NBU and DGF in the Crossroad of the Reform

Marius VismantasCountry Sector Coordinator, Financial and Private Sector Development

Ukraine, Belarus & Moldova

The views expressed in this presentation do not constitute an official position of the World Bank Group on the issues discussed

Decision making today

• Supervision– Supervises– Becomes alert– Issues warnings– Develops corrective actions– CALLS A BANK A TROUBLED BANK– Introduces TA– Develops rehab/resolution plan– Decides on liquidation– Liquidates

• DGF

Pays out deposits

Decision making after

• Supervision– Supervises– Becomes alert– Issues warnings– Develops corrective actions– CALLS A BANK A TROUBLED

BANK

• DGF

– Introduces “TA”– Develops

rehab/resolution plan– Decides on liquidation– Liquidates– Pays out deposits

Separation of troubled banks from regular supervision

• In banks, conventional wisdom suggests separating problem assets from the rest of the bank– Keeps management focused on core banking – Allows more efficient NPL resolution – limited funding and skills channeled to

a specific purpose

• Similarly, troubled bank resolution should be separated from regular supervision– Keeps the regulator focused on core supervision– Key is (1) calling a bank a troubled bank and (2) determining least-cost

resolution strategy – two crucial judgments which would be separated– Allows more efficient troubled bank resolution– Strengthens both institutions rather than weakens them individually - the

system is strengthened as a consequence

NBU and DGF Cooperation - TODAY

• Information sharing – but mostly of past events/decisions; little added by DGF to the supervisory process

• Contingency credit line NBU DGF

• NBU overextending, loaded with all judgmental decisions

• DGF purely and narrowly mechanical

NBU and DGF Cooperation - FUTURE

• DGF performs judgmental role in resolution– Relief to the NBU from overextension in judgment– Uses specialized cost tests– Takes decisions on spending money - not only for deposit payout– Accountable for decisions and funds spent

• NBU maintains judgmental role in supervision– Still pulls the plug on a troubled bank – key to ultimate success

• Information sharing – enhanced significantly

• Joint teams on borderline banks

NBU and DGF Cooperation - FUTURE

• NBU recognition of the DGF as an equal highly professional partner – mutual strength – interdependence of success – benefit to the system

• Needless to say - full professional independence of both institutions is sin qua non for the success of the new institutional framework

NBU and DGF – Mutual Interest

• Both institutions collectively responsible for success of resolving troubled banks

• NBU– Motivated to see DGF succeed – as such success would

vindicate NBU supervision and decision making on troubled banks

• DGF– motivated to see NBU succeed in supervision and calling

troubled banks at a right time – as such success would mean less work to the DGF, or better outcomes in resolution

Overarching objective

Protect depositors =

Protect taxpayers