Paul A.

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

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

Regions Impacted
 Western Europe
 Asia
 United States
 Emerging Europe
 Latin America and the Caribbean
 Southeast Asia
 Greater Middle East
 The Global Economic Recession

Second Order Effects

 Enterprise failures;

 Rising unemployment;

 Falling levels of GDP/Economic contraction; and

 Pervasive economic hardship.

The Global Economic Recession

Regions Impacted
 All
The International Financial Crisis

What has brought us to this point?

The International Financial Crisis

Failures in risk management

The International Financial Crisis

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

The Liquidity Driver

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

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

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

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

The Result
The International Financial Crisis

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?

 Road Forward
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

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

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

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

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