1 / 0

Dealing with distressed financial institutions Ramon Guzman Capital Markets and Financial Institutions Division (CMF

Dealing with distressed financial institutions Ramon Guzman Capital Markets and Financial Institutions Division (CMF). Port of Spain , June 2011 4th Biennial International Business, Banking and Finance Conference . Overview.

edena
Download Presentation

Dealing with distressed financial institutions Ramon Guzman Capital Markets and Financial Institutions Division (CMF

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. DealingwithdistressedfinancialinstitutionsRamonGuzmanCapital Markets and FinancialInstitutionsDivision (CMF)

    Port of Spain, June 2011 4th Biennial International Business, Banking and FinanceConference.
  2. Overview Howtodealwithweakordistressedbankswasalways a favoritetheme in theliteratureon central banking and supervision. Ampleexperience in bothdeveloping and advancedeconomies (plenty more now). Realityismessy and actionbytheauthoritiesrarelycompliesfullywiththenorm. Structure of thepresentation: Causes, Phases, Prior Conditions, Principles and Tools foraction in case of a bank in distress. A panoramicview of actionssince 2007. Preliminarylessons.
  3. Causes of Bank problems Importantdistinction, symptoms (losses, liquidityshortages, NPL s and assetqualitytroubles, capital erosionorreputationalissues) are not causes. Causes can generallybetrackeddownto poormanagement of creditrisk (lendingstandards, excessiverisktaking, loan concentration, fraud..), or totheimpact of specificriskfactors (marketrisk, liquidityrisks, operationalrisk, legal risks, strategicrisks)
  4. Causes of Bank troubles A systemtodealwithdistressedbanksisonly a piece in thefinancial safety net. Effectivesupervisionbasedonsoundprudentialregulation (solvency and liquidityrations, internalcontrols, riskmanagementsystems, apropriateaccounting and reporting) couldhelpadoptcorrectivemeasures and prevent crisis. EarlyWarningSystems,availability of information and onsitesupervision.
  5. Phases of theprocess StrongRegulation and thequality and independence of theSupervision determines thespeed and thephases of theintervention Decisionmakingtakes place in a continuum within a context of imperfectinformation. Liquidity and Solvency. Beingprudentmeansunderstanding: a) Liquidity shortages rarely walk alone, b)Thereisoften no orange light, and c) Costs of denialincrease in non linear terms.
  6. Prior Conditionsforintervention General Comprehensiveforensics: the diagnosis isavailable and un-equivocallyrequiresaction. Full commitment of authoritiesinvolved Clear financialstabilityobjectives Institutional: A set of powers, operationalindependence and resourcesfortheauthoritiesinvolved Legal protection for good faith supervisors Others, a lender of last resort, depositprotection, informationsharing rules, aninsolvencyregime.
  7. Principlesfor a principledintervention General principles Fairburden-sharing; moral-hazard and minimizingimpactontaxpayers Costefficiency of thesolutionadopted Decisivenness and consistency Operationalguidelines Timelinness Proportionality of themeans: always? Flexibility vs rules Transparency and accountability: howmuch?
  8. Thetool box Individual institution (and system wide) Financial support according to the level and nature of distress (liquidity, emergency liquidity, capital injection, guarantees, asset purchases and/or assumption transactions) Conditionality: restructuring Resolution Options: private sector merger or sale, takeover by the authorities, bailout, receivership.
  9. Thetool box II Individual institution (and system wide) Some crucial determining factors: risk to system stability, availability of resources, market interest, independence of the authorities. Some more: fiscal and monetary impact, competition policy, legacy issues, international coordination.
  10. Thetool box III Immediate impacts of the intervention/resolution Restructuring of the Bank: effective surgery should mean no zombies and no bailout. Who pays? Shareholders, subordinated debt holders, management and, ultimately, depositors and senior creditors. How?: Limits to dividend pay out and/or debt redemptions, on compensation practices, and on voting rights. Ultimately, loss in share value or debt haircuts. Removal of management.
  11. FUENTE: L. Laeven y F.Valencia (IMF Working Paper)
  12. A BALANCE OF THE MEASURES ADOPTED Exceptional circumstances have been used to explain why the rule book was set aside. All in all (IMF, March 2011) Decisive reaction Success in stabilizing the financial sector, but Little restructuring involved Concentration increased Moral hazard increased Role of Fiscal and Monetary policy support Long term: too soon to say. We will have to wait until regulations are overhauled (TBTF, Living Wills etc)
More Related