Stylized facts from recent world

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					STYLIZED FACTS FROM RECENT
  WORLDWIDE EXPERIENCE

               Patrick Honohan
                  The World Bank


      Prepared for the Norges Bank Conference
   “Banking Crisis Resolution – Theory and Policy”
               Oslo, June 16-17, 2005
                             Outline
• Features of recent crises
      They’re not all the same;
      but they’re not all different either
• The broad consensus on resolution principles…
      Speed of action
      Transparency of cost allocation
      Restoration of capital/incentives for safe & sound banking
  …should not conceal some areas of debate
      Who will provide the capital?
      How to clean up the assets?
      Depositor hits?
           Varied sources of crises

• Unstable macro conditions
  – positive feedback loop
  – but banking often not causal
  – unhedged positions a special feature
• Unraveling of government impositions
  – China, Vietnam, Zambia, etc.
  – Analysis: Macro easy, politics hard
• Management failures
  – “diverted deposits” fraud
     Four distinctive features of recent
                resolutions
• Skewed distribution of losses
   – not all banks fail: the fittest survive
• State-owned as well as private bank losses
   – Even in macro-related collapses,
       • Turkey=50%, Indonesia=46%
• Information emerges slowly
   – One-shot resolution is rare: it’s not over ’til it’s over
• Currency depreciation has often been central
   – Sometimes a trigger, sometimes a resolution tool
   Post-crisis systemic performance (1)

Variety more striking than commonalities

• GDP growth tends to be adversely affected
   – But could be misleading to interpret as causal


• Inflation more often slows than accelerates

• Nominal interest rates more often fall than increase
                              Regularities for some…but
                                     East Asia: GDP Pre- and Post-1997 Crisis

                        140
Index of GDP 1997=100




                        130
                        120
                        110
                        100
                         90
                         80
                         70
                         60
                              1991    1992   1993   1994   1995   1996   1997    1998    1999   2000   2001    2002   2003   2004



                                             Indonesia             Korea                Malaysia              Thailand

                                                                                From Hanson, 2005
LAC: Some exceptions




           From Hanson, 2005
LAC: Some exceptions




           From Hanson, 2005
                             GDP growth before and since
        10

                                                                                      China
        8


                                                                                Vietnam
        6
                       Lithuania
                             Ukraine                 Cameroon
                   Latvia                                                    Yemen
        4                                                                     Korea
                                                  Costa Rica     Swaziland
After




                                                      Bulgaria                  Malaysia
        2                                             CAR                    Thailand
                                                                Paraguay Argentina
                                                             Jamaica      Ecuador
        0                                                            Venezuela
                                                           Burundi
                                                           Zimbabwe
        -2
                                  Congo DR

        -4
             -20       -15       -10         -5            0        5          10          15
                                                  Before
                       Inflation before and after
        1.8

        1.6

        1.4

        1.2

        1.0
After




        0.8

        0.6

        0.4          Zimbabwe

        0.2                                                      Congo DR

                                        Russia        Bulgaria   Brazil
        0.0
               0.0   0.2    0.4   0.6      0.8    1.0      1.2    1.4     1.6   1.8
        -0.2
                                             Before
   Post-crisis systemic performance (2)

• Bank lending does tend to be compressed after
  crises, even when financial depth increases.

• Long-lived macrodoubts, sometimes fuelled by the
  crisis, can cause dollarization to jump.

• Shrinking intermediation spreads have been
  correlated with falling concentration rates.
        Bank credit to pvt sector before & after (% GDP)
        1.6

        1.4
                                                         China                Malaysia
        1.2                                                        Korea

        1.0
                                                                   Thailand
After




        0.8

        0.6                 Croatia

        0.4         Vietnam
                                        Philippines
Ukraine                       Bulgaria
   0.2                     Ecuador     Indonesia
                          Mexico
                       Venezuela
        0.0
              0.0     0.2        0.4    0.6        0.8       1.0      1.2        1.4
                                          Before
                  Deposit dollarization before and after
        100

                                                                 Bolivia
         90

         80


         70
                                        Paraguay
         60
                         Ecuador
                                   Bulgaria
After




         50

                      Zambia
         40                         Vietnam

         30


         20

         10


          0
              0          20            40              60   80             100
                                              Before
         Spreads (loan-deposit rates) before and after
        70


                  Zimbabwe
        60


        50


        40
After




                         Paraguay
        30


        20                                 Zambia

                       Croatia                              Ukraine
    10                        Jamaica
Argentina                 Ecuador            Bolivia
                                         Bulgaria
                            Lithuania
                                          Latvia
        0
             0    10            20               30    40      50
                                        Before
    Post-containment phase resists
 econometric assessment of alternatives

• Consequences likely to unfold over a decade or more
• Different strategies will affect macro stability, investment,
  power structures as well as future financial stability
   – Immediate fiscal costs not enough
   – Wider economic consequences resist summary
   – Obvious correlations absent
• So fall back on broad qualitative experience unavoidable at
  present
 Containment phase remains contentious

• Differences of opinion center on:
   –   regulatory forbearance,
   –   liquidity support,
   –   closure policy,
   –   blanket deposit guarantees and
   –   allocation of losses to depositors and other claimants.
• Accommodation along any of these dimension has
  been costly (Honohan and Klingebiel, 2003).
    Post-containment resolution issues:
           Common ground (1)
• Transparent resolution policy; speed of action;
  deal also with corporate distress.

• Merits of an all-private resolution; avoid full
  socialization of losses
   – shareholders & subordinated claimholders should pay
   Post-containment resolution issues:
          Common ground (2)
• Actual practice follows the consensus -- with
  implementation deficiencies:

   – Insiders allowed to loot
   – Unsuitable new shareholders
   – Too optimistic on asset recoverability
        (mistaken attempt to protect the budget)
   Post-containment resolution issues:
          Points of contention
• Capital and ownership

• Recapitalization issues (state-owned banks)

• AMCs: Not the only solution?

• Real value of deposits/exchange rate policy
      Capital and ownership: options

• Relying on existing shareholders
   – But risk of self-dealing and looting
   – Leaves State in poor bargaining position
   – Preserves existing power structures (cf Rajan-Zingales)
• Seeking domestic merger partner
   – 2 weak banks = 1 strong one?
• Finding other local owners (where?)
• Nationalization (only temporary solution)
• Foreign buyers
     Recapitalization: the logical sequence

1.    Inject assets to ensure capitalization and prospective
      earnings
     –   should be with tradable/bankable instruments, not vague IOUs
     –   consistent with safe-and-sound banking

2.    Restructure liability structure to protect taxpayer
      subject to adequate incentives


3.    Rebalance government debt (maturity etc.)

4. Sterilize any undesired monetary side-effects
        When to recapitalize insolvent
         Government-owned banks
• Recapitalization irrelevant under public ownership…
      …and could be bad

• Fox and chickens

• Wait until governance is right

• Recapitalization design relevant only in the context of
  privatization…
       …or at least financial autonomy of the banks
               Real value of deposits

• Depositor confidence is important, but also need to set
  system on sustainable path

• Impact on financial depth surprisingly low following:
       Nominal losses for
               local currency deposits (Argentina),
               FX deposits (Argentina, Russia);
       Real losses for
                local currency from devaluation (Turkey, Indonesia)
                        Monetary depth, selected countries 1990-2004

               0.7


               0.6

               0.5
share of GDP




                                                                             Argentina
               0.4
                                                                             Indonesia
                                                                             Russia
               0.3
                                                                             Turkey

               0.2


               0.1

                0
                     1990   1992   1994   1996   1998   2000   2002   2004
         Features of the next crisis?


• Endogenous dollarization (FX deposits and loan)

• Cross-border banking group contagion

• Too big for governments?

				
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