1 cross-border stability framework: lessons from the global financial crisis jerzy pruski bfg 15 th...
TRANSCRIPT
1
Cross-border stability framework: Lessons from the global financial crisis
Jerzy Pruski
BFG 15th Anniversary Conference
Warszawa, 21 May 2010
Domestic financial stability frameworkCompleteness & efficiency of the system
2
Low effectiveness of existing crisis management tools
3
Global financial crisis 2007 – 2010 / response options
Standard legislation
Ineffective:- need for quick decisions- inadequate for specific circumstances
Private sector solutions Bailout/nationalization Standard bankruptcy proceedings
Examples
Important M&A- Bear Stearns (JP Morgan)- Merrill Lynch (BoA)Negative examples:ABN Amro (RBS, Santanderand Fortis)
TARP, AIG, CitiGroup, RBS, Lloyds TSB, Northern Rock, Fortis,Dexia, KBC, AIB, Commerzbank, Hypo Real Estate
Available only for small banks.Not resorted to after the collapseof Lehman Brothers for fear ofsystemic risk
Scope Very limited Very limitedBroadly used
Significant changes requiredFiscal burden of financial turmoil must to be drastically limited
Robust domestic stability network as prerequisite for effective cross-border safety net
4
• Regulations• Rescue function (temporary) Rescue function:
to be extended & implemented
• Liquidity
• Regulations• Supervision
• Pay-box• Rescue function
MoFDGS
Special resolution regimes:to be implemented
?
Periodic financial crises remain inevitable in a market economy even despite strong domestic stability network
Ministry ofFinance
CentralBank
Financial Services Authority
Deposit Guarantee
Scheme
strong & completedomestic
financial stability system
Need for effective rescue and resolution functions
5
Bank restructuringor capital injection
Private sectorsolutions
Bailout/Temporarynationalisation
Assistance forexisting shareholders
Tools to support M&As
Moral hazard
No change of ownership
Change of ownership required
Rescue function (capital injection and/or liquidity support)
Rescue activities not justified
Special receivership powersAuthority for Purchase and Assumption
Private sector solution not available
Complete toolkit of instruments a pre-condition for effective crisis management
Orderly liquidation
Pay-box function
Rescue Resolution
Insurance
Resolution function
6
Sell the whole bank
Sell asset pools
Liquidate assets
Failed Bank
Cost and systemic risk assessment
Receivership
Quick decision
FDIC
Alternative
model Insured deposit pay-out
Sell deposits & branchesCoverage for
insured deposits(DGS)
Reduction of:systemic riskamount of required fundsmoral hazard
Significance of special resolution regimes
Advantages
1. Reduction of systemic risk of default
2. Transfer of control to regulators
2. Reduction of fiscal cost
3. Costs transferred to existing shareholders
5. Reduction of moral hazard
6. Better market discipline
7
Fiscal and stability costs*
*based on Čihák & Nier (2009)
Fis
ca
l c
os
ts
Stability costsSystemic financial stability impact
Special resolution
Disorderly bankruptcy
„Bailout”
Ordinary resolutions
(Direct costs)
(Indirect costs)
Cross-border interconnectedness Additional risks and challenges
8
Cross-border interconnectedness
9
Increased risk of crisis&
Extraordinary challenge for crisis management
Broad range of benefits of globalisation
• Insufficient information • Crisis contagion
Global economy
cross- border dimensions
Country 1
Cross-border risk management
10
Bank 1
Bank 11
Bank 12
Bank 13
Bank 2
Bank 21
Bank 22
Country 2
Domestic market risk
Cross-border dimensions
Prevention instruments
Crisis management
Microprudential
Macroprudential
Bank 14
Cross-border banking groups imply:• enormous complications for financial safety net• modifications in the toolkit of stability instruments and new regulatory authorities
interbank links
Defaultrisk
External risk
Cross-border connections Risk monitoring limitations
11
Systemic risk Limitations
Identification of systemically importantinstitutions requires access to data on entirecross-border network
Total picture of the risk is not visiblefrom the perspective of a single country
In addition to a local component, the risk imposed on domestic banks depends on external foreign risk, which is only partially visible
Capital surcharge to risk-weighted assets
(in % of initial risk-weighted assets)Country Banks Network Country 1 Country 2
charges charges charges
Country 1 Bank 1 0,74 0,97
Bank 2 1,43 1,11Bank 3 0,44 0,54Bank 4 0,41 0,50
Country 2 Bank 5 1,56 0,58
Bank 6 1,06 0,34
?
?
Source - IMF
Limiting the risk of crisis
12
Robust domestic safety net Harmonization + cooperation Integrated solutions
Effective domestic financial stability system
Some decisions are transferred to international level
Mostly non-binding
Involves the issue of individual state independence
• legal aspect – different legal rules• burden sharing aspect
Difficult to implement
Available solutions for mitigation of cross-border crisis risk
Pending construction
European UnionFinancial stability system enhancement
13
Crucial importance however still:
• non-binding
• limited efficiency
Euro Area
Existing cross-border stability framework in the EU
14
European
Union
• monetary policy
• stabilization policy
ECB
Regulations
Coordination
ESRB, EBAnot authorized to imposefiscal cost
New solutions
Urgent need for new and rigorously enforced fiscal rules
Crucially important but remain:Harmonisation
Proposed cross-border stability framework
15
Currently discussed solutions
European stability framework legs behind domestic standards
Limitations and barriers
- lack of ex-ante burden sharing
- non – existant legal framework for transfer of assets
- legal differences
- lack of common bankruptcy law
Basel III
ESF European Stability Fund
ERA European Resolution Agency
EDGS European DGS
Fragmented Non-binding Lack of funds
IES Integrated European Supervisor
EMF European Monetary Fund
Outstanding: • fiscal problems• global imbalances• asset bubbles
Risk of overregulation
Risk of overregulation
16
Sources of global financial crisis
Macroprudential Microprudential Macroeconomics
European Systemic Risk Board New regulations
- focus on stability of consumer prices- not oriented to asset prices and monetary aggregates- fiscal policy- FX regime
Theory and practiceof macroeconomic policy
essentially unchanged
Remains to be tested
- selective scope (only banking sector) - effectiveness not fully proved- incomplete cost-benefit analysis - limited territorial scale- limiting the scale of operations
Risk of suboptimal policy mix
17
Monetary policy
Recently reached deficit and debtlevels force budgetary restraint
Pro-cyclical measures
Low interest rates and monetaryeasing despite improvementof economic situation
Restrict the range and scopeof banking activity
Fiscal policySupervisory and regulatory
policy
Focus on new regulation rather thanmore effective supervision
The risk of inconsistent monetary – regulatory policy mix
The entire burden of emerging from the crisis rests on monetary policy with successively lower interest rates and a familiar potential for future assets bubbles
Counter-cyclical measures Pro-cyclical measures
Banking regulations