"new style" of financial services to help cure the crisis
TRANSCRIPT
“New style” of financial services to help cure the
crisis without contributing to the next one
The Future of the World Financial Architecture and of the World’s Main Currencies in
Assuring Economic Growth
Prague, March 23-25, 2010
Piroska M. Nagy
Senior Advisor, EBRD
Key Points
Emerging Europe: proven resistance in crisis
But post-crisis clean-up is still significant
Prepare for the post-crisis world:
– Need for improved business model - local currency capital markets and LCY lending in the non-Czech Emerging Europe
– Impact of Basel 3
Still large convergence potential in Emerging Europe
A whole new post-crisis world…
… to take advantage of
The global environment of finance
More sustainable, but possibly slower growth
– Protracted recovery
– Increased regulation
Exit from government support
– for financial institutions
– for macroeconomic demand
Need to regain public confidence
Overall: adjust to a lower profitability world for banks
Implications and special issues for Emerging Europe
Successful crisis management – proven track record
Impact of post-crisis clean-up
– Distressed asset management
– Recapitalization
– Risk Mitigation
Need for sustainable lending
– Local currency lending/local capital market development
Impact of regulation
– Increased role of non-banks and non-bank products
Post-Crisis Cleanup:Legacy of the Crisis
NPLs peaking now, high but not as high as generally feared; large country differences
Loan losses accumulated over the past 1-2 years
Low economic growth reduces client creditworthiness
Concerns about collateral valuation given declines asset values (e.g. real estate, equipment)
Post-Crisis Clean-up:Who provides credit guarantees
To/Through Banks:
Credit guarantee companies
– Public sector
– Private sector / mutual associations
CDS market
Export credit agencies
Development banks
To Corporates:
Credit insurers (e.g. Euler-Hermes, Coface)
Export credit agencies
Development banks
Post-Crisis Clean-up:Risk mitigation/credit guarantees
Public sector: encourage lending to targeted sectors (exporters, SMEs)
– Reduce the risk to banks where credit crunch is related to high risk perception – EBRD Credit condition survey of Feb 2010
– Mitigate to a small degree but mostly socialize the risk
Private sector: engage in profitable, actuarially sound insurance transactions
– Mitigate risk through underwriting and monitoring standards
– Price and charge for risk
Post crisis clean-up:Distressed asset management
Clear need on the basis of past crisis experience
But little has been done thus far
- IFC
- EBRD
Post-Crisis Clean-Up:Potential role for IFIs
Single exposure risk sharing
Portfolio risk sharing
Additional capacity in the existing guarantee sector
SME recapitalization
Distressed asset management
Sustainable lending: Local currency Key to success
Analyse the FX problem and sequence measures:
– If macro credibility is the problem, address that first
– If underdeveloped local currency markets: address that
– If moral hazard, externalities: regulate
Involve all stakeholders – collective action problem
Keep the policy eye on the ball: a longer term project
Local currency market development – a road map
Country-by-country approach
Joint country assessments by IFIs and possibly European institutions
Policy package with priorities
Distribution of tasks among stakeholders
Implementation
Local Currency - distributing tasks Governments, IMF, EC, ECB - macroeconomic policy frameworks
Governments, IMF, World Bank, EBRD - LC public debt management
European Commission - regulating FX exposures and helping with legal frameworks
Home and host regulators - develop/coordinate regulatory approaches to FX lending
EC, WB, EBRD - advising on legal/institutional changes to develop local currency capital markets; physical infrastructure; instruments
Investing IFIs (EBRD, EIB, IFC (IBRD?))
– Issuing LC bonds
– Lending in LC
– Investing into market structures
– Helping with derivatives markets when needed
Local Currency - Banks’ role
Internalize higher credit risks of FX – lower risk thus margin on unhedged LC loans
Discontinuing riskiest FX asset classes
– short term, unsecured consumer loans;
– currencies (non-Euro)
Improve disclosures and stress testing
When conditions are right, enter the long end of the LC market for funding and lending -
Regulation Key Elements of Basel III (reminder)
Raise quantity and quality of capital
– Exclude minority shareholdings from Tier 1 capital
– Exclude goodwill from Tier 1 capital
– Exclude subordinated debt from Tier 2 capital
– Capital charges on counterparty risk
Raise liquidity
Reduce leverage
Strengthen banks’ risk management and disclosure
Regulation:Consequences in Eastern Europe (1)
• Overall backup: good capital levels and good quality of capital (not too much Tier 2 and Tier 3) and also liquidity
• But impact may be large
• Excluding minority stakes from common Tier 1 cap:
Justified by crisis experience?
Will likely hamper development of local equity markets
• Excluding goodwill from Tier 1 capital:
Particular impact in some countries (Ukraine)
Regulation:Consequences in Eastern Europe (2)
• Capital charges on counter party risks:
May reduce parent bank funding of subsidiaries
May hinder local currency capital market development
• Excluding subordinated debt from Tier 2
Regulation: Importance of less regulated segments: non-banks
• Banks: shifting to intermediation between borrowers/savers and non-banks financial sector
• Pension funds and insurance industry
• Government bond markets
• Corporate bond issuance in local currency
• Emerging Europe: room for a regional bond fund a la Asian Bond Fund?
Regulation:Missing elements for Emerging Europe
Liquidity coverage ratio needs more emphasis on composition of liabilities, requiring better currency-by-currency matching of liabilities and assets.
Foreign exchange loans to borrowers without income in the same foreign currency
Cross-border supervision, crisis management, and crisis resolution (model in EE: “Vienna Initiative”)
A more sustained convergence play to return
Real GDP Growth (percent)
Emerging Europe
Euro area
-6
-4
-2
0
2
4
6
8
2006 2007 2008 2009 2010 2011
Conclusions
A still tougher short term should become bight around the corner
Proven crisis-resistance
More sustainable model with local currency opportunities
Some consolidation within the industry with new business and product opportunities
