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Bank Guarantee Fund
Poland
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
1
Scale of losses
Recapitalization
Scale of the problem
2010 IADI Annual Conference
2
Scale of losses
Cumulative peak losses as a percentage of riskweighted assets at the start of the crisis
Financial crises
in last 15 years
huge losses
Source – Bank of England
2010 IADI Annual Conference
3
Recapitalization in the EU and US
Source - Bloomberg
2010 IADI Annual Conference
4
Recapitalization in the EU
Capital raised by financial institutions (2007-2010) in EUR billions
UK
Slovakia
Slovenia
Portugal
Netherlands
Malta
Luxembourg
Italy
Ireland
Greece (GR)
France
Finland
Spain
Germany
Cyprus
Belgium
Austria
2009
0
10
20
30
40
50
60
2008
70
2007
80
90
EUR
bn
EUR
billions
Source - ECB
2010 IADI Annual Conference
5
Recapitalization in the EU
Capital raised by EU financial institutions (2009-2010)
Capital
raised by financial institutions (2009-2010)
Recapitalization in different countries
90,000
80,000
(million euros)
70,000
60,000
50,000
40,000
30,000
20,000
10,000
0,000
Q1 09
Q2 09
Q3 09
Q4 09
State_capital
Q1 10
Q2 10
Q3 10
Market_raised
Recapitalisation Amounts by Issue Date
Recapitalization
by issue date
100,000
(million euros)
80,000
Source: EU Commission Services
60,000
40,000
20,000
0,000
2007
Q1 08
Q2 08
Q3 08
Q4 08
Q1 09
Banks under restructuring
Q2 09
Q3 09
Q4 09
Q1 10
Q2 10
Q3 10
Non restructured banks
2010 IADI Annual Conference
6
Recapitalization in the EU
Government capital injections into UK banks and building societies
2007-2010
Huge fiscal cost
for the UK
Sources – HM Treasury, Bank of England
2010 IADI Annual Conference
7
Recapitalization
Barriers to Private Solution
2010 IADI Annual Conference
8
Barrier 1 – scale and concentration
Complexity and scale of international banking
groups
Source – Bank of England
Concentration of US banking system and average assets
relative to GDP of US commercial banks
Sources – FDIC, Bank of England
2010 IADI Annual Conference
9
Banking sector size and concentration
Banking sector size to GDP (% )
Netherlands
UK
478
Germany
373
France
- banking sector asset size
360
Belgium
- proportion of potential risk to banking sector asset size
354
Ireland
329
Spain
- proportion of potential risk to GDP in different states
312
Italy
168
Poland
75
0
100
200
300
400
Sources: ECB, Banks Annual Reports (2009), ‘’Credit Writedowns”
(June 2010), ”The Forbes Global 2000” ranking (2010)
%
500
Assets of the largest bank group to GDP
Assets of 3 largest banking groups to GDP
350%
Differentiations
502
332%
325%
Assets of the largest bank group to banking sector balance sheet total
Assets of 3 largest banking groups to banking sector balance sheet total
90%
82%
309%
80%
300%
269%
68%
70%
243%
250%
203%
65%
65%
64%
63%
60%
200%
170%
158%
50%
46%
150%
120%
107%
109%
40%
121%
36%
30%
43%
28%
16%
39%
39%
20%
29%
35%
28%
25%
15%
Be
lg
iu
m
nd
s
ly
Ita
N
et
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rla
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Ire
la
Sp
ai
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U
K
an
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Fr
er
m
rla
nd
s
m
N
et
he
U
K
Be
lg
iu
nd
la
Ire
an
ce
Fr
Sp
ai
n
ly
Ita
er
m
Ja
pa
n
G
th
Ko
re
a
U
SA
So
u
an
y
2010 IADI Annual Conference
an
y
10%
0%
Po
la
nd
17%
G
12%
27%
26%
66%
Po
la
nd
50%
63%
39%
33%
95%
91%
100%
108%
38%
10
Banking sector size and concentration
Assets of 3 largest banks, deficit and debt (% of GDP)
Banking
sector size
(2009)
Debt growth
(2010 forecast)
400%
Assets of 3 largest
banks
(% of GDP)
350%
Netherlands
Banking sector
size (2009)
Deficit
growth/fall
(2010 forecast)
400% Assets of 3 largest
banks
(% of GDP)
350%
Netherlands
UK
UK
Belgium
300%
300%
-1
Belgium
Ireland
Ireland
250%
250%
France
200%
France
200%
Spain
Spain
150%
150%
Italy
Italy
Germany
100%
Germany
100%
Poland
50%
50%
USA
Poland
Public debt (2009, % GDP)
0%
40
50
60
70
2010 IADI Annual Conference
80
90
100
110
120
USA
Government deficit (2009, % GDP)
0%
0
2
4
6
8
10
12
14
11
16
Barrier 2 – lack of capital among big banking groups
required for acquisitions
Liabilities (2001 = 100) and leverage of banks
and building societies by size in the UK (a)
High leverage level of
big banks
Source: Bank of England
2010 IADI Annual Conference
12
Re-privatization
Effectiveness
2010 IADI Annual Conference
13
Nationalization – positive and negative factors
OBA and Nationalization remain among optional tools to maintain financial stability
Strong factors
Temporary
solution
Negative factors
 Critical financial functions - maintained
 Injection of huge amount of public money
 Depositors and good debtors - protected
 Risk that part of the money will not be
recovered even after privatisation
 Prevented systemic risk by protecting
financial contracts
2010 IADI Annual Conference
 Risk of moral hazard
14
Public Funds Injection
Background for the OBA/Nationalization decision
Type
OBA
Cost
Direct
Indirect
Total
Equity/
Contribution
$ Amount_1
-α
$ Amount_1 - α
P&A
$ Amount_2
+β
$ Amount_2 + β
Payoff
$ Amount_3
+β
$ Amount_3 + β
Liquidation
α – Amount expected to be recovered by selling shares
β – Loss to the national economy
α is the most critical in decision process
Source: KDIC Korea
2010 IADI Annual Conference
15
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
Bank under nationalization
1
State
2
Restructuring
agreement
Definition of Exit
Conditions
Restructuring
Restructuring
agreement targets
Restructuring
agreement overview
Resolution cost
2010 IADI Annual Conference
Re-privatization process
3
Final
results
Future
owner
Final
recovery
+
Amount recovered
16
Public costs of nationalization
Costs of nationalization of selected banks for public finance:
• in nominal terms
• in proportion to GDP
140
EUR
billions
bn EUR
5,2%
Nationalization cost
Nationalization
countries GDP
totoGDP
120
100
80
3,6%
60
0,2%
2,1%
0,2%
40
1,4%
14,0%
1,2%
0,3%
0,8%
0,2%
20
st
at
e
re
al
E
er
zb
an
k
Hy
po
AI
B
Co
m
m
KB
C
De
xia
s
Fo
r ti
Ll
oy
ds
RB
S
Am
er
ica
TS
B
No
rth
er
n
R
oc
k
Ba
nk
of
Ci
ti
gr
ou
p
0
Data sources: Official bank websites, Eurostat, Reuters, European Commission
2010 IADI Annual Conference
17
Questions
Scale of nationalization - tremendous
Efficient re-privatization - crucial
Re-privatization



When ?
Under what conditions ?
How ?
2010 IADI Annual Conference
18