in Emerging Markets Czech Experience Vladimir Tomsik Vicegovernor Czech National Bank National Bank of Cambodia Phnom Penh 6 January 201 6 Outline Czech financial system stylized facts ID: 1027302
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1. The Role of Financial Systemin Emerging Markets Czech ExperienceVladimir TomsikVicegovernorCzech National BankNational Bank of Cambodia, Phnom Penh6 January 2016
2. OutlineCzech financial system – stylized factsTransformation – from a “mono-bank” to a market based banking sectorThe world financial crisis and Basel IIICNB supervision and regulationLesson learned2
3. Czech Financial system – Stylized facts3
4. 4Financial SystemBanking sector is the key segment of the CZ financial systemTotal Assets: USD 252,6 bln. (approx. 120 % of GDP) Types of Financial Institutions – Shares on Total Assets (percent)Source: Czech National Bank
5. 5Czech Banking Sector in 201523 banks4 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 societiesCzech 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 middle-sized 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
6. Czech Banking Sector6Banks linked mainly to the Czech economy rather than a financial center/hubSource: ECB, Statistical Data Warehouse
7. Czech Banking Sector7Concentrated banking system (TOP5 = 61% of sector’s assets) but close to the average of EU countriesSource: ECB, Statistical Data Warehouse
8. Czech Banking Sector8The sector remained very profitable despite the crisis and adverse macroeconomic conditionsSource: ECB, Statistical Data Warehouse
9. Czech Banking Sector9Sound funding structure (loans to deposits) and stable liquidity indicatorsSource: ECB, Statistical Data WarehouseSource: CNB
10. Czech Banking SectorHighly (adequately) capitalized and high quality of capital10Source: ECB, Statistical Data Warehouse
11. 1111Basel III criteria: TOP4 Banks in the Czech RepublicSource: CNB
12. Transformation12
13. TransformationTransformation phases (with advantage of ex-post view):“mono-bank” transformed to two tier systemState Bank of Czechoslovakia transformed to the central bank and state owned 4 commercial banks in early 90sBirth symptoms – bad loans from the former regime, missing long-term funds, undercapitalization, and a lack of knowledgeable staffConsolidation – bad loans and write-offs transferred to a consolidation bank in early 90sSmall banks and their crisisCommercial banking gradually established along with regulation and supervisionPrincipal interest to increase competition57 new small banks established in 1991—1994 on the back of benign entry policySmall banks sought to get a market share but at the costs of going beyond the prudent threshold13
14. TransformationSmall banks and their crisis (cont.)Lose capital conditions and/or staff with missing expertise => High share of non-performing loans and a low recovery rateThis first phase ended in bank crisis – a consolidation program launched in 1996 for small banks that resulted in revoked licenses for many of themMoreover, macroeconomic slowdown and a FX crisis after 1996Negative 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 1998-200014Source: World Bank, World Development Indicator Database
15. TransformationPrivatization of big banksPrivatization frequently postponed due to political reasonsGiven 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 supervisionPrivatization resumed in 1998Foreign banks have brought know-how and NPL declined15Note: Baltics—EST, LVA, and LTU. CE5—CZE, HUN, POL, SVK, and SLO. CIS—BL, MDA, RUS, and UKR. SEE EU—BLG, CRO, and ROM. SEE xEU – ALB, SRB, BIH, UKV, MKD, and MNE. Source: World Bank, World Development Indicator Database
16. Transformation – Lessons learnedTotal 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 unjustified16Source: Barta and Singer (2006)
17. the World financial crisis and Basel III17
18. 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 slowdownNo public support/aid in the crisis as the banks remained resilientMassive deposit base and Czech banks did not face a lack of liquiditySource: European Commission. Customizable map: www.aneki.com18World Financial Crisis
19. World Financial CrisisThe crisis did not significantly shift intragroup lending – Czech banks remained net creditor in cross-border interbank lendingFalse believe that financial integration has made banks more prone and vulnerable to external shocksThe resilience an outcome of timely policy actions, sound regulation, and prudent bank lending19Net balance
20. Basel III and the Czech RepublicConservation buffer introduced in July 2014 and a countercyclical buffer – introduced in August 2014Set quarterly and 1 year aheadSystemic importance buffer – set for 4 largest bank in Nov. 2014New evaluation after 2 year latest => November 2016Liquidity coverage ratio – since October 2015
21. The sector has been capital-generating (even throughout the crisis), not capital-consumingDividend payments despite the crisisSource: CNB.Basel IIISource: ECB, Statistical Data Warehouse
22. CNB supervision and regulation22
23. 23Functional Model of the Integrated Supervision The CNB is an integrated supervisory authority of the financial market in the Czech RepublicThe CNB supervises the banking sector, capital market, insurance industry, pension funds, credit unions, exchange bureaus, and payment system institutionsCurrent cross-sector functional model of the Financial Market Supervision Department – since March 2011
24. 24Advantages of Integrated Supervisor Easy day-to-day communication + information-sharing synergiesEasier 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 economyStrong technical and professional support Unification of reporting formats for different sectors where suitableUnification of supervisory techniques for different sectors where suitableFaster development of supervisory methods, internal procedures etc. Our experience is positive
25. 25Advantages of Integrated Supervisor in an Independent Central BankEasy sharing information from money market, payment system (existence of Chinese walls) – crucial for banking supervisionCombination of financial stability and supervisory point of views – common working groups (stress testing exercises for banks and insurance companies)Independent and apolitical decision-making processAllows to focus on systemic risk Adequate financial sources enable hiring experienced staff and using necessary technical supportAdvantage of additional synergic effects
26. 26Challenges for Integrated SupervisionAppropriate governance structure – Chinese walls x information sharingSize of the supervisory institution x number of supervised entitiesPrudential x consumer protection supervisionToo fast unification of benchmarks, requirements etc.External factorsNon harmonized EU regulation Different markets, business products, tradition, … Different accounting and supervisory standardsHandling of confidential problemsLanguage and communication There is still a room for the improvement
27. 27Colleges of Supervisors – Banking SectorCNB actively participates in activities of 11 colleges (10 EU + 1 US)Regular (at least annual) meetingsExchange of information on financial situation and risks of individual entities of respective groupStandardized risk assessments, joint risk assessments and joint capital decisionsCoordination of supervisory activities – e.g. coordinated on-site inspections, off-site reviewsJoint on-site inspections – e.g. ICAAP of the groupSecured websites established for the purpose of information sharingCurrently prevailing form of cooperation with foreign authorities
28. 28Banking Supervision – Analytical Tools - RASRisk assessment system (RAS)Type of banks` assessment is being developedAn 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 institutionsWeb-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 trailRAS Structure Individual risk assessment (Bank Rating) + Financial market relevance (Systemic Impact) = Final outcome (Supervisory Action)
29. 29Banking Supervision – Analytical Tools - RASThe 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)
30. Lessons learned -CONCLUSIONS30
31. Lessons Learned - ConclusionsPrivatization can be done in a relatively short period of time without a need of domestic capital accumulationForeign investment and ownership have brought efficiency, know-how, and experiencesUnjustified hesitation – substantial improvement of banking sector performance after privatization of big banksFalse believe that foreign bank ownership and financial integration make banks more prone and vulnerable to external shocksA part of the transformation costs probably unavoidable, as the banking sector “bears” partly the heritage of the pastPrudent regulation and supervision as a key for sound financial systemPositive experience with the integrated supervision – significant synergic effects31
32. Thank you for your attentionVladimir TomsikVicegovernorCzech National Bankemail: vladimir.tomsik@cnb.cz32