail-outsprovide support only where required

Avoid moral hazardprovide adequate support, but only once

Stop looting

Allocate some losses to others

BANKING CRISES MANAGEMENTMaximize value of the investment

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Promote optimal debt restructuringbalance: growth vs. required investment

Ensure adequate bank restructuring

Maximize present value of banks and assetsacquired

Leverage investment to get structural change

BANKING CRISES MANAGEMENTGovernments as private investors

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19

Political work institutional arrangementsmandate and principles

Technical workstrategies and policies

due diligence investment and monitoringsale

Financing

BANKING CRISES MANAGEMENTInstitutional arrangements

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Purpose-built crisismanagement unit

Temporary

Extraordinary legalpowers likely

Ample resources

Clear mandate andprinciples

Permanentinstitutions ofgovernment withdirect responsibilityand authority

Available financialresources (DIC, CB,operating funds)

Routine lines ofcommunication andinformation sharing

Finance ministry moreinvolved

Supplemental financial

resources (expandeddeposit gty, banksupport, consultants)

Ad-hoc lines of

communication Players continue to

functionindependently

Ad hoc ExtraordinaryNormal

Fewinstitutions

Scope of distressMany institutions

BANKING CRISES MANAGEMENTPolit ical work

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Mandate (what to do)protect depositors, solve debt problems (banks

& NBFIs, corporate & consumer), maintainservices, etc.

Principles (how to work)

use commercial principles, provide support onlyonce, minimize period of government ownership,etc.

Agreed by top political authorities and known to allother players


Technical work

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22

Problem Resolution Strategies

Banks & non-banks

Large corps & SMEs Consumers

Problem Resolution Strategies

Banks & non-banks

Large corps & SMEs Consumers

Capacity-building Strategies

Political

Financial Human resources

Capacity-building Strategies

Political

Financial

Human resources

Diagnosis(due diligence)

Diagnosis(due diligence)

Execution(investment)Execution(investment)

Sale of assets back toprivate sector(exit strategy)

Sale of assets back toprivate sector(exit strategy)

BANKING CRISES MANAGEMENTResolution tools

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Suspensiondeposits frozen

Liquidationdeposits paid out

Assisted acquisitiondeposits transferred

Nationalization temporary government ownership

BANKING CRISES MANAGEMENTPolicies for use of resolution tools

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Avoid suspension

Liquidate under certain circumstances

Arrange assisted acquisitions where possible

Nationalize as fallback

BANKING CRISES MANAGEMENTPolicies for investing public funds

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25

Eliminate existing shareholders at least marginalize them

Confirm management team remove some top officials

Provide adequate support Get maximum restructuring

Provide support only once

Sell ASAP

BANKING CRISES MANAGEMENTRationale for rapid sale

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Give focus to all actionsbank restructuring, asset management

Make transparent the real situationmarket test

Demonstrate intentions and resolve Upgrade business practices

Avoid delay

Reduce uncertainty

BANKING CRISES MANAGEMENTFinancing

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Must secure necessary funds to invest

Substantial upfront outlays

equity investments in banksasset purchases (NPLs)own operations

Net investment = upfront outlays less salesproceeds

Insufficient upfront financing undermines crisis

resolution

The Russian Banking Crisis of 1998BANKING CRISES MANAGEMENT

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David HoelscherIMF


January 11, 2000

The Russian Banking Crisis of 1998

BANKING CRISES MANAGEMENTBefore the crisis

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Rapid growth in the number of banksfrom 10 in1992 to over 1,600 in 1997

Authorities perception that banks were financiallysound:Highly capitalized (leverage ratios of 16 percent

and higher) according to Russian accounting

standardsMet CBR's prudential regulations

BANKING CRISES MANAGEMENTBefore the crisis (continued)

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Financial statistics did not reflect true conditionsLimited deposit mobilization: Nongovernment

deposits amounted to 12 percent of GDP

compared with 33 percent in Poland and 64percent in the Czech Republic.

Limited lending to corporate sector

Portfolios concentrated (almost 60 percent) inGKOsSignificant exposure to foreign exchange risk

BANKING CRISES MANAGEMENTBefore the crisis (continued)

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Structure of banking system highly concentratedTop 10 banks held over 80 percent of banking

system assets.Sberbank alone held 25 percent of system

assets.Top 10 (20) banks held 55 percent (79 percent) of

all foreign currency denominated assets.Small and medium banks held only 10 percent of

their portfolio in GKOs.

BANKING CRISES MANAGEMENTCauses of the crisis

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Crisis provoked by forced restructuring of theGKOs and exchange rate depreciation; causesmore fundamental

Series of banking crises in 1996 and 1997 reflectedwidespread banking fragility

Large vulnerability of the large banks to exchangerate volatility

Large concentration in GKOs

Significant nonperforming loan portfolios in allbanks

Dependence of banks on non-interest earnings

(fees, exchange rate speculation)

BANKING CRISES MANAGEMENTImpact of the crisis

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Largest banks, dependent on the GKO market,immediately became illiquid.

Deposits were frozen. The payment system ground to a halt.

Default on forward exchange contracts and foreign

debt service obligations.

BANKING CRISES MANAGEMENTResponse of the authorities

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Argued that the crisis was caused by illiquidity notinsolvency

Called for a moratorium on foreign debt payments Permitted households to shift deposits to Sberbank

Freed bank reserves

Provided emergency credit to banks

BANKING CRISES MANAGEMENTResponse of the World Bank/Fund team

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LimitationsAuthorities were not convinced there was a

banking crisis.No IAS-based data were available on the

financial status of the banking system.Severe budget constraint.

Weak legal and institutional basis for bankrestructuring and liquidation.

BANKING CRISES MANAGEMENTResponse of the World Bank/Fund team (continued)

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Immediate focus on three areasCollecting accurate financial data on major

banks (based on IAS)Strengthening legal framework for bank

restructuring and bank liquidationEstablishing institutional framework for bank

restructuring

BANKING CRISES MANAGEMENTCollecting accurate financial data

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World Bank financed due diligence reviews of 18large banksAmong the largest in the systemRepresented almost 50 percent of banking

system assetsRelied on standard macroeconomic assumptions

and IAS

BANKING CRISES MANAGEMENTCollecting accurate financial data (continued)

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Financial results15 of the 18 were deeply insolvent.The 15 had net negative net worth of R 211

billion (US$13.5 million) or 173 percent of assets.Some banks had negative net worth equivalent

to over 400 percent of assets.

BANKING CRISES MANAGEMENTCollecting accurate financial data (continued)

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Qualitative resultsThe cause of the banking crisis was more than

illiquidity caused by the collapse of the GKO

market.The largest charge against capital (34 percent)

was from provisions for nonperforming loans.

The second largest charge (28 percent) was forforeign exchange losses.The third largest cause (13 percent) was for GKO

losses.

BANKING CRISES MANAGEMENTStrengthening legal framework

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Bank bankruptcy was handled under generalbankruptcy law.

Shareholders had considerable leeway ininfluencing the proceedings.

No special bank restructuring legislation.

BANKING CRISES MANAGEMENTEstablishing institutional framework

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No institution clearly responsible for bankrestructuring

Disagreement within the government on whichinstitution should be responsible

Inadequate prudential regulations

Reliance on Russian accounting standards

BANKING CRISES MANAGEMENTResults of the first year:Bank consolidation

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The CBR withdrew the banking licenses of 6 of the18 banks.

Three of the 18 are under management of the bank-restructuring agency (ARCO).

Corrective action plans for some 240 banks are

being monitored by the CBR.

BANKING CRISES MANAGEMENTResults of the first year:Banking legislation

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The Bank Bankruptcy Law (BBL) was signed intolaw in March 1999.

Amendments to the BBL have been drafted and areready for submission to the Duma.

The Bank Restructuring Law was signed into law in

June 1999.

BANKING CRISES MANAGEMENTResults of the first year:Institutional development

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The Bank Restructuring Agency (ARCO) wasestablished.

The CBR has begun modernization of itssupervisory regulations.

The CBR consolidated and improvementmanagement of the supervisory functions.

The banking system will shift to IAS by end-2001.

BANKING CRISES MANAGEMENTNext steps:Continued consolidation of the banking system

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Corrective action plans for remaining 18 banks forwhich there were due diligence reviews

Technical support for ARCO Financial and operational reviews of Sberbank

Reviews of other state banks

BANKING CRISES MANAGEMENTNext steps:Development of a core banking system

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Review of remaining large banks and developmentof restructuring plans

Identification of banks that could form the core of awell-operating banking system

Monitoring of the implementation of restructuringplans

Identif ication and removal of impediments toforeign investment in the banking sector

BANKING CRISES MANAGEMENTNext steps:Operating environment

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Implementation of IAS in commercial banks byend-2001

Continued modification in prudential regulations,including consolidated supervision and applicationof fit and proper criteria for bank owners andmanagement

Revision of bank disclosure requirements

Documents

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