The Czech Financial Sector and the Role of the CNB: Historical Overview Miroslav Singer Governor, Czech National Bank 4th Regional Governors Meeting Rovinj Croatia, 1 April 2016
Overview Evolution of Czech banking sector since early 1990s Integration of supervision into CNB Banking Union: CNB stance Financial/banking sector now Financial stability M. Singer Czech Financial Sector and Role of CNB: Historical Overview 2
Restructuring of banking sector: main stages In 1990, banking sector started from scratch Split of monobank (1990) two-tier system Inherited deficiencies (under-capitalisation, bad loans, shortage of long-term funds, inexperienced staff, legal loop-holes, non-existent risk management) Consolidation Programme I (clean-up of balance sheets of Komerční banka, Česká spořitelna, Investiční banka; establishment of Konsolidační banka in 1991 as a major vehicle for takeover of bad loans) (overall costs = 7% of 1995 GDP) Entry of small banks (13 in 1990, 13 in 1991, 17 in 1992, 10 in 1993 and 4 in 1994) (under-capitalised, unsound development strategies, often fraudulent behaviour, benign licensing policy) M. Singer Czech Financial Sector and Role of CNB: Historical Overview 3
Restructuring of banking sector: main stages continued Consolidation Programme II (1996) (purpose: to prevent domino effect within small bank sub-sector; of total of 18 banks, 15 were treated under CP II) (costs: similar to CP I) Stabilisation Programme (adopted in 1996) (was intended for 13 small banks; 6 banks joined but 5 were excluded stabilisation programme turned out to be unsuccessful) Four big state-owned banks: ownership was untransparent and diluted; state control was inefficient; profitability and competitiveness were low and worsened in 2nd half of 1990s By 1996, the Czech banking sector was witnessing many unfavourable developments M. Singer Czech Financial Sector and Role of CNB: Historical Overview 4
Implications of bad loan accumulation Vulnerable banks Underperforming credit channel of monetary policy High fiscal costs of keeping banking sector alive (instead of having budget revenue) Around 1996, the banking sector was a serious bottleneck (Achilles heel) of the Czech economy M. Singer Czech Financial Sector and Role of CNB: Historical Overview 5
Privatisation of big banks Big state-owned banks were impediment to smooth functioning of banking sector Privatisation resumed in 1998: IPB (Nomura) 1998 Agrobanka (GE) 1998 CSOB (KBC) 1999 CS (Erste Bank) 2000 KB (Societe General) 2001 Privatisation costs during 1996 2004: 10% of GDP Foreign banks brought know-how Privatisation of banks was one of the cornerstones of the economic transformation M. Singer Czech Financial Sector and Role of CNB: Historical Overview 6
Banking sector performance: 1994 2015 Clean-up of CS and KB Recession Profitability plummeted Privatisation The clean-up and privatisation of banks put the banking sector on the path to success Source: CNB M. Singer Czech Financial Sector and Role of CNB: Historical Overview 7
12 Banking sector restructuring costs: volume (as % of 1995 GDP) 10 9,7 8 as % of GDP (current prices) 6 4 2 2,2 1,4 4,2 1,5 1,6 0,9 2,8 1,6 0,2 0-0,4-0,4-1,0-2 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Source: Ministry of Finance, CNB The total accumulated restructuring costs during 1992-2004 were substantial: 24% of GDP M. Singer Czech Financial Sector and Role of CNB: Historical Overview 8
100 Restructuring costs: structure 80 60 in bn CZK 40 20 0-20 -40 Consolidation and stabilisation of banks Pre-privatisation assistance Related to centrally planned economy 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Source: Ministry of Finance, CNB Sequence of costs: related to centrally planned economy consolidation and stabilisation preprivatisation assistance M. Singer Czech Financial Sector and Role of CNB: Historical Overview 9
Integration of supervision into CNB M. Singer Czech Financial Sector and Role of CNB: Historical Overview 10
Financial market supervision No blueprint for supervision existed at beginning of 1990s gradual and spontaneous development Supervision developed in response to liberalisation, privatisation and other transformation steps Four-tier sector-based supervision emerged over time: CNB (since 1990): banks Czech Securities Commission (since 1998): capital market Ministry of Finance: insurance + pension funds Office for Supervision of Credit Unions (since 1997): credit unions The parallel existence of four supervisory bodies increasingly contradicted the global character of the financial market M. Singer Czech Financial Sector and Role of CNB: Historical Overview 11
First phase of integration of supervision: 1 April 2006 Office of Supervision of Credit Unions Capital Market Supervision Insurance and Pension Funds Supervision Banking Supervision M. Singer Czech Financial Sector and Role of CNB: Historical Overview 12
Why in Czech National Bank? Bank-based financial system in Czech Republic (banking assets account for ¾ of total financial sector assets) Capacity and cost efficiency Know-how (accumulated in field of banking supervision) Comparative advantage in labour market (CNB offers more competitive and performance-related salaries) Financial stability issues (strengthened links between supervision on microeconomic level, role of lender of last resort and macroprudential analysis) favourable conditions for dealing with possible crises Independence of CNB The CNB was respected by market players M. Singer Czech Financial Sector and Role of CNB: Historical Overview 13
Experience from first phase Easier communication between supervisors (enhanced importance of informal communication on all levels) Transfer of know-how by means of joint teams Convergence of procedures (licensing, on-site supervision, off-site supervision, analyses, reporting, etc.) Uniform approach to publishing (regular reports on activity of individual departments) Although the first phase of integration was implemented successfully, questions about how to deepen integration started emerging M. Singer Czech Financial Sector and Role of CNB: Historical Overview 14
Sectoral model Second phase of integration of supervision Banking Regulation and Supervision Department Capital Market Regulation and Supervision Department Insurance Companies Regulation and Supervision Department Functional model Financial Market Supervision Department Financial Market Regulation and Analyses Department 1 January 2008 Licensing and Sanctions Procedures Department M. Singer Czech Financial Sector and Role of CNB: Historical Overview 15
Reasons for switch to functional model Unification of relevant support activities (data availability, information and systemic support) Unification of procedures and approaches to regulatory framework and update of legislation (application of identical principles) Unification of licensing and administrative procedures (including sanction procedures) Unification of supervisory and analytical procedures for producing internal and public documents Better allocation of experts in organisational units better use of sectoral experience smoother convergence of regulation and supervision Under the old sectoral model, department managers were responsible for a given sector only; responsibility for the whole financial sector lay with the Bank Board M. Singer Czech Financial Sector and Role of CNB: Historical Overview 16
Supervision during financial crisis CNB introduced supply facility to boost money market (option of using government bonds as collateral during such operations to increase liquidity) Intensive monitoring: Daily data collection (introduced one day after decision): Cash requirements (one and two days ahead) Money market and government bond market (in real time) Financial institutions (banks and other major players) with one-day lag (liquidity, intragroup exposures, deposits, limits, withdrawals from money market funds) Ad hoc information gathering on toxic asset holdings (after CDOs, Iceland, fall of Lehman Brothers, etc.); information from all parts of financial groups (i.e. banks, insurers, investment funds, pension funds) at same time of day Consultations between governor, vice-governor and Banking Association The CNB had access to very prompt information and could intervene immediately where necessary; the key factor for success was integrated supervision M. Singer Czech Financial Sector and Role of CNB: Historical Overview 17
Number of CNB employees (1998 2015) Source: CNB While the number of CNB employees has fallen slightly in recent years, the number of supervisory staff has risen M. Singer Czech Financial Sector and Role of CNB: Historical Overview 18
Banking Union: CNB stance M. Singer Czech Financial Sector and Role of CNB: Historical Overview 19
Why is banking union being created? Euro area is economically heterogeneous (similarly heterogeneous as USA, maybe even more so) Consequently, it needs fiscal transfers on similar scale to USA (but has no option of tax federalisation!) Yet transfers of this magnitude are unacceptable to voters in North Future of euro area depends on cutting links between banks and public budgets BU is attempt define mechanisms that will allow fiscal transfers in form acceptable to Northern countries (particularly Germany) The Bulgarian lev, Swedish krona and Czech koruna zones, for example, do not need the BU. They exist within the borders of single nation states, which give them the institutions they need to sustain their own currencies. The point of the BU is to preserve the euro area! M. Singer Czech Financial Sector and Role of CNB: Historical Overview 20
Single Supervisory Mechanism Creation of SSM will mean transfer of some micro- and macroprudential powers from national supervisory authorities to ECB (some tasks will be delegated to national supervisors) All banks domiciled in euro area (around 6,000) will be subject to ECB supervision; banks supported from EFSF/ESM; 140 systemically important banks, i.e. around 80% of bank assets in EU, will be subject to direct ECB supervision ECB Supervisory Board chairman will be proposed by ECB; candidate will have to be approved by European Parliament and decided by EU Member States (Ecofin) Putting the ECB in charge of banking supervision is giving rise to many demands and will lead to the ceding of the bulk of powers to the European level M. Singer Czech Financial Sector and Role of CNB: Historical Overview 21
Predicted/expected benefits of SSM for participating countries Breaking of vicious circle between bank solvency and sovereign debt (in countries where banks operate) through direct recapitalisation of banks from ESM this assistance is conditional on establishment and effective operation of SSM Unified and cross-border supervision of credit institutions Enhanced supervision of financial sector for some states of euro area (southern periphery) and overall reduction in number of interventions to support banks in euro area The establishment of the SSM may contribute to increasing the effectiveness of banking supervision in the euro area M. Singer Czech Financial Sector and Role of CNB: Historical Overview 22
Risks and uncertainties for participating countries Two main uncertainties: Who will pay for recapitalisation of euro area banking sector? Will SSM be good enough even with better capital buffers? Moral hazard expectation that EU will ( this time ) cover costs of bank failures Weaker pressure for structural reform of economies Weaker pressure for reform of banking sectors that currently have too many banks of questionable viability Loss of powers and responsibilities of national supervisory and resolution authorities for financial stability and market functioning Even this mechanism is likely to become unacceptable to Northern constituencies if transfers through quasifiscal channels of the BU become too frequent M. Singer Czech Financial Sector and Role of CNB: Historical Overview 23
Euro area in 2013: important numbers GDP: EUR 9.5 tn Government debt: EUR 9 tn (95% of GDP) Government securities outstanding: EUR 7 tn Total MFI assets: EUR 30 tn (of which interbank assets: EUR 5 tn) MFI exposure to government securities: EUR 1.7 tn MFI loans to private sector: EUR 10.5 tn Size of Single Resolution Fund: EUR 0.06 tn (not to be reached until 2024) Assistance available from ESM for direct recapitalisation of banks: EUR 0.06 tn (ESM can only be used for euro area) Little political will to establish single fiscal backstop; solution must also cover non-euro area states participating in BU The centralised funds for large bank resolution are totally inadequate; if a country gets into serious financial difficulties it will have to rely on its own resources M. Singer Czech Financial Sector and Role of CNB: Historical Overview 24
Stance of CNB We support mechanisms leading to stabilisation of euro area However, Czech koruna does not need BU Euro area must primarily help itself; resources of all EU Member States put together are not enough to stabilise it Czech financial sector is highly specific in EU in being liquid and well capitalised; despite being based on host principle it is net creditor of euro area financial sector Therefore: We support the creation of the BU in the euro area We want to eliminate the risk of institutions from our financial sector being drawn into a euro area crisis We want to retain the current balance of powers in the EBA and other institutions between euro area and non-euro area countries and home and host institutions M. Singer Czech Financial Sector and Role of CNB: Historical Overview 25
Banking union: summary CNB will continue to try to: assist in creation of BU eliminate risks associated with other proposed elements of BU (with due regard to specifics of Czech banking sector) retain symmetry between supervisory powers and responsibility for financial sector stability in Czech Republic If Czech Republic (as non-euro country) were to join SSM: it would cede banking supervisory powers it would not be able to vote in key ECB decision-making body (Governing Council), only in Supervisory Board it would not be entitled to assistance from ESM, which is only for euro area member countries CNB believes that country that will not be BU member should not contribute to BU s operating costs and to risk sharing The CNB does not currently see any reason for the Czech Republic to join the banking union M. Singer Czech Financial Sector and Role of CNB: Historical Overview 26
Financial/banking sector now M. Singer Czech Financial Sector and Role of CNB: Historical Overview 27
Czech financial system (shares in total assets) Source: CNB The banking sector is a key segment of the Czech financial system; total assets: USD 252.6 bn (approx. 120% of GDP) M. Singer Czech Financial Sector and Role of CNB: Historical Overview 28
23 banks Banking sector in 2015 4 large banks (assets over CZK 300 bn/usd 12 bn) 11 medium-sized banks (CZK 50 300 bn/usd 2 12 bn) 3 small banks (up to CZK 50 bn/usd 2 bn) 5 building societies Czech ownership prevails only in two state-owned banks (CEB support for CZ exporters, CMZRB support for SMEs) All parent banks of CZ subsidiaries are from EU countries, except for one medium-sized bank (GE Money Bank USA) and one small bank (ERB banka, Russia) which started up in spring 2009 24 branches of foreign banks (foreign bank branches only from EU countries: single licence principle) Ownership of banks is well diversified across the EU; the largest banks are owned by banks from different EU countries (Austria, France, Belgium and Italy) M. Singer Czech Financial Sector and Role of CNB: Historical Overview 29
Capital and capital adequacy The capital ratio is currently close to 18% Source: CNB M. Singer Czech Financial Sector and Role of CNB: Historical Overview 30
Return on equity (RoE) (in %, 2014) Source: ESRB, White Book Bank profitability is low in the euro area but high in the Czech Republic M. Singer Czech Financial Sector and Role of CNB: Historical Overview 31
Loan-to-deposit ratio (in %, 2015 Q4) Source: ECB, ESRB In some countries, loans still considerably exceed deposits; the Czech banking sector remains highly conservative as regards balance-sheet liquidity M. Singer Czech Financial Sector and Role of CNB: Historical Overview 32
Financial stability M. Singer Czech Financial Sector and Role of CNB: Historical Overview 33
Legislative underpinning of financial stability function Financial stability objective not covered explicitly in central bank law until early 2006 Fully-fledged macroprudential institution since 2013: Article 2(1) The primary objective of the CNB shall be to maintain price stability. In addition, the CNB shall work to ensure financial stability and the safe and sound operation of the financial system in the Czech Republic. Financial Stability Unit (FSU) established in July 2004 as autonomous unit within Economic Research Department (small: six economists; people from other parts of CNB occasionally contributed to financial stability analyses and Financial Stability Report) Financial Stability Department established in 2010; currently: director + 12 analysts Macroprudential policy is now an important part of the CNB s mandate alongside monetary policy M. Singer Czech Financial Sector and Role of CNB: Historical Overview 34
Financial Stability Report First CNB Financial Stability Report published in early 2005 (67 pages, two short annexes, no special topics or articles) Fixed structure starting with FSR published in May 2006 Executive summary + main text + special feature articles 8-page summary, 75 90 pages of basic text, 30 40 pages of special features, with yearly frequency preserved Focus always on whole of previous year plus first few months of current year (publication in June) increasing forward-looking content as in monetary policy documents prediction horizon of macro-stress tests: 3 years Separate macroprudential policy chapter since 2012 position in financial cycle, warnings and recommendations, messages to financial sector, regulatory initiatives The CNB s macroprudential policy is very transparent M. Singer Czech Financial Sector and Role of CNB: Historical Overview 35
Macro-stress test results in Financial Stability Report 2014/15 Despite an increase in risk costs and a decrease in profitability in the Adverse Scenario, the capital ratio remains well above the minimum of 8% M. Singer Czech Financial Sector and Role of CNB: Historical Overview 36
Capital buffers enhance banks resilience CRD IV/CRR give CNB powers to strengthen banks ability to absorb losses through capital buffers All banks have been required to maintain capital conservation buffer in full amount of 2.5% of CET1 since July 2014 CRD IV also offers CNB alternative ways of setting requirements with regard to systemic importance of banks CNB decided to apply 1% 3% systemic risk buffer to four banks with effect from October 2014 In December 2015, CNB identified seven other systemically important institutions (regulatory consolidated groups); it does not currently deem it necessary to set additional capital requirement for them Countercyclical capital buffer (CCB) rate for exposures located in CZ has been set quarterly since August 2014 In December 2015 the CNB decided for the first time to set a higher-than-zero CCB rate, specifically at 0.5% of exposures located in the Czech Republic with effect from January 2017 M. Singer Czech Financial Sector and Role of CNB: Historical Overview 37
Summary Development of market economy in CZ was hindered in early 1990s by inheritance that had little in common with modern banking Privatisation of large inefficient banks was implemented very late, to detriment of economy (banking crisis) Supervision was integrated into CNB in 2006 this proved particularly useful in wake of financial crisis Foundations of quality supervision: implementation of international regulatory and supervisory standards, independence, integration, skilled employees, appropriate pay CNB does not currently see any reason for Czech Republic to join banking union Czech banking sector is fully integrated into EU banking sector Czech banks are conservative, stable, profitable and resilient to shocks Macroprudential policy is now an important part of the CNB s mandate Having initially been a bottleneck of the economic transformation, domestic banks are now a success story: they are the backbone of the Czech market economy and are contributing to growth M. Singer Czech Financial Sector and Role of CNB: Historical Overview 38
Thank you Miroslav Singer Czech National bank Na Příkopě 28 115 03 Praha 1 Miroslav.Singer@cnb.cz Tel: +420 224 412 000 M. Singer Czech Financial Sector and Role of CNB: Historical Overview 39