The Role of Financial - PowerPoint Presentation

Slide1

The Role of Financial Systemin Emerging Markets Czech ExperienceVladimir TomsikVicegovernorCzech National BankNational Bank of Cambodia, Phnom Penh6 January 2016Slide2

OutlineCzech financial system – stylized factsTransformation – from a “mono-bank” to a market based banking sectorThe world financial crisis and Basel IIICNB supervision and regulationLesson learned2Slide3

Czech Financial system – Stylized facts3Slide4

4Financial System

Banking sector is the key segment

of the

CZ

financial system

Total Assets: USD 252,6 bln

.

(approx. 120

% of GDP)

Types of Financial Institutions – Shares on Total Assets (percent)

Source: Czech National BankSlide5

5Czech Banking Sector in 2015

2

3

banks

4 large banks (assets over CZK 300

billion/USD 12 billons)

8 middle sized banks (CZK

5

0 – 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

o

f

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

bankSlide6

Czech Banking Sector6Banks linked mainly to the Czech economy

rather than a financial center/hub

Source: ECB, Statistical Data WarehouseSlide7

Czech Banking Sector7

C

oncentrated

banking system

(

TOP5 = 61%

of

sector’s

assets)

but close to the average of EU countriesSource: ECB, Statistical Data WarehouseSlide8

Czech Banking Sector8

The sector remained very

profitable

despite the crisis and adverse macroeconomic conditions

Source: ECB, Statistical Data WarehouseSlide9

Czech Banking Sector9Sound funding structure (loans to deposits) and stable liquidity

indicators

Source: ECB, Statistical Data Warehouse

Source: CNBSlide10

Czech Banking SectorHighly (adequately) capitalized and high quality of capital10

Source: ECB, Statistical Data WarehouseSlide11

11

11

Basel

III

criteria

: TOP4

Banks in the Czech Republic

Source: CNBSlide12

Transformation12Slide13

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 policy

Small banks

sought to get a market share

but at the costs of going beyond the prudent threshold

13Slide14

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 1998-200014

Source: World Bank, World Development Indicator DatabaseSlide15

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 declined15

Note:

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 DatabaseSlide16

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)Slide17

the World financial crisis and Basel III17Slide18

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 liquidity

Source: European Commission

.

Customizable

map: www.aneki.com

18

World

Financial CrisisSlide19

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 balanceSlide20

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 2015Slide21

The sector has been capital-generating (even throughout the crisis), not capital-consumingDividend payments despite the crisis

Source: CNB.

Basel III

Source: ECB, Statistical Data WarehouseSlide22

CNB supervision and regulation22Slide23

23Functional Model of the Integrated Supervision The CNB is a

n

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

Slide24

24Advantages 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 suitableFaster development of supervisory methods, internal procedures etc. Our experience is positiveSlide25

25Advantages of Integrated Supervisor in an Independent Central BankEasy 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 Slide26

26Challenges for Integrated SupervisionAppropriate 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 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 Slide27

27Colleges of Supervisors – Banking SectorCNB 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 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 sharing

Currently prevailing form of cooperation with foreign authoritiesSlide28

28Banking Supervision – Analytical Tools - RASRisk 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 trailRAS Structure Individual risk assessment (Bank Rating) + Financial market relevance (Systemic Impact) = Final outcome (Supervisory Action)Slide29

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)Slide30

Lessons learned -CONCLUSIONS30Slide31

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 effects

31Slide32

Thank you for your attentionVladimir TomsikVicegovernorCzech National Bankemail: vladimir.tomsik@cnb.cz32