Contingency funding: back to the future ? Antoaneta Geala Bank Deposit Guarantee Scheme

1. Contingency funding: back to the future? Antoaneta Geala Bank Deposit Guarantee Scheme Romania High-level Seminar on Challenges for European Deposit Insurance Systems: Funding, Investment Practices and Reimbursement February 26, 2015, Warsaw, Poland

2. Contents Funding governance Contingency funding – a historical perspective Contingency funding tools’ pros and cons Case studies Stand-by credit lines Lessons learned Contingency funding: Back to the future? Challenges for smaller DGSs outside the eurozone

3. Funding governance National Bank of Romania (NBR) Board • Statutory approval on: • Annual funding policy • Annual contributions • Special contributions • Borrowings from: • Ministry of Finance • Financial institutions • Credit institutions • Bond issuance • Any suspension of contribution payment FGDB Supervisory Board CEO Funding policy

4. Contingency funding – a historical perspective • Over time, FGDB included various contingency funding tools in its funding mix: • - Special contributions • Borrowing from NBR (when the law allowed it) • - Stand-by credit lines

5. Contingency funding tools’ pros and cons

6. Case studies

7. Factsheet • In 2000 two small-to-medium sized Romanian Banks went bankrupt: • Bankcoop and Banca Internationala a Religiilor (BIR) • Covered banks: 32 Romanian banks and 8 branches of foreign banks • Eligible deposits in the banking system (December 31st, 1999) : lei 53,178 bln. • Covered deposits of the two bankrupt banks: lei4,629.7 bln. • FGDB resources at the time of the first bankruptcy: lei 434.7 bln. (9.4% of pay-out amount) • Covered amount: H1 2000: lei 54.764.000, H2 2000: lei65.169.000 • Cover ratio – elgible deposits (December 31st, 1999): 0.8%

8. Legal framework • Legal provisions (pay-out): • Pay-out period: to start at the latest in 2 months from the official bankruptcy • Pay-out period through the agent bank to be decided by FGDB; it may be extended two times by three months each, upon the NBR’s approval; after that, FGDB carries out the pay-out using its own resources • Legal provisions (financing): • Initial contribution: 1% of the bank’s equity capital • Annual contribution: up to 0.8% of the amount of eligible deposits of individuals • The law gave FGDB the power to increase the annual contribution of a bank up to 1.6% if the bank had pursued risky and unhealthy policies • Special contributions from banks:up to two times the level of the annual contributions • Special contribution: up to 1,6% of the amount of eligible deposits of individuals • Incomes from recovery of FGDB’s claims • Incomes from investment of FGDB’s own resources • Borrowing.

9. Case study no. 1- Bankcoop • Share in the banking as at December 31st, 1999: 0.89% of net assets and 9.28% of equity capital • Covered deposits: lei2,754.9 bln. (5.5% of the covered deposits in the banking system) • Amount paid-out: lei2,728.9 bln. • Funding: • FGDB resources • Borrowing from NBR:lei 2,000 bln. • Maturity 5 years with 2 years grace period • Repayment in 6 half-year equal installments • Drawdown during 12th April – 24th May 2000 • Interest rate (reset every half-year): 1.67% p.a. – 9.30 % p.a. • Special contributions: equal to annual contributions in 2000 Pay-out timeline 31st December, 2000 8th February, 2000 12th April 2000 20th June, 2000 • Pay-out by FGDB’s own cashier desk and postal cheques Bankruptcy date • Pay-out by agent bank

10. Case study no. 2- BIR • Share in the banking system as at December 31st, 1999: 2.17% of net assets and 2.09% of equity capital • Covered deposits: Lei 1,874.8 bln. (3.5% of the covered deposits in the banking system) • Amount paid-out: Lei 1,848.7 bln. • Funding: • FGDB resources • Borrowing from NBR:lei 1,500 bln. • Maturity 5 years • Repayment: yearly, equal installments • Drawdown during 5th October – 2nd November 2000 • Interest rate: flat, 15% p.a. • Special contributions: equal to annual contributions in 2000 Pay-out timeline 31st December, 2000 9th October, 2000 30thNovember, 2000 10thJuly, 2000 • 1 month delay because the shareholders contested the NBR’s decision • Pay-out by FGDB’s • own cashier desk • and postal cheques Bankruptcy date • Pay-out by • agent bank

11. Structure of funding

12. Stand-by credit lines

13. Contingency funding – stand-by credit lines • In 2007 FGDB put in place stand-by credit lines with the member banks: • The agreements were renewed annually during 2007 - 2010 • FGDB paid 0.5% commitment fee • The total amount was calculated based on the target ratio and the eligible deposits of the banks • The number of banks was reduced gradually to make their management easier • The purpose of their implementation: • To have emergency funding available • To reduce the burden for banks • the annual contribution rate was reduced from 0.3% in 2006 to 0.1% in 2007 and incresed again from 0.2% in 2009 to 0.3% in 2010 when the stand-by credit lines were given up

14. Stand-by credit lines’ impact 33 banks 32 banks 10 banks 7 banks

15. Lessons learned • Contingency planning is essential to early detect and fix any problems in funding pay-outs • Good liquidity management plays a vital role in timely and cost-efficient funding • Orderly liquidation of assets is depenent on several factors: • Types of assets (Bonds, T-Bills, deposits etc.) • Capital market stage of development (depth, width, liquidity) and conditions • Adequate maturity structure of investment • Readily available funding sources • Existing arrangements with the Government structures, financial or credit institutions (including special contributions) • Access to capital market • Cost/benefit analysis of alternative sources of funding (if possible)

16. Contingency funding: Back to the future? * The new DGS law to transpose the DGSD in the local legislation has not been adopted yet.

17. Challenges for some DGSs outside the eurozone

18. Thank you! For further details visit www.fgdb.ro

19. Annexes

20. FGDB’s resources

21. FGDB’s borrowing rates – a comparison

22. Impact of RON/EUR adverse movement on FGDB’s cover ratio

23. Net profit / loss in Romanian banking system