Strategies for Privatising: Case Study for Strategic Investors

1. STRATEGIES FOR PRIVATISING: CASE STUDY FOR STRATEGIC INVESTORS BY HERMAN MULDER, SENIOR EXECUTIVE VICE PRESDIENT CO-HEAD GROUP RISK MANAGEMENT FOR WORLD BANK, IMF & BROOKINGS INSTITUTION CONFERENCE ON THE ROLE OF STATE-OWNED FINANCIAL INSTITUTIONS Washington 27 april 2004

2. NATURE & ROLE OF STATE-OWNED BANKS (SOB) • NO ARCHE-TYPE SOB: MANY TYPES IN DIFFERENT COUNTRIES: DETERMINANT IS GOVERNANCE STRUCTURE, NOT OWNERSHIP PER SE; • KEY FACTOR: (POLICY-) DIRECTED LENDING ON CONCESSIONAL TERMS; • BUT NON-SOB’S MAY AFFECT THE BANKING SYSTEM TOO: WEAK GOVERNANCE & RISK MANAGEMENT, MISPRICING; • WEAK BANKING SYSTEM: ASIAN CRISIS SHOWED FISCAL & ECONOMIC COSTS PLUS LOSS OF TRUST/CONFIDENCE AMONG DEPOSITORS/INVESTORS; • “UTILITY” ROLE OF BANKING SECTOR: MULTIPLE “PROTECTION”: STATE OWNERSHIP, BANKING LAW/REGULATIONS, EFFECTIVE SUPERVISORY BY (INDEPENDENT) CB, SELF-REGULATION + MARKET DISCIPLINE: EVOLUTIONARY SCALE;

3. NATURE & ROLE OF FOREIGN BANKING INVESTORS IN EM COUNTRIES • FULL ACQUISITION OR ONLY “CONFIGURATION” ? • FIT IN GLOBAL FRANCHISE; • DUE DILIGENCE, FINANCIAL ROBUSTNESS UNDER DIFFERENT SCENARIOS; • TURNAROUND STORY & ABILITY: IF (EX-) SOB, MORE DIFFICULT/COSTLY; • ACCEPTABLE LEGAL FRAMEWORK; • LOCAL BANKING SYSTEM SUFFICIENTLY MARKET BASED; • BUILDING ON CURRENT MANAGEMENT OR NEW TEAM ? • ROLE MODEL FOR LOCAL PEERS AND SUPERVISOR: SYSTEMS, EFFICIENCY, RISK, PRODUCTS, DISCLOSURE, WINDOW TO INTERNATIONAL MARKETS;

4. SOME KEY ISSUES FOR NEW OWNER • OVERALL GOVERNANCE STRUCTURE & STANDARDS; • IMPROVE INFRASTRUCTURE: SYSTEMS, MIS, DATA; • IMPROVE RISK-PARADIGM: DISAGGREGATION OF RISK TYPES (INCL. MRM, ALM, ORM) : RISK CHARTER, RISK ORGANISATION, POLICIES, TRAINING; • DISCIPLINE CREDIT-ANALYSIS & - CLASSIFICATION: REDIRECT NAME LENDING, MIS-PRICING, ASSET/COLLATERAL VALUATION, INTEREST ACCRUAL ON NPL’S, ETC; • MFV, CUSTOMER ORIENTED BUSINESS MODEL, PERFORMANCE RELATED COMPENSATION;

5. THE BASEL 2 CHALLENGE & OPPORTUNITY • SYSTEMIC RISK IS NOT LIMITED TO LARGE, COMPLEX, INTERNATIONALLY OPERATING BANKS FROM BC-COUNTRIES; • B2 IS A FURTHER BROADENING & DEEPENING OF THE “CORE PRINCIPLES”; • B2 IS MORE THAN JUST COMPLIANCE: IT WILL RE-SHAPE BANK & CAPITAL MARKETS WORLDWIDE; • B2 CONSULTATIVE PROCESS WAS RICH EXPERIENCE, ACCELERATING UNDERSTANDING, DEVELOPMENT AND CONVERGENCE OF MODERN RISK/ERM CONCEPTS; • B2 IS BY DESIGN NOT BEST PRACTICE: “FUTURE WORK” WAITING, FURTHER CONVERGENCE OF RC AND EC (INCL. DIVERSIFICATION);

6. BASEL 2 PERSPECTIVE FOR EM-COUNTRIES AND SOB’S (1) • B2 OFFERS TEMPLATE FOR EM SUPERVISORS AND LOCAL LEAD-BANKS RESP. BANKING ASSOCIATIONS TO STRENGTHEN LOCAL BANKING SYSTEM: CHALLENGE & OPPORTUNITY; • SOUND LOCAL BANKING SYSTEM IS ESSENTIAL FOR CREATING SOUND, DEEP LOCAL CAPITAL MARKETS, WHICH IS KEY FOR LOCAL DEVELOPMENT AGENDA (INCL. INFRASTRUCTURE, TRADE) ; • SHAPE OF LOCAL BANKING SYSTEM WITH 4-5 ANCHOR BANKS ? SOB’S UNDER PRESSURE;

7. BASEL 2 PERSPECTIVE FOR EM-COUNTRIES AND SOB’S (2) • RATING AGENCIES, EQUITY ANALYSTS, INVESTORS, INTERNATIONAL BANK COUNTERPARTIES WILL PREFER BANKS WITH STATED BASEL2 AMBITION; • COUNTRY-SPECIFIC ROADMAP BETWEEN SUPERVISOR AND BANKING ASSOCIATION TO BE AGREED UPON; • FOREIGN BANKS, ALREADY SUBJECT TO BASEL 2, WILL PLAY AN ACTIVE ROLE IN SUCH ROADMAP: OUR SUBS WILL BE A-IRB/AMA;

8. CONCLUDING OBSERVATIONS ON SOB’S • PACE OF THE MARKET PLACE ACCELERATING: ONLY BEST PRACTICIONERS WITH MARKET DISCIPLINE WILL EVENTUALLY SURVIVE; • NOTWITHSTANDING POLITICAL FRAGMENTATION, BUSINESS GLOBALLY AND INTRA-REGIONALLY BECOMING EVER MORE INTER-WOVEN; • B2 IS WAKE-UP CALL FOR MOF/SOB’S ON THEIR RELATIONSHIP, AN ISSUE TO BE CATALYSED BY THE INDEPENDENT SUPERVISOR, FI’S, FOREIGN PARTNER-BANKS; • SOB ROLE MUST CHANGE: “COMPLEMENTARITY”, “MARGINALITY”, “TEMPORARITY”; • BUSINESS CONFIDENCE/TRUST WORLDWIDE HAS BEEN SHAKEN, NEEDS TO BE REBUILT ! (AND TRUST IS OUR CORE BANKING ASSET).