Some introductory remarks Re-privatization of (Partially & Wholly) Nationalized Banks

11

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

Bank Guarantee Fund Poland

2010 IADI Annual Conference 2

Scale of losses

Recapitalization Scale of the problem


Scale of losses

Cumulative peak losses as a percentage of risk-weighted assets at the start of the crisis

Financial crises in last 15 years

huge losses

Source – Bank of England


Recapitalization in the EU and US

Source - Bloomberg


Recapitalization in the EU

Capital raised by financial institutions (2007-2010) in EUR billions

0 10 20 30 40 50 60 70 80 90

Austria

Belgium

Cyprus

Germany

Spain

Finland

France

Greece (GR)

Ireland

Italy

Luxembourg

Malta

Netherlands

Portugal

Slovenia

Slovakia

UK

EUR bn

2009 2008 2007

Source - ECB

EUR billions


Recapitalisation Amounts by Issue Date

0,000

20,000

40,000

60,000

80,000

100,000

2007 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 Q3 09 Q4 09 Q1 10 Q2 10 Q3 10

(mill

ion

eu

ros)

Banks under restructuring Non restructured banks


Recapitalisation Amounts by Member States

0,000

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

UK DE NL IE FR BE ES DK AT IT EL LU SE LV SI HU

Banks under restructuring Non restructured banks

Capital raised by EU financial institutions (2009-2010)

0,000

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

Q1 09 Q2 09 Q3 09 Q4 09 Q1 10 Q2 10 Q3 10

(millio

n e

uro

s)

State_capital Market_raised

Capital raised by financial institutions (2009-2010)

Recapitalization by issue date

Recapitalization in different countries

Source: EU Commission Services


Government capital injections into UK banks and building societies2007-2010


Huge fiscal cost for the UK

Sources – HM Treasury, Bank of England


Recapitalization Barriers to Private Solution


Barrier 1 – scale and concentration

Complexity and scale of international banking groups

Concentration of US banking system and average assets relative to GDP of US commercial banks

Sources – FDIC, Bank of EnglandSource – Bank of England


Banking sector size and concentration

Banking sector size to GDP (% )

478

373

360

354

329

312

168

75

502

0 100 200 300 400 500

Poland

Italy

Spain

Ireland

Belgium

France

Germany

UK

Netherlands

%

Differentiations

- banking sector asset size

- proportion of potential risk to banking sector asset size

- proportion of potential risk to GDP in different states

Sources: ECB, Banks Annual Reports (2009), ‘’Credit Writedowns” (June 2010), ”The Forbes Global 2000” ranking (2010)

12% 16%27%

39%

63% 66%

95%108% 109%

121%

170%

203%

332%

309%325%

269%243%

158%

120%107%

91%

39%43%28%

0%

50%

100%

150%

200%

250%

300%

350%

Poland

USA

South

Kor

ea

Japa

n

Germ

any

Italy

Spain

Franc

e

Irelan

dUK

Belgium

Nethe

rland

s

Assets of the largest bank group to GDPAssets of 3 largest banking groups to GDP

38%

68%65% 64%

35%39%

36%33%

28%29%

25%

15%17%

26%

46%

82%

65%63%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Poland

Germ

any

UK

Franc

e

Spain

Irelan

dIta

ly

Nethe

rland

s

Belgium

Assets of the largest bank group to banking sector balance sheet totalAssets of 3 largest banking groups to banking sector balance sheet total


Banking sector size and concentration

-1

Assets of 3 largest banks, deficit and debt (% of GDP)

USA

Spain

Ireland

UK

France

Germany

Poland

Italy

Belgium

Netherlands

0%

50%

100%

150%

200%

250%

300%

350%

400%

40 50 60 70 80 90 100 110 120

Public debt (2009, % GDP)

Assets of 3 largest banks

(% of GDP)

Banking sector size

(2009)Debt growth

(2010 forecast)

USA

Netherlands

Belgium

Italy

Poland

Germany

France

UK

Ireland

Spain

0%

50%

100%

150%

200%

250%

300%

350%

400%

0 2 4 6 8 10 12 14 16

Government deficit (2009, % GDP)

Assets of 3 largest banks

(% of GDP)

Banking sector size (2009)

Deficit growth/fall

(2010 forecast)


Barrier 2 – lack of capital among big banking groups required for acquisitions

Source: Bank of England

Liabilities (2001 = 100) and leverage of banks

and building societies by size in the UK (a)

High leverage level of big banks


Re-privatization Effectiveness


Nationalization – positive and negative factors

Strong factors

Critical financial functions - maintained

Depositors and good debtors - protected

Prevented systemic risk by protecting financial contracts

Negative factors

Injection of huge amount of public money

Risk that part of the money will not be recovered even after privatisation

Risk of moral hazard

OBA and Nationalization remain among optional tools to maintain financial stability

Temporary solution


Public Funds Injection

Total

$ Amount_1 - α

$ Amount_2 + β

Indirect

- α

+ β

+ β

Direct

$ Amount_1

$ Amount_2

$ Amount_3

Equity/ Contribution

OBA

$ Amount_3 + β

Liquidation

P&A

Payoff

CostType

Background for the OBA/Nationalization decision

α – Amount expected to be recovered by selling sharesβ – Loss to the national economy α is the most critical in decision process

Source: KDIC Korea


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

Resolution cost

RestructuringState

1

Futureowner

Restructuring agreement

Definition of Exit Conditions

Restructuringagreement targets

Restructuringagreement overview

Final results

Amount recovered

2 3

+

Final recovery

Bank under nationalization Re-privatization process


3,6%

0,2%0,2%

1,4%

2,1%

1,2% 0,3% 0,2%

14,0% 0,8%

5,2%

0

20

40

60

80

100

120

140bn EUR

Nationalization cost to countries GDP

Costs of nationalization of selected banks for public finance:• in nominal terms• in proportion to GDP

Public costs of nationalization

Data sources: Official bank websites, Eurostat, Reuters, European Commission

EUR billions

Nationalization costto GDP


Questions

Scale of nationalization - tremendous

Efficient re-privatization - crucial

Re-privatization

When ? Under what conditions ? How ?

Documents

Some introductory remarks Re-privatization of (Partially & Wholly) Nationalized Banks