Challenges of supervisory regulatory changes. Mira Erić Vice-Governor, National Bank of Serbia Washington, June 3 rd 2010

Transcription

1 Challenges of supervisory regulatory changes Mira Erić Vice-Governor, National Bank of Serbia Washington, June 3 rd 2010

2 Contents Overview of Serbian market Current banking regulatory framework in Serbia Implementation of Basel II framework in Serbia Challenges of supervisory architecture changes

3 Serbia on the road to EU accession SEE country with app. 7.3 million population and GDP of 30.5 billion EUR; In 2008 Serbia entered the Agreement on stabilization and association with EU; The national currency Dinar is under a managed float regime; Following the crisis spillover Serbia has entered stand by arrangement with the IMF in order to ensure foreign reserve base as well as Vienna agreement with largest foreign owned banks witch ensured for foreign exposure to remain at the level of pre crisis period. Basic macroeconomic indicators Real GDP growth (%) Inflation (CPI %) Unemployment rate (%) % of GDP Current account deficit FX reserves FDI Fiscal budget deficit Total foreign debt Public foreign debt

4 Serbian financial sector National Bank of Serbia is an independent authority responsible for conducting monetary policy as well as for supervision of banks, insurance companies, private pension funds and financial leasing; Primary objective of NBS is price stability and without prejudice to its primary objective maintaining financial stability; assets (eur mln) III 2009 VI 2009 IX 2009 XII 2009 Banking sector (34) 19,735 20,056 19,044 19,901 21,104 22,530 Insurance companies (26) ,035 1, premium Financial leasing (17) 1,202 1,383 1,331 1,287 1,251 1,161 Voluntary pension funds net assets (9)

5 Serbian banking sector Number of banks Number of employees 32,342 31,182 Ownership structure Foreign (%) State (%) Private (%) 9 8 Competitivenes / Concentration HHI Top 5 / Assets (%) Top 10 / Assets (%) Capital Equity (RSD bln) Equity growth (%) CAR Tier 1 / Assets (%) Leverage Assets Assets (RSD bln) 1,777 2,160 Assets growth (%) NPL Total NPL Corporate NPL Households Profitability Profit (RSD bln) NIM ROA ROE OCC Liquidity Liquidity ratio (average monthly) LTD (%) Dominantly foreign owned EMU based banks 71,7% Highly competitive environment Low leverage Strong capital More than adequately provisioned Strong liquidity Resilient in stress tests (e.g. FSAP, Oct 09: even a substantial increase in NPLs under the most severe scenario would not result in significant undercapitalization ; after shock CAR of 16,5%) No need to use taxpayers money during the crisis

6 Contents Overview of Serbian market Current banking regulatory framework in Serbia Implementation of Basel II framework in Serbia Challenges of supervisory architecture changes

7 NBS as conservative supervisor with strong countercyclical policy orientation During the expansionary period of where we had tripling of both loan portfolio and assets, a number of countercyclical restrictive measures were taken: monetary (wider base and high required reserve ratio, high reference rate ) supervisory (higher CAR ratio of 12%, conservative loan classification and provisioning rules fully deductible from regulatory capital and linked to possibility to distribute profits, higher capital requirements, i.e. risk weights for exposures to unhedged borrowers, conservative monthly installment to income ratio for households ) market discipline (intensive work on consumer protection and financial education, enhancing transparency in banking business ) and even some administrative measures (limiting growth of households loans to Tier I, ceiling on cash loans repayment term, obligatory down-payment for household loans ) Very tight fit & proper rules for bank owners

8 influenced the scenery of the banking sector High quality capital o o o 82% of total regulatory capital before deductions refers to Tier 1 and the remaining 18% refers to Tier 2 capital (almost all long-term subordinated debt) 83% of Tier 1 capital refers to equity and the remaining part to disclosed reserves and retained profits 25% of total regulatory capital reduced for regulatory provisions, i.e. potential losses for both balance and off-balance sheet exposures Strong capital buffers o Total regulatory provisions covering 20% of gross balance and off-balance sheet exposures, while IFRS provisions cover only 8,5% o Total regulatory provisions to gross NPLs of 160% o CAR of 21,5% (regulatory capital after all deductions to total RWA, including capital requirements for market risks) Strong liquidity buffers o Liquidity ratio (liquid and assets due in 1m to obligations due in 1m) of around 1,9 o Share of liquid assets in total assets of 32% Reputable owners o 74% of banking sector assets owned by foreign banks, while 72% by banks headquartered in EMU

9 Contents Overview of Serbian market Current banking regulatory framework in Serbia Implementation of Basel II framework in Serbia Challenges of supervisory architecture changes

10 Full scale Basel II implementation in Serbia is set for the year 2011 The approach to implementing Basel II highly influenced by Serbian EU path full harmonization of EU directives Gradual transition Country-specific issues taken into consideration by parts of supervisory regulation (classification and regulatory provisioning rules) not explicitly covered by Basel II standards (so far) Basel I Maintaining tight regulatory provisioning rules Basel II Law on banks and regulation New set of regulation step towards Basel II Strategy & operational plan Basel II project group Preparation phase First draft of regulation Final draft of regulation Public debate Publishing Full scale implementation

11 Main challenges of Basel II implementation Regulatory challenges: Development of the supervisory capacity for the new regulatory framework (skills needed for more advanced approaches); Further transition to risk-based supervision different way of communication the identified deficiencies to banks Absence of rating agencies in Serbia; Limited scope for addressing the country specific issues in terms of minimal capital requirements only through Pillar II (e.g. currency induced credit risk) Further communication with the industry for the purpose of proper implementation of new standards; Banking industry challenges: HIGH IMPORTANCE Applying more principle-based regulation; Human resources development; Further development and integration of risk management function in all activities; Absence of sufficiently long historical data time series;

12 Implementation of Basel II+ (or III?) Basel II changes published in June 09 already included in the draft regulation relevance very low, since it mostly referred to securitization non-existent in Serbia due to absence of relevant regulatory framework Basel II changes published in December 09 much more relevant Liquidity both short term and structural, long term Capital structure and quality Capital requirements Leverage ratio Capital buffers Conservative and countercyclical NBS regulatory framework created considerable buffers making the transition to Basel II+ smoother than in the case of less conservative regulatory regimes Keeping the minimum CAR requirement at 12% and maintaining some conservative non Basel II measures (such as tight provisioning rules) will ensure that further changes to accord will not create rebound effect on banking sector Basel II+ changes will be introduced as early as possible after their final calibration in order to preserve already created buffers

13 NBS has experience with concepts proposed under Basel II+ Liquidity ratio similar concept based on 1-month horizon exists; Most of proposed liquidity monitoring tools already used in banks riskassessment High-quality capital elements (equity and retained earnings) dominate existing banks capital structure Most significant regulatory capital deductions under the draft regulation will be applied to Tier 1 capital Reliance solely on external credit ratings currently very limited Leverage ratio currently at 8% when approximating the most conservative proposed approach Capital conservation already exists, the banks are not allowed to distribute profits until they cover loan-loss provisions calculated under the regulatory rules Forward looking provisions already exist, regulatory rules for loan-loss provisions are much tighter than under the IFRS and provide for earlier recognition of potential losses Capital building mechanisms based on the excessive credit growth (household lending limit to Tier 1 capital and general reserve requirement for excessive growth) recently abolished, as a countercyclical measure during the crisis

14 Contents Overview of Serbian market Current banking regulatory framework in Serbia Implementation of Basel II framework in Serbia Challenges of supervisory architecture changes

15 Important supervisory issues are still to be addressed Challenges in Serbia Setting up of macro-prudential supervisory framework Addressing the de-eurization issue (approximately 75% of banking loan portfolio is denominated in FX or FX indexed and most of it represent exposure to unhedged borrowers) Further development of both supervisory and banks disclosure with the aim of maintaining and building consumer and public confidence Treatment of non EU subsidiaries SEE countries banks are in most cases of non-systemic importance for the group, but of the systemic importance for the host country Addressing the spill over effects (mother banks markets Austrian banks in late 2008 and Greek banks nowadays; potential group level contractions; high dependency of Serbian enterprises on foreign capital funding) Europe-wide challenges Introducing the single-rule book vs. the need to address country-specific macroeconomic issues Proper definition of exit strategies Clear definition of home supervisor responsibility, especially towards non-eu hosts the appropriate division of responsibility in line with power-authority

16 Thank you for your attention