Retail investorbehaviour at times of

financial crisis:Czech Republic

September-October 2008 Radek Urban,

ISČS

22

SummarySummary

• what crisis?• media• banks• other agents• markets• authorities• … still too soon to declare victory

33

What crisis?

• no default, no takeover, no nationalisation• low penetration of investments in household assets• low percentage of equities in investments• no bank stopped withdrawals, no lines at branches• no mutual fund stopped redemptions• no TV coverage – other stories of the tabloid culture• reserved perception of media coverage• ….but still, increase in currency in circulation

44

Media – the „washing powder effect“

• Disclosure debate• Performance debate• Valuation debate• Credit quality debate• Liquidity debate

• mass market effect: „If it was on TV (in the press), I go to my shop (branch) and buy.“

• Media consumers do not differentiate who „paid“ for the news:„ Who can lose savings?“„Who can lose assets?“ „Who has lost already?“ „Who will need government help?“

55

Banks . . . strong positioned• self funding position of Czech banks means no liquidity issues

• high dependence on branch networks, low dependence on agent distribution networks = different communication channels

• first week of nervousness, no real panic: client withdrawals and client claims peaked already

• increased questions about deposit insurance and its parameters• increased interest in safe-deposit boxes• Incresed questions on off-shore banking in neighbouring countries

• high motivation to channel money from investment products to bank deposits

66

Other agents . . . part of banking groups• money market funds lost some 5% of assets• most money market funds had credit exposure and repriced

down by some 2%

• battered investors in equity funds do not redeem• but buying has not started yet

• bond and balanced funds not in the spotlight

• life companies and pension funds are considered long-term

• some two thirds of assets flowing from off-balance sheet products end up on balance sheets of group banks = function of very high market concentration

77

Markets . . . far from liquid

• TED spread not a proper measure: corporate bonds illiquid for quite some time

• government bonds suffered from massive bid-offer spread widening

• repo market was never properly functioning as banks used to have enough credit lines

• central bank stepped in with the repo window• still not enough bids as real money investors wait and see

• equity market liquid at low prices• FX market liquid . . . but is Herstatt risk present?

88

Authorities . . . an anchor in a stormy sea

government: sticks to principles in an environment where others maybe don´t

central bank: calms depositors and market participants

deposit insurance fund: witnesses high sensitivity on deposit insurance percentage (90% vs. 100%)

99

Too soon to declare victory . . . as of today

Today or tommorrow there may be another surprise in the markets;

and when we are through, textbooks will have to be rewritten.