The Why and The Steps Involved: Banking Crises Management

BANKING CRISES MANAGEMENT
The Why and The Steps Involved

Stijn Claessens
World Bank
Second World Bank/IMF Financial Sector Liaison Committee Seminar January 11, 2000
BANKING CRISES MANAGEMENT Banking crises management

Does it matter? Why do banks and banking systems go bust? The steps in resolving banking system distress.
BANKING Bank insolvencyCRISES since 1980 MANAGEMENT
Systemic crisis
Borderline and small crisis
No crisis or insufficient information
BANKING CRISES MANAGEMENT Costs of selected banking crises

1980-82 1981-84 1977-83 1994-96 1988-90 1994-97 1991-93 1982-89 1985-88 1984-91 0
Argentina Chile Israel Venezuela Benin Mexico Finland Ghana Malaysia US

10 20 30 Percent of GDP 40 50 60
4
BANKING CRISES MANAGEMENT Insolvency and growth 5 years after crisis

Change in average GDP growth (percent)
Crisis OECD countries Crisis Non-OECD countries
+ 0.2
Non-crisis countries
- 0.8 -1.3
5
BANKING CRISES MANAGEMENT Why do banks go bust?

Macro factors Micro factors Legacies
BANKING MANAGEMENT How do banking CRISES systems get in trouble?

Macro factors Micro factors Poor early intervention Legacies

Study of 29 cases of banking system crisis: Actual factors cited
Macro Terms of trade drop Recession Asset bubble Dutch disease Capital flight Poor supervision/regulation Deficient bank management Political Interference Connected Lending Fraud Weak Judiciary Bank Runs Lending to SOEs 20 16 7 4 2 26 20 11 9 6 2 2 6
8
Micro
Legacies
BANKING CRISES MANAGEMENT Phases in resolving banking system distress

Containment Phase while the distress is unfolding critical Restructuring Phase institutional setup rehabilitation, restructuring, loss-allocation, recapitalization Deeper Reform Phase fundamental reforms by nature a long process
BANKING CRISES MANAGEMENT Steps in the containment phase

Onset of financial crisis acceleration of bad financing and looting Open financial crisis bank runs, large liquidity support, currency crisis, interest spikes Attempts to limit losses suspension of weak financial institutions limits on institutions (conservator, contractual arrangements) government (blanket) guarantee Stabilization
10

Steps in the restructuring phase (that is, if restructuring follows)
Diagnose the problem its size and causes (e.g., corporate sector, governance weaknesses) Develop proper institutional tools and framework legal framework, powers to intervene institutional focus for restructuring review processes etc.
11
BANKING CRISES MANAGEMENT Steps in the restructuring phase (continued)

Develop strategy for restructuring vision for the financial sector resolving bad financial institutions supporting good financial institutions Loss allocation and government support write-offs, nationalization closures, recapitalization, rehabilitation use of public resources Re-privatization
12

Bank Resolutions
Charles Enoch
IMF
14
BANKING CRISES MANAGEMENT The case of Indonesia

Five major sets of interventions: both open bank resolution and bank closures Situation marked by pervasive deep insolvency Large number of banks: 224 at outset of crisis (seven state banks held 45% of assets) Limited managerial capacity Poor initial legal and regulatory infrastructure Little scope for outside acquisitions
BANKING CRISES MANAGEMENT The five major interventions

Closure of 16 banksNovember 1997 IBRA intervention into 54 banksFebruary 1998 IBRA full takeover of seven banks (BTO1) and closure of seven othersApril 1998 Closure of four banks taken over in April 1998August 1998 Closure of 38 banks; IBRA full takeover of 7 banks (BTO2); joint recapitalization with government of nine banks (ultimately only seven)March 1999
BANKING CRISES MANAGEMENT The 16 banks closuresNovember 1997

Widespread runs on many banks before the closure announcement Closures based on initial assessment of deep insolvency; actual closures a subset of banks originally identified Limited deposit insurance, around $6,000 per depositor, fully covered over 90% of depositors. Powerful group threatened with losses Lack of resolve indicated by BIs permission to let owner of a closed bank take over a small bank and transfer assets to it
BANKING CRISES MANAGEMENT The 16 banks closures

(continued)
Noncompliance by authorities in major elements of Fund program Loss of confidence in overall economic policy; flight from currency: runs on banks Initial closures handled efficiently; inadequate legal framework for follow up
BANKING CRISES MANAGEMENT IBRA InterventionsFebruary 1998

IBRA established end-January 1998; blanket deposit protection announced (later also made retrospective) Focus on illiquidity of banks, because of massive central bank liquidity support and lack of data on banks solvency 55 banks (comprising 40% of banking system) that had borrowed more than twice their capital from BI were brought under IBRAs auspicesi.e., IBRA staff on premises, supervisory responsibility moved to IBRA Major exercise including over 500 staff; takeover achieved efficiently; uniform criteria applied
BANKING CRISES MANAGEMENT IBRA Interventions

(continued)
Last-minute refusal to allow publicity hampered powers of IBRA staff to control the banks Little immediate impact on borrowing from BI (these eased in March 1998 after new sanctions were introduced on such borrowings) Example of soft open bank resolution

April 1998Full takeover by IBRA and bank closures
Takeover of seven banks comprising 16% of the banking system (BTO1 banks) that had each borrowed at least 2 trillion rupiah ($240 million); four had borrowed 5 trillion rupiah ($600 million) Suspension of shareholder rights, change of management (except the one state bank) Seven small banks (0.4% of banking system) that had borrowed over 500% of their capital, and 75% of their assets were closed Enormous public relations exercise: Press conferences by Finance Minister and IBRA; commercial PR firm
BANKING CRISES MANAGEMENT April 1998

(continued)
Uniform treatment focusing on liquidity criteria; efficient closure process; deposits immediately available at designated state bank Still a lack of adequate legal powers; IBRA could only transfer out the assets of the closed banks in early 1999. Initial runs on some BTO banks tailed off within a few weeks. Additional BTO bank (largest private bank) in May 1998 in wake of riots
BANKING CRISES MANAGEMENT Closure of four BTO BanksAugust 1998

Audits by international firms determining true state of the banks: NPLs among BTO banks estimated to range from 55% to 90% Leakage of audits to press; sporadic runs on banks; end of deniability by authorities Declaration of insolvency of listed BTO banks Development of initial bank-by-bank strategy: those banks that might be sold; possible platform bank; those to be closed
BANKING CRISES MANAGEMENT Closure of four BTO Banks

(continued)
Four banks, including second largest private bank (5% of banking sector), closed. Deposit transfers carried out efficiently. Open bank resolution, in this case a prelude to bank closure. Requires full confidence in the guarantee Strategy evolving as combination of open bank resolution and closures

38 bank closures, 7 bank takeovers (BTO2), jointrecapitalization schemeMarch 1999
Audits of all banks indicated pervasive deep insolvency; many of the remaining better-known private banks had CAR around 10 to 20%. Triage of banks: A CAR above 4%; B 4 to 23%; C worse than 25%. C banks to be closed; A banks strong enough not to need support; B banks eligible for joint recapitalization with government under stringent conditions
BANKING CRISES MANAGEMENT 38 Banks closures

(continued)
March 13 announcement: 73 banks A category (6% of banking sector); 9 banks B category (10% of sector) and met recapitalization conditions; 7 banks (2% of sector) failed test, but had 80,000 depositors and were to be taken over by IBRA (BTO2); 38 banks (5% of sector) were C category or failed the conditions. Major exercise; much emphasis on uniform solvency criteria
BANKING CRISES MANAGEMENT 38 Banks closures

(continued)
Unfortunately, delays in initiating implementation meant interventions were not a surprise: worker resistance; probable management looting. Problems gradually overcome; interventions well received in the markets and by outside commentators.
BANKING CRISES MANAGEMENT Lessons

Resolving banking crisis very complicated. Strategy bound to evolve. Initial steps bound to be messy as authorities act on limited information. Each crisis different, but there may be a case for some closures up-front, especially if the banks are known to be deeply insolvent and riddled with fraud. The decision when to introduce blanket deposit guarantee is critical, and may not be straight forward.

(continued)
Open bank resolution may be costly if there is no good replacement management available and/or the restructuring agency cannot establish firm control. In the initial stages the focus for action is likely to be on liquidity criteria; later it moves to solvency. Early introduction of best practice accounting, provisioning, classification rules. Action should be based on transparent, uniform, simple, and defensible criteria.

(continued)
Closure process will lead to reduction in number of banks, hence boosting potential profitability of those remaining. Increase in state ownership likely, at least initially. State banks may be handled separately (on toobig-to fail grounds), but likely to be in at least as much need of operational restructuring.
Mexicos 1994 Banking Crisis
Fernando Montes-Negret
World Bank
14

Preamble to the 1994 Twin Banking and Currency Crises
1982 Bank nationalization: 58 out of the 60 banks in operation were nationalized; Consolidation into 18 domestic banks; Increasing financing of the public sector deficit: Share of private sector in total credit declined from 40% (198081) to 25% in 1986; A lost decade (198292): Loss of skills, systems, qualified staff and bank supervisors.
BANKING CRISES MANAGEMENT Preamble

(continued)
Rapid financial liberalization (198889): freeing of interest rates, abolition of directed credit rules and drastic reduction of reserve requirements. Misguided bank privatizations (199192): No foreign entry allowed, new inexperienced bankers, non-transparent licensing (no fit & proper tests), little capital, HLBO, expensive banks: given true condition of loan portfolios and final sale price (between 2.2 and 3.1 book value). Main driver: Maximize fiscal revenue (US$ 12.5 billion).

(continued)
199194 credit boom: Domestic credit grew 8 times faster than GDP: asset inflation, over-exposure to real estate sector and FX-denominated loans; Inadequate accounting and disclosure; Poor supervision, regulation and enforcement Distorted incentives: for owners, managers, borrowers, depositors and supervisors (conflicts of interest).

(continued)
Large current account deficit (7% of GDP) financed with short-term capital inflows; BOMs low liquidity: High (Short-term FX Debt/ FXR): 2.6 in November, 1994; BOMs vulnerability to attack on currency by domestic residents: (M2/FXR) ratio as high as 9 prior to the December currency crisis.
BANKING CRISES MANAGEMENT 199394 Pre-crisis crisis

Several mid-size insolvent banks intervened (Union, Cremi): overextended, serious connected lending and fraud; Political shocks: Colosios assassination and Chiapas uprising; The December 1994 fiasco: 100% depreciation of the Mexican peso in 1Q/95.
BANKING CRISES Responding to the crisis: FirstMANAGEMENT phase, 199596

The denial phase was too prolonged in Mexico and excessive secrecy, discretionality and lack of accountability contributed to increase the fiscal cost. In the presence of very poor accounting standards, the authorities were too lax in giving liquidity/forbearance to insolvent institutions.

Sharp but short contraction in 1995 (real output fell 6%) followed by an export-led recovery (help from the US locomotive). Sharp contrast with Asia. Inadequate incentive framework kept in place for too long: for supervisors (conflict of interest, oversecretiveness, lack of accountability, PR campaign); for bank shareholders (non-dilution, several bailouts, great deals for foreign banks);
(continued)

(continued)
for bank depositors and lenders in the inter-bank market (universal deposit insurance) for bank managers (not replaced or replaced too late after looting banks-Confia); for borrowers (bailouts and low cost of nonrepayment, contaminating portfolio and promoting a cultura de no pago under a lax legal/judicial framework); for federal budget (small cash outlays).

Inadequate institutional crisis management framework (FOBAPROA), compromising prudential supervision; Shaky legal foundations left untouched (Secured Lending Legislation and Bankruptcy Law); Lack of information to other government agencies, to Congress and the public (FOBAPROAs balance sheet was a state secret until early 1998) in view of mounting fiscal losses. Avoidance of bank runs (positive).
(continued)
BANKING CRISES MANAGEMENT Responding to the crisis: Second phase, 1997

Delays in introducing a comprehensive accounting reform (until 1997), followed by excessive, costly and untransparent (often case-by-case) forbearance; The March 1998 reform package: Congress gets into the picture politicizing the problem (inadequate FOBAPROA audit); Public shocked at discovering the size of the losses and the extent of the mismanagement of the crisis, although with minimal consequences;
BANKING CRISES MANAGEMENT Responding to the crisis: Third phase, 1998

Approval of IPABs Law after a lost year (1998). Mounting fiscal cost: from 8.4% of GDP in 1996 to 21.3% of GDP in 1999heavy and lasting fiscal burden in a country with low tax effort (10% of GDP); Servicing real interest on IPABs debt will require 1 point of GDP per year for the foreseeable future.
BANKING CRISES MANAGEMENT Responding to the crisis: Fourth phase, 1999

Getting IPAB off the ground in May, 1999shortcomings; New found decisiveness: Intervention of the third (Serfin) and fifth (Bancrecer) largest banks. Phasing out universal deposit insurance; The least cash solution is not the least cost solution: Need for a tax reform in view of low tax effort; Accounting tricks, mounting cash-flow needs, profitability problems and ballooning fiscal cost;
BANKING CRISES MANAGEMENT Responding to the crisis: Fourth phase, 1999

(continued)
Why the medicine ended up killing the patient: FOBAPROAs zero-coupon bonds and negative carry-carryovers; Need for legal/judicial reforms; Economic recovery without domestic credit: restoring bank lending to the private sector after 5 years of real decline.
BANKING CRISES MANAGEMENT The role of the World Bank

Important TA during early phases of the crisis: Better diagnostics and foreign expertise (FTAL); Tensions emerge between Bank staff and government: Access to information, differences about crisis management and strategy; Mea culpa: The Financial Sector Restructuring Loan (FSRL) of 199596: A US$1 billion unsatisfactory loanover-promises on both sides; under-estimation of the depth of the crisis and lack of political will to act early;
BANKING CRISES MANAGEMENT The role of the World Bank

(continued)
Stocktaking of conditions of the Mexican banking system requested by the Banks Operations Committee; Fundamental disagreement with the Mexican authorities: extent of the insolvency and actions going forward; No illusions: No access to the information, no action (mid-97mid-99)- no WB lending; New determination to move towards a financial resolution of the crisis: The Bank Restructuring Facility Loan to IPAB; Challenges going forward: sale of assets, budgetary pressures and debt management issues.

Reflecting on the major lessons from the Mexican crisis
In mid-1997 the official fiscal cost of the crisis was 8.4% of GDP. In late 1999 the cost estimate had jumped to 21.3% of GDP!. What happened? There are some key important lessons.
BANKING Major lessons CRISES MANAGEMENT

First, hiding the problem, unfortunately, does not do away with it. On the contrary, delays in taking effective action always increases, often exponentially, the cost of the crisis for a number of reasons: there is no cash-flow solution, perverse incentives continue, moral hazard and adverse selection problems become more acute.

(continued)
Second, the main public concern of the supervisors was to give the impression that things were going well and that the banks were improving their financial condition along with the rapid recovery of the real sector of the economy (199697). A well orchestrated PR campaign was mounted to influence bank analysts in N.Y. However, the tide did not raise all the boats!: lending to the private sector continued to decrease in real terms and the financial condition of the banks worsened in 1998.

(continued)
Third, ad hoc-ism and case-by-case deals, without a clear global strategy. It led to unfairness among banks, additional costs, particularly in attracting foreign banks, and bad, overly secretive, decisions. Lack of standardization in the debt instruments issued by FOBAPROA.

(continued)
Fourth, excessively complex financial engineering solutions to hide the fact that limited cash was available for resolving the crisis ended up killing some banks (which ended up financing the government with a negative carry-over):the medicine killed the patient.

(continued)
Fifth, the least cash solution is not the least cost solution. Incentives to show a tighter fiscal stance and poor consolidation of the broad public sector deficit led to minimize cash transfers to the banks, postponing the financial solution (as opposed to the accounting solution), resulting often in continuous negative cash-flows for distressed banks, raising considerably the fiscal cost of the crisis. Directly (higher bank losses) and indirectly (welfare loss resulting from lack of credit to a large group of domestic enterprises).

(continued)
Sixth, declaring victory too early is a very dangerous strategy: It puts additional constraints to the actions of the supervisor and often creates incentives to hide past mistakes with additional sub-optimal decisions. Seventh, the tendency to identify the size of the fiscal resources available to the size of the cash needs of the system leads to incomplete and often unsustainable solutions.

(continued)
Eighth, providing liquidity solutions to cases of insolvency almost always increases the fiscal cost of the crisis, particularly in cases when the old owners and managers who brought down the bank remain in place. Nine, bailouts via several purchases of bad assets should be avoided (up to three purchases were made for some banks). It creates perverse incentives and it is often a source of corruption and increased fiscal costs.

(continued)
Tenth, delays in the sale of bad assets compound the problems of banks and raises the fiscal cost of the crisis, since assets lose value through time. Eleventh, in general, bank managers and owners responsible for bringing down their bank should be replaced. In Mexico the authorities felt partially guilty and tried to spare some owners not diluting them at great cost to the taxpayer.

(continued)
Twelve, bank supervisors should not be in charge of resolving banks, intervening and managing banks, selling bad assets, etc. In the presence of conflicts of interests, it is likely that the quality of supervision and enforcement might be compromised. Thirteen, I cannot stress enough the importance of better disclosure.
Governments and Crisis Management
David Scott
World Bank
14
BANKING CRISES MANAGEMENT Governments response drives the costs

Slow or partial response increases cost cost of carry good money after bad Stock loss not predetermined determined by behavior of debtors, creditors, courts, and governments Bad practices offering bail-outs, permitting theft Governments often get it wrong
15
BANKING CRISES MANAGEMENT How to approach a crisis

Paradigm fiscal cost finances an investment in salvaging the system Goals invest no more than necessary to get the job done maximize value of the investment Approach act like a private sector investor
16
BANKING CRISES MANAGEMENT Invest no more than necessary

Get on with it rapid debt and bank restructuring Avoid bail-outs provide support only where required Avoid moral hazard provide adequate support, but only once Stop looting Allocate some losses to others
17
BANKING CRISES MANAGEMENT Maximize value of the investment

Promote optimal debt restructuring balance: growth vs. required investment Ensure adequate bank restructuring Maximize present value of banks and assets acquired Leverage investment to get structural change
18
BANKING MANAGEMENT Governments asCRISES private investors

Political work institutional arrangements mandate and principles Technical work strategies and policies due diligence investment and monitoring sale Financing
19
BANKING CRISES MANAGEMENT Institutional arrangements

Scope of distress Few institutions
Normal
Permanent institutions of government with direct responsibility and authority Available financial resources (DIC, CB, operating funds) Routine lines of communication and information sharing
Many institutions
Ad hoc
Finance ministry more involved Supplemental financial resources (expanded deposit gty, bank support, consultants) Ad-hoc lines of communication Players continue to function independently
Extraordinary
Purpose-built crisis management unit Temporary Extraordinary legal powers likely Ample resources Clear mandate and principles
20
BANKING Political work CRISES MANAGEMENT

Mandate (what to do) protect depositors, solve debt problems (banks & NBFIs, corporate & consumer), maintain services, etc. Principles (how to work) use commercial principles, provide support only once, minimize period of government ownership, etc. Agreed by top political authorities and known to all other players
21
BANKING Technical work CRISES MANAGEMENT

Problem Problem Resolution Resolution Strategies Strategies Banks Banks & & non-banks non-banks Large Large corps corps & & SMEs SMEs Consumers Consumers Diagnosis Diagnosis (due (due diligence) diligence)
Capacity-building Capacity-building Strategies Strategies Political Political Financial Financial Human Human resources resources
Execution Execution (investment) (investment)
Sale Sale of of assets assets back back to to private private sector sector (exit (exit strategy) strategy)
22
BANKING Resolution tools CRISES MANAGEMENT

Suspension deposits frozen Liquidation deposits paid out Assisted acquisition deposits transferred Nationalization temporary government ownership
23
BANKING CRISES MANAGEMENT Policies for use of resolution tools

Avoid suspension Liquidate under certain circumstances Arrange assisted acquisitions where possible Nationalize as fallback
24
BANKING CRISES MANAGEMENT Policies for investing public funds

Eliminate existing shareholders at least marginalize them Confirm management team remove some top officials Provide adequate support Get maximum restructuring Provide support only once Sell ASAP
25
BANKING CRISES MANAGEMENT Rationale for rapid sale

Give focus to all actions bank restructuring, asset management Make transparent the real situation market test Demonstrate intentions and resolve Upgrade business practices Avoid delay Reduce uncertainty
26
BANKING CRISES MANAGEMENT Financing

Must secure necessary funds to invest Substantial upfront outlays equity investments in banks asset purchases (NPLs) own operations Net investment = upfront outlays less sales proceeds Insufficient upfront financing undermines crisis resolution
27

The Russian Banking Crisis of 1998
David Hoelscher
IMF
BANKING Before the crisisCRISES MANAGEMENT

Rapid growth in the number of banksfrom 10 in 1992 to over 1,600 in 1997 Authorities perception that banks were financially sound: Highly capitalized (leverage ratios of 16 percent and higher) according to Russian accounting standards Met CBR's prudential regulations

(continued)
Financial statistics did not reflect true conditions Limited deposit mobilization: Nongovernment deposits amounted to 12 percent of GDP compared with 33 percent in Poland and 64 percent in the Czech Republic. Limited lending to corporate sector Portfolios concentrated (almost 60 percent) in GKOs Significant exposure to foreign exchange risk

(continued)
Structure of banking system highly concentrated Top 10 banks held over 80 percent of banking system assets. Sberbank alone held 25 percent of system assets. Top 10 (20) banks held 55 percent (79 percent) of all foreign currency denominated assets. Small and medium banks held only 10 percent of their portfolio in GKOs.
BANKING CRISES MANAGEMENT Causes of the crisis

Crisis provoked by forced restructuring of the GKOs and exchange rate depreciation; causes more fundamental Series of banking crises in 1996 and 1997 reflected widespread banking fragility Large vulnerability of the large banks to exchange rate volatility Large concentration in GKOs Significant nonperforming loan portfolios in all banks Dependence of banks on non-interest earnings (fees, exchange rate speculation)
BANKING CRISES MANAGEMENT Impact of the crisis

Largest banks, dependent on the GKO market, immediately became illiquid. Deposits were frozen. The payment system ground to a halt. Default on forward exchange contracts and foreign debt service obligations.
BANKING Response of the CRISES authorities MANAGEMENT

Argued that the crisis was caused by illiquidity not insolvency Called for a moratorium on foreign debt payments Permitted households to shift deposits to Sberbank Freed bank reserves Provided emergency credit to banks
BANKING MANAGEMENT Response of the CRISES World Bank/Fund team

Limitations Authorities were not convinced there was a banking crisis. No IAS-based data were available on the financial status of the banking system. Severe budget constraint. Weak legal and institutional basis for bank restructuring and liquidation.
BANKING MANAGEMENT Response of the CRISES World Bank/Fund team

(continued)
Immediate focus on three areas Collecting accurate financial data on major banks (based on IAS) Strengthening legal framework for bank restructuring and bank liquidation Establishing institutional framework for bank restructuring
BANKING CRISES MANAGEMENT Collecting accurate financial data

World Bank financed due diligence reviews of 18 large banks Among the largest in the system Represented almost 50 percent of banking system assets Relied on standard macroeconomic assumptions and IAS

(continued)
Financial results 15 of the 18 were deeply insolvent. The 15 had net negative net worth of R 211 billion (US$13.5 million) or 173 percent of assets. Some banks had negative net worth equivalent to over 400 percent of assets.

(continued)
Qualitative results The cause of the banking crisis was more than illiquidity caused by the collapse of the GKO market. The largest charge against capital (34 percent) was from provisions for nonperforming loans. The second largest charge (28 percent) was for foreign exchange losses. The third largest cause (13 percent) was for GKO losses.
BANKING CRISES MANAGEMENT Strengthening legal framework

Bank bankruptcy was handled under general bankruptcy law. Shareholders had considerable leeway in influencing the proceedings. No special bank restructuring legislation.
BANKING CRISES MANAGEMENT Establishing institutional framework

No institution clearly responsible for bank restructuring Disagreement within the government on which institution should be responsible Inadequate prudential regulations Reliance on Russian accounting standards

Results of the first year: Bank consolidation
The CBR withdrew the banking licenses of 6 of the 18 banks. Three of the 18 are under management of the bankrestructuring agency (ARCO). Corrective action plans for some 240 banks are being monitored by the CBR.

Results of the first year: Banking legislation
The Bank Bankruptcy Law (BBL) was signed into law in March 1999. Amendments to the BBL have been drafted and are ready for submission to the Duma. The Bank Restructuring Law was signed into law in June 1999.

Results of the first year: Institutional development
The Bank Restructuring Agency (ARCO) was established. The CBR has begun modernization of its supervisory regulations. The CBR consolidated and improvement management of the supervisory functions. The banking system will shift to IAS by end-2001.

Next steps: Continued consolidation of the banking system
Corrective action plans for remaining 18 banks for which there were due diligence reviews Technical support for ARCO Financial and operational reviews of Sberbank Reviews of other state banks

Next steps: Development of a core banking system
Review of remaining large banks and development of restructuring plans Identification of banks that could form the core of a well-operating banking system Monitoring of the implementation of restructuring plans Identification and removal of impediments to foreign investment in the banking sector

Next steps: Operating environment
Implementation of IAS in commercial banks by end-2001 Continued modification in prudential regulations, including consolidated supervision and application of fit and proper criteria for bank owners and management Revision of bank disclosure requirements

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