Alexander, William, Jeffrey Davis, Liam P. Ebrill, and Carl-Johan Lindgren, 1997, Systemic Bank Restructuring and Macroeconomic Policy (Washington: International Monetary Fund).
Basel Committee on Banking Supervision, 1999, The Compendium of Documents Produced by the Basel Committee on Banking Supervision (Basel: Bank for International Settlements, February).
Basel Committee on Banking Supervision, 1998, “Instruments Eligible for Inclusion in Tier 1 and Tier 2 Capital,” Press Release (Basel: Bank for International Settlements, October 27).
Dziobek, Claudia, 1998, “Market-Based Policy Instruments for Systemic Bank Restructuring,” IMF Working Paper 98/113 (Washington: International Monetary Fund).
Ingves, Stefan, and Göran Lind, 1997, “Loan Loss Recoveries and Debt Resolution Strategies,” in Banking Soundness and Monetary Policy: Issues and Experiences in the Global Economy, Charles Enoch and John H. Green, eds. (Washington: International Monetary Fund).
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)| false Ingves, Stefan, and Göran Lind, 1997, “ Loan Loss Recoveries and Debt Resolution Strategies,” in Banking Soundness and Monetary Policy: Issues and Experiences in the Global Economy, Charles Enochand John H. Green, eds.( Washington: International Monetary Fund).
Ito, Takatoshi, and David Folkerts-Landau, 1996, International Capital Markets: Developments, Prospects, and Key Policy Issues (Washington: International Monetary Fund).
Maldeikis, Eugenius, 1998, “Asset Disposition in Lithuania,” presentation to the FDIC International Conference on Deposit Insurance, Conference Papers Volume II, September 9–11.
Ministry of Finance and Bank of Thailand, 1998, Joint Statement of August 14, 1998.
Ministry of Finance (Thailand), 1998, capital support schemes announced on August 14.
Montes-Negret, Fernando, and Luca Papi, 1997, “The Polish Experience with Bank and Enterprise Restructuring” (Washington: The World Bank, FSDD).
Nyberg, Peter, 1997, “Authorities’ Role and Organizational Issues in Systemic Bank Restructuring,” IMF Working Paper 97/92 (Washington: International Monetary Fund).
Stone, Mark R., 1998, “Corporate Debt Restructuring in East Asia: Some Lessons from International Experience,” IMF Paper on Policy Analysis and Assessment 98/13 (Washington: International Monetary Fund).
Sundararajan, V., 1999, “Prudential Supervision, Bank restructuring, and Financial Sector Reform,” in Sequencing Financial Sector Reforms — Country Experiences and Issues, R. Barry Johnston and V. Sundararajan, eds. (Washington: International Monetary Fund).
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)| false Sundararajan, V., 1999, “ Prudential Supervision, Bank restructuring, and Financial Sector Reform,” in Sequencing Financial Sector Reforms — Country Experiences and Issues, R. Barry Johnstonand V. Sundararajan, eds.( Washington: International Monetary Fund).
United States, Federal Deposit Insurance Corporation, 1998, Chapter 6, “Other Resolution Alternatives” in Resolutions Handbook: Methods for Resolving Troubled Financial Institutions in the United States (Washington: Government Printing Office).
Vichit-Vadakan, Vicharat, 1998, “Thai Financial Crisis and Reform,” presentation to the FDIC International Conference on Deposit Insurance, Conference Papers Volume II, September 9–11.
This paper was written with help from colleagues in the Monetary and Exchange Affairs Department (MAE) and able research assistance from Elena Budreckaite. The paper benefited from the comments of Stanley Fischer, Stefan Ingves, and Carl-Johan Lindgren. An earlier draft was reviewed by Charles Adams, Bijan Aghevli, Peter Heller, and Leslie Lipschitz of the IMF, and Jonathan Fiechter, Larry Promisel, and Thomas A. Rose of the World Bank.
The paper does not discuss in detail certain related matters, such as the rationale for the use of public funds, the deposit insurance agency (DIA), the need for, and methods of, taking legal recourse against criminal acts, and corporate restructuring. More in-depth discussions of forbearance and asset management corporations are subjects of separate papers.
The design and sequencing of bank restructuring and prudential supervision reforms, taking into account their macroeconomic impact, are discussed in William Alexander, Jeffrey Davis, Liam P. Ebrill, and Carl-Johan Lindgren, Systemic Bank Restructuring and Macroeconomic Policy (Washington: International Monetary Fund, 1997); V. Sundararajan, “Prudential Supervision, Bank restructuring, and Financial Sector Reform,” in Sequencing Financial Sector Reforms — Country Experiences and Issues, R. Barry Johnston and V. Sundararajan, eds. (Washington: International Monetary Fund, 1999).
See glossary for definition of the term.
The form of resolution for a problem bank—closure and liquidation, partial or complete merger, temporary “bridge bank,” or support to keep the bank operating—depends upon the bank’s governance, its financial condition, and its franchise value.
The rationale and appropriateness of the use of public funds in bank recapitalization warrants more detailed discussion, but this is beyond the scope of this paper.
The government should appoint independent, professionally competent executives and boards to manage banks that are taken over. If it proves difficult to find such individuals, the use of international bankers, accounting firms, and investment bankers becomes critical to fill part of the human resource gap. Otherwise, human resource constraints may influence the design of the restructuring and recapitalization program, and place a premium on identifying economies of scale in resolving banks, and on efficient clustering of problem banks.
See Peter Nyberg, “Authorities’ Role and Organizational Issues in Systemic Bank Restructuring,” IMF Working Paper 97/92 (Washington: International Monetary Fund, 1997). Sometimes asset management functions are located within the bank restructuring agency.
For example, Thailand converted FIDF support into equity.
Central banks rank in priority over a failed bank’s assets according to whether they hold collateral against their loans to it, and the quality of that collateral.
See Nyberg, op. cit.
Indonesia, Malaysia, and Thailand have no DIA and so required a special agency. Although it has an existing DIA, Korea has also created a special agency to handle its bank problems. During the bank and thrift problems of the late 1980s and early 1990s in the United States, the Bank Insurance Fund (ΒIF) was judged able to handle the banking problems and resolved 1,394 failed banks between 1984 and 1992. The thrift regulator and insurer, however, were replaced by a new regulator, and a special temporary agency, the Resolution Trust Corporation (RTC), was created to manage the crisis (Alexander, Davis, Ebrill, and Lindgren, op. cit., pp. 86–91).
Indonesia and Thailand have placed their BRAs subordinate to the ministries of finance. In Malaysia, the BRA is run by the central bank, which is only quasi-independent of the MOF. Korea’s BRA is a subsidiary of its independent supervisory agency. Japan and Mexico have involved their DIAs to some extent in bank restructuring and recapitalization. The United States created an independent agency (the Resolution Trust Corporation) to handle failed thrifts, but not failed banks. However, the RTC spent a smaller percentage of GDP (roughly 2 percent of GDP in the mid-1990s) on failed thrifts than the countries considered in this paper will incur in restructuring their banking systems. See Charts 1 through 8 in Appendix III.
These partners need to have sufficient capital at risk to give them a strong incentive to stay with the institution and to work for its survival.
Sweden, for example, required banks to provide to the BRA data based on universally applied criteria on a common date. The BRA then fed the information obtained from banks and data from other sources (including macroeconomic data and predictions) into a forecasting model, which outlined each bank’s likely development over the next 3 to 5 years. See Stefan Ingves and Göran Lind, “Loan Loss Recoveries and Debt Resolution Strategies,” in Banking Soundness and Monetary Policy: Issues and Experiences in the Global Economy, Charles Enoch and John H. Green, eds. (Washington: International Monetary Fund, 1997).
This criticism was made of the Big Five’s work in Indonesia. Also, the Korean government wanted an assessment quickly, and the international partners of the international accounting firms declared themselves unable to sign the audits in the time frame allowed, which reduced their impact.
In some cases, the restructuring agency may come under pressure to extend public aid beyond banks to the nonbank financial system.
See Ingves and Lind, op. cit.
For example, even where shares are written down to zero, human resource constraints might suggest that “fit and proper” shareholders be retained on the board of directors and be given stock options tied to future performance. Alternatively, an insolvent bank might be closed and a new charter issued to the former owners conditional on their injection of new capital.
These techniques have all been used by the Bank Insurance Fund (BIF) and the Resolution Trust Corporation (RTC) in the United States. Malaysia has provided asset guarantees to acquirers of merged finance companies, Korea has given put options to acquiring banks in P&As, and Thailand has provided stop-loss guarantees and yield-maintenance agreements to new investors taking over intervened banks.
Korean banks have been recapitalized to 10 percent, to allow them to survive some further deterioration in asset quality.
Unlimited liability is not uncommon. Before granting a license, supervisors frequently require shareholders to undertake, for example, in a comfort letter to keep their bank adequately capitalized.
Nevertheless, this approach is being tried in Indonesia, where the capital support facility for private banks requires contributions from existing shareholders to “fill the hole” in return for the opportunity to buy back the government shares later and reacquire the bank under specified conditions.
The published Joint Statement of August 14, 1998, from the Ministry of Finance and the Bank of Thailand imposes this condition.
See Claudia Dziobek, “Market-Based Policy Instruments for Systemic Bank Restructuring,” IMF Working Paper, No. WP/98/113, August 1998.
Nationalization is the usual outcome in cases where insolvency is deep and the bank is regarded as systemically important.
The government could also retain specific rather than general voting powers, to allow it to approve the details of a merger, for example.
They are popular among “white knight” acquirers because they allow the acquirers to rescue a corporation, while ensuring that they can exit first, if trouble occurs. Convertible preferred shares are being used by the Japanese government and also in Thailand and Indonesia.
CARs are improved because equity increases and the value of risk-weighted assets falls, as both cash and government bonds have zero risk weight under the Basel standards.
Authorities sometimes place indexed bonds with banks to lower the initial costs of debt service and to mask the full costs of recapitalization. However, costs to the government could rise and banks could benefit if inflation escalates.
This has occurred in Korea and Thailand, and is in prospect in Indonesia.
The Government of Thailand charges banks 0.4 percent of liabilities annually for the guarantee it is providing.
Under the Basel Capital Accord, loans carry a 100 percent weight, while cash and government bonds carry a zero or 20 percent weight.
Legal deficiencies may also be handled more easily through a centralized agency. See, “Corporate Debt Restructuring in East Asia: Some Lessons from International Experience,” by Mark R. Stone, IMF PPAA/98/13, October 1998.
By mid-1996, Mexico had spent two-thirds of its projected net outlays to purchase bad loans and support debtors; only one-third went to recapitalize banks. See pp. 114–16 in Takatoshi Ito and David Folkerts-Landau, International Capital Markets: Developments, Prospects, and Key Policy Issues (Washington: International Monetary Fund, 1996). Countries typically purchase bad loans and support debtors when banks’ internal governance is weak and property rights are poorly defended by the legal system.
The bank will no longer need to make provisions against the assets the government purchases. However, the bank will not gain from regaining provisions that have already been made because they will be written off against the sale to the government at less than book value.
If the centralized AMC is dealing with private banks, it is particularly important to determine transfer prices that do not involve an implicit subsidy, and such determination is quite complex in times of uncertainty, as discussed earlier.
Thailand and the United States have taken this approach.
Indonesia, Japan, Korea, Malaysia, and Mexico have bought bad assets from open banks.
This was the compromise adopted by Sweden. See Ingves and Lind, op. cit.
An exception to the general rule may occur where the government buys banks’ loans to public enterprises. Where these loans have received an explicit or implicit public guarantee, the government may, with justification, choose to buy the loans close to book value.
A question arises concerning provisions that have been taken against assets that are purchased by the government. If the provision is greater than the loss, if any, on the sale of the asset to the government, then the bank will benefit from the transaction. If the excess provisions are reversed in the profit and loss accounts, the government may recoup some of its outlays in the form of additional taxes on bank profits. This would happen, for example, when provision had been made for an asset which the government buys at book value.
There are examples in Asia and elsewhere where assets have been purchased at inflated prices. However, in Indonesia and Malaysia, the asset management agency has stated that asset purchases would be based on realistic values.
Arne Berggren discusses establishing and operating AMCs in his unpublished paper, “Establishing Asset Management Companies.”
See Nyberg, op. cit.
Existing bank-client ties may in fact reflect a “cozy” relationship that could impede an aggressive liquidation process.
This is the approach adopted in Lithuania as described in the presentation “Asset Disposition in Lithuania,” by Eugenius Maldeikis at the FDIC International Conference on Deposit Insurance, September 1998.
This approach is being used in Thailand, as described by Vicharat Vichit-Vadakan in “Thai Financial Crisis and Reform,” presentation to the FDIC International Conference on Deposit Insurance, September 1998.
For instance, it may be particularly productive to hold and repackage property companies before seeking to sell them.
Japan and the United States have followed this approach.
Indonesia, Korea, Malaysia, Mexico, and Thailand have assisted in the restructuring of private debt. The Government of Mexico has been particularly active in providing support to households, small- and medium-size businesses of all sizes. Corporate restructuring is being done privately with government encouragement.
See Stone, op. cit.
Examples of the former approach include bank recapitalization schemes linked to bank conciliation agreements in Poland, or to debt workout and restructuring in Thailand. See “The Polish Experience with Bank and Enterprise Restructuring” by Fernando Montes-Negret and Luca Papi, The World Bank, FSDD, January 1997, and the capital support schemes announced by the Ministry of Finance in Thailand, on August 14, 1998.
See “Corporate Workouts: A U.K. Perspective,” by Pen Kent, in Crisi d’Impresa e Risanamento, Milan, 1997, and Pen Kent, “International Debt: A Case-by-Case Strategy,” Banking World, No. 5, (May 1996), pp. 13–16.
These techniques have been used, for example, in Malaysia and in the United States.
For example, Chapter 6, “Other Resolution Alternatives” of the FDIC’s Resolutions Handbook: Methods for Resolving Troubled Financial Institutions in the United States 1998, takes the position that regulatory forbearance can be a useful tool when recapitalizing banks. A number of Asian countries are transparently allowing their troubled banks to temporarily fall below minimum capital standards, while adhering to a schedule for restoration of capital standards.