23rd Annual BSCEE Conference

23rd Annual BSCEE Conference

Lessons learned from the crisis and policies aimed at strengthening the resilience of the banking sector – the experience of the Czech Republic and measures undertaken by the Czech National Bank

Vítězslav BabickýFinancial Market Analyses Division DirectorCzech National Bank

Ohrid, 15 June 2010

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Agenda

I. Overview of the Czech financial market and banking sector

II. Global financial crisis from the supervisory perspective and actions taken by the CNB

III. The CNB as the integrated supervisory authority and member of EU structures

IV. Conclusions

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The CNB supervises (the scope of supervision is, however, different): banking sector almost 85%

Bankovní sektor83,9%

Fondy kolektivního investování

3,0%Sektor pojišťoven

8,1%

Penzijní fondy4,4%

Ostatní0,6%

• Leasing, factoring, home credit services outside of the scope of the CNB supervision

• Credit unions counted together with banking sector, in terms of total assets negligible

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Net profits of the banking sector (left axis, bil. CZK)Rentability of Tier 1 capital (ROE, %, right axis)

• Net profits growing up to 60 bil. CZK in 2009 (total assets 4 200 bil. CZK)

• ROE stable over the crisis period

Pramen: ČNB

0

10

20

30

40

50

60

70

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

0

5

10

15

20

25

30

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Čistý zisk (mld. Kč, levá osa))

Rentabilita Tier 1 kapitálu (ROE, v %, pravá osa)

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Capital adequacy (red colour, left axis)Share of banks with capital adequacy below 10% (blue)

• Level of capital adequacy is high enough and growing through the crisis period

• All banks with capital cushions after crisis

Pramen: ČNBPozn.: Aktiva sektoru = aktiva bank bez poboček zahraničních bank.

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9

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12

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12/02 12/03 12/04 12/05 12/06 12/07 12/08 12/09

0

10

20

30

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50

60

70

80

90

100

Kapitálová přiměřenost (levá osa)

Podíl bank s kapitálovou přiměřeností pod 10 % na aktivech sektoru (pravá osa)

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Quick liquid assets of banks (red) and building savings companies (blue) to total assets, and covering of the 3M position (lines, right axis)

• Banks during the crisis period keep enough quick liquid assets

Pramen: ČNB

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5

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15

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25

30

35

40

45

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12/06 06/07 12/07 06/08 12/08 06/09 12/09

-250

-200

-150

-100

-50

0

Bankovní sektor: RLA/aktiva (levá osa)

Stavební spořitelny: RLA/aktiva (levá osa)

Bankovní sektor: krytí 3M netto pozice pomocí RLA (pravá osa)

Stavební spořitelny: krytí 3M netto pozice pomocí RLA (pravá osa)

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New nonperforming loans (bil. CZK, left axis)Ratio of nonperforming loans (red line, right)

• Nonperforming loans are growing through the crisis period

Pramen: ČNBPozn.: Nové nesplácené úvěry aproximovány změnou stavu.

-4-3-2-10123456789

1011121314

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

0

0,5

1

1,5

2

2,5

3

3,5

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4,5

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Nové nesplácené úvěry ve čtvrtletí (v mld. Kč, levá osa)

Podíl nesplácených úvěrů (v %, pravá osa)

200920082007

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• Many governments were forced to react on the critical situation in order to rescue its banking systems through issuance of guarantees and by providing banks with state money – not the Czech Republic

• Credit policy of the commercial banks was tightened and granting of credits to the real economy was reduced due to the insufficient free funds and functionless interbank market. Moreover, commercial interest rates increased as banks revised and increased risk margins

• Related uncertainty about the future development and adverse sentiment led to the restriction in demand

• There was a slump of the prices on the financial markets, stock indices and commodity prices fell sharply – impact namely on collective investment schemes

• Above mentioned facts were reflected in the deceleration of the economic growth which then turned into a downturn and economic recession accompanied by higher rate of unemployment, negative effects on state budgets, etc.

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• CNB analyses and assesses the crisis on global financial markets since 2nd half of 2007 (analyses of investment portfolios of supervised institutions, exposures in toxic assets)

• Crisis escalated in 2nd half of 2008 and necessary measures were taken – the ČNB established exceptional reporting in the area of financial market supervision, regular repo operations with ČNB were introduced in order to strengthen the liquidity of the Czech financial market (government bonds as a collateral), accounting (HTM portfolio for insurance companies and pension funds), and other regulatory measures (e.g. changes in deposit guarantees)

• The Czech Republic was hit only indirectly by the crisis, the banking and other financial market sectors are still healthy

• Government support of the Czech financial market was not needed• Economic recession in surrounding countries is reflected in lower demand for export• The crisis is demonstrated by lower rentability of investments and profits from financial

placements• The Czech Republic does not face the risks arising in other Central and Eastern

European countries (e.g. high foreign currency loans)• Domestic currency is an advantage

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• Crucial importance of communication during the crisis period• CNB is active in the international cooperation in the field of financial

market supervision: European Commission structures (Lamfalussy structure – 2nd level: EBC,

ESC, EIOPC, FCC – expertise for the MF, 3rd level: CEBS, CESR, CEIOPS, IWCFC/JCFC)

ECB structures (BSC: working groups WGMA, WGBD, WGCR) BCBS IOSCO IOPS IAIS Bilateral cooperation with other financial supervisors or international

organisations Multilateral agreements – colleges of supervisors, crisis management


E.Council E.Commission E.Parliament

EBC1 ESC1 EIOPC1 FCC1

CEBS2 CEIOPS2 CESR2

JCFC2 (earlier IWCFC)

E.Com - controlof implementation

Convergence

1 Ministry of finance2 Supervisory Authorities

L 1

L 2

L 3

L 4

Legislation

Lamfalussy structure:

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Reaction to the financial crisis: discussion on the new supervisory architecture on the EU level:Macro-prudential European Systemic Risk Board (ESRB) within ECBMicro-prudential European System of Financial Supervisors (ESFS) – EBA, ESMA, EIOPA + national supervisors

Proposals also on crisis management and resolution frameworkImportance of balance between powers and responsibilities,balance between home and host supervisors; fiscal competence and responsibility for the financial stability remains at national level

Regulation harmonized on EU level – CRD, Solvency II, UCITS, AIFM directive, rating agencies; discussion on bank levy, short-selling bans

Main CNB advantage: fully integrated approach to the financial market supervision

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1st stage of the integration (April 2006)

Credit Unions Supervisory Office

Czech Securities Commission

Insurance and pension funds

supervision

Banking supervision

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• The integration of all supervisory authorities into the CNB led to• better use of synergies in the individual financial market segments

supervision,• greater harmonisation of regulatory rules and supervisory procedures,• lower supervision cost.

• Financial Market Committee was established as an advisory body of the CNB Board for financial market supervision.

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2nd stage of the integration (January 2008):

Banking Regulation and Supervision

Dept.

Capital Market Regulation and

Supervision Dept.

Insurance Regulation and

Supervision Dept.

Financial Market Supervision Dept.

Financial Market Regulation and Analyses Dept.

Licensing and Enforcement Dept.

Sectoral supervision

Functional supervision January 2008

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• The goal of the second stage of the integration is to create the truly integrated supervision of the Czech financial market by: creating a single, common institutional culture, identifying and resolving unwarranted regulatory differences

between the sectors, balancing sector-specific technical issues with consistency of

the whole process so that ultimately the same activities will be supervised in the same way, thereby avoiding arbitrage opportunities as much as possible.

• For comprehensive information about integration see: Erbenova, M (2006): Integrating Financial Market Supervision in the Czech Republic, Law in transition, EBRD, available via internet: http://www.ebrd.com/pubs/legal/lit062g.pdf

http://www.ebrd.com/pubs/legal/lit062g.pdf

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• In exercising its supervisory powers and in its activities generally, not only strives to ensure that the supervised entities comply with the relevant regulations, but also pays attention to: enhancing the institutional infrastructure of the Czech financial

market, increasing the transparency and competitiveness of this market and its credibility in the eyes of the public as well as attractiveness to business.

• For comprehensive information about the CNB as well as about the financial market and financial supervision see www.cnb.cz

http://www.cnb.cz/

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Conclusions

• Financial markets in the Czech Republic are resistant to the financial crisis which has its causes namely in developed countries

• Functional model of the financial market supervision helps to adequate supervisory reactions on the financial market

• CNB is prepared well for the market turmoils in the globalized economy

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Thank you for your attention

www.cnb.cz

Vítězslav BabickýTel. (420) 224.412.621

Financial Market Analyses Division DirectorCzech National Bank

[email protected]

http://www.cnb.cz/

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I. The CNB as the integrated supervisory authority of the Czech financial market

• Statute: The Czech National Bank is the central bank of the Czech Republic and the supervisor of the Czech financial market. In the same time it is a part of the European System of Central Banks (ESCB), which comprises the ECB and the NCBs of all EU Member States.

• Mandate for financial market supervision as stipulated by Act No.6/1993 Coll., on the CNB: The CNB supervises the activities of entities operating on the financial market, analyses the evolution of the financial system, sees to the sound operation and development of the financial market in the Czech Republic, and contributes to the stability of its financial system as a whole.

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I. The CNB as the integrated supervisory authority of the Czech financial market, cont.

• The CNB's strategic vision for the area of financial market supervision: To work to ensure the stability of the financial system and the safe and smooth development of the financial market in the Czech Republic taking into account that a stable financial system and a dynamically developing financial market, based, among other things, on sound and prospering financial institutions respected by the general public, contribute significantly to the long-term growth of the economy and are in the interests of businesses and the public alike.

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I. The CNB as the integrated supervisory authority of the Czech financial market, cont.

• In its capacity of the integrated supervisor of the Czech financial market, the CNB basically: supervises the financial market of the Czech Republic, contributes to its regulation by issuing so called secondary

legislation, i.e. regulations known as “provisions” and “decrees”, cooperates with government (Ministry of Finance) in the area of

primary legislation, i.e. laws that create basic framework of financial regulation and are approved by the Parliament,

develops international cooperation especially multilateral cooperation within the framework of the Lamfalussy process and ESCB as well as bilateral cooperation with supervisory authorities of (not only) EU Member States.

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II. Organisational structure of the financial market supervision

• Current organisational structure of financial supervision is based rather of functions of financial market regulation and

supervision than on sectoral structure of financial system, the result of the second stage of integration of financial market

supervision in the Czech Republic • Broader context: Integration of financial market

supervision was a two stage process: 1) Transfer of power and concentration of staff, know how etc.

under umbrella of the CNB as a result of policy decision and legislative process (May 2004 - April 2006).

2) Thereafter “real integration“ (new organisational structure since January 2008) and further development in the medium term.

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II. Organisational structure of the financial market supervision, cont.

1st Stage• According to the Financial market supervision integration act,

passed in February 2006 by the Czech Parliament, on 1 April 2006 the CNB took over all the activities of the: • Czech Securities Commission,• Finance Ministry´s Office of the State Supervision in Insurance and

Pension Funds,• Office for Supervision of Credit Unions

• Emphasis was laid on ensuring continuity of all supervisory functions and had no negative effects on the exercise of supervision or the operation of the financial sector.

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Extract:

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III. The CNB's activities in the field of financial market supervision

The CNB supervises (the scope of supervision is, however, different):

• Banks (21) - licensing and prudential supervision, consumer protection.

• Branches of foreign banks (18) - notification and limited prudential supervision, consumer protection.

• Credit unions (17) - licensing and prudential supervision, consumer protection.

• Insurance companies (35, 1 reinsurance company) - licensing and prudential supervision, consumer protection.

• Branches of foreign insurance companies (17) - notification and limited prudential supervision, consumer protection.

• Pension funds (10) - licensing and prudential supervision, consumer protection.

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III. The CNB's activities in the field of financial market supervision, cont.

The CNB supervises, the scope of supervision is, however, different (cont.)

• Security exchange - licensing, prudential supervision (operational risk) and supervision of market behaviour, consumer protection.

• Off-exchange market operator - licensing, prudential supervision (operational risk) and supervision of market behaviour, consumer protection.

• Settlement system operators (3) - licensing, prudential supervision (operational risk), consumer protection.

• Investment services providers (39) of which 11 banks and 28 non- bank firms – licensing, prudential supervision, supervision of market behaviour, consumer protection.

• Management companies (22) - licensing, prudential supervision, supervision of market behaviour, consumer protection.

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The CNB supervises, the scope of supervision is, however, different (cont.)

• Investment funds (27) - licensing, prudential supervision, supervision of market behaviour, consumer protection.

• Open-end mutual funds (139) - licensing, prudential supervision, supervision of market behaviour.

• Closed-end mutual funds (2) - licensing, prudential supervision, supervision of market behaviour.

• Depositories (8) - licensing, prudential supervision, supervision of market behaviour, consumer protection.

• Payment systems - operational risk, consumer protection• Issuers of e-money - prudential supervision (operational risk),

consumer protection.• Insurance intermediaries and independent loss adjusters (105 980)

– registration, consumer protection. • Investment intermediaries (9 121) – registration, consumer

protection.

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The CNB does not supervise all institutions that offer financial services in the Czech market because:

• Numerous financial institutions from EU countries are able to provide financial services in the Czech Republic after notifying the CNB of this activity under the freedom to provide services (without establishing a branch) pursuant to Article 21 of Directive 2000/12/EC. Such activities do not fall within the CNB's supervision.

• Number of notifications as of December 2009 Credit institutions: 275

of which e-money institutions: 12 Insurance companies: 614 Funds: 1,457 Investment companies: 49 Investment intermediaries: 884 Payment institutions: 19

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The CNB does not supervise all institutions that offer financial services in the Czech market because (cont.):

• The supervision of branches of EU based financial institutions is limited (for example in the case of credit institutions the supervision is in principle limited to liquidity issues).

• In the area of consolidated supervision of financial groups the CNB acts in most cases as a host supervisor.

• There are numerous subjects that provide financial services and are not supervised by the CNB, namely non-bank lenders, leasing and factoring companies.

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• Off-site surveillance consists mainly of: Regular monitoring of activities of supervised financial institutions

including monitoring of market behaviour in organised capital market.

Reviews of compliance with the prudential rules and limits. Imposition of remedial measures when deficiencies are identified.

• Off-site surveillance is based on continuous appraisal of all available information taken from various sources, in particular: Statements and reports regularly submitted by supervised financial

institutions. Monitoring of securities trading. Auditors´ reports. Results of on-site examinations. Visits in supervised financial institutions. And other (meetings with management, public sources).

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• The on-site supervision tasks are tailored according to the business and risk profile of supervised entity. Generally spoken, an on-site examination can involve: Examination of credit risk management. Examination of market risk management. Examination of adequacy of technical reserves (insurance

companies). Examination of trading records. Verification of internal audit and control systems. Verification of anti-money laundering system. Verification of operational risk management, security and functionality

of IT systems.

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• CEBS: Group de Contact, Expert Group on Prudential Regulation, Expert Group on Financial Information

• CESR: CESR-Fin, CESR-Pol, CESR-Tech, Investment Management Expert Group, Econet, MiFID Level 3, Post-Trading Expert Group, Prospectus Contact Group, Transparency Group

• Recently 8 standing committees• CEIOPS: Financial Requirements Expert Group (QIS), Internal Model Expert

Group, Internal Governance, Supervisory Review and Reporting Expert Group, Insurance Group Supervision Committee, Committee on Consumer Protection

• Prospects of transformation to EBA, ESMA, EIOPA• Cooperation in ESRB

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IV. Global financial crisis from the supervisory perspective

• The financial crisis was triggered on the US subprime mortgage market in 2007.

• U.S. real estate prices peaked in mid-2006. Following steep decline made refinancing more difficult and volume of mortgages in delinquency grew up quickly. This was followed by the collapse on the CDO markets that caused giant losses of many big internationally active banks.

• Subsequent lack of trust among the financial institutions about their ability to fulfil their liabilities led to the liquidity crisis.

• Liquidity crisis caused huge financial problems to many banking institutions throughout the world. Some of them bankrupted, including the largest world investment banks.

• The financial crisis caused e.g. bankrupt of Lehman Brothers, Merrill Lynch was saved by take-over from the side of BoA, the largest US savings bank Washington Mutual also bankrupted, US government had to provide assistance to the largest world insurance company AIG, etc.).

Documents

23rd Annual BSCEE Conference