Financial Sector Strategies for Public Financial Managers

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

The International Financial Crisis Country Impacts and Appropriate Policy Responses to Systemic Banking Crises

The Perfect Storm
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

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

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

The Global Economic Recession
All
Regions Impacted

What has brought us to this point?

Failures in risk management

Excessive levels of investment capital
Elevated investor expectations
Sustained global economic growth
Three Catalysts

Altered traditional bank funding streams
Unmanageable currency mismatches
Deterioration of lending practices
The Liquidity 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 Asset Price 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
Balance Sheet Driver

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

The Result

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

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

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

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

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

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

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

Financial Sector Strategies for Public Financial Managers

by icgfmconference on May 13, 2009

Accessibility

Categories

Tags

Upload Details

Usage Rights

2 Embeds 13

Statistics

Financial Sector Strategies for Public Financial Managers — Presentation Transcript

http://icgfm.blogspot.com	7
http://www.slideshare.net	6