11 Some introductory remarks Re-privatization of (Partially & Wholly) Nationalized Banks Jerzy Pruski 2010 IADI Annual Conference Financial Safety-Nets Going Forward Tokyo, October 2010 Bank Guarantee Fund Poland

2010 IADI Annual Conference 2 Scale of losses Recapitalization Scale of the problem

2010 IADI Annual Conference 3 Scale of losses Cumulative peak losses as a percentage of risk- weighted assets at the start of the crisis Financial crises in last 15 years huge losses Source – Bank of England

2010 IADI Annual Conference 4 Recapitalization in the EU and US Source - Bloomberg

2010 IADI Annual Conference 5 Recapitalization in the EU Capital raised by financial institutions ( ) in EUR billions Source - ECB EUR billions

2010 IADI Annual Conference 6 Recapitalization in the EU Capital raised by financial institutions ( ) Recapitalization by issue date Recapitalization in different countries Source: EU Commission Services

2010 IADI Annual Conference 7 Government capital injections into UK banks and building societies Recapitalization in the EU Huge fiscal cost for the UK Sources – HM Treasury, Bank of England

2010 IADI Annual Conference 8 Recapitalization Barriers to Private Solution

2010 IADI Annual Conference 9 Barrier 1 – scale and concentration Complexity and scale of international banking groups Concentration of US banking system and average assets relative to GDP of US commercial banks Sources – FDIC, Bank of England Source – Bank of England

2010 IADI Annual Conference 10 Banking sector size and concentration Differentiations - banking sector asset size - proportion of potential risk to banking sector asset size - proportion of potential risk to GDP in different states Sources: ECB, Banks Annual Reports (2009), ‘’Credit Writedowns” (June 2010), ”The Forbes Global 2000” ranking (2010)

2010 IADI Annual Conference 11 Banking sector size and concentration

2010 IADI Annual Conference 12 Barrier 2 – lack of capital among big banking groups required for acquisitions Source: Bank of England Liabilities (2001 = 100) and leverage of banks and building societies by size in the UK (a) High leverage level of big banks

2010 IADI Annual Conference 13 Re-privatization Effectiveness

2010 IADI Annual Conference 14 Nationalization – positive and negative factors Strong factors  Critical financial functions - maintained  Depositors and good debtors - protected  Prevented systemic risk by protecting financial contracts Negative factors  Injection of huge amount of public money  Risk that part of the money will not be recovered even after privatisation  Risk of moral hazard OBA and Nationalization remain among optional tools to maintain financial stability Temporary solution

2010 IADI Annual Conference 15 Public Funds Injection Total $ Amount_1 - α $ Amount_2 + β Indirect - α + β Direct $ Amount_1 $ Amount_2 $ Amount_3 Equity/ Contribution OBA $ Amount_3 + β Liquidation P&A Payoff CostType Background for the OBA/Nationalization decision α – Amount expected to be recovered by selling shares β – Loss to the national economy α is the most critical in decision process Source: KDIC Korea

2010 IADI Annual Conference 16 Recovery as a result of efficient nationalization and privatization Strict conditions and procedures are required to avoid moral hazard Full and clean exit is crucial when re-privatizing – sell all government shares and remove all risks such as contingent liability Resolution cost Restructuring State 1 Future owner Restructuring agreement Definition of Exit Conditions Restructuring agreement targets Restructuring agreement overview Final results Amount recovered Final recovery Bank under nationalizationRe-privatization process

2010 IADI Annual Conference 17 Costs of nationalization of selected banks for public finance: in nominal terms in proportion to GDP Public costs of nationalization Data sources: Official bank websites, Eurostat, Reuters, European Commission EUR billions Nationalization cost to GDP

2010 IADI Annual Conference 18 Questions Scale of nationalization - tremendous Efficient re-privatization - crucial Re-privatization  When ?  Under what conditions ?  How ?