Paul A. Leonovich Associate Director Banking & Financial Services Miami, Florida May 2009

United States Department of the Treasury Office of Technical Assistance

OTA MISSION Strengthen public financial management and financial institutions in developing and transition countries

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

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

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.

The International Financial Crisis Western Europe Asia United States Emerging Europe Latin America and the Caribbean Southeast Asia Greater Middle East Regions Impacted

Western Europe

Asia

United States

Emerging Europe

Latin America and the Caribbean

Southeast Asia

Greater Middle East

The Global Economic Recession Enterprise failures; Rising unemployment; Falling levels of GDP/Economic contraction; and Pervasive economic hardship. Second Order Effects

Enterprise failures;

Rising unemployment;

Falling levels of GDP/Economic contraction; and

Pervasive economic hardship.

The Global Economic Recession All Regions Impacted

All

The International Financial Crisis What has brought us to this point?

What has brought us to this point?

The International Financial Crisis Failures in risk management

Failures in risk management

The International Financial Crisis Excessive levels of investment capital Elevated investor expectations Sustained global economic growth Three Catalysts

Excessive levels of investment capital

Elevated investor expectations

Sustained global economic growth

The International Financial Crisis Altered traditional bank funding streams Unmanageable currency mismatches Deterioration of lending practices The Liquidity Driver

Altered traditional bank funding streams

Unmanageable currency mismatches

Deterioration of lending practices

The International Financial Crisis Healthy (i.e. excessive) performance Elevated housing prices in multiple markets Lack of appreciation for cyclicality of the sector Overexposure by lenders Fundamentally different from previous downturns The Asset Price Driver

Healthy (i.e. excessive) performance

Elevated housing prices in multiple markets

Lack of appreciation for cyclicality of the sector

Overexposure by lenders

Fundamentally different from previous downturns

The International Financial Crisis Excessive leveraging Increasingly crowded environment Assets moved off balance sheet (complex new instruments: CDOs, CDSs) Inadequate regulatory capital provision Segregation of incentives Reputational risk aspect underestimated Balance Sheet Driver

Excessive leveraging

Increasingly crowded environment

Assets moved off balance sheet (complex new instruments: CDOs, CDSs)

Inadequate regulatory capital provision

Segregation of incentives

Reputational risk aspect underestimated

The International Financial Crisis Rapid asset expansion Higher risk profile of lending in numerous markets Insufficient institutional capacity Growth Driver

Rapid asset expansion

Higher risk profile of lending in numerous markets

Insufficient institutional capacity

The International Financial Crisis The Result

The Result

The International Financial Crisis Asset price deflation Locking up of credit markets (both consumer and commercial) Crisis of confidence, especially between banks Vicious Downward Spiral

Asset price deflation

Locking up of credit markets (both consumer and commercial)

Crisis of confidence, especially between banks

The International Financial Crisis Where do we go from here?

Where do we go from here?

Road Forward Renewed focus on the Basel Core Principles Efforts to Strengthen risk-based supervision Adherence to Safety & Soundness principles Proper assignation of risk Cyclical alignment of capital adequacy standards Use of prompt corrective actions Holistic supervisory approach Use of statistical early warning systems Improved Application of Regulatory Standards

Renewed focus on the Basel Core Principles

Efforts to Strengthen risk-based supervision

Adherence to Safety & Soundness principles

Proper assignation of risk

Cyclical alignment of capital adequacy standards

Use of prompt corrective actions

Holistic supervisory approach

Use of statistical early warning systems

Road Forward Established best practices Early intervention Market-based approaches optimal Replace bank management Recapitalization by government only after full diagnostic of bank viability established Carve out bad (“toxic”) assets if market is viewed to be unrecoverable in near-medium term Problem Bank Resolution Approaches

Established best practices

Early intervention

Market-based approaches optimal

Replace bank management

Recapitalization by government only after full diagnostic of bank viability established

Carve out bad (“toxic”) assets if market is viewed to be unrecoverable in near-medium term

Road Forward Mergers & Acquisitions (M&A) Good Bank/Bad Bank solutions Bridge Banks Purchase & Assumption Transactions (P&As) Problem Bank Units (PBUs) Problem Bank Resolution Approaches

Mergers & Acquisitions (M&A)

Good Bank/Bad Bank solutions

Bridge Banks

Purchase & Assumption Transactions (P&As)

Problem Bank Units (PBUs)

Road Forward Easing of monetary policy Exchange rate challenges Avoiding deflation Need for sound end game strategy Even once the recovery takes hold, it will be hard to detect the improvement Role of Central Banks

Easing of monetary policy

Exchange rate challenges

Avoiding deflation

Need for sound end game strategy

Even once the recovery takes hold, it will be hard to detect the improvement

Road Forward Fiscal stimuli Social safety net provision Need for exit strategy Role of Governments

Fiscal stimuli

Social safety net provision

Need for exit strategy

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: PLeonovich@ota.treas.gov

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: PLeonovich@ota.treas.gov