Quarterly Systemic Risk Survey. December Year II, No. 5

Transcription

1 Quarterly Systemic Risk Survey December 18 Year II, No. 5

2 Quarterly Systemic Risk Survey December 18 Year II, No. 5

3 N O T E All rights reserved. Reproduction for educational and non-commercial purposes is permitted provided that the source is acknowledged. National Bank of Romania, Str. Lipscani nr. 5, cod 331, Bucureşti Phone: ; fax: ISSN 1-53X (online)

4 Contents Quarterly Systemic Risk Survey 5 Annex 1 Map of main risks to global financial stability 7 Annex Map of risks to financial stability, banks views 9 Annex 3 Banks responses to the Systemic Risk Questionnaire 1 Annex Structure of the Systemic Risk Questionnaire and methodological notes

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6 December 18 Quarterly Systemic Risk Survey In line with the previous assessment, the main systemic risks identified internationally refer to: (i) repricing of risk premia in global financial markets and contagion risk for emerging markets on the background of monetary policy normalisation in advanced economies and of a sudden tightening of global financing conditions, (ii) the rising public and private sector debt, (iii) (geo)political uncertainties, amid the escalating trade tensions and the adoption of protectionist policies, as well as the UK s exit from the European Union, (iv) the liquidity risk and the contagion effect from the shadow banking sector to the financial system or (v) the expansion of cryptoassets and the risks associated with cyber security, the new financial technologies (fintech) and other such activities outside the prudential regulation areas (Annex 1). Moreover, according to the most recent assessment of the global economic outlook, the IMF revised the balance of risks on global economic growth as being tilted to the downside, but indicated as main risk sources the additional escalation of trade tensions and the high degree of (geo)political uncertainty 1. Based on the Systemic Risk Questionnaire, the largest credit institutions operating in Romania identified during the current exercise one severe risk, four high risks and four moderate ones. Unlike the previous survey, during the current exercise banks were questioned regarding the potential implications stemming from the enforcement of Government Emergency Ordinance No. 11/18 instituting certain measures in the public investment field and certain fiscal and budgetary measures, amending and supplementing some normative acts and extending some deadlines. For the first time, banks identified a severe risk regarding the stability of the Romanian banking sector, stemming from the uncertain and unpredictable legislative framework governing the banking and financial field, with implications for the banking sector solvency. By comparison with the previous assessments, in which this risk was classified to be high, during the current exercise, banks considered it to be severe, difficult to manage and with a very high impact on the financial system. Among the most important effects estimated by local banks are the following: (i) a drop in profitability, with a potential impact on own funds and total capital ratio, (ii) distortions in the functioning of the money market, (iii) a domestic currency depreciation, (iv) a step-up in inflationary effects, (v) costlier loans and lower deposit rates, (vi) a contraction in loans to households and non-financial corporations with an impact on economic growth, (vii) the withdrawal of investors from banks operating in Romania and (viii) a decrease in the quality of local bank services (by diminishing or waiving planned investments) and a stronger fintech presence on the market. 1 World Economic Outlook Update, January 19 Table 1 of Annex features banks views on systemic risks, while Annex 3 comprises banks individual responses and Annex shows the detailed breakdown of the Questionnaire submitted to banks, as well as some methodological notes. NATIONAL BANK OF ROMANIA 5

7 Quarterly Systemic Risk Survey The high risks identified by credit institutions, by importance, are as follows: (1) the fast deterioration of investors sentiment towards emerging economies in the context of external developments, () higher financing costs following an interest rate hike and/or a weaker exchange rate, with a negative impact on the debt servicing capacity of borrowers, especially households and SMEs, (3) financial innovation and challenges to cyber security and () the default risk for loans to the private sector. This last risk was revised upwards from moderate to high, climbing from sixth place (according to the September 18 survey) to fifth place in the current exercise. According to credit institutions, by importance, moderate systemic risks comprise the following: (i) the stronger link between the banking and public sectors, due to both direct and indirect exposures, (ii) the developments in the residential real estate market, (iii) the swift growth of household lending and (iv) the further modest developments in lending to non-financial corporations. Credit institutions revised downwards the risk posed by developments in the residential real estate market, from high during the previous round (fifth place) to moderate during the current exercise (seventh place). In addition, the risk posed by the swift growth of household lending was revised downwards, falling from seventh to eighth position. The last risk occupied the same position compared to the previous round. NATIONAL BANK OF ROMANIA

8 December 18 Annex 1 Map of main risks to global financial stability Table 1. Main risks to the European financial system, as identified by the ECB Map of main risks to European financial stability 1. Disorderly increase in global risk premia. Debt sustainability concerns 3. Hampered bank intermediation capacity. Liquidity strains in the investment fund sector Risk level medium-level systemic risk, remains constant compared to the previous assessment medium-level systemic risk, rising from the previous assessment medium-level systemic risk, remains constant compared to the previous assessment potential systemic risk, rising from the previous assessment Source: Financial Stability Review, ECB, November 18 Table. Main risks to global financial stability Map of main risks to global financial stability 1. Monetary policy normalisation amid inflationary pressures. Escalating trade tensions and adoption of protectionist policies 3. Contagion risk for emerging markets on the background of monetary policy normalisation in advanced economies and of a sudden tightening of global financing conditions. Political and geopolitical uncertainty, especially with regard to Brexit 5. High public and private debt in several countries. Expansion of cryptoassets and the risks associated with cyber security, the new financial technologies (fintech) and other such activities outside the prudential regulation areas Source: IMF Global Financial Stability Report, October 18; IMF World Economic Outlook, October 18; IMF World Economic Outlook Update, January 19; FSB FSB reviews financial vulnerabilities and deliverables for G Summit, October 18. Table 3. Main risks to financial stability, as identified by the Fed Map of main risks to global financial stability 1. Brexit and euro area fiscal challenges. Economic difficulties in China and other emerging market economies 3. Trade tensions, geopolitical uncertainty or other factors that intensify investors risk aversion Source: Board of Governers of the Federal Reserve System, Financial Stability Report, November 18 NATIONAL BANK OF ROMANIA 7

9 Quarterly Systemic Risk Survey Table. Map of risks to financial stability in Romania Deterioration in investors sentiment towards emerging economies Uncertainties surrounding economic activity in the EU: Brexit and sovereign debt in the euro area Default risk for loans to the private sector Tensions surrounding domestic macroeconomic equilibria Developments in the real estate market severe systemic risk high systemic risk moderate systemic risk low systemic risk Note: The colour shows risk intensity. The arrows indicate the outlook for risk in the period ahead. Source: NBR, Financial Stability Report, December 18 8 NATIONAL BANK OF ROMANIA

10 December 18 Annex Map of risks to financial stability, banks views Table 1. Banks views on systemic risks to financial system 3 for December 18 December 19 No.* Systemic risks to the financial sector Current risk level** Risk management challenges*** Risk 1 Uncertain and unpredictable legislative framework governing the banking and financial field, with implications for banking sector solvency Risk Fast deterioration of investors sentiment towards emerging economies in the context of external developments (e.g. global economic growth, political changes and heightening geopolitical tensions, the European banking sector) and/or domestic developments (e.g. pro-cyclical fiscal policy, widening current account deficit) Risk 3 Higher financing costs following an interest rate hike and/or a weaker exchange rate, with a negative impact on the debt servicing capacity of borrowers, especially households and SMEs Risk Financial innovation and challenges to cyber security Risk 5 Default risk for loans to the private sector Risk A stronger link between the banking and public sectors, due to both direct exposures (e.g. government securities, loans to central and local government) and indirect exposures (e.g. First Home loans) Risk 7 Developments in the residential real estate market (e.g. rise in residential property prices) Risk 8 The swift growth of household lending Risk 9 Further modest developments in lending to non-financial corporations, in a context of loose payment discipline, yet also amid an existing sustainable lending growth potential, with negative implications for the medium- and long-term economic outlook Severe systemic risk/highly challenging to manage (absolute values ranging from 7 to 8) High systemic risk/challenging to manage (absolute values ranging from 5 to ) Moderate systemic risk/manageable (absolute values ranging from 3 to ) Low systemic risk/no challenge (absolute values ranging from 1 to ) * Risks are ranked according to the average risk importance based on banks responses. ** The colour indicates the current risk level, by considering the probability of the risk occurrence and the impact on the banking sector in the event of risk materialisation over the course of one year. *** The colour indicates how challenging currently is for credit institutions to manage the risk. The arrows indicate the evolution of risk/risk management capacity compared to the previous exercise (September 18), considering a.5 point materiality threshold. 3 For the structure of the Questionnaire and methodological notes, see Annex. NATIONAL BANK OF ROMANIA 9

11 Quarterly Systemic Risk Survey Annex 3 Banks responses to the Systemic Risk Questionnaire 1. Banks responses on the risk posed by financial innovation and challenges to cyber security 8 Bank 1 Bank Bank Bank Chart 1a. Probability of occurrence 8 Bank 1 Bank Bank Bank Chart 1b. Severity of impact 8 Bank 1 Bank Bank Bank Note: A higher value indicates a higher probability of risk occurrence / a more severe risk impact / a greater challenge to manage the risk. Chart 1c. Challenge to manage 1 NATIONAL BANK OF ROMANIA

12 December 18 8 Bank 1 Bank. Banks responses on the risk posed by higher financing costs following an interest rate hike and/or a weaker exchange rate, with a negative impact on the debt servicing capacity of borrowers, especially households and SMEs Bank Bank Chart a. Probability of occurrence 8 Bank 1 Bank Bank Bank Chart b. Severity of impact 8 Bank 1 Bank Bank Bank Chart c. Challenge to manage Note: A higher value indicates a higher probability of risk occurrence / a more severe risk impact / a greater challenge to manage the risk. NATIONAL BANK OF ROMANIA 11

13 Quarterly Systemic Risk Survey 8 Bank 1 Bank Bank 3. Banks responses on the risk posed by a fast deterioration of investors sentiment towards emerging economies in the context of external developments (e.g. global economic growth, political changes and heightening geopolitical tensions, the European banking sector) and/or domestic developments (e.g. pro-cyclical fiscal policies, widening current account deficit) Bank Chart 3a. Probability of occurrence 8 Bank 1 Bank Bank Bank Chart 3b. Severity of impact 8 Bank 1 Bank Bank Bank Chart 3c. Challenge to manage Note: A higher value indicates a higher probability of risk occurrence / a more severe risk impact / a greater challenge to manage the risk. 1 NATIONAL BANK OF ROMANIA

14 December 18 8 Bank 1 Bank. Banks responses on the risk posed by the uncertain and unpredictable legislative framework governing the banking and financial field, with implications for banking sector solvency Bank Bank Chart a. Probability of occurrence 8 Bank 1 Bank Bank Bank Chart b. Severity of impact 8 Bank 1 Bank Bank Bank Chart c. Challenge to manage Note: A higher value indicates a higher probability of risk occurrence / a more severe risk impact / a greater challenge to manage the risk. NATIONAL BANK OF ROMANIA 13

15 Quarterly Systemic Risk Survey 5. Banks responses on the default risk for loans to the private sector 8 Bank 1 Bank Bank Bank Chart 5a. Probability of occurrence 8 Bank 1 Bank Bank Bank Chart 5b. Severity of impact 8 Bank 1 Bank Bank Bank Chart 5c. Challenge to manage Note: A higher value indicates a higher probability of risk occurrence / a more severe risk impact / a greater challenge to manage the risk. 1 NATIONAL BANK OF ROMANIA

16 December 18 8 Bank 1 Bank. Banks responses on the risk posed by a stronger link between the banking and public sectors, due to both direct exposures (e.g. government securities, loans to central and local government) and indirect exposures (e.g. First Home loans) Bank Bank Chart a. Probability of occurrence 8 Bank 1 Bank Bank Bank Chart b. Severity of impact 8 Bank 1 Bank Bank Bank Chart c. Challenge to manage Note: A higher value indicates a higher probability of risk occurrence / a more severe risk impact / a greater challenge to manage the risk. NATIONAL BANK OF ROMANIA 15

17 Quarterly Systemic Risk Survey 7. Banks responses on the risk posed by the swift growth of household lending 8 Bank 1 Bank Bank Bank Chart 7a. Probability of occurrence 8 Bank 1 Bank Bank Bank Chart 7b. Severity of impact 8 Bank 1 Bank Bank Bank Chart 7c. Challenge to manage Note: A higher value indicates a higher probability of risk occurrence / a more severe risk impact / a greater challenge to manage the risk. 1 NATIONAL BANK OF ROMANIA

18 December 18 8 Bank 1 Bank 8. Banks responses on the risk posed by further modest developments in lending to non-financial corporations, in a context of loose payment discipline, yet also amid an existing sustainable lending growth potential, with negative implications for the medium- and long-term economic outlook Bank Bank Chart 8a. Probability of occurrence 8 Bank 1 Bank Bank Bank Chart 8b. Severity of impact 8 Bank 1 Bank Bank Bank Chart 8c. Challenge to manage Note: A higher value indicates a higher probability of risk occurrence / a more severe risk impact / a greater challenge to manage the risk. NATIONAL BANK OF ROMANIA 17

19 Quarterly Systemic Risk Survey 9. Banks responses on the risk posed by developments in the residential real estate market (e.g. rise in residential property prices) 8 Bank 1 Bank Bank Bank Chart 9a. Probability of occurrence 8 Bank 1 Bank Bank Bank Chart 9b. Severity of impact 8 Bank 1 Bank Bank Bank Chart 9c. Challenge to manage Note: A higher value indicates a higher probability of risk occurrence / a more severe risk impact / a greater challenge to manage the risk. 18 NATIONAL BANK OF ROMANIA

20 December 18 Chart 1. Developments in banks aggregate responses on the probability of occurrence, potential impact and capacity to manage systemic risks the 8 systemic risks Probability Impact Management capacity Uncertain and unpredictable legislative framework governing the banking and financial field Probability Impact Management capacity Higher financing costs following the interest rate hike and/or the weaker leu exchange rate Probability Impact Management capacity Fast deterioration of investor sentiment in emerging economies Probability Impact Management capacity Further modest developments in lending to non-financial corporations Dec.17 Mar.18 Jun.18 Sep.18 Dec.18 Note: 1. A higher value indicates a higher probability of risk occurrence, a more severe risk impact and greater challenge to manage the risk.. The values at banking system level are calculated by weighting the individual responses by the banks' market share. 5 3 Dec.17 Mar.18 Jun.18 Sep.18 Dec.18 Probability Impact Management capacity Financial innovation and challenges to cyber security Probability Impact Management capacity Developments in the residential real estate market Probability Impact Management capacity The swift growth of household lending Probability Impact Management capacity A stronger link between the banking and public sectors Note: 1. A higher value indicates a higher probability of risk occurrence, a more severe risk impact and greater challenge to manage the risk.. The values at banking system level are calculated by weighting the individual responses by the banks' market share. NATIONAL BANK OF ROMANIA 19

21 Quarterly Systemic Risk Survey Annex Structure of the Systemic Risk Questionnaire and methodological notes 1a Credit institution: Systemic Risk Questionnaire Reference date: 31 December 18 For the purpose of this questionnaire, systemic risk means a risk of disruption in the financial system with the potential to have serious negative consequences for the internal market and the real economy (Regulation (EU) No 19/1 of the European Parliament and of the Council of November 1). Please assess for the following 1 months the systemic risks identified in rows 1-9 of the table below. Please also fill in row 1 of the table with another systemic risk identified from your perspective. Systemic risks Developments in the residential real estate market (e.g. rise in residential property prices) Further modest developments in lending to non-financial corporations, in a context of loose payment discipline, yet also amid an existing sustainable lending growth potential, with negative implications for the medium- and long-term economic outlook Fast deterioration of investors sentiment towards emerging economies in the context of external developments (e.g. global economic growth, political changes and heightening geopolitical tensions, the European banking sector) and/or domestic developments (e.g. pro-cyclical fiscal policy, widening current account deficit). Financial innovation and challenges to cyber security 5.. Uncertain and unpredictable legislative framework governing the banking and financial field, with implications for banking sector solvency A stronger link between the banking and public sectors, due to both direct exposures (e.g. government securities, loans to central and local government) and indirect exposures (e.g. First Home loans) 7. Default risk for loans to the private sector 8. The swift growth of household lending Higher financing costs following an interest rate hike and/or a weaker exchange rate, with a negative impact on the debt servicing capacity of borrowers, especially households and SMEs Explanations: Risk importance (A) Probability of risk occurrence (B) Potential impact on the banking sector (C) Bank s risk management capacity (D) (A) When ranking the risks based on importance, please use the following scale from 1 to 9, where 1 is the most significant risk, and 9 is the least significant risk. Assessing the importance of a risk (A) combines: the probability of the risk to occur (B) and the impact in case it occurs (C), taking into account the bank s capacity to manage the risk (D). (B) When ranking the risks based on the probability of occurrence, please use the following scale: The probability of the risk is 1=Insignificant, =Very low, 3=Low, =Below average, 5=Above average, =High, 7=Very high and 8=Certainty. (C) When ranking the risks based on the potential impact on the financial system, i.e. expected loss conditioned by the risk materialising, please use the following scale: The impact of the risk is 1=Insignificant, =Very low, 3=Low, =Below average, 5=Above average, =High, 7=Very high and 8=Extremely high. (D) When ranking the risks based on the credit institution s capacity to manage the risk before its occurrence (i.e. how prepared your bank is to take ex-ante measures to significantly mitigate the risk), please use the following scale: 1=No challenges, =Very easy to manage, 3=Easy to manage, =Relatively easy to manage, 5=Relatively challenging to manage, =Challenging to manage, 7=Very challenging to manage, 8=Cannot be managed. NATIONAL BANK OF ROMANIA

22 December 18 1b Please provide, if applicable, any clarifications or additional information you deem necessary for a better understanding of the responses at point 1a. Clarifications/Additional information - continued c Please assess from your bank s perspective the possible implications of the entry into force of the Government Emergency Ordinance No. 11/18, i.e. the Chapter IV provisions - Imposing the tax on bank assets. The analysis is based on the credit institutions responses to the Systemic Risk Questionnaire. The questionnaire is sent to the top 1 banks in the system by asset value. These held approximately 83 percent of total bank assets in November 18. The questionnaire addresses persons in managerial positions within the risk management departments of these institutions. The analysis is carried out as follows: the NBR identifies the risks that might be considered systemic and requires banks to state to which extent their view is similar, how they rank the risks by the importance of their possible consequences on the financial system, what is their capacity to cope with the consequences if a systemic risk materialises and the probability of risk occurrence. In addition, credit institutions themselves can suggest risks they perceive to be systemic. The method of compiling banks responses regarding the three risk elements (probability of occurrence, impact severity and capacity to manage the risk) uses the weighted average, the weighting factor being the asset market share. A 1 to 8 scale is used, where 1 shows a risk with an insignificant probability of occurrence / no challenges in being managed, and 8 shows a risk with a probability of occurring with certainty / which cannot be managed. Abbreviations ECB EU ESRB FED FSB IMF NBFI NBR SRQ European Central Bank European Union European Systemic Risk Board US Federal Reserve System Financial Stability Board International Monetary Fund Non-bank financial institution National Bank of Romania Systemic Risk Questionnaire NATIONAL BANK OF ROMANIA 1

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