Article

Banking
Restructuring

Submitted By
Muhammad Laraib
SP07-BB-0082

To
Sir Mansoor Tallat

Advance Accounting
 Muhammad Ali Jinnah University

Banking Restructuring – Lessons for

Georgia
Restructuring: concept, goal and contest. Termini restructuring is of
Latin origin and means changing-improvement of the structure of some
object or system, i.e. its forms and consistence (morphology). It
basically means unchanged character of directions of its functioning.
They use restructuring from large plan in the economical texts mostly
with debts, including foreign ones, payments and taxation (trade)
balance, corporation sector of the economy and of separate
enterprises, of banking system entirely and separate banks (other
credit organizations).

Its basic elements are:

• eradication and minimization of negative influence of bad macro-

economic, political and other common factors upon situation and
perspectives of functioning of banking system;
• improving systemic organization (structure, kinds, types) of
totality of credit organizations, creation of conditions for effective
and civil competition among them;
• improving legislative base for mutual-advantage collaboration
and organization-economic mechanisms among credit
organizations and their clients;
• increasing quality of managing entire banking system and its
separate elements;
• financial cure of separate banks and other credit organizations;
• effective (with minimal social experiences) liquidation of vital
credit organizations.

Foreseeing these elements, we can state following definition:

restructuring banking system in managed process of its global
readjustment (improvement), supported by changing in industrial,
cash, taxation, budgetary and information policy, also in the policy of
the banks themselves, and which is directed towards formation of
banking system adequate to effective, trustful and dynamically
developed modern requests.

According to this definition, restructuring effective, stabile and healthy

banking system in not needed (though, it is possible to improve or
reform it). Thus, restructuring is a cure (curing something that is not
healthy), i.e. restructuring may be understood and must be understood
to be the process, with the help of which banking system of concrete
country transit to the new level of development. It is also evident, that
restructuring is curing of such systems, which are in crises and can not
get out of it without help. Finally, from the point of restructuring
(privately displaying necessity of financial curing) we must discuss
absolutely every bank. In this case, restructuring, as a process of
readjustment, seems to have its own instrumentation, which will not be
bounded only with the instruments of ordinal procedure banking
management?

According to the mentioned above, we can make main goal of

restructuring process of banking system - its recovery and taking its
movement to the relatively new trajectory, at which it already gains
earlier lost potential of progressive development and becomes
adequate to the real sector of the economy again.

• In relation with this, we must pay attention to the following

principle requests towards the context of the process to be
discussed:
• activities provided in relation to the restructuring will be
profitable only in case, if we foresee not only reasons of banking
crisis, but also define those fundamental; defects of economical
relations, which make banking system viable at the modern
stage;
• restructuring of banking system, which, in fact, must give rise to
its reanimation in the earlier condition, doesn't solve problems
neither of whole system, nor of the country economy;
• it is necessary to process not only tactical activities before
starting the process of restructuring, but also to set strategic
objects: to receive such structure of banking, which will be
adequate to the goals and functions standing towards the banks
at the new stage;

while processing activities of reforming banking system they must

clearly define a circle of those problems, which must be solved during
the process of reforming with the help of renewed banking system and
they must set the price of activities;

Effective restructuring requests combined methods of approaches

towards the problems. World practice processed principles and
methods of approaches of solving banking crisis, approbation of which
showed their sufficient effectiveness. It is nonprofessional and not
expedient to use some principles and refusing others;

A process of solving crisis may not be fast, simple or cheap.

Th8is common goal, mentioned above, in its turn, may be concreted
into the list of those problems, working at which must form real
concept of restructuring process according to the conditions in modern
Georgia:

1. eradication of conditions provoking banking crisis, solving

problems in relation with banking sphere and real sector;
2. financial curing of those problematic banks, which have kept
viability and perspectives of development, also state support of
those banks, which have abilities of effective usage of this aid;
3. providing trustful satisfaction of basic current requests on bank
services (payments and short-termed crediting) of the industrial
subjects;
4. foundation of a new, more complete structure of banks and other
credit organizations (according to the forms, measures of the
property, regional distribution and so on);
5. Creation of more complete rules and instruments regulating new
rules of banking activities and of this activities;
6. Creation of conditions. Mechanisms and stimuli for turning banks
to the side of enterprises, for their involving into the process of
further production, also overcoming inflexibility of the banks in
the process of solving investment problems;
7. Recovering trustfulness among banks;
8. Recovering trustfulness in relation with the banking system,
appearing stimuli among population for putting their savings on
the accounts;
9. Creation of the stimuli for increasing responsibilities and
effectiveness of the bank managers;
10. Civilly closing of not viable banks and fulfillment of the
mechanisms of their liquidation.

There is an idea about the fact, that main goal of restructuring banking
system is recapitalization of the banks (recovering lost a capital and its
further growth), but it is not quite correct: since today the hardest
problem is, that a spectra of profitableness and trustfulness of capital
investment is very tight.

Some bankers offer such understanding of restructuring and such

pragmatic activities of radical reforming of banking system, the
essence of which finally has been brought to the regrouping of the
almost bankrupted banks according to the principles of specialization
(specialized banks working in the country scale, banks oriented
towards export or those obligated in the groups of large enterprises,
also regional banks). they meant, that new "system forming" groups
would obey to the strict control of appropriate governmental structures
or groups of enterprises, in exchange of it, it will have right for working
on budgetary resources. Suggestions of separate bankers were not
related with the problems of recovering whole banking system.

We can form basic problems of restructuring banking system in the

following way:

Transiting to the foundation of a healthy market banking system by

readjustment of separate problematic banks, providing structural
reform of banking system;

Increasing whole capital of banks and filling banking system with long-
termed resources;

Creation conditions stimulating growth of the quality of market

commercial banks, including those in the regions.

Main goal of restructuring program must be: creating such layer of

technological market commercial banks, which provides marketing
policy and makes basic profit from credit-operations. It is interesting,
that within the bound of 2-3 years program share of such capital in the
banking system may reach up to 30-40%, and credit share in the credit
portfolio of banking system - 30%. Share of profit made from crediting
in whole income of banking system must not be less, than 6%. Half of
such healthy banks must still function in the regions.

The concept of those first steps, which must make foundation to the
realization of effective program of restructuring banking system, must
be formed in this way:

1. processing a conception of developing banking system and its

taking as a manual 2-3 years earlier;
2. consisting a program on working at the passed liabilities and its
realization; We mean that a special state organ working on
restructuring purchases from the banks their "bad money;.
3. realizing recapitalization of the banks. we mean, that the same
or other state organ enters the capitals of the banks for a little
time, increases this capital and credit potential of the banks and
then sells its share in the capitals of the banks;
4. passing the law about guaranteeing deposits of the people in the
commercial banks on time;
5. creating equal conditions for competition and development of
every bank. We must refuse other banks "having social
importance", "forming a system" and somehow "related" with
somebody;
6. clear formulating of the role of government and state banks in
the banking system;
 7. realizing evident support of regional market commercial banks;
8. creating effective mechanisms of developing infrastructure of the
banks and their functioning;
9. changing a system of taxation of commercial banks;
10. processing and realization of activities refinancing
commercial banks by the central bank;
11. creation and realization of the package of legislative and
organization activities developing hypothec crediting;
12. fastening the process of transiting commercial banks to the
international standards of accounting

Restructuring: principles and conditions. We can name following to be

the obligatory principles (main rules) of the process restructuring
banking system:

A principle of solidary obligations. The essence of it is, that in the

mentioned process there participate (with out resources) and
coordinate the banks themselves (in the first place - the owners), their
creditors and the government. It is impossible to restructure banking
system without state support. Though, it is evident, that the state will
not be able to support every bank, having extremely reduced
resources. Accordingly, the banks in the first place must try to solve
their problems independently and the managers and creditors of the
cured banks must stand on the advantage position.

The principle of minimizing loss and expenses. It says, that while

realizing restructuring we must consider those activities, which give
the opportunities of overcoming crisis with the less budgetary
expenses (financial expenses of the society) and with little loss from
the side of banking system and the clients of banks to be more prior.

Liquidation of problematic banks is much losable, but socially more

difficult way. It needs especially measured method of approach
towards the problems of the depositors the banks to be liquidated. Fast
liquidation of not solvent banks may deepen the crisis (an Indonesian
example in 1997-1998). According to the estimation of numbers of
experts, best way out of it is confluence of the problematic bank with
the healthy one, though this is quite doubtful recommendation.

A principle of minimizing liquidation requests to give priorities to the

activities of reorganization and support and not bankrupting in the
process of restructuring and financial curing.

A principle of just distribution of expenses on restructuring mean, that

the stated part of expenses on curing banks must be compensated by
those, who receive risks related with these banks, are responsible for
their loss and make profit after restructuring (i.e. participants of the
banks, its highest administration). Economical obligation of not solvent
managers and owners of the banks may be expressed, for example, by
adequate reduction of their own banking capital, their participation in
the restructuring process in the way of additional entering in the bank
capitals. Part of the loss may be covered at the expense of the
depositors.

A principle of strategic method of approach means definition of the

strategic problem, what kind of banking system is wanted by the
society after restructuring (in the condition if it conforms to the new
purposes and functions of the banks at the new stage). Only after this
they must select advantage and agreed activities, which may be
recommended for readjustment of separate banks and its entire
system.

A principle of complex method of approach means, that a system

defined by the program must be fulfilled completely. It is impossible to
bring whole concept of reconstruction process to its separate
consisting parts (for example, everything mustn't be bounded only
with solving financial problems displayed in one concrete period of
time).

We can name such principles of providing restructuring, as

transparency (necessity) of distributing expenses related with it,
strengthening management of those banks, which are supported by
the state, encouraging independent adaptation of the banks with the
changed situation and others.

Following conditions of restructuring are also of great importance:

1. Success of reconstructing banking system is in close touch with

how much clearly and knowing affair they formulate long-termed
problems, industrial, structural and financial policy. For example,
crediting enterprises, especially of large ones, is possible only in
the case, if it is effective, if it leans upon clear state strategy. It is
an important condition without which bank restructuring may not
be successive.
2. For successiveness of restructuring banking system it is the most
necessary to recover and develop such conception, which will
conform to the main economical goals. This conception may be
oriented towards fulfillment of objects of operative character
(recovering a mechanism of payment, solving other problems).
3. It's not real to try restructuring banking system, apart form
reforming and restructuring the surrounding, in which bank
functions. This request in the first place touched upon real sector
 of the economy and its active enterprises. Banking system is a
kind of "built" and its successful restructuring is able by knowing
what the basis is like, i.e. what kind of economy shall it support.
Concrete requests and possibilities of real economy are the main
criteria defining, what the banking system must be. Solving
problems of real sector requests advantage economical policy of
the state. In every case, real sector and banking system also
needs concrete orienteer, which themselves appear to be
additional stimuli of development.
4. Restructuring of banking system must be outrun by curing of
money and credit relations. Here curing of money relations must
play leading role (privately avoiding barter and other cash-free
"payments" in the economy). This needs providing activities
stimulating investments in real sector of the economy, because it
is impossible to come out of the economical crisis in other case.
5. Restructuring banking system is impossible without staff
revolution. Specialists of short-termed financial speculations
must master either modern directions or give the way to those
professionals, who can work with the real sector, have
knowledge and ability in the part of estimating and managing
investment and industrial risks.
6. Restructuring banking system requests important correcting of
legislative and normative base.

According to the mentioned above, we can separate some leading

questions about restructuring banking system, on which there still is no
satisfying answers.

• What was the main reason of the situation, in which the banks
appear? It's thoughtful, that we must make choice among
situation in real economy and peculiarities of bank activities. We
consider it not to be correct to oppose two reasons to each other
this way in our concrete conditions.
• What must turn into the basic concept of restructuring process
(important consisting part)? Managers of central banks give
different answers to this central question. There are such
variants not conforming to each other: 1. financial curing of
those problematic banks, which keep viability and perspectives
of development; 2. rising the level of capitalization of the banks;
3. curing money relations; 4. recovering not as much of banks,
but cash-credit relations; 5. creation functionally new banking
system.
• What must the structure of banking system be, formation of
which is purposeful? This is a principal problem. It is necessary to
clear everything related with this. The banks must have an
"assortment" if there is no other variant to be received.
 • What must a conception of recovering and developing banking
system be? Privately, following questions still remains to be
doubtful (more in practice, then in theory): must we consider
basic direction of curing banks their reorganization and
readjustment, which concerns financial and other support and
structural reforming?

Foreign experience of restructuring banking system. Bank

reconstruction is not a unique problem. Banking crisis has been noticed
almost in 70 countries during 20 years. A process of recovering
balance has been continuing very difficultly everywhere and the state
participated in them (though, scales of this participation were different
in the different places and periods. Sometimes reasons of the crisis
coincided with each other, sometimes they were specific. But forms of
their solving coincided in many cases: stabilizing crediting, filling own
capital of the banks, purchasing their assets (including passed debts)
and others. As a rule, basic financial heaviness leaned upon the state
directly, or in the way of financing specially founded agencies by it.

USA was a pioneer in the field of banking restructuring, where a

system of guaranteed deposits and a special institute managing these
deposits has been founded under the influence of the crisis in 1929-
1933. This institution was a federal corporation insuring deposits
(FCID).Next stage of restructuring banking sphere is related with the
series of banking crisis took place in absolutely different countries
during last 20 years.

In 1980-1991 1300 banks and 1400 borrowing-saving associations

stopped existence in the USA. According to the different estimations,
restructuring banking system cost 300-500 billion dollars (5% of the
WIP). In 1995 banking crisis took place in Japan, in 1994-1995 - in
France, in 1989-1990 - in Australia, in 1987-1989 - in Norway, in 1991 -
in Sweden, in 1991-1993 - in Finland, in 1980-1982, 1900-1991 and
1995 - in Argentina, in 1990, 1994-1995 - in Brazil, in 1981-1982,
1990-1991 and 1995 - in Argentina and Mexico, in 1982-1984 - in
Chile, in 1994-1995 - in India, in 1994 - in Indonesia, in 1985-1988 - in
Malaysia, in 1981-1987 - in Philippines, in 1991-1995 - in Hungary, in
1990s - in Poland, Bulgaria, Lithuania, Latvia, Estonia and others. In
some countries systemic crisis used to be repeated periodically. Some
countries were able to avoid systemic basic crisis with the help of
having insurance system, in the first place, at the expense of effective
banking management and regulation.

Price of restructuring banking system is very different: 5% of WIP in the

USA, 10 - in Hungary and Brazil, more, then 40 - in Chile and 55% - in
Argentina.Central banks can support problematic banks in the crisis
situation, especially in case of spoiling their current liquidity. In
Venezuela, eight not solvent banks used special lines of liquidity for
compensating money resources. Though, they were not able to cover
borrowed sources in the future.

In other cases, crediting is an important step of central banks. They are

supported during banking crisis and give them resources and terms for
restructuring credit organizations. A long termed support provided by
the central bank of Poland is a good example of it, when it purchased
low profitable shares and long-termed bonds from the banks. Granting
long-termed credits by the central bank sometimes depends on
creation of complex plans of improving situation by the banks (list of
stated activities and expected results).

Reducing the level of obligatory reserves (or increasing percentage

payments on them) is another way of supporting banks, for example,
part of obligatory reserves of deposits poste restates were set free for
financing purchasing certificates of termed deposits of the institutions,
which had been working by the program of restructuring banks.

They use special tax advantages very seldom in the process of bank
restructuring. Notwithstanding this, Brazil used tax stimuli for
encouraging confluence: "swallowed" bank could exclude then value of
not active credits, "the sallower" received credits equaled to the
distinction between the purchase and balance prices. Some countries
use tax stimuli for shares and bonds issued during the realization of
restructuring program.

They somehow make the rules of regulation and management under

the conditions of restructuring banking system simple. They
compensate this by creation such middle-termed system of regulation
and management (in the crisis period), which foresees risks of banking
activities more adequately.

To save the banks being in hard position actions provided by the state
may support weakening the feeling of responsibility of the banks. In
such conditions, the following is of great importance not to give rise to
the weakening encouragement of irresponsible behavior of the banks
in the future. It is considered, that it is necessary to grant a sum for
making large profit and participants of the banks must be responsible
for their obligations. They requested from the banks to discard a
capital partially a conditions for making support in South Korea; the
state obliged itself with bad debts of credit organizations in Mexico
only in case if its participants used to make additional income; while
bankrupting of credit organizations in Brazil and India, their
participants were obliged to enter additional sum equal to the size of
their initial entering in the nominal fund.

Herewith, participant of the banks are not always obliged with the
responsibilities, for example, in case of the loss received from those
credits, which are granted by banks by the state indications, it is
necessary to range the size of responsibility, as the participants may
not have possibility for solving problems in the credit organization
because of the not having transparency and of the organization
calculations and other reasons.

They founded specialized institutions in the most part of the countries

during restructuring banking system, which have been obliged with the
problems of managing this process.

A government and central banks of many countries solved problems

with bank crisis and restructured own banking system in different
ways. Practice has shown up, that there is neither ideal form of
restructuring, nor the universal strategy of normalizing situation in
banking sector. Very often this or that action depends on concrete
occasion. Notwithstanding this, we may separate total signs of
successful programs, which have been realized abroad:

the fastest definition of the scales of problems, its recognition on the

state level and readiness of the government for granting important
financial resources for solving problems;

passing transparent, activities adequate to the essence of the problem,

moving “bad” assets from the problematic banks off;

processing complex, transparent, operative program, its correct and

successive development;

fulfillment of the procedures of banking management.

Chile. A complex of activities. Large scaled restructuring of banking

system in Chile has started since 1984, when a central bank of the
country started granting stabilizing credits for supporting liquidity of
the banks and purchasing their not trustful credits or changing not
active assets on liquidity. Deregistration of the bank debts took place
in the way of turning creditors into the shareholders.

State became a guarantor for foreign debts of the private banks. Size
of the debts transited to the central bank of Chile by the end of 1985
overcame whole capital of problematic banks 3 times and consisted 6
billion dollars (25% of WIP). About 60% of expiated credits were
changed on its bonds by the central bank.

They involved straight state control in numbers of system forming

banks of the country.

Recapitalization of the banks transited under the state control used to

be realized in the way of additional issuing of the shares placed among
small and middle investors. A state corporation of supporting
development (CORFO) worked on this program.

Results. The banks practically fulfilled their obligations in the part of

the deposits of physical and juridical persons with the help of the used
activities. Though the quantity of national private banks was reduced
from 22 to 15, but they were able to keep every large bank and
improve their working by 1987. After 1996 every commercial bank of
Chile has been considered to be competitionable.

The value. By the end of 80s, expenses provided on restructuring

banking system of Chile consisted from 30 to 40% of the country WIP.

Mexico. A complex of activities. Restructuring of banking system in

Mexico has been started in 1995 after devaluation of national currency
and strengthening of financial situation, which followed devaluation.
One of the nominal activities of Mexican bank (main bank of the
country) was involving special calculation unit UDI (unidades de
inversion), which was indexed with the level of prices. Whole assets of
the banks were calculated by it, for avoiding devaluations of credit
portfolios of the banks.

Basic organ working on restructuring banks was banking fund of

protecting savings (FOBAPROA). During the process of readjustment it
expiated securities from the bank and banks provided deposing of
received resources in the Mexican bank. They gave five years to the
banks for expiating these papers. In other cases they were going to
convert them into the shares of these banks and their realization at the
market.

For solving problems with foreign debts of national banks central bank
granted short-termed currency credits from these banks to them, who
passed payment of these obligations. At the same time FOBADROA
published doubtful assets of commercial banks. Herewith, the
shareholders, in its turn, were obliged to enter sums equal to the half
of resources granted by FOBAPROA. Banks were to enter resources
received from this operation into the 10 year bonds.
They involved outer management of problematic banks. In some cases
they granted their shares to the foreign banks. At the same time they
supported bank debtors, provided restructuring of their liabilities.

Results. With the help of restructuring Mexico could avoid destroying of

banking system. Deposits of the people practically were not defected.
They kept trust of foreign investors in the banks of the country.

The value. Restructuring of banking system of Mexico costs 60-65

billion dollars (about 14.5% of national WIP).

Argentina. A complex of activities. State governmental organs in

Argentina supported more trustful banks for solving problems of
banking crisis. They used differenced method of approach. They
separated banks into several groups:

I group – Middle and large banks having temporal problems of liquidity

because of loosing clients. They granted them credits of central bank
of Mexico and Bunco de la nacio Argentina;

II group – small banks, which were to confluence with large, relatively

healthier banks or were to be swallowed by them;

III group – small banks, which were at the edge of bankrupting. They
stopped operations in these banks and they desired to readjust, sell
and liquidate them;

IV group – 12-15 state banks owned by the administration of

Argentinean provinces, which were to be privatized.

Expiation of “bad” debts was provided not by state agencies, but file
largest commercial banks, which founded a special trust-fund in
January 1995 together with the central bank. For compensating
provided expenses they reduced a normative of reserved requests.

Results. A complex of anti-crisis activities in Argentina provided

stabilization of banking system in one year. Though during this period
position of foreign banks were significantly strengthened. There share
in the total assets of banking system of the country drew up 42%.

The value. Expenses wasted on restructuring banking system of

Argentina drew up 2.5-3.5% of the country WIP according to the
various estimations.

Scandinavian countries. A complex of activities. notwithstanding

distinctions in the reasons provoking crisis in every Scandinavian
country, a conception of restructuring banking system leaned upon
practically united conditions and principles of state support. They are:

• founding a special state organ for overcoming banking crisis and

providing state support avoiding mediator agencies;
• strengthening the role of prudential banking management and
separating a special organ for its realization;
• overcoming deposits in relation with as physical, so juridical
persons with the method of joint approach (“nobody looses”);
• supporting every bank in equal principles and conditions and
fluent transparency of information for entire society;
• total method of estimating situation in banks and displaying
need of state support. This support a confluence with usage of
“not popular” activities towards owners and managers, which
supported them. These are such sanctions, as compensation of
material loss at the expense of the property of guilty managers
of the bank, devaluation of nominal capital until loosing whole
resources (this activity in Norway was obligatory) and so on.

Programs of restructuring banking systems of these countries were

being realized by optimal conformity of responsibilities and stimuli at
every level including owners, organs of managing separate banks and
regulating organs of whole system.

A value. Expenses in Sweden consisted 4.3% of WIP and 9.9% - in

Finland.

Hungary. A complex of activities. Restructuring banking system has

been continuing in two stages. At the first stage (1992-1995) the state
used to transfer important sum of money in problematic and, in the
first place, large banks. At the same time clearing of bank assets in the
way of changing “bad” credits at state bond took place. They used
state guarantees very actively. They tried to use special structure for
centralized restructuring – capital investment and development bank
of Hungary, but by 1995 the banks appeared again under the critical
situation.

At the second stage (1995-1997) method of approach in relation with

restructuring has been changed. They used state resources only for
supporting those large state banks, which were to be privatized.
Restructuring made them attractive for western investors.

Results. State share in the bank capital after first stage has been
increased from 41.4% in 1991 till 69% in 1994. The result of second
stage was increasing the share of foreign capital in the banking system
of the country till 60% by 1997 (in 1996 – 48%, in 199535%, in 1991-
1994 – 12-15%) and reduction of the share of state property till
20.66%. Share of “bad” debts in total sum of debts by 1993-1997 has
been reduced from 13.2 till 1.2%. There was no occasion of selling
deposits or refusing returning money to the debtors.

A value. Expenses provided at restructuring banking system of

Hungary consisted from 12 till 18% of its WIP.

Estimating restructuring in Russia. Necessity of restructuring Russian

banking system has become evident in the middle of the 90s. They
began appropriate practical activities from August in 1998, which at
the beginning had an operative anti crisis character. Herewith, they
paid special attention in the first variant of restructuring program to
the saving of many-profiled (“system forming”), interregional banks,
but later they decided to gather middle and small banks.

Operative anti-crisis activities. In 1998-1999 bank of Russia (central

bank) together with the government of the country provided operative
activities for recovering ability of the bank, to be able to realize basic
complex of service.

1.They provided three many-sided interbank clearing, which made it

possible to register 30 billion rubles for recovering taxation system. In
many regions this gave opportunity to the banks to release from the
cargo of nonpayment wholly or partially.

2.They decided to move obligation of numbers of banks towards

physical persons to the savings bank of Russia.

3.they used a mechanism of refinancing banks from September 1998

for supporting bank liquidity: they granted Lombard credits to the
more, then 80 banks, overnight – to 34, one year credits to 15 on
them; they changed normative of obligatory reserves (total 5%
normative). They gave banks right of regulating obligatory reserves.

4.Changes took place in the requests towards banks. Central bank

postponed usage of activities influencing in case of not consisting
minimal normative of own capital of the banks for two years.

5.They involved special norms regulating activities of the selected

circle of banks, in which there were: rule of calculating absolute sizes
of economical normative, changing of calculating rules of some
normative, rule of influencing activities. this gave the banks damaged
by the crisis, though having good perspectives opportunity for leaning
upon the quantity of their capital owned by the banks till the first of
August 1998, or changing currency course of Ruble while taking risks.
6.They reduced limit of open currency positions, strengthened rule of
calculating liquidity normative.

7.They reduced 10 times registration of payment and size of the price

for opening branch.

8.They changed prohibition for paying entering in the nominal capital

by foreign currency.

9.They involved requests towards registration of currency risks formed

by balance-free operations and termed agreements. They managed
activities of credit organizations working on the consolidated basis.
They involved a rule of foreseeing bank risks in the banks.

10. They continued foreseeing licensing of those banks, which

abolished law, had not satisfying financial situation, and had no
perspectives of development.

At the same time, Bank of Russia and a government processed long-

termed activities for solving basic problems of restructuring banking
system. We can separate following:

Participating in processing those legislative acts, which are necessary

for success of restructuring banking system;

Working of executive government with the local organs for the purpose
of defining their possible participation in normalizing banking activities
in the regions;

Participation in foundation of the Agency of restructuring banking

system (ARBS) and collaboration of central bank with it in the fields of
restructuring separate banks;

Creation regime of prior support for restructuring banks.

For the purpose of widening possibilities of postponing own capital by

the banks:

They abolished prohibition on paying entering in the nominal capital of

the banks and receiving subordination loans by the foreign capital;

They processed a rule of making entering in the nominal capital of the

banks, when it takes place at the expense of converting bank
obligations in the licenses of participating in the nominal capital;
They changed methods of approach towards requests of minimal size
of own capital. These requests are still active for newly founded banks
and are abolished for the active ones;

The involved the rule of paying nominal capital of the banks by the
state securities.

By the end of 1999 Russian bank announced finishing of the first stage
of restructuring banking system, which means, that this system
recovered ability of providing basic complex of service, they kept
viable kernel of the banks.

According to the Russian bank data, quantity of problematic banks by

the first of January 2000 has been reduced from 480 till 199, and by
the first of November – till 155. They widened the scales of bank
activities, increased their assets. Whole capital of the active banks
(except saving banks) has been increased per 2.7, though its size
consisted only 46% towards the August of 1998, they reduced the
number of those banks, normative of liquidity of which was less, then
the obligatory level H3 per 70%.

The affair has been being interrupted by the absence of an evident

economical policy of the government. The bank of Russia had no
conception of recovering and developing banks, which would be
received by the totality of banks and finally state role and the place of
central bank, instruments to be used in relation with commercial
banks, main goals and directions of working with restructuring. At the
way of restructuring lack of resources still remained to be the main
problem.

Bank of Russia and ARBS estimated possibilities of forming quite

effective instrument, which would give them possibility for organizing,
managing and transformation of banking system, also,, their
possibilities and readiness in the wealth of the resources of bank
refinancing and self-curing.

It is more dangerous, that bank of Russia considers liquidation of the

banks to be prior way of working with problematic banks.

Herewith, liquidation of the banks loosing license is processing very

slowly and is followed by large expense. To the mind of Bank
Association of Russia (BAR), restructuring process is continuing slowly
and not progressively. They consider, that bank of Russia has been
able to define banks to be supported, discuss the programs of their
curing and supporting realization of these programs. They have had
enough time for avoiding not viable banks, but they haven’t done that.
40% of credit organizations of banking system have lost their licenses,
and only 3/5 of them have been rubbed out of the registration book.
Middle term of liquidation procedures is 2-3 years. Herewith, almost
half of competition mass is worked for organizing competition
management and current expenses. Creditors of the banks in such
occasion loose their money forever. It seems that n case of liquidating
bank only those of the interested persons win, who provides the
procedure of liquidation and bankrupting.

Finally, it must be mentioned, that bank of Russia practically refused

providing credit support to the banks for the purpose of providing
stabilizing activities. The state refused to support practical programs of
restructuring banking system as well. After these, the society suffers
more and more loss.

They often call a process of transforming banking system in Russia

“slowly progressive restructuring”. Truly, in fact it is brought to the
individual and spontaneous “conformity” of the banks to the new
request of the time. This makes it dangerous, that this will recover only
earlier banking system – with the same weaknesses and defects.

Experience of overcoming banking crisis in the USA. US economy has

been influenced by banking problems several times. One of them
appeared during the period of large depression of 1929-1933.
Thousand of bank deposits were devaluated because of ineffective
operations of the banks, also not returning of the granted loans and
total degradation of the economy. They closed hundreds of banks and
provided confiscation of thousands of objects because of not returning
of loans. US congress passed laws about founding federal corporations
insuring deposits and also those insuring loans and savings. Except
insuring, these corporations were obliged to research a lot of financial
institutions for the purpose of finding defects in bank legislation and
procedures and regulation of banking operations. This system has
been working effectively during many years.

By the end of 1970 and beginning of 1980 banking industry of the USA
was fluctuated by another financial catastrophe. To the analytical
mind, reason of this was defective practice of granting doubtful credits,
also, not transparency of the activities of regulating organs. Such
organs that time were department of currency control, corporations
mentioned above and institutions of Federal Reserve System. Exactly
this time they destroyed reductions on percentage rates set for the
banks on the attracted resources. They gave the banks right to pay
any percents to the depositors (but higher, then market rates). That’s
why rates in the 80s overcame annual 20%. It is evident, that the
banks were to grant credits in higher percents (25% and more) for
keeping profitableness.

Prices were being grown, especially those of immovable property

(mostly because of expensive inner prices on oil). They abolished
reductions to the borrower-saving associations on realization financing
venture projects related with immovable property and speculative
commercial operations (at whole US territory). Then they let the
commercial banks grant credits on reconstruction projects and other
risky operations related with immovable property (the government
stimulated such operations), as in the country, so abroad. Herewith, for
guaranteeing such credits, banks attracted deposits with very high
percents. By the end of the 80s it was impossible to return such credits
because of high percents and side spread of speculative character of
the borrowers’ operations. Scales of bankrupting companies and
private persons in those years were extreme. Finally, values of oil and
immovable property have been significantly cheapened. Because of
low level of banking management and under the conditions of
deregulation reduced the number of hundreds of borrow-saving
associations and financing resources of commercial banks, that they
started using deposits attracted by the higher rates for payments on
the old deposits and, they continued granting risky credits. By the end
of 1988 both mentioned corporations were nearly bankrupted, as they
were to give all their resources to the not solvent banks and
associations in the way of insurance payment. The US congress was to
provide banking reform again.

Under such conditions the congress passed the law about reforming,
recovering obligations of financial institutions and compulsory payment
(FIRREA). This law signed in 1989 became the most fluent banking law,
had ever being passed in the USA. For its realization and according to
it they founded Trust Corporation of returning resources (RTC), which
has following goals:

• Liquidation of a lot of bankrupted borrow-saving association;

• Provision maximal returning of resources and minimizing loss of
the payers;
• Minimizing results of the crisis for immovable property and
financial markets;
• Providing cheap apartments for the people having low and
middle income.

The congress didn’t pass those parts of the legislative act, which
foresaw financial support of the shareholders of problematic credit
organizations and thus didn’t help massive restructuring of such
organizations. Thus, Credit Corporation started playing functions of
liquidations department and not those of restructuring agency.

Restructuring separate banks of the USA was realized only in

exceptional occasions and even if the share-holders were ready to
enter additional important resources into the capital and the creditors
agreed to find compromised solution of obligations related with
discounting. Herewith, they were to like restructuring plan. During
whole history, they provided restructuring only of several banks in the
USA.

During the six year of existence, Trust Company managed and

liquidated 747 not solvent borrow-saving corporations (40% of such
organizations). A corporation, usually, was able to find firm and easily
managed bank, which would oblige itself with obligations existed at the
deposits of the bankrupted organizations. According to the FIRREA law,
corporation used to give such banks cash or liquid assets of same
volume. When transition of deposits didn’t take place in such banks,
the corporation according to the corporation normative paid the
depositor guaranteed part of their deposits (not more, then 100 000
dollars). Middle rest on the depository account in the bankrupted
organizations consisted 7500 dollars, total quantity of their depositors
overcame 25 million people. Total balance value of the shares of these
organizations was 451 billion dollars. By the end of the activities of
RTC, in December in 1995, 95% of these assets were sold per price
equal to the 87% of balance value, or the corporations was able to
return 87 cents on every dollar.

RTC processed and involved special methods of marketing and

realization of bank assets, most of which have been used widely in
other countries, they are:

• Securitization of commercial loans united in pulls (emission of

turnover securities by provision);
• Wholesale of the rights of request on credit to the large market
corporations;
• Concluding open auctions in the regions;
• Organization of conducting open tenders on the federal level;
• Conducting auctions and tenders by participation of foreign
investors;
• Realization of immovable property by the scheme of financing
agreement;
• Creation data base of the objects of immovable property
managed by RTC (the base became available for the interested
buyers allover the world).
RTC administration knew, that mission of this corporation would be
hard to be fulfilled, without having correctly planned strategy, strictly
processed methodology and procedures, also without strict control.
The most difficult problem was conforming conditions of selling assets,
covering loans and restructuring, also stating responsibilities and limits
of wasting RTV resources.

They found way out by setting limits and wide distributing obligations.
The procedures of transiting obligations to the staff workers foresaw
preparing statement on every asset.

As a rule, main reason of banking problems is bad management.

Inability of the setting good inner control and strict keeping of the
procedures finally brought the bank to the strengthening problems and
bankrupting. Unprofessional management may give rise to the
mistakes in managing risks and liquidity. When these questions are
guaranteed by the managers and administration of the banks, this is
followed by problematic assets and problematic banks. Exactly this
took place in the USA in 1970-80s. There were too many banks and
they granted huge credits, and this was absolutely incorrect. Weak
organization of selecting borrowers by the banks, entering of payments
and controlling financial position of the borrowers and also weak
management showed up.

Lamara Qoqiauri
Working place: Tbilisi Iv. Javakhishvili State University