Outsourcing – a Tool for Increasing the Competitivness of Czech banks

Doc. František Pavelka, CSc

Sumy, 26. may 2011, Ukraine

Structure of the speech

1. Analysis of the competitiveness of Czech banks

2. Outsourcing – a tool for enhancing the competitiveness of Czech banks

3. Principles of the outsourcing regulation4. Experiences of the outsourcing usage in

Czech Banking System

1. Analysis of the competitiveness of Czech banks

Two periods of the Czech bank system development:

Last decade of the XX th century - a period of formation and consolidation of the Czech banking system.

First decade of the XXI st century - a phase of the formation of the classical, functional banking and financial market.

Birth of the two degree bank system 1990 - 2000

Quick development • One Central bank• 7 state owned banks as maximum at

1995/1997• 28 Czech private banks as maximum at 1994• 27 foreigner banks as maximum at 1997• 127 Czech credit unions as maximum at 1999

Consequences of the quick development

• 5 state owned banks – Consolidation program, preparation for privatization – costs of the rescue 350 billions of Crowns

• Czech private banks – massive bankruptcies and revoking of licenses (29 in total), Stabilization program, costs about 30 billions

• Czech credit unions - total collapse, today only 14 unions

Consequences for bank´s competitiveness

• Competitiveness of the Czech banks both state owned and private owned is close to zero.

• Czech banking market began to take on foreign banks' capital

• 1995 Czech capital 77,2%, foreigner 22,8%• 1998 Czech capital 61,3%, foreigner 38,7%• 2001 Czech capital 30,0%, foreigner 70,0%

Birth of the classical bank and financial market

2001 - 2010

Red lines:

• Massive entry of the foreigner capital

• Stabilization of the Czech bank system

• Entry of the country on EU

• Consolidation of the financial market regulation

Stabilization of the Czech bank system (number of banks)

Year Czech Foreign Total

2002 11 26 372003 9 26 352004 9 26 352005 9 28 372006 9 29 372007 8 29 372008 7 30 372009 8 32 392010 8 33 41

Massive entry of the foreigner capital

Year Share of the Czech capital

Share of the foreign capital

1995 77,2 % 22,8%

2000 45,5 % 54,1 %

2004 14,2 % 85,8 %

2009 19,7 % 80,3 %

Consolidation of the financial market regulation

Periode Characteristics

1998 - 2000 Standardization of the regulation

2001 - 2004 Harmonization of the regulation, entry in EU

2005 - 2006 Integration of the financial market regulation

2007 - 2010 Basel II implementation

Two different tendencies

The condition for bank's competitiveness ameliorate!

Internal interbank competition is growing

International interbank competition near to zero

Fatal question on bank's competitiveness

How big can be

the interest of the foreign capital

on the growth of the competitiveness

of the Czech economy?

Index of the support of the competitiveness

00,5

11,5

22,5

33,5

44,5

5

19951997

19992001

20032005

20072009

rok

Support index

2. Outsourcing – a tool for enhancing the competitiveness of Czech banks„Outsourcing is defined as a regulated entity’s use of a third party (either an affiliated entity within a corporate group or an entity that is external to the corporate group) to perform activities on a continuing basis that would normally be undertaken by the regulated entity, now or in the future“ (Joint Forum, march 2005 at the Bank Committee for Banking Supervision at BIS ).

OUTSOURCING

Level of the

outsourcing

Tactical outsourcing

Strategic outsourcing

Transformatory outsourcing

PYRAMID SAVINGS SCHEMES

TACTICAL

STRATEGIC

TRANFORMATORY

Onsourcing

Transformatory outsourcing changes on

ONSOURCING

Onsourcing internal sourcing:

ONSOURCINGAs a form of mutuel transfer of services

ADVENTAGE:Diminution of the riskMultiplication of the economies of scaleEconomies of the unificationEffektivness of the cross selling Possibility to avoid regulation rules

Onsourcing type of ČSOB group

HYPOmortgages

ČSOBInvestment

fund

ČSOBInsurance

ČSOBLeas

ČMSSsavings

ČSOBbank

Onsourcing type Wüstenrot

Mortgagebank

NonLive

insurance

BuildingSavingsociety

Liveinsurance

3. Principles of the outsourcing regulation

• „Outsourcing has the potential to transfer risk, management and compliance to third parties who may not be regulated, and who may operate offshore.

• In these situations, how can financial service businesses remain confident that they remain in charge of their own business and in control of their business risks?“

• (Outsourcing in Financial Services, Joint Forum, 2005

Main risk of outsourcing• Operational risks, or risks of a third party (external

service provider failure)• reputation risks (loss of reputation due to the service

provider failure)• legal risks (adherence to legal regulations –

compliance, law enforceability, observing contracts, withdrawal from contract)

• concentration risks (hereby is understood the excessive concentration of the whole branch – e.g. banking – on outsourcing of one similar task, important for banks – e.g. IT providers)

The main theme of the regulation

protection of the

consumers‘ interestsnamely protection of the • personal dates • business dates• information under the banking secrecy

4. Experiences of the outsourcing usage in Czech Banking System

• Main stream – onsourcing• Supportive stream – classical

(tactical) outsourcing

Main streams

• Integration and unification of methodology, IT systems, accounting, reporting and so on

• Concentration of the realisation of the non banking activities to the one specialised member of the bank group

• Cross-selling• Franchising • Decentralization of the Distribution of the

product and services

Supporting stream Pyramid of the outsourced activities

Transportazion

Facilities management

Marketing

Call centres

Manufacturing

Human ressources

Finance

Distribution and logistik

Administration

IT

Costs of outsourcing (regulated)end of 2010, million of Czech crowns

bankscosts on outsourcing

% from administration costs

big banks 7 456 37,61%

medium banks 527 12,36%

small banks 35 2,25%

buildings savings societies

92 6,09%

total 8 110 29,02%

Herfindahl index of market competition

year assets deposits

2007 0,100 0,1272008 0,101 0,1162009 0,103 0,118

Hirfendahl-Hirschman Index

year HHI2007 0,4211542008 0,3798632009 0,381364

Author´s calculation, total assets

Thanks for your attention