1. Contingency funding: back to the future? Antoaneta Geala Bank Deposit Guarantee Scheme Romania High-level Seminar on Challenges for European Deposit Insurance Systems: Funding, Investment Practices and Reimbursement February 26, 2015, Warsaw, Poland

2. Contents 2 1.Funding governance 2.Contingency funding – a historical perspective 3.Contingency funding tools’ pros and cons 4.Case studies 5.Stand-by credit lines 6.Lessons learned 7.Contingency funding: Back to the future? 8.Challenges for smaller DGSs outside the eurozone

3. 3 Funding governance National Bank of Romania (NBR) Board CEO Funding policy Statutory approval on: Annual funding policy Annual contributions Special contributions Borrowings from: Ministry of Finance Financial institutions Credit institutions Bond issuance Any suspension of contribution payment FGDB Supervisory Board

4. 4 Over time, FGDB included various contingency funding tools in its funding mix: - Special contributions - Borrowing from NBR (when the law allowed it) - Stand-by credit lines Contingency funding – a historical perspective Criteria Urgency (occurrence of a pay-out situation or just as a precautionary measure) Overall situation of the banking system Availability of funds Cost / benefit analysis

5. 5 Contingency funding tools’ pros and cons Applied to fund the pay-out Pros: convenient for FGDB; relatively easy to collect Cons: burdensome for banks Special contributions Applied to fund the pay-out Pros: convenient for FGDB; low cost Cons: borrowing from NBR is no longer available (the law forbids now this type of borrowing); borrowing from the Ministry of Finance has never been tested Borrowing from NBR / Ministry of Finance Used as a precautionary measure Pros: convenient for banks; readily available to FGDB Cons: expensive for FGDB Stand-by credit lines

6. 6 Case studies

7. 7 In 2000 two small-to-medium sized Romanian Banks went bankrupt: Bankcoop and Banca Internationala a Religiilor (BIR)  Covered banks: 32 Romanian banks and 8 branches of foreign banks  Eligible deposits in the banking system (December 31 st, 1999) : lei 53,178 bln.  Covered deposits of the two bankrupt banks: lei 4,629.7 bln.  FGDB resources at the time of the first bankruptcy: lei 434.7 bln. (9.4% of pay-out amount)  Covered amount: H1 2000: lei 54.764.000, H2 2000: lei 65.169.000  Cover ratio – elgible deposits (December 31 st, 1999): 0.8% Factsheet

8. 8 Legal provisions (pay-out):  Pay-out period: to start at the latest in 2 months from the official bankruptcy  Pay-out period through the agent bank to be decided by FGDB; it may be extended two times by three months each, upon the NBR’s approval; after that, FGDB carries out the pay-out using its own resources Legal provisions (financing):  Initial contribution: 1% of the bank’s equity capital  Annual contribution: up to 0.8% of the amount of eligible deposits of individuals  The law gave FGDB the power to increase the annual contribution of a bank up to 1.6% if the bank had pursued risky and unhealthy policies  S pecial contributions from banks: up to two times the level of the annual contributions  Special contribution: up to 1,6% of the amount of eligible deposits of individuals  Incomes from recovery of FGDB’s claims  Incomes from investment of FGDB’s own resources  Borrowing. Legal framework

9. 9  Share in the banking as at December 31 st, 1999: 0.89% of net assets and 9.28% of equity capital  Covered deposits: lei 2,754.9 bln. (5.5% of the covered deposits in the banking system)  Amount paid-out: lei 2,728.9 bln. Funding: FGDB resources Borrowing from NBR: lei 2,000 bln. Maturity 5 years with 2 years grace period Repayment in 6 half-year equal installments Drawdown during 12 th April – 24 th May 2000 Interest rate (reset every half-year): 1.67% p.a. – 9.30 % p.a. Special contributions: equal to annual contributions in 2000 Case study no. 1- Bankcoop Bankruptcy datePay-out by agent bank 8 th February, 200012 th April 200020 th June, 2000 Pay-out by FGDB’s own cashier desk and postal cheques 31st December, 2000 Pay-out timeline

10. 10  Share in the banking system as at December 31 st, 1999: 2.17% of net assets and 2.09% of equity capital  Covered deposits: Lei 1,874.8 bln. (3.5% of the covered deposits in the banking system)  Amount paid-out: Lei 1,848.7 bln. Funding: FGDB resources Borrowing from NBR: lei 1,500 bln. Maturity 5 years Repayment: yearly, equal installments Drawdown during 5th October – 2 nd November 2000 Interest rate: flat, 15% p.a. Special contributions: equal to annual contributions in 2000 Case study no. 2- BIR Bankruptcy datePay-out by agent bank 10 th July, 2000 9 th October, 2000 30 th November, 2000 Pay-out by FGDB’s own cashier desk and postal cheques 31 st December, 2000 Pay-out timeline 1 month delay because the shareholders contested the NBR’s decision

11. 11 Structure of funding

12. 12 Stand-by credit lines

13. 13 In 2007 FGDB put in place stand-by credit lines with the member banks:  The agreements were renewed annually during 2007 - 2010  FGDB paid 0.5% commitment fee  The total amount was calculated based on the target ratio and the eligible deposits of the banks  The number of banks was reduced gradually to make their management easier The purpose of their implementation:  To have emergency funding available  To reduce the burden for banks  the annual contribution rate was reduced from 0.3% in 2006 to 0.1% in 2007 and incresed again from 0.2% in 2009 to 0.3% in 2010 when the stand-by credit lines were given up Contingency funding – stand-by credit lines

14. 14 Stand-by credit lines’ impact 33 banks32 banks 7 banks 10 banks

15. 15  Contingency planning is essential to early detect and fix any problems in funding pay- outs  Good liquidity management plays a vital role in timely and cost-efficient funding Orderly liquidation of assets is depenent on several factors: Types of assets (Bonds, T-Bills, deposits etc.) Capital market stage of development (depth, width, liquidity) and conditions Adequate maturity structure of investment  Readily available funding sources Existing arrangements with the Government structures, financial or credit institutions (including special contributions) Access to capital market  Cost/benefit analysis of alternative sources of funding (if possible) Lessons learned

16. 16 Contingency funding: Back to the future? Funding source Past law Current law * Directive 2014/49/EU Comments Special contributions √√√ Extraordinary contributions not exceeding 0.5% of the DGS’s covered deposits per calendar year; in exceptional circumstances and upon consent of competent authority, higher extraordinary contributions can be raised. Borrowing √√√ DGSs shall have in place adequate alternative funding arrangements to enable them to obtain short-term funding to meet the claims against them. A DGS is entitled to an amount equal to the amount of the mandatory contributions up to the target level, which the MS will make immediately available to that DGS upon request for use exclusively for the purposes set out in Article 11 (if the competent authority considers that the DGS cannot raise extraordinary contributions). DGS shall repay the amount through contributions from its members. Payment commitments XX√ Payment commitments shall not exceed 30% of the total amount of DGS’s available financial means. Borrowing between DGSs XX√ They are optional; the amount is capped to 0.5% of the covered deposits of the borrowing DGS. * The new DGS law to transpose the DGSD in the local legislation has not been adopted yet.

17. 17 Challenges for some DGSs outside the eurozone Shorter period for the DGS to make available the repayable amount (within 7 working days) Correct identification of the economic business cycle’s stage (avoid the procyclical contributions) Work out the adequate target level matching the particular circumstances of the banking system Identify the adequate mix of funding to manage the contingencies Constraints: Smaller banks, more vulnerable to economic downturns Availability of funds in case of emergency Shortage of adequately liquid investment choices (low-risk assets / sufficiently diversified) Low width, depth and liquidity of capital market The pay-out amount and the unavailable deposits are denominated in different currencies Potential effects: Difficulties to raise extraordinary contributions DGS cannot meet the repayment deadline (7 working days) Exchange rate risk incurred by DGS (the actual target level can decrease rapidly) Possible solutions: Set a target level above the minimum recommended by the DGSD Special provisions in the national legislation enabling the authorities (Ministry of Finance) to raise the funds to be borrowed by DGS Secondary market operations used by the Treasury (Ministry of Finance) to manage the public debt (bond exchange, buy back) in order to improve market liquidity

18. Thank you! For further details visit www.fgdb.rowww.fgdb.ro

19. Annexes

20. 20 FGDB’s resources

21. 21 FGDB’s borrowing rates – a comparison

22. Impact of RON/EUR adverse movement on FGDB’s cover ratio

23. Net profit / loss in Romanian banking system