COMPARISON OF PROBLEM BANK IDENTIFICATION, INTERVENTION AND RESOLUTION IN THE SEACEN COUNTRIES

Transcription

1 COMPARISON OF PROBLEM BANK IDENTIFICATION, INTERVENTION AND RESOLUTION IN THE SEACEN COUNTRIES Sukarela Batunanggar (Project Leader) The South East Asian Central Banks (SEACEN) Research and Training Centre Kuala Lumpur, Malaysia

2 2008 The SEACEN Centre Published by The South East Asian Central Banks (SEACEN) Research and Training Centre Lorong Universiti A Kuala Lumpur Malaysia Tel. No.: (603) Fax No.: (603) Telex: MA Cable: SEACEN KUALA LUMPUR COMPARISON OF RESOLUTION IN THE SEACEN COUNTRIES ISBN: All right reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form by any system, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the copyright holder. Designed & Printed in Malaysia by Yamagata (M) Sdn. Bhd.

3 FOREWORD The Asian crisis episode taught us that a banking crisis resolution is very costly, painful and complicated. However, it also inspires us that well-managed financial institutions especially banks and effective banking supervision are essential to maintain financial system stability. A sound, efficient and competitive banking system is crucial to ensure sustained economic growth. To this end, a well designed and effective regulatory framework is essential. Most of research and literature on problem bank resolution were mainly focus on the causes of the crises and resolution of systemic crisis. There were few studies on problem bank identification, intervention and resolution. To fill this gap, The SEACEN Centre initiated a research project entitled Comparison of Problem Bank Identification, Intervention and Resolution in the SEACEN Countries. This study is organised in two parts. Part I, the overview, provides an informative and balanced summary of the current status of problem bank identification, intervention and resolution mechanisms in the SEACEN countries. It also provides a set of important policy lessons and implications based upon the regional experience throughout the 1997 financial crisis. Part II consists of seven country papers which outline the legal and regulatory frameworks on problem bank identification, intervention and resolution in each country. The SEACEN Centre gratefully acknowledges the contribution of the Project Leader Mr. Sukarela Batunanggar (Bank Indonesia) and country researcher: Mr. Steven Avel (Bank of Papua New Guinea), Mr. Bisma Raj Dhungana (Nepal Rastra Bank), Mr. Harrison S.W Ku (Central Bank of the Republic of China (Taiwan)), Ms. Uma Rajoo (Bank Negara Malaysia), P.W.D.N.R. Rodrigo (Central Bank of Sri Lanka), and Mr. Rath Sovannorak (National Bank of Cambodia). The Centre and the Project Leader would also like to thank Mr. Conrado A. Reyno (Bangko Sentral ng Pilipinas) and staffs as well as Mrs.Tongurai Limpiti (Bank of Thailand) and staffs who kindly provided information for the survey. Last but not least, The Centre and the Project Leader would also like to express gratitude to Prof. Joon-Ho Hahm (Yonsei University South Korea) and Dr. David Scott (World Bank) for their insightful comments and suggestions. Certainly the views expressed in the paper are those of the authors and do not necessarily reflect those of The SEACEN Centre or its member central banks. We hope that this study will be valuable reference for supervisory authorities and policy makers in dealing with problem banks. Dr. A.G. Karunasena July 2008 Executive Director The SEACEN Centre iii

4 Foreword... iii Table of Contents...iv Executive Summary...xi PART I: INTEGRATIVE REPORT CHAPTER 1 COMPARISON OF PROBLEM BANK IDENTIFICATION, INTERVENTION AND RESOLUTION IN THE SEACEN COUNTRIES by Sukarela Batunanggar 1. Introduction Objectives of the Study Data and Methodology General Framework Managing Problem Banks in SEACEN Countries Legal Framework for Bank Regulation and Supervision Prudential Requirements Problem Bank Identification Problem Bank Intervention Problem Bank Resolution Safety Nets and Crisis Management Conclusions and Policy Recommendations...23 References...27 Appendix...31 PART II: COUNTRY CHAPTERS CHAPTER 2 RESOLUTION IN CAMBODIA by Rath Sovannorak 1. Introduction Legal Framework in Dealing with Problem Banks Legal Framework Roles and Responsibilities of NBC and of Administrator or Liquidator...53 iv

5 3. Problem Bank Identification Supervisory Strategies and Methods and Early Warning System Problem Bank Identification Communications Problem Bank Resolution and Intervention History of Bank Closure Prompt Corrective Actions (PCA) Conclusion...60 Appendix 1: PRAKAS on Standardized Procedure for Prompt Corrective Action for Banking and Financial Institutions Appendix 2: PRAKAS on Amendment of Prakas Standardized Procedures for Prompt Corrective Action for Banking and Financial Institutions...66 CHAPTER 3 RESOLUTION IN INDONESIA by Sukarela Batunanggar and Bambang W. Budiawan 1. Introduction Legal Framework in Dealing with Problem Bank Legal and Institutional Framework Coordination and Information Sharing Prudential Banking Regulation and Supervision Pre-Crisis (1991 to 1997) Post-Crisis (1998 to Present) Organisational Structure of Banking Supervision Problem Banks Identification Supervisory Risk Assessment Systems Early Warning Systems and Other Indicators Macro-Prudential Surveillance Communicating Concerns Problem Bank Intervention Normal Supervision Intensive Supervision Special Surveillance Problem Bank Resolution Resolution of Failing Banks without Systemic Risks Resolution of Failing Banks with Systemic Risks Liquidation of Failing Banks...89 v

6 7. Crisis Management Financial Safety Nets Prior to Crisis Crisis Management during the Banking Crisis Banking Crisis Management in the Post Crisis Conclusions and Policy Recommendations Conclusions Policy Recommendations References Appendix CHAPTER 4 RESOLUTION IN MALAYSIA by Uma Rajoo 1. Introduction Legal and Institutional Framework Communication and Coordination of Activities Prudential Regulation and Supervision Problem Bank Identification - Supervisory Regime and Rating Framework Problem Bank Intervention Problem Bank Resolution Crisis Management - The Malaysian Experience Resolution of Non-Performing Loans (NPL) Recapitalisation of Banking Institutions Alleviating Debt Servicing Capacity of the Corporate Sector The Bank Restructuring Programme Key Lessons From the Crisis Conclusions and Recommendations References CHAPTER 5 RESOLUTION IN NEPAL by Bhisma Raj Dhungana vi 1. Introduction Objectives of Nepal Rastra Bank Classification of Banks and Financial Institutions Banks and Financial Institutions under NRB s Jurisdiction Legal Framework in Dealing with Problem Banks in Nepal...129

7 2.1 Roles and Responsibilities of Different Agencies in the Resolution of Problem Banks Mechanisms for Inter-agency Cooperation and Information Sharing Among Domestic as well as Foreign Official Agencies Mechanisms to Ensure Autonomy of Bank Authorities and Legal Protection to the Regulators Problem Bank Identification Supervisory Strategy Prudential Requirements Early Warning Systems, Other Indicators and Risk Assessment Communicating Concerns Main Problems in the Banking System Causes of Problems in the Banking System Internal Factors External Factors Problem Bank Intervention Prompt Corrective Actions Resolving Liquidity Problems Resolving Credit and Capital Impairment Problem Removing Bank Management and Ownership Role of the Courts in Bank Intervention Resolution Management Resolution under Insolvency Act, Official Administration of Insolvent Banks Initiation of Bank Insolvency Proceedings Some of the Important Roles and Responsibilities of the Liquidator in Insolvency Act and Companies Act Restructuring Programs under Insolvency Act Treatment of Bank Deposits and Other Claims Crisis Management Issues Related to Systemic Banking Crisis Institutional Arrangements to Deal with Systemic Crisis Conclusion and Recommendations References Annex 1: Status of Non-Performing Loans in the Nepalese Banking System Annex 2: Consolidated Financials of the Banking System vii

8 CHAPTER 6 RESOLUTION IN PAPUA NEW GUINEA by Steven Avel viii 1. Introduction Legal Framework for Regulation and Supervision of Financial System Legal Framework Coordination and Information Sharing Issues on Autonomy, Accountability and Legal Protection of Bank Supervisors Problem Bank Identification Supervisory Strategy Prudential Requirements Early Warning Systems, Other Indicators and Risk Assessments Communication Concerns Problem Bank Identification: The Case of PNGBC Problem Bank Intervention Prompt Corrective Actions Resolving Liquidity Problems Resolving Credit and Capital Impairment Problems Removing Bank Management and Ownership Issues Role of the Courts in Bank Intervention Problem Bank Intervention: The Case of PNGBC Problem Bank Resolution Grounds for Receivership and Early Resolution Supervisory Responsibilities for Failing Banks Asset Quality and Financial Review Process Bank Closing Process Resolution Methods Problem Bank Resolution: The Case of the PNGBC Crisis Management Key Policies in Dealing with Systemic Banking Crisis Institutional Arrangements for Systemic Banking Crisis Key Issues in Crisis Management Prospects and Future Outlook for PNG s Financial Sector Strengths and Perceived Vulnerabilities of the Financial Sector Threats and Challenges to Growth and Sustainability of the Financial Sector Future Plans...171

9 8. Conclusion Recommendations Abbreviations References Appendix 1a Appendix 1b CHAPTER 7 RESOLUTION IN SRI LANKA by P.W.D.N.R. Rodrigo 1. Introduction Legal Framework in Dealing with Problem Bank Legal Framework Coordination and Information Sharing Issues on Autonomy, Accountability and Legal Protection of Bank Supervisor Problem Bank Identification Supervisory Strategy (Risk-based Supervision Framework) Prudential Requirements Early Warning Systems, Other Indicators and Risk Assessment Communicating Concerns Problem Bank Intervention Prompt Corrective Actions Resolving Liquidity Problems Resolving Credit and Capital Impairment Problems Removing Bank Management and Ownership Issues Role of the Courts in Bank Intervention Resolution Management Grounds for Receivership and Early Resolution Supervisory Responsibilities for Failing Banks Asset Quality and Financial Review Process Bank Closing Process Resolution Methods Cost of Resolution Crisis Management Key Policies in Dealing with Systemic Banking Crisis Institutional Arrangements for Systemic Banking Crisis Key Issues in Crisis Management Conclusions ix

10 CHAPTER 8 RESOLUTION IN REPUBLIC OF CHINA (TAIWAN) by Harrison S.W. Ku 1. Introduction Legal Framework in Dealing with Problem Banks Legal Framework Coordination and Information Sharing Issues on Autonomy, Accountability and Legal Protection of Bank Supervisor Problem Bank Identification Supervisory Strategy Prudential Requirements Early Warning Systems Communicating Concerns Problem Bank Intervention Prompt Corrective Action Resolving Liquidity Problems Resolving Credit and Capital Impairment Problems Removing Bank Management and Ownership Issues Role of Courts in Bank Intervention Resolution Management Grounds for Receivership and Early Resolution Supervisory Responsibilities for Failing Banks Asset Quality and Financial Review Process Bank Closing Process Crisis Management Conclusion Appendix 1: Summary of the CDIC Supervision and Conservatorship of Problem Banks (1996~2000) Appendix 2:Auctioning Off of the Non-performing Loans of Chung Hsing Bank and Kaohsiung Business Bank Appendix 3:The Financial Restructuring Fund (FRF) Appendix 4:Fact Sheet on Taiwan Deposit Insurance System Appendix 5:Additional Information on Problem Bank Management in ROC (Taiwan) x

11 EXECUTIVE SUMMARY Effective problem bank identification and resolution is crucial to ensure not only the soundness of a bank, but also the resilience of the financial system as a whole since banks are dominant players in the financial system. Successful problem bank management will reduce the potential of both individual bank failures and banking crisis as well as minimise resolution costs. Hence, a comprehensive, clear framework and guidelines for dealing with problem banks is crucial. This study aims at two main objectives: (i) to analyse the framework and process of problem bank identification, intervention and resolution in the SEACEN countries; and (ii) to identify key issues and lessons learned for an effective problem bank management. In general, bank supervisors in nine SEACEN countries surveyed have a clear legal and prudential framework in dealing with problem banks. However, the level of progress diverges from country to country depending on their legal and political settings as well as economic development. Crisis hit countries (Indonesia, Malaysia and Thailand), and countries experiencing banking system distresses (Philippines and Republic of China, Taiwan) appear to have a more developed framework, particularly on crisis management. Supervisory authorities in the crisis-affected countries have enhanced the effectiveness of their banking supervision along with the post-crisis bank restructuring program. However, non crisis-affected hit countries (Cambodia, Nepal, Papua New Guinea and Sri Lanka) have a relatively less comprehensive framework. Non-crisis countries mostly are yet to have an explicit deposit insurance scheme and develop a crisis management framework. Among key challenges for bank supervisors is to ensure both macro and micro supervisory objectives to maintain financial stability and ensure depositor protection are effectively attained. In practice, it often is difficult to identify and measure as well as manage systemic risk which requires different skills and methodologies. Therefore, it is imperative to perform and enhance the efficacy of macro-prudential surveillance to identify, monitor and mitigate the risks to the financial system. For countries which are yet to have a crisis management framework it is important to develop comprehensive financial safety nets, consisting of: (i) an explicit and limited deposit insurance scheme; (ii) a well-defined and transparent LLR both in normal times and during systemic crises; and (iii) a clear crisis management framework. Deposit insurance and LLR can be important tools for crisis management, but they are not sufficient to prevent banking crises. They should be used along with measures such as market discipline and prudential banking supervision. A welldevised framework is essential, but effective implementation is much more important. It is necessary to perform a crisis simulation regularly in order to increase readiness in managing crisis Therefore, capacity building is indispensable. xi