financial sector strategies for public financial managers
DESCRIPTION
Paul Leonovich, Associate Director for Banking & Financial Services, Office of Technical Assistance, United States Department of the Treasury “Financial Sector Strategies for Public Financial Managers” The presenters will discuss strategies and tactics that can be utilized in responding to current financial sector and debt market challenges.TRANSCRIPT
Paul A. Leonovich
Associate Director
Banking & Financial ServicesMiami, FloridaMay 2009
United StatesDepartment of the Treasury
Office of Technical Assistance
OTA MISSION
Strengthen public financial management
and financial institutions
in developing and transition countries
The International Financial Crisis
Country Impacts and Appropriate
Policy Responses to
Systemic Banking Crises
The Perfect Storm
World Financial Crisis
&
Global Economic Recession
The International Financial Crisis
Freezing up of credit on the international capital markets and within domestic banking systems;
Burgeoning default rates on loans;
Difficulty in rolling over domestic and external debt;
Widening fiscal deficits;
Emerging widespread bank failures; and
Devaluating currencies.
First Order Effects
The International Financial Crisis
Western Europe Asia United States Emerging Europe Latin America and the Caribbean Southeast Asia Greater Middle East
Regions Impacted
The Global Economic Recession
Enterprise failures;
Rising unemployment;
Falling levels of GDP/Economic contraction; and
Pervasive economic hardship.
Second Order Effects
The Global Economic Recession
All
Regions Impacted
The International Financial Crisis
What has brought us to this point?
The International Financial Crisis
Failures in risk management
The International Financial Crisis
Excessive levels of investment capitalElevated investor expectationsSustained global economic growth
Three Catalysts
The International Financial Crisis
Altered traditional bank funding streamsUnmanageable currency mismatchesDeterioration of lending practices
The Liquidity Driver
The International Financial Crisis
Healthy (i.e. excessive) performanceElevated housing prices in multiple marketsLack of appreciation for cyclicality of the sector Overexposure by lendersFundamentally different from previous
downturns
The Asset Price Driver
The International Financial Crisis
Excessive leveragingIncreasingly crowded environmentAssets moved off balance sheet (complex
new instruments: CDOs, CDSs)Inadequate regulatory capital provisionSegregation of incentives Reputational risk aspect underestimated
Balance Sheet Driver
The International Financial Crisis
Rapid asset expansionHigher risk profile of lending in numerous
marketsInsufficient institutional capacity
Growth Driver
The International Financial Crisis
The Result
The International Financial Crisis
Asset price deflationLocking up of credit markets (both consumer
and commercial)Crisis of confidence, especially between banks
Vicious Downward Spiral
The International Financial Crisis
Where do we go from here?
Road Forward
Renewed focus on the Basel Core PrinciplesEfforts to Strengthen risk-based supervisionAdherence to Safety & Soundness principlesProper assignation of riskCyclical alignment of capital adequacy
standardsUse of prompt corrective actionsHolistic supervisory approachUse of statistical early warning systems
Improved Application of Regulatory Standards
Road Forward
Established best practicesEarly interventionMarket-based approaches optimalReplace bank managementRecapitalization by government only after full diagnostic
of bank viability establishedCarve out bad (“toxic”) assets if market is viewed to be
unrecoverable in near-medium term
Problem Bank Resolution Approaches
Road Forward
Mergers & Acquisitions (M&A)Good Bank/Bad Bank solutionsBridge BanksPurchase & Assumption Transactions (P&As)Problem Bank Units (PBUs)
Problem Bank Resolution Approaches
Road Forward
Easing of monetary policyExchange rate challengesAvoiding deflationNeed for sound end game strategyEven once the recovery takes hold, it will be
hard to detect the improvement
Role of Central Banks
Road Forward
Fiscal stimuliSocial safety net provisionNeed for exit strategy
Role of Governments
Thank You
Paul A. Leonovich
Associate Director for Banking & Financial Services
United States Department of the Treasury
International Affairs - Office of Technical Assistance
740 15th Street, N.W., 4th Floor
Washington, D.C. 20005
Email: [email protected]