1. 11 Some introductory remarks Re-privatization of (Partially & Wholly) Nationalized Banks Jerzy Pruski 2010 IADI Annual Conference Financial Safety-Nets Going Forward Tokyo, 27-28 October 2010 Bank Guarantee Fund Poland

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

3. 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

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

5. 2010 IADI Annual Conference 5 Recapitalization in the EU Capital raised by financial institutions (2007-2010) in EUR billions Source - ECB EUR billions

6. 2010 IADI Annual Conference 6 Recapitalization in the EU Capital raised by financial institutions (2009-2010) Recapitalization by issue date Recapitalization in different countries Source: EU Commission Services

7. 2010 IADI Annual Conference 7 Government capital injections into UK banks and building societies 2007-2010 Recapitalization in the EU Huge fiscal cost for the UK Sources – HM Treasury, Bank of England

8. 2010 IADI Annual Conference 8 Recapitalization Barriers to Private Solution

9. 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

10. 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)

11. 2010 IADI Annual Conference 11 Banking sector size and concentration

12. 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

13. 2010 IADI Annual Conference 13 Re-privatization Effectiveness

14. 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

15. 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

16. 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 2 3 + Final recovery Bank under nationalizationRe-privatization process

17. 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

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