the role of financial system in emerging markets czech experience vladimir tomsik vicegovernor czech...

The Role of Financial Systemin Emerging Markets Czech Experience

Vladimir TomsikVicegovernorCzech National Bank

National Bank of Cambodia, Phnom Penh6 January 2016

Outline

• Czech financial system – stylized facts

• Transformation – from a “mono-bank” to a market based banking

sector

• The world financial crisis and Basel III

• CNB supervision and regulation

• Lesson learned

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CZECH FINANCIAL SYSTEM – STYLIZED FACTS

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Financial 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 Bank

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Czech Banking Sector in 2015

• 23 banks• 4 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 societies

• Czech 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 banksforeign bank branches only from EU countries (single license principle) – one indirectly owned by Japanese and one by the US bank

Czech Banking Sector

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Banks linked mainly to the Czech economy rather than a financial center/hub

Source: ECB, Statistical Data Warehouse


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Concentrated banking system (TOP5 = 61% of sector’s assets) but close to the average of EU countries



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The sector remained very profitable despite the crisis and adverse macroeconomic conditions



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Sound funding structure (loans to deposits) and stable liquidity indicators


Source: CNB


Highly (adequately) capitalized and high quality of capital

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1111

Basel III criteria: TOP4 Banks in the Czech Republic

Source: CNB

192%

133%

17,5 %

6,99%

LCR (%)

NSFR (%)

Total capital ratio (%)

Leverage (%)

Q4 2014Q2 2015Limits

100

24

8

9 6 3 300200

300

200

1000

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TRANSFORMATION

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Transformation

Transformation phases (with advantage of ex-post view):1) “mono-bank” transformed to two tier system

• State Bank of Czechoslovakia transformed to the central bank and state owned 4 commercial banks in early 90s

• Birth symptoms – bad loans from the former regime, missing long-term funds, undercapitalization, and a lack of knowledgeable staff

• Consolidation – bad loans and write-offs transferred to a consolidation bank in early 90s

2) Small banks and their crisis• Commercial banking gradually established along with regulation and supervision• Principal interest to increase competition• 57 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

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Transformation

2) Small banks and their crisis (cont.)• Lose capital conditions and/or staff with missing expertise => High share of non-

performing loans and a low recovery rate• This first phase ended in bank crisis – a consolidation program launched in 1996 for

small banks that resulted in revoked licenses for many of them• Moreover, macroeconomic slowdown and a FX crisis after 1996• Negative 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 1998-2000

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Source: World Bank, World Development Indicator Database

Transformation

3) Privatization of big banks• Privatization frequently postponed due to political reasons• Given 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 supervision

• Privatization resumed in 1998• Foreign banks have brought know-how and NPL declined

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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 Database

Transformation – Lessons learned

• Total 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 unjustified

16Source: Barta and Singer (2006)

THE WORLD FINANCIAL CRISIS AND BASEL III

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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 slowdown

• No public support/aid in the crisis as the banks remained resilient

• Massive deposit base and Czech banks did not face a lack of liquidity

Source: European Commission. Customizable map: www.aneki.com

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World Financial Crisis

World Financial Crisis

• The crisis did not significantly shift intragroup lending – Czech banks remained net creditor in cross-border interbank lending

• False believe that financial integration has made banks more prone and vulnerable to external shocks

• The resilience an outcome of timely policy actions, sound regulation, and prudent bank lending

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Net balance

Basel III and the Czech Republic

• Conservation buffer introduced in July 2014 and a countercyclical buffer – introduced in August 2014• Set quarterly and 1 year ahead

• Systemic importance buffer – set for 4 largest bank in Nov. 2014• New evaluation after 2 year latest => November 2016

• Liquidity coverage ratio – since October 2015

• The sector has been capital-generating (even throughout the crisis), not capital-consuming

• Dividend payments despite the crisis

Source: CNB.

Basel III


CNB SUPERVISION AND REGULATION

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Functional Model of the Integrated Supervision

• The CNB is an 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

Off-site On-site

Prudential supervisionPrudential

Supervision Division

Prudential Inspection Division

Conduct of business supervision

Conduct of Business

Supervision Division

Conduct of Business Inspection Division

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Advantages 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 suitable

• Faster development of supervisory methods, internal procedures etc.

Our experience is positive

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Advantages of Integrated Supervisor in an Independent Central Bank

• Easy 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

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Challenges for Integrated Supervision

• Appropriate 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 factors• Non harmonized EU regulation

• Different markets, business products, tradition, …

• Different accounting and supervisory standards

• Handling of confidential problems

• Language and communication

There is still a room for the improvement

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Colleges of Supervisors – Banking Sector

• CNB 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

decisions• Coordination of supervisory activities – e.g. coordinated on-site inspections,

off-site reviews• Joint on-site inspections – e.g. ICAAP of the group• Secured websites established for the purpose of information sharing

Currently prevailing form of cooperation with foreign authorities

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Banking Supervision – Analytical Tools - RAS

Risk 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 trail

RAS StructureIndividual risk assessment (Bank Rating) +Financial market relevance (Systemic Impact) =Final outcome (Supervisory Action)

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Banking Supervision – Analytical Tools - RAS

• The 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)

A B C D

ABCD

Market relevance

Risk assessment

LESSONS LEARNED -CONCLUSIONS

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Lessons Learned - Conclusions

• Privatization can be done in a relatively short period of time without a need of domestic capital accumulation

• Foreign investment and ownership have brought efficiency, know-how, and experiences• Unjustified hesitation – substantial improvement of banking sector

performance after privatization of big banks• False believe that foreign bank ownership and financial integration make

banks more prone and vulnerable to external shocks• A part of the transformation costs probably unavoidable, as

the banking sector “bears” partly the heritage of the past• Prudent regulation and supervision as a key for sound financial

system• Positive experience with the integrated supervision –

significant synergic effects

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Thank you for your attention

Vladimir TomsikVicegovernor

Czech National Bank

email: [email protected]

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mailto:[email protected]

the role of financial system in emerging markets czech experience vladimir tomsik vicegovernor czech...

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