The Role of Financial System in Emerging Markets Czech Experience

Transcription

1 The Role of Financial System in Emerging Markets Czech Experience Vladimir Tomsik Vicegovernor Czech National Bank Lessons Learned on the Way to the Prosperity Economic Transformation Seminar in Myanmar November 25, 2015

2 Outline Czech financial system stylized facts Transformation from a mono-bank to a market based banking sector The world financial crisis and Basel III CNB supervision and regulation EU integration Lesson learned 2

3 CZECH FINANCIAL SYSTEM STYLIZED FACTS 3

4 Financial System Types of Financial Institutions Shares on Total Assets (percent) Source: Czech National Bank Banking sector is the key segment of the CZ financial system Total Assets: USD 252,6 bln. (approx. 120 % of GDP) 4

5 Czech Banking Sector in banks 4 large banks (assets over CZK 300 billion/usd 12 billons) 8 middle sized banks (CZK billion/usd2 12 billions) 6 small banks (up to CZK 50 billion/usd 2 billions) 5 building societies Czech ownership prevails only in two state-owned banks (CEB support of CZ exporters, CMZRB support of SMEs). Four small banks (PPF banka, Air Bank, Fio banka, Hypotecni banka) have also Czech owners, all other banks are direct or indirect subsidiaries of foreign banks. All parent banks of CZ subsidiaries are coming from EU countries, except of one middlesized bank (GE Money Bank USA) and one small bank (ERB banka, Russia) which started its activities in Spring Distribution of ownership is well diversified across EU countries. The largest banks are owned by banks from different EU countries (Austria, France, Belgium and Italy). 24 branches of foreign banks foreign bank branches only from EU countries (single license principle) one indirectly owned by Japanese and one by the US bank 5

6 Czech Banking Sector Banks linked mainly to the Czech economy rather than a financial center/hub Source: ECB, Statistical Data Warehouse 6

7 Czech Banking Sector Concentrated banking system (TOP5 = 61% of sector s assets) but close to the average of EU countries Source: ECB, Statistical Data Warehouse 7

8 Czech Banking Sector The sector remained very profitable despite the crisis and adverse macroeconomic conditions Source: ECB, Statistical Data Warehouse 8

9 Czech Banking Sector Sound funding structure (loans to deposits) and stable liquidity indicators Source: CNB Source: ECB, Statistical Data Warehouse 9

10 Czech Banking Sector Highly (adequately) capitalized and high quality of capital Source: ECB, Statistical Data Warehouse 10

11 Basel III criteria: TOP4 Banks in the Czech Republic LCR (%) % 200 6,99% 133% Leverage (%) NSFR (%) ,5 % Total capital ratio (%) Q Q Limits Source: CNB 11

12 TRANSFORMATION 12

13 Transformation Transformation phases (with advantage of ex-post view): 1) mono-bank transformed to two tier system State Bank of Czechoslovakia transformed to the central bank and state owned 4 commercial banks in early 90s Birth symptoms bad loans from the former regime, missing long-term funds, undercapitalization, and a lack of knowledgeable staff Consolidation bad loans and write-offs transferred to a consolidation bank in early 90s 2) Small banks and their crisis Commercial banking gradually established along with regulation and supervision Principal interest to increase competition 57 new small banks established in on the back of benign entry policy Small banks sought to get a market share but at the costs of going beyond the prudent threshold 13

14 Transformation 2) Small banks and their crisis (cont.) Lose capital conditions and/or staff with missing expertise => High share of nonperforming loans and a low recovery rate This first phase ended in bank crisis a consolidation program launched in 1996 for small banks that resulted in revoked licenses for many of them Moreover, macroeconomic slowdown and a FX crisis after 1996 Negative macroeconomic trends and bank losses hit hard even big banks. As a result state had to increase capital and clean up their balance sheets in Source: World Bank, World Development Indicator Database 14

15 Transformation 3) Privatization of big banks Privatization frequently postponed due to political reasons Given the public costs faced at the end of 90s, reforms and privatization based on (i) high participation of foreign (Western European) banks and (ii) strong bank supervision Privatization resumed in 1998 Foreign banks have brought know-how and NPL declined Note: Baltics EST, LVA, and LTU. CE5 CZE, HUN, POL, SVK, and SLO. Source: World Bank, World Development Indicator Database CIS BL, MDA, RUS, and UKR. SEE EU BLG, CRO, and ROM. SEE xeu ALB, SRB, BIH, UKV, MKD, and MNE. 15

16 Transformation Lessons learned Total costs estimated about 25 percent of annual GDP Barta and Singer (2006) Probably a main bulk of cost unavoidable, as the banking sector bore the cost from the former regime (transformed to bank losses) Substantial improvement of performance after privatization of big banks => hesitation unjustified Source: Barta and Singer (2006) 16

17 THE WORLD FINANCIAL CRISIS AND BASEL III 17

18 World Financial Crisis Map of EU Member States where state aid was provided to the financial sector in (in red) Effects of the world financial crisis imported through a real economy slowdown No public support/aid in the crisis as the banks remained resilient Massive deposit base and Czech banks did not face a lack of liquidity Source: European Commission. Customizable map: 18

19 World Financial Crisis The crisis did not significantly shift intragroup lending Czech banks remained net creditor in cross-border interbank lending False believe that financial integration has made banks more prone and vulnerable to external shocks The resilience an outcome of timely policy actions, sound regulation, and prudent bank lending Net balance 19

20 Basel III and the Czech Republic Conservation buffer introduced in July 2014 and a countercyclical buffer introduced in August 2014 Set quarterly and 1 year ahead Systemic importance buffer set for 4 largest bank in Nov New evaluation after 2 year latest => November 2016 Liquidity coverage ratio since October 2015

21 Basel III Total Tier1 Capital to Risk Weighted Assets Ratios at the Czech Rep. -- all banks, percent Basel III Czech banks raised capital ratios mainly through capital accumulation Source: ARAD, CNB. Retained earnings as the main source of capital accumulation Table: : Decomposition of of growth changes of in capital capital to to RWA RWA ratios ratios Tier1 Capital Tier1 Capital Change in Contributions in p.p. to RWA in to RWA in capital ratio Accumulation RWA to TA TA 2008 (%) 2014 (%) of capital All banks Source: ARAD data, decomposition based on Cohen and Scatigna (2014) Accumulation of capital Lower riskiness of assets Growing balance sheets 21

22 Basel III The sector has been capital-generating (even throughout the crisis), not capital-consuming Dividend payments despite the crisis Source: CNB. Source: ECB, Statistical Data Warehouse

23 CNB SUPERVISION AND REGULATION 23

24 Functional Model of the Integrated Supervision The CNB is an integrated supervisory authority of the financial market in the Czech Republic The CNB supervises the banking sector, capital market, insurance industry, pension funds, credit unions, exchange bureaus, and payment system institutions Current cross-sector functional model of the Financial Market Supervision Department since March 2011 Off-site On-site Prudential supervision Prudential Supervision Division Prudential Inspection Division Conduct of business supervision Conduct of Business Supervision Division Conduct of Business Inspection Division 24

25 Advantages of Integrated Supervisor Easy day-to-day communication + information-sharing synergies Easier communication with supervised entities, foreign supervisors Stronger position in the crisis situation Enables to monitor the whole financial market (financial stability perspective) Ability to analyze the impact of development in one sector to other sectors or to the whole economy Strong technical and professional support Unification of reporting formats for different sectors where suitable Unification of supervisory techniques for different sectors where suitable Faster development of supervisory methods, internal procedures etc. Our experience is positive 25

26 Advantages of Integrated Supervisor in an Independent Central Bank Easy sharing information from money market, payment system (existence of Chinese walls) crucial for banking supervision Combination of financial stability and supervisory point of views common working groups (stress testing exercises for banks and insurance companies) Independent and apolitical decision-making process Allows to focus on systemic risk Adequate financial sources enable hiring experienced staff and using necessary technical support Advantage of additional synergic effects 26

27 Challenges for Integrated Supervision Appropriate governance structure Chinese walls x information sharing Size of the supervisory institution x number of supervised entities Prudential x consumer protection supervision Too fast unification of benchmarks, requirements etc. External factors Non harmonized EU regulation Different markets, business products, tradition, Different accounting and supervisory standards Handling of confidential problems Language and communication There is still a room for the improvement 27

28 Colleges of Supervisors Banking Sector CNB actively participates in activities of 11 colleges (10 EU + 1 US) Regular (at least annual) meetings Exchange of information on financial situation and risks of individual entities of respective group Standardized risk assessments, joint risk assessments and joint capital decisions Coordination of supervisory activities e.g. coordinated on-site inspections, off-site reviews Joint on-site inspections e.g. ICAAP of the group Secured websites established for the purpose of information sharing Currently prevailing form of cooperation with foreign authorities 28

29 Banking Supervision Analytical Tools - RAS Risk assessment system (RAS) Type of banks` assessment is being developed An internal analytical tool that combines the results of both off-site analysis and on-site examination in order to assess the risk profile of credit institutions Web-based IT application developed internally for the purpose of Pillar 2 (support for SREP) Should reflect CEBS` Guidelines on the Application of the Supervisory Review Process under Pillar 2 (CP03 revised) e.g. audit trail RAS Structure Individual risk assessment (Bank Rating) + Financial market relevance (Systemic Impact) = Final outcome (Supervisory Action) 29

30 Banking Supervision Analytical Tools - RAS The combination of individual risk assessment and market relevance enables better identification of the institutions and areas which could have been possibly risky for the financial market as a whole better use of supervisory resources (on-site inspection planning) Risk assessment A B C D Market relevance A B C D 30

31 EU INTEGRATION 31

32 Roadmap towards BU (euro and BU) Financial crisis aftermath: loss of market and mutual confidence increase in heterogeneity of the credit quality of the banking systems in the euro zone ( stress in bank funding stress in sovereign funding) increase in home country bias lending less across borders consequences for jobs and growth The idea of a single banking system/bu originated in threats to the integrity of the single currency (euro zone): is there a currency risk in banks balance sheets (liabilities)? are the fiscal positions of governments sustainable will they be able to provide a backstop for their banks this time around? (and sustain even more debt) 32

33 Objectives to be achieved through BU Financial stability Single strong supervision uniform application of the rules and procedures removing national weakness/forbearance/bias better identification of emerging systemic risks macro-prudential instruments to act counter-cyclically Breaking the link between banks and sovereigns spreading of losses across all banks in participating MS better confidence in banks and in the ability to solve their problems 33

34 Roadmap towards BU Bank Supervision: new rules on bank capital requirements (CR Directive and Reg.) - EU/effective new single supervisory mechanism (SSM Regulation) EA+/adopted revision of EBA Regulation EU/effective Bank Resolution: new rules on recovery and resolution of banks (BRR Directive) EU/agreed new single restructuring mechanism and Fund (SRM Regulation) EA+/agreed common European public backstop for the SRF EA+/not agreed Deposit insurance: new rules on deposit guarantee schemes (DGS Directive) EU/agreed single deposit guarantee scheme and Fund - not agreed Other: revised rules on state aid for the financial sector (ensuring a level playing-field in resolution decisions involving public support) EU/effective possibility of direct recapitalization of banks from the European Stability Mechanism (ESM) EA, conditional/not yet agreed 34

35 Shall the Czech Republic join the BU? CNB perspective Financial stability is maintained without BU good record of CNB supervision no vicious circle between banks and sovereigns resolution can be achieved in an efficient manner through the agreed rules and burden-sharing arrangements Czech Republic is a good example of existing financial integration without BU our banks are mainly subsidiaries of financial groups established in the EA countries no fragmentation, nor problems with level playing field Funding of the economy banks financed mainly through local deposits 35

36 Shall the Czech Republic join the BU? CNB perspective The following risks must be assessed before any decision: Potential fiscal impact due to possible mismatch between bank losses and financial means in the SRF. the BU as a back-door to fiscal union ( consequences of the crisis not yet resolved in some EA MS) factual obligation of the MS to provide bridge financing from national sources possible adoption of joint guarantees for SRF to be able to pay its obligations (mutualization of debt) risk of potential high costs for local banks to resolve foreign banks Rise of moral hazard (debts and losses will be always covered from common resources). 36

37 LESSONS LEARNED - CONCLUSIONS 37

38 Lessons Learned - Conclusions Privatization can be done in a relatively short period of time without a need of domestic capital accumulation Foreign investment and ownership have brought efficiency, know-how, and experiences Unjustified hesitation substantial improvement of banking sector performance after privatization of big banks False believe that foreign bank ownership and financial integration make banks more prone and vulnerable to external shocks A part of the transformation costs probably unavoidable, as the banking sector bears partly the heritage of the past Prudent regulation and supervision as a key for sound financial system Positive experience with the integrated supervision significant synergic effects 38

39 Thank you for your attention Vladimir Tomsik Vicegovernor Czech National Bank 39