Some introductory remarks Re-privatization of (Partially & Wholly) Nationalized Banks

1. Bank Guarantee Fund Poland 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 1

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 (2007-2010) in EUR billions EUR billions Source - ECB 2010 IADI Annual Conference

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

7. Recapitalization in the EU Government capital injections into UK banks and building societies 2007-2010 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 Source – Bank of England Sources – FDIC, 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 Liabilities (2001 = 100) and leverage of banks and building societies by size in the UK(a) High leverage level of big banks Source: Bank of England 2010 IADI Annual Conference

13. Re-privatization Effectiveness 2010 IADI Annual Conference

14. Nationalization – positive and negative factors OBA and Nationalization remain among optional tools to maintain financial stability Temporary solution • 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 2010 IADI Annual Conference

15. Public Funds Injection Background for the OBA/Nationalization decision Type Cost Direct Indirect Total $ Amount_1 - α $ Amount_1 - α OBA Equity/ Contribution P&A $ Amount_2 + β $ Amount_2+ β Liquidation Payoff $ Amount_3 + β $ Amount_3+ β α – Amount expected to be recovered by selling shares β – Loss to the national economy α is the most critical in decision process Source: KDICKorea 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 Bank under nationalization Re-privatization process 3 State Future owner 1 2 Final results Restructuring agreement Definition of Exit Conditions Restructuring Final recovery Restructuring agreement overview Restructuring agreement targets Resolution cost Amount recovered + 2010 IADI Annual Conference

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

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