Paul A. Leonovich Associate Director Banking & Financial Services Miami, Florida May 2009
United States Department of the Treasury Office of Technical Assistance
OTA MISSION <ul><li>Strengthen public financial management </li></ul><ul><li>and financial institutions </li></ul><ul><li>...
The International Financial Crisis Country Impacts and Appropriate  Policy Responses to Systemic Banking Crises
The Perfect Storm <ul><li>World Financial Crisis </li></ul><ul><li>& </li></ul><ul><li>Global Economic Recession </li></ul>
The International Financial Crisis <ul><ul><li>Freezing up of credit on the international capital markets and within domes...
The International Financial Crisis <ul><ul><ul><li>Western Europe </li></ul></ul></ul><ul><ul><ul><li>Asia </li></ul></ul>...
The Global Economic Recession <ul><ul><li>Enterprise failures; </li></ul></ul><ul><ul><li>Rising unemployment; </li></ul><...
The Global Economic Recession <ul><ul><li>All </li></ul></ul>Regions Impacted
The International Financial Crisis <ul><ul><li>What has brought us to this point? </li></ul></ul>
The International Financial Crisis <ul><ul><li>Failures in risk management </li></ul></ul>
The International Financial Crisis <ul><ul><li>Excessive levels of investment capital </li></ul></ul><ul><ul><li>Elevated ...
The International Financial Crisis <ul><ul><li>Altered traditional bank funding streams </li></ul></ul><ul><ul><li>Unmanag...
The International Financial Crisis <ul><ul><li>Healthy (i.e. excessive) performance </li></ul></ul><ul><ul><li>Elevated ho...
The International Financial Crisis <ul><ul><li>Excessive leveraging </li></ul></ul><ul><ul><li>Increasingly crowded enviro...
The International Financial Crisis <ul><ul><li>Rapid asset expansion </li></ul></ul><ul><ul><li>Higher risk profile of len...
The International Financial Crisis <ul><ul><li>The Result </li></ul></ul>
The International Financial Crisis <ul><ul><li>Asset price deflation </li></ul></ul><ul><ul><li>Locking up of credit marke...
The International Financial Crisis <ul><ul><li>Where do we go from here? </li></ul></ul>
Road Forward <ul><ul><li>Renewed focus on the Basel Core Principles </li></ul></ul><ul><ul><li>Efforts to Strengthen risk-...
Road Forward <ul><ul><li>Established best practices </li></ul></ul><ul><ul><ul><ul><li>Early intervention </li></ul></ul><...
Road Forward <ul><ul><li>Mergers & Acquisitions (M&A) </li></ul></ul><ul><ul><li>Good Bank/Bad Bank solutions </li></ul></...
Road Forward <ul><ul><li>Easing of monetary policy </li></ul></ul><ul><ul><li>Exchange rate challenges </li></ul></ul><ul>...
Road Forward <ul><ul><li>Fiscal stimuli </li></ul></ul><ul><ul><li>Social safety net provision </li></ul></ul><ul><ul><li>...
Thank You <ul><li>Paul A. Leonovich </li></ul><ul><li>Associate Director for Banking & Financial Services </li></ul><ul><l...
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Financial Sector Strategies for Public Financial Managers

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Paul Leonovich, Associate Director for Banking & Financial Services, Office of Technical
Assistance, United States Department of the Treasury

“Financial Sector Strategies for Public Financial Managers”
The presenters will discuss strategies and tactics that can be utilized in responding to
current financial sector and debt market challenges.

Published in: Economy & Finance, Business
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Financial Sector Strategies for Public Financial Managers

  1. 1. Paul A. Leonovich Associate Director Banking & Financial Services Miami, Florida May 2009
  2. 2. United States Department of the Treasury Office of Technical Assistance
  3. 3. OTA MISSION <ul><li>Strengthen public financial management </li></ul><ul><li>and financial institutions </li></ul><ul><li>in developing and transition countries </li></ul>
  4. 4. The International Financial Crisis Country Impacts and Appropriate Policy Responses to Systemic Banking Crises
  5. 5. The Perfect Storm <ul><li>World Financial Crisis </li></ul><ul><li>& </li></ul><ul><li>Global Economic Recession </li></ul>
  6. 6. The International Financial Crisis <ul><ul><li>Freezing up of credit on the international capital markets and within domestic banking systems; </li></ul></ul><ul><ul><li>Burgeoning default rates on loans; </li></ul></ul><ul><ul><li>Difficulty in rolling over domestic and external debt; </li></ul></ul><ul><ul><li>Widening fiscal deficits; </li></ul></ul><ul><ul><li>Emerging widespread bank failures; and </li></ul></ul><ul><ul><li>Devaluating currencies. </li></ul></ul>First Order Effects
  7. 7. The International Financial Crisis <ul><ul><ul><li>Western Europe </li></ul></ul></ul><ul><ul><ul><li>Asia </li></ul></ul></ul><ul><ul><ul><li>United States </li></ul></ul></ul><ul><ul><ul><li>Emerging Europe </li></ul></ul></ul><ul><ul><ul><li>Latin America and the Caribbean </li></ul></ul></ul><ul><ul><ul><li>Southeast Asia </li></ul></ul></ul><ul><ul><ul><li>Greater Middle East </li></ul></ul></ul>Regions Impacted
  8. 8. The Global Economic Recession <ul><ul><li>Enterprise failures; </li></ul></ul><ul><ul><li>Rising unemployment; </li></ul></ul><ul><ul><li>Falling levels of GDP/Economic contraction; and </li></ul></ul><ul><ul><li>Pervasive economic hardship. </li></ul></ul>Second Order Effects
  9. 9. The Global Economic Recession <ul><ul><li>All </li></ul></ul>Regions Impacted
  10. 10. The International Financial Crisis <ul><ul><li>What has brought us to this point? </li></ul></ul>
  11. 11. The International Financial Crisis <ul><ul><li>Failures in risk management </li></ul></ul>
  12. 12. The International Financial Crisis <ul><ul><li>Excessive levels of investment capital </li></ul></ul><ul><ul><li>Elevated investor expectations </li></ul></ul><ul><ul><li>Sustained global economic growth </li></ul></ul>Three Catalysts
  13. 13. The International Financial Crisis <ul><ul><li>Altered traditional bank funding streams </li></ul></ul><ul><ul><li>Unmanageable currency mismatches </li></ul></ul><ul><ul><li>Deterioration of lending practices </li></ul></ul>The Liquidity Driver
  14. 14. The International Financial Crisis <ul><ul><li>Healthy (i.e. excessive) performance </li></ul></ul><ul><ul><li>Elevated housing prices in multiple markets </li></ul></ul><ul><ul><li>Lack of appreciation for cyclicality of the sector </li></ul></ul><ul><ul><li>Overexposure by lenders </li></ul></ul><ul><ul><li>Fundamentally different from previous downturns </li></ul></ul>The Asset Price Driver
  15. 15. The International Financial Crisis <ul><ul><li>Excessive leveraging </li></ul></ul><ul><ul><li>Increasingly crowded environment </li></ul></ul><ul><ul><li>Assets moved off balance sheet (complex new instruments: CDOs, CDSs) </li></ul></ul><ul><ul><li>Inadequate regulatory capital provision </li></ul></ul><ul><ul><li>Segregation of incentives </li></ul></ul><ul><ul><li>Reputational risk aspect underestimated </li></ul></ul>Balance Sheet Driver
  16. 16. The International Financial Crisis <ul><ul><li>Rapid asset expansion </li></ul></ul><ul><ul><li>Higher risk profile of lending in numerous markets </li></ul></ul><ul><ul><li>Insufficient institutional capacity </li></ul></ul>Growth Driver
  17. 17. The International Financial Crisis <ul><ul><li>The Result </li></ul></ul>
  18. 18. The International Financial Crisis <ul><ul><li>Asset price deflation </li></ul></ul><ul><ul><li>Locking up of credit markets (both consumer and commercial) </li></ul></ul><ul><ul><li>Crisis of confidence, especially between banks </li></ul></ul>Vicious Downward Spiral
  19. 19. The International Financial Crisis <ul><ul><li>Where do we go from here? </li></ul></ul>
  20. 20. Road Forward <ul><ul><li>Renewed focus on the Basel Core Principles </li></ul></ul><ul><ul><li>Efforts to Strengthen risk-based supervision </li></ul></ul><ul><ul><li>Adherence to Safety & Soundness principles </li></ul></ul><ul><ul><li>Proper assignation of risk </li></ul></ul><ul><ul><li>Cyclical alignment of capital adequacy standards </li></ul></ul><ul><ul><li>Use of prompt corrective actions </li></ul></ul><ul><ul><li>Holistic supervisory approach </li></ul></ul><ul><ul><li>Use of statistical early warning systems </li></ul></ul>Improved Application of Regulatory Standards
  21. 21. Road Forward <ul><ul><li>Established best practices </li></ul></ul><ul><ul><ul><ul><li>Early intervention </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Market-based approaches optimal </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Replace bank management </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Recapitalization by government only after full diagnostic of bank viability established </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Carve out bad (“toxic”) assets if market is viewed to be unrecoverable in near-medium term </li></ul></ul></ul></ul>Problem Bank Resolution Approaches
  22. 22. Road Forward <ul><ul><li>Mergers & Acquisitions (M&A) </li></ul></ul><ul><ul><li>Good Bank/Bad Bank solutions </li></ul></ul><ul><ul><li>Bridge Banks </li></ul></ul><ul><ul><li>Purchase & Assumption Transactions (P&As) </li></ul></ul><ul><ul><li>Problem Bank Units (PBUs) </li></ul></ul>Problem Bank Resolution Approaches
  23. 23. Road Forward <ul><ul><li>Easing of monetary policy </li></ul></ul><ul><ul><li>Exchange rate challenges </li></ul></ul><ul><ul><li>Avoiding deflation </li></ul></ul><ul><ul><li>Need for sound end game strategy </li></ul></ul><ul><ul><li>Even once the recovery takes hold, it will be hard to detect the improvement </li></ul></ul>Role of Central Banks
  24. 24. Road Forward <ul><ul><li>Fiscal stimuli </li></ul></ul><ul><ul><li>Social safety net provision </li></ul></ul><ul><ul><li>Need for exit strategy </li></ul></ul>Role of Governments
  25. 25. Thank You <ul><li>Paul A. Leonovich </li></ul><ul><li>Associate Director for Banking & Financial Services </li></ul><ul><li>United States Department of the Treasury </li></ul><ul><li>International Affairs - Office of Technical Assistance </li></ul><ul><li>740 15th Street, N.W., 4th Floor </li></ul><ul><li>Washington, D.C.  20005 </li></ul><ul><li>Email: PLeonovich@ota.treas.gov </li></ul>

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