The Role of Financial System in Emerging Markets Czech Experience

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
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
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CZECH FINANCIAL SYSTEM –
STYLIZED FACTS
3
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
Czech Banking Sector in 2015
•
•
•
•
•
23 banks
• 4 large banks (assets over CZK 300 billion/USD 12 billons)
• 8 middle sized banks (CZK 50 – 300 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 2009.
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
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Czech Banking Sector
Banks linked mainly to the Czech economy rather than a financial center/hub
Source: ECB, Statistical Data Warehouse
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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
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Czech Banking Sector
The sector remained very profitable despite the crisis and adverse
macroeconomic conditions
Source: ECB, Statistical Data Warehouse
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Czech Banking Sector
Sound funding structure (loans to deposits) and stable liquidity indicators
Source: CNB
Source: ECB, Statistical Data Warehouse
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Czech Banking Sector
Highly (adequately) capitalized and high quality of capital
Source: ECB, Statistical Data Warehouse
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Basel III criteria: TOP4 Banks in the Czech Republic
LCR (%)
300
192%
200
100
6,99%
Leverage (%)
9
6
133%
3
0
100
200
300
NSFR (%)
8
17,5 %
16
Q4 2014
Q2 2015
Limits
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Total capital ratio (%)
Source: CNB
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TRANSFORMATION
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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 1991—1994 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
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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 1998-2000
Source: World Bank, World Development Indicator Database
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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.
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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)
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THE WORLD FINANCIAL CRISIS AND
BASEL III
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World Financial Crisis
Map of EU Member States where state aid was provided to the financial sector in 2008–2014 (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: www.aneki.com
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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
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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. 2014
• New evaluation after 2 year latest => November 2016
•
Liquidity coverage ratio – since October 2015
Basel III
Capital to Risk Weighted Assets Ratios at the Czech Rep. -- all banks, percent
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Basel III
Total
Tier1
15
• Czech banks raised capital
ratios mainly through capital
accumulation
10
• Retained earnings as the main
source of capital accumulation
5
0
2008
2009
2010
2011
2012
2013
2014
Source: ARAD, CNB.
Table: Decomposition of changes in capital to RWA ratios
Table :
Decomposition of growth of capital to RWA ratios All banks
Tier1 Capital to RWA in 2008 (%)
12.3
Tier1 Capital to RWA in 2014 (%)
17.8
Change in capital ratio 5.5
Contributions in p.p.
Accumulation RWA to TA TA of capital 8.2
1.7
‐4.4
Source: ARAD data, decomposition based on Cohen and Scatigna (2014)
Accumulation of capital
Lower riskiness of assets
Growing balance sheets
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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
CNB SUPERVISION AND
REGULATION
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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
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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
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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
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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
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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
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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)
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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)
A
Market
relevance
Risk assessment
B
C
D
A
B
C
D
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EU INTEGRATION
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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)
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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
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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
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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
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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).
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LESSONS LEARNED CONCLUSIONS
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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
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Thank you for your attention
Vladimir Tomsik
Vicegovernor
Czech National Bank
email: vladimir.tomsik@cnb.cz
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