Download Financial Crisis in Central and Southern Europe: The World Bank`s

Financial Crisis in Central and
Southern Europe: The World Bank’s
Instruments and Policies
Orsalia Kalantzopoulos, Sr. Advisor
Financial and Private Sector Development
How did CEE countries get into
crisis?
While global imbalances played a crucial role, some (but clearly not all) of the
countries in ECA accumulated their own sources of vulnerability.
• High private sector imbalances (manifesting in large current account
deficits)
• High private sector credit growth
• Both made possible by high global liquidity (as well as little attention to
counterbalancing macro policies)
Indeed, external financing was uniquely abundant—also fueled by the
expectation of rapid EU convergence
But the source of funds affects
risks
Three sources in ECA (and rollover (RO) during East Asia was 65%):
• Domestic savings (resident deposits); quite stable
• Parent banks; so far stable (RO 90%)—role of Vienna initiative
• Wholesale funding—largely dried up!
Sources of Funding in ECA Countries
Bank funding
Parent bank
Wholesale
Convergent 1/
HUN
Credit
growth
KAZ
HRV
SRB
BGR
RUS
UKR
LVA
Excessive 2/
low stability
Resident
deposits
CZE
SLK
POL
TUR
MKD
ROM
LTU
EST
medium stability
lower risk
grey area
higher risk
high stability
grey area
Source: M itra, Selowsky and Zalduendo, 2009, Turmoil at Twenty (forthcoming).
1/ Countries exp eriencing credit growth rates that could be viewed as in line with those of countries with similar initial
ratios of p rivate sector credit to GDP.
2/ Countries exp eriencing credit growth rates that can be considered as above average; that is, their credit growth rates are
too high in relation to their initial ratios of credit to GDP.
Diagnostics and Issues
Identified
• Banking exogenous shocks -- withdrawal of international
interbank credits to domestic banks;
• Banking endogenous problems -- of overly high loan/deposit
ratios, high loan/value ratios and over-reliance of foreign
exchange borrowing by bank customers (euro, yen, etc.)
• Bank supervision: lack of supervisory oversight in part due to
overreliance on Basel II internal ratings based models.
• Subsidiaries of domestic banks in riskier countries and lack of
adequate home/host supervision arrangements.
Focus Areas of Multilateral
Players -- IMF, EC
• Multilateral financial rescue packages involved the IMF, EC (its
financial/funding institutions, ECB, EIB, EBRD), and the World Bank.
• IMF and EU Financial Support: Largest -- provided critical mass of
funding needs. IMF/EU funding served some key purposes: (a)
liquidity to central banks and banking system; (b) fiscal support; (c)
bank capitalization contingent facilities; and (d) foreign exchange
reserves.
• IMF Policy Agenda: focused on fiscal/current account deficit
adjustment, debt reduction and debt sustainability, monetary and
inflationary developments, fiscal reserves, and international reserves.
Focus Areas of Multillatral
Players -- World Bank
• Focus on medium-longer term structural reforms and longer term
impacts of crises and needed mitigation measures, including:
• (a) preservation of social expenditures and support programs (all);
• (b) stronger banking credit regulation and independent well funded
supervisors (Romania, Hungary, Serbia);
• (c) banking and corporate debt resolution (Latvia, Ukraine);
• (d) mechanisms for winding down troubled banks with lowest fiscal
cost (Latvia, Ukraine); and
• (e) preventive supervisory powers to halt deteriorating trends in
individual institutions or systemically (Hungary, Latvia, Serbia).
Critical Elements of World Bank
Financial Packages
• World Bank is focusing on banking sector credit portfolio trends
and potential deterioration of loans due to negative GDP
growth. Instruments and policies used include:
• (a) design of intensive special purpose bank inspections
(Hungary, Ukraine);
• (b) stress testing of banks’ balance sheets and available capital
with implications for capital strengthening (Hungary, Ukraine,
Latvia);
Critical Elements of World
Bank Financial Packages
• (c) new preemptive supervisory powers to require additional
capital or intervene banks before they reach insolvency stage
(Latvia, Hungary, Ukraine); and
• (d) bank resolution powers to carve out good assets from a
failing bank and transfer to other market participants with
matching deposits to keep the maximum number of depositors
current and actively serviced (rather than being paid out)
(Ukraine, Latvia).
Coordination with IMF and EU
• IMF and EU (including ECB) have played major resource role in
foreign currency liquidity in the interbank market and in
ensuring that parent banks of local subsidiaries maintain their
funding in domestic country markets (Vienna initiative).
• IMF and EU have also provided funds for contingent bank
capitalization programs (EU-wide design) to strengthen bank
balance sheets and prevent premature insolvencies.
• World Bank has focused on quality of the asset side (asset
quality) and long term solvency of banks while IMF/EU have
focused on bank liabilities and need for funding liquidity for
client countries.
Critical Elements - World Bank
Financial Packages
• EU/IMF/Bank have emphasized broader coverage and
funding of deposit insurance systems to provide confidence
to depositors to maintain their funds in banks and avoid “runs”
on banks.
• At times, this requires modest increases in premiums for
deposit insurance funds but not overly high premiums to avoid
stressing bank finances further. EU/IMF funding at times
serves as backstop for broader government guarantees of
depositors, i.e., another form of liquidity guarantees to banks.
Other World Bank Funding and
Policy Areas
POLICIES TO FIX MICRO/INSTITUTIONAL LEVEL PRACTICES
THAT EXACERBATED THE CRISIS:
• The World Bank has also focused on improving loan
accounting norms and standards to assure higher loss
reserves/provisions against possible deterioration of loan
portfolios and hence erosion of bank capital.
• Has also encouraged increased deposit-based funding (vs.
interbank or bank bond funding) of banking loans, for banks to
have increased stability via deposits in their funding base.
Other World Bank Funding and
Policy Areas
POLICIES TO FIX MICRO/INSTITUTIONAL LEVEL PRACTICES
THAT EXACERBATED THE CRISIS, Continued ….
• The World Bank has encouraged less enterprise borrowing in
foreign currency if customers only earn local currency.
• Coupled with the above issue, it has also helped design out-ofcourt debt restructuring procedures for debtors to maintain
loan repayments and allow banks to reduce loan write-offs.
• The World Bank has encouraged financial authorities to utilize
more flexible methods of bank resolution (vs. laws on
outright bankruptcy/receivership of banks) so that failing banks’
assets and liabilities can be transferred to sounder banks,
before liquidating residual bad assets, thus saving fiscal funds.
Thank you