NBU and DGF in the Crossroad of the Reform

1. NBU and DGF in the Crossroad of the Reform Marius Vismantas Country 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

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. Overarching objective Protect depositors = Protect taxpayers