Systemic crises appear suddenly, evolve chaotically. ◦

Small, apparently minor shocks  trigger a vicious cycle of crisis. ◦

Systemic crises then evolve along unforeseen paths ◦

Once started, developments can seem chaotic, almost random

Preparation more effective than predict a crisis. ◦

Early warning systems, stress testing supervisory tools◦

In a crisis, limited data, changing conditions, uncertainties. ◦

Policy responses are often outside the normal range◦

Political crises can merged with the economic crisis.

1992‐2002, the “golden age”

of systemic crises

Finland, Norway Sweden (1992), Indonesia Korea Malaysia Thailand

(1998), Russia (1998), Turkey (2001), Argentina (2002). 

Crises due to both macroeconomic and microeconomic factors

“Golden age”

because policy options were greater. 

Recent global crises: new challenges, more limited policy options

Outline of Presentation

Impact of Systemic Crises

Policies for Managing a Systemic Crisis

Recent Global Crisis

Lessons for Crisis Planning

Objective of Presentation

Describe the policy environment that allows bank 

restructuring to proceed effectively and at least cost.

Indonesia

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

1986 1989 1992 1995 1998 2001 2004

Source: WEO.

Trend GDPGDP

Thailand

0

1,000

2,000

3,000

4,000

5,000

6,000

1986 1989 1992 1995 1998 2001 2004

Source: WEO.

Trend GDPGDP

Real GrowthMalaysia

0

50

100

150

200

250

300

350

1986 1989 1992 1995 1998 2001 2004

Source: WEO.

Trend GDPGDP

Real GrowthKorea

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

1986 1989 1992 1995 1998 2001 2004

Source: WEO.

Trend GDPGDP

Crisis Period Gross Outlay Recovery Net Cost Assets 1/

Chile 1981-83 52.7 19.2 33.5 47.0Ecuador 1998-2001 21.7 0.0 21.7 41.3Indonesia 1997-present 56.8 4.6 52.3 68.1Korea 1997-2000 31.2 8.0 23.1 72.4Malaysia 1997-2000 7.2 3.2 4.0 130.6Sweden 1991-93 4.4 4.4 0.0 102.4Thailand 1997-2000 43.8 9.0 34.8 117.1Turkey 2000-present 29.7 1.3 30.5 71.0

Source: IMF.

Notes:1/ Assets of deposit money banks in the eyar before the first crisis year.

Bank resolution requires comprehensive policy framework 

A consensus on framework design has emerged

Based on experience of last two decades

Forms the foundation for  planning

Clarifies decisions made in anticipation  and decisions in the heat of the 

crisis

That framework canEase implementationReduce costsShorten the crisis

Phase 1 – Address Liquidity Shocks

Phase 2 – Stabilize Creditor Expectations

Phase 3 – Restructure  and Reorganize Banks

Phase 4 – Manage Impaired Assets

Systemic crisis almost always began as a liquidity problem

Illiquidity spreads crisis, worsens panic and most be reversed

Measures:All countries extended emergency liquidity

Required minimum or no conditions

Announce a medium-term restructuring program

Be transparent in policies to regain confidence

Argentina Finland IndonesiaKorea Malaysia NorwayRussia SwedenThailand Turkey

Argentina 24.3Finland 5.5Indonesia 53.8Korea 28.9Malaysia 12.2Norway 6.2Russia 31.5Sweden 9.4Thailand 25.9Turkey 22.16

Priority policy objective

Measures:Protect depositors, possibly with a blanket guarantee

Government support critical for credibility

Guarantees cannot solve the crisis

Combine with revised macroeconomic program

Combine with medium-term restructuring program

Be transparent in policies to regain confidence

Blanket guaranteeFinland Sweden Thailand Indonesia Korea Malaysia Turkey

No blanket guaranteeArgentinaNorwayRussia

Deposit FreezeArgentina

No deposit freezeFinland Sweden Thailand Indonesia Korea Malaysia TurkeyNorwayRussia

Viable, undercapitalized banks:

present time-bound restructuring plans, private recapitalization

Be subject to intensive reporting and monitoring

Insolvent, unviable banks:

Should be intervened and resolved as soon as possible

Should be passed to agency responsible for resolution

Deposits should be transferred to sound banks

Diagnosing viability 

More than meeting current regulatory capital

Focus on medium term viability (ability to generate 

profits)

Three stages:1. Examined current information on capital, liquidity 2. Conduct forward-looking assessment

How business model will meet changing conditions

Determine how long to meet fully prudential requirements 3. Agree on operational plan, additional

Restructuring and resolution options

Monitored forbearance to allow time to restructure

Different resolution tools used

Private sector options

Mergers and acquisitions

Recapitalization or salesPublic sector options

Purchase and assumption

Bridge banks

Public sector capital support

Liquidation

ForbearanceArgentinaFinlandIndonesiaKorea

MalaysiaNorwayRussia Thailand Turkey

No forbearanceSweden

Argentina Finland IndonesiaKorea Malaysia NorwayRussia SwedenThailand Turkey

Use of mergersFinland IndonesiaKorea

Malaysia NorwayRussia

SwedenThailand Turkey

No mergersArgentina

Bank closuresIndonesiaKorea NorwayRussia Thailand Turkey

No bank closuresArgentinaFinland Malaysia Sweden

New AgencyArgentina Finland IndonesiaKorea Malaysia NorwayRussia SwedenThailand

No New AgencyTurkey

Provision of Liquidity Central banks provided liquidity on demandConditions for access eased

Stabilize Creditor ExpectationsBlanket guaranteesCovering all creditors including depositors

Restructure  and Reorganize BanksDiagnosis in medium term contextVariety of resolution tools 

Manage Impaired Assets

Banks “new”

funding model failed

Not traditional crisis—securities not loan portfolio

Real estate collapse created losses in securities

Creditor fear spread to ALL securities

Core funding from securitization failed

Banks’

capital levels deteriorated

Assets were marked to market

Procyclical capital requirements hit

Created a credit crunch, economic slowdown

Creditor panic

Policy response broadly consistent with standard

Significant provision of liquidity

Extension of guarantees to all creditors

Public funds to stabilize asset markets

Public funds to stabilize firms

However, some important differences

Recapitalization with preferred shares not public ownership

Limited diagnosis or evaluation

Few conditions on use of public funds

Lessons for Crisis Planning

Past experiences provide crisis management framework

Provide liquidity

Remove incentives for creditor runs

Evaluate medium term viability as well as current balance sheet position

Have an adequate tool kit for bank restructuring and resolution exists.

But crises are unpredictable so early planning essential

Have a institutional setting for policy coordination in place.

Have resolution options prepared in advance

Information sharing agreements

Manuals and procedures prepared (even if unlike to be used)

Criteria for selecting resolution option

Policy consensus about use of public resources

Conditionality for public support

Test alternative scenarios to identify and fix gaps

Lessons for Crisis Planning

Planning under uncertainty◦

Have the legal authority to act◦

General plans, not specific scenarios◦

Make crisis preparations part of routine

Plan for failure◦

Surprises will happen.◦

Identify what must be protected; build redundancies.◦

Agility needed in problem identification, decision making◦

Plans should be robust to failure. 

Lessons for Crisis Planning contd…

A Word of Caution

No “right”

model of crisis management

Preparation as well as prevention

Thank

you