The safety of Central and Eastern European financial systems and the risk of contagion

Transcription

1 Dobiesław Tymoczko / Narodowy Bank Polski, Warsaw School of Economics The safety of Central and Eastern European financial systems and the risk of contagion Warsaw / 23 June Agenda 1 Financial stability in CEE countries what to look at? 2 G-SIFIs and their role in CEE region 3 Risks of contagion 4 Mitigating risk 1

2 3 Defining financial stability Financial system stability is a situation when the system performs all its functions in a continuous and efficient way, even when unexpected and adverse disturbances occur on a significant scale (NBP s FSR). There is no generally accepted definition of financial stability. More broadly it is an absence of financial instability, or, less reflexively, a lack of systemic financial crises or panics. There is no clear-cut instrument, nor a clear-cut objective of avoiding financial instability no good way to give a quantitative measurement of financial stability (Goodhart 2004). 4 Financial system development & financial stability Overall comparisons by level of financial intermediation and by region confirm that while financial systems of developing economies tend to provide less access to finance, their stability is comparable to financial systems in developed economies. Thus looking only at financial depth may be misleading or insufficient (Čihák, Demirgüç- Kunt, Feyen, Levine 2012 and 2013). For banking sectors that are not very connected to the global banking network, increases in interconnectedness are associated with a reduced probability of a banking crisis. However, above a certain threshold growing interconnectedness may increase the probability of a banking crisis (Čihák, Muñoz, Scuzarella 2011). Recent research contradict the classical paradigm that financial structure is irrelevant for growth. ESRB analysis proves that countries with bank-based systems tend to feature somewhat lower long-run growth. Bank credit supply is more volatile than supply from debt capital markets, and thus amplifies both financial and real instability. (ESRB 2014). 2

3 5 Banking sector development (loans for non-public sector to GDP) depending on the level of GDP per capita Segments of the financial sector (% of GDP) Logarithm of GDP per capita (in PPP) Banking sector Banking sector - actual values in Poland Banking sector - actual values in Czech Republic Banking sector - actual values in Hungary Note: The values of the regression function were estimated for a panel of 203 countries containing data on their financial systems in The following colours were used to differentiate between time-series: yellow, red and blue (for the years 2000, 2007 and 2012, respectively). Source: NBP calculations based on data of the International Monetary Fund (World Economic Outlook, 04/2013), the World Bank (Financial Structure Dataset, 04/2013), and NBP. In comparison to a broad panel of countries, banking sectors of CEE countries are relatively underdeveloped. Evidence from the recent global financial crisis shows that there is no optimal structure of the financial system that would ensure effective performance of its functions in all economic conditions (IMF 2012). 6 Banking sector development levels in selected Central and Eastern European countries and in the euro area, (%) Assets/GDP Loans/GDP Deposits/GDP Poland Czech Republic Hungary Euro area Source: For the euro area ECB Statistical Data Warehouse; for other countries data provided by national central banks and GUS. Compared to the average value for euro area, CEE countries were still characterised by a relatively low level of financial intermediation. In Poland, as in many other CEE countries, the ratio of credit-to-gdp stays well below 100% of GDP, which leaves considerable space for expansion. However, beyond a certain threshold when credit/gdp exceeds 100% of GDP the further expansion of credit actually has a negative effect on growth (Arcand, Berkes and Panizza 2012). A common feature of CEE countries banking sectors is also a large share of claims towards central banks in total assets. 3

4 7 Banking sectors of particular importance for financial stability 3,5 3,0 2,5 2,0 1,5 1,0 0,5 0,0 Stock market capitalisation vs. credit for the private sector USA United Kingdom Germany France Poland * End of 2013 data for bank credit are unavaliable. End of 3 rd quarter 2013 were used instead. Hungary Czech Republic Spain* Slovenia* Slovakia Financial systems in CEE countries (and in the EU in general) are bank-oriented; banks play a crucial role in financing the economy Banks settle payments Banks provide products that allow other entities to manage financial risk Source: Bloomberg, National central banks. 8 Asset structure of the Polish financial system, % In terms of assets the Polish financial system is the least bankoriented among the financial systems of CEE countries Banks Credit unions Insurance companies Investment funds Open pension funds Investment firms Note: The latest data for credit unions refer to the end of September Source:NBP, UKNF, Analizy Online, KSKOK. At the end of 2013 the share of bank assets in total financial sector assets in Poland amounted to 67.1%. 4

5 9 Agenda 1 Financial stability in CEE countries what to look at? 2 G-SIFIs and their role in CEE region 3 Risks of contagion 4 Mitigating risk Banking sector in Europe become too big Bank loans / GDP in selected European countries (%) 10 Bank credit-to-gdp has increased everywhere in Europe (the extent of the increase varies substantially across countries). Source: ECB Total consolidated assets of domestic and foreign owned banks / GDP (%) in H European banking groups have grown too much (TBTF issue). Many of the G-SIFIs headquartered in Euro area are present in CEE countries as well. Source: ECB *For presentational purposes the y-axis was truncated at 600%. The values for Luxembourg and Malta are 1719% and 798% respectively. 5

6 Banking sector in Europe become too big (2) Bank loans to GDP in US, Japan and Europe Housing loans as % of total bank loans to households in EU-12 and CEE (bottom panel) 11 Source: ECB The aggregate productivity growth in an economy increases along with the growing ratio of credit for the private sector to GDP, but when this ratio grows to exceed one, the further increase of credit for the private sector becomes a drag on productivity growth (Cecchetti and Kharroubi 2012). At the same time banks concentrated more and more on crediting households (in particular housing loans), at the cost of loans to enterprises, which was not favourable in terms of long-term economic growth. 70% 60% 50% 40% 30% 20% 2003 EU enlargement CEE Source: ECB Source: ECB 12 Banking systems in Central and Eastern Europe Foreign banks, mainly from Western Europe, play important role in the banking systems of in Central and Eastern Europe, both in terms of ownership and funding. Asset share of foreign banks in the region in many cases exceeds 60%. Asset Share of Foreign Banks in Central and Eastern Europe, % as of 2011 Source: IMF 6

7 13 Foreign bank ownership evolution in Central and Eastern Europe Estonia Lithuania Hungary Slovakia Latvia Czech Republic Poland Initially, presence of foreign banks brought financial know-how, technology, and international networks into a country, thus improving the efficiency and quality of financial intermediation in general and of credit provision in particular. % Introducing foreign-owned banks broke the symbiotic link between government and state enterprises and newly privatized enterprises. Foreign bank ownership helped harden budget constraints and attain macroeconomic stability (Mitra et al., 2010). Source: IMF Presence of large banking institutions in CEE region 14 Poland Czech Republic Slovakia Hungary Romania Bulgaria Croatia Estonia Latvia Lithuania Unicredit Raiffeisen Societe General Ernste KBC * Nordea ** GE Money Bank Intensa Sanpaolo Eurobank EFG *** Swedbank SEB Commerzbank Citibank Volksbank ING Danske DnB NORD BayernLB Alpha Bank National Bank of Greece Hypo Alpe Adria Santander Millennium BCP Source: Banks financial reports * KBC unit sold to Santander, ** Nordea unit sold to PKO BP, *** Eurobank EFG merged with Raiffeisen 7

8 Foreign banks active in CESEE: CESEE Subsidiaries' Assets and Shares in Total Group Assets, Source: IMF Notes: A bank is defined as foreign-owned when it has a foreign global-ultimate-owner that controls 25 percent or more of its total shares. A few small subsidiaries did not have 2011 data at the time of download. 16 Agenda 1 Financial stability in CEE countries what to look at? 2 G-SIFIs and their role in CEE region 3 Risks of contagion 4 Mitigating risk 8

9 17 Transmission channel Mechanism 1 Funding channel Funding drawn from non-residents 2 Credit channel Direct credit exposures to non-resident banks 3 Direct market channel Contagion in financial market 4 Macroeconomic channel Slowdown induced by fall in demand for exports 5 Capital/ownership channel Outflow of dividends to foreign owners 6 Indirect credit channel FX exposure to unhedged borrowers 7 Confidence channel Fall in confidence in the local banking sector Source: NBP 18 Change in funding from BIS-reporting countries' banks ( ) as percent of GDP Source: IMF Changes in foreign funds in selected CEE countries (September 2008 = 100%) Bulgaria Poland Romania Czech Republic Hungary Source: National Central Banks Prior to the crisis, rapid capital inflows resulted in a strong increase in external debt levels, especially in the form of bank intercompany loans. Between 2008 and 2013, some CESEE countries experienced significant contraction in foreign funding. Comparing to September 2008, foreign funds in Poland increased, while in the other countries of the region declined gradually. 9

10 19 Lower availability of foreign funding translated in lower credit growth in CEE Countries with the sharpest credit contractions and foreign bank funding reductions tend to have similar weaknesses in bank fundamentals. Changes in domestic bank credit to the private sector are positively correlated with changes in foreign banks external positions vis-à-vis all sectors. FX lending indirect credit channel 20 Source: IMF FX loans in Central and Eastern Europe were partly supply-driven with foreign banks exploiting cheaper international funding sources and domestic banks tapping the FX swap market to issue loans matching the currency structure of their funding liabilities. CEE countries are exposed to varying degrees of risks steaming from FX lending because of different policy regimes they operate under (currency board, peg or inflation targeting) 10

11 21 Market channel for emerging economies Due to high and rising interdependence between domestic financial markets (especially amongst the emerging economies) unfavourable events which change the market participants perception of risk in one of them could cause similar consequences for the others (Goldstein and Pauzner 2004; Ozkan and Unsal 2012). For this reason a sudden adjustment of asset prices in one foreign financial market may trigger a similar adjustment in the domestic financial markets. Such disturbances could lead to increased losses of local financial institutions, e.g. due to changes in the valuation of their assets Exchange rates of selected currencies of CEE countries, Bankruptcy of Lehman Brothers 15 September EUR/PLN EUR/CZK EUR/HUF Note: Data for exchange rates normalised to 100 as at 1 January Source: Thomson Reuters. A sharp increase in global risk aversion after the collapse of Lehman Brothers initiated a flight to quality in the global financial markets. Foreign investors rapidly closed their positions in emerging markets, which strongly affected the domestic currencies (including the Polish zloty). The Polish zloty was perceived as a proxy currency for the region, owing to the high liquidity of its market. This status contributed to a significant depreciation of the Polish zloty and a prolonged period of exchange rate volatility. 11

12 Yields on 10Y government bonds of selected countries of the region, % Bankruptcy of Lehman Brothers 15 September Source: Thomson Reuters. Poland Czech Republic Hungary After the collapse of Lehman Brothers increased global risk aversion and market participants concerns about the possible impact of the crisis on emerging economies contributed to the flight to quality. This affected T-bond markets of these countries (including Poland), leading to a rapid foreign capital outflow and a sharp rise in yields. However, market participants soon began to distinguish between individual emerging markets. Interest rate disparity and a relatively good economic performance of CEE countries at that time boosted the demand for their T-bonds. As a result, their prices soon recovered to pre-crisis levels Yields on 5Y government bonds of selected EU countries, % Request of Greece for IMF's financial help 23 April Source: Thomson Reuters Political crises in Greece and Italy early November 2011 Germany France Italy Spain Poland Hungary From April 2010 to September 2012 sovereign debt crisis in the euro area contributed to significant volatility of yields in government bond markets of some European countries. Market participants favourable perception of the Polish economy significantly dampened the impact of financial contagion on the domestic bond market. Consequently, yields on Polish government bonds remained relatively stable throughout the crisis, compared to some euro area countries and other countries of the region. 12

13 25 Agenda 1 Financial stability in CEE countries what to look at? 2 G-SIFIs and their role in CEE region 3 Risks of contagion 4 Mitigating risk 26 Macroprudential policies To mitigate future risks associated with excessive cross border funding volatility and FX loans, countries in the region will need to make more aggressive use of macroprudential policies, like: Tools seeking to influence lenders behavior, such as cyclical capital requirements, leverage ratios, Tools focusing on borrowers behavior, such as ceilings on loan-to-value ratios (LTVs) or on debt-to-income ratios (DTIs) 13

14 27 FX lending: examples of measures taken in Poland Since 2008 moral suasion of Financial Supervision Authority and National Bank of Poland to curb FX lending to households Financial Supervision Authority s updated Recommendation S on mortgage lending adopted on June 18 and effective in 2014 contains a provision that no FX mortgage loans should be extended to households without a natural hedge. Since about 2 years new FX mortgages origination has almost stopped and outstanding stock gradually declined. An issue arises however how to cope with still high stock of FX lending? 28 More domestic ownership in banking systems? As a aftermath of the global crisis and received rescue packages some of the foreign parent banks have sold their subsidiaries, prompting M&A activities in CEE countries. If the near future more banks would be put up for sale, than possible buyers could be domestically-owned financial institutions. However in this scenario, a potential problem of creating TBTF institutions still exists. 14

15 29 Funding challenges The new normal for the banking sector in the CEE region assumes that lending growth will be bounded by deposit base growth. 15