DT CEE prezentacja bez not [Tylko do odczytu] Tymoczko D. IRMC 2014.pdf · 2014‐06‐17 2...

2014‐06‐17

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Dobiesław Tymoczko / Narodowy Bank Polski, Warsaw School of Economics

Warsaw / 23 June 2014

The safety of Central and Eastern European financialsystems and the risk of contagion

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

2The safety of Central and Eastern European financial systems and the risk of contagion

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Defining financial stability

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Financial system stability is a situation when the system performs allits functions in a continuous and efficient way, even whenunexpected and adverse disturbances occur on a significant scale(NBP’s FSR).

There is no generally accepted definition of financial stability. Morebroadly 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 avoidingfinancial instability… no good way to give a quantitativemeasurement of financial stability (Goodhart 2004).

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

Financial system development & financial stability

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Overall comparisons by level of financial intermediation and byregion confirm that while financial systems of developing economiestend to provide less access to finance, their stability is comparable tofinancial systems in developed economies. Thus looking only atfinancial 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 bankingnetwork, increases in interconnectedness are associated witha reduced probability of a banking crisis. However, above a certainthreshold growing interconnectedness may increase the probability ofa banking crisis (Čihák, Muñoz, Scuzarella 2011).

Recent research contradict the classical paradigm that financialstructure is irrelevant for growth. ESRB analysis proves thatcountries with bank-based systems tend to feature somewhat lowerlong-run growth. Bank credit supply is more volatile than supply fromdebt capital markets, and thus amplifies both financial and realinstability. (ESRB 2014).


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Banking sector development (loans for non-public sector to GDP) depending on the level of GDP per capita

Note: The values of the regression function were estimated for a panel of 203 countriescontaining data on their financial systems in 1991−2012. The following colours wereused 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 EconomicOutlook, 04/2013), the World Bank (Financial Structure Dataset, 04/2013), and NBP.

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In comparison to a broadpanel of countries, bankingsectors of CEE countries arerelatively underdeveloped.

Evidence from the recentglobal financial crisis showsthat there is no optimalstructure of the financialsystem that would ensureeffective performance of itsfunctions in all economicconditions (IMF 2012).


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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

Banking sector development levels in selected Central and Eastern European countries and in the euro area, 2010-2012 (%)

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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 stillcharacterised by a relatively low level of financial intermediation.

In Poland, as in many other CEE countries, the ratio of credit-to-GDP stayswell below 100% of GDP, which leaves considerable space for expansion.

However, beyond a certain threshold – when credit/GDP exceeds 100% ofGDP – 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 ofclaims towards central banks in total assets.


Assets/GDP Loans/GDP Deposits/GDP

2010 2011 2012 2010 2011 2012 2010 2011 2012

Poland 81.8 84.7 84.8 49.2 52.3 50.5 43.6 45.5 45.4

Czech Republic 111.0 116.5 120.6 53.1 54.9 55.9 71.5 73.6 78.6

Hungary 105.2 103.3 93.0 52.7 50.3 43.5 35.2 35.6 35.1

Euro area 351.3 355.8 344.6 107.3 105.7 102.5 80.8 80.4 83.1

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Banking sectors of particular importance for financial stability

■ Financial systems in CEEcountries (and in the EU ingeneral) are bank-oriented; banksplay a crucial role in financing theeconomy

■ Banks settle payments

■ Banks provide products that allowother entities to manage financialrisk


Stock market capitalisationvs. credit for the private sector

Source: Bloomberg, National central banks.

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in*

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2011 2012 2013

* End of 2013 data for bank credit are unavaliable. End of 3rd quarter 2013 were used instead.

Asset structure of the Polish financial system, 2005-2013

Note: The latest data for credit unions refer to the end of September 2013.

Source:NBP, UKNF, Analizy Online, KSKOK.


2005 2006 2007 2008 2009 2010 2011 2012 20130

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Banks Credit unions Insurance companies

Investment funds Open pension funds Investment firms

%

In terms of assets thePolish financial systemis the least bank-oriented among thefinancial systems ofCEE countries.

At the end of 2013 theshare of bank assets intotal financial sectorassets in Polandamounted to 67.1%.

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Agenda




4 Mitigating risk


Banking sector in Europe become too big

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Bank loans / GDP in selected European countries (%)

Source: ECB


Bank credit-to-GDP hasincreased everywhere inEurope (the extent of theincrease varies substantiallyacross countries).

European banking groupshave grown too much (TBTFissue).

Many of the G-SIFIsheadquartered in Euro areaare present in CEE countriesas well.

Total consolidated assets of domestic and foreign owned banks / GDP (%) in H1 2013

Source: ECB *For presentational purposes the y-axis was truncated at 600%. The values for Luxembourg and Malta are 1719% and 798% respectively.

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Banking sector in Europe become too big (2)

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Bank loans to GDP in US, Japan and Europe

The aggregate productivity growth in an economyincreases along with the growing ratio of credit for theprivate sector to GDP, but when this ratio grows toexceed one, the further increase of credit for theprivate sector becomes a drag on productivity growth(Cecchetti and Kharroubi 2012).

At the same time banks concentrated more and moreon crediting households (in particular housing loans),at the cost of loans to enterprises, which was notfavourable in terms of long-term economic growth.


Housing loans as % of total bank loans to households in EU-12 and CEE (bottom panel)

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70%

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Source: ECB

Source: ECB

Source: ECB

Banking systems in Central and Eastern Europe

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Asset Share of Foreign Banks in Central and Eastern Europe, % as of 2011

Source: IMF

Foreign banks, mainly fromWestern Europe, playimportant role in the bankingsystems of in Central andEastern Europe, both interms of ownership andfunding.

Asset share of foreign banksin the region in many casesexceeds 60%.


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Initially, presence of foreign banksbrought financial know-how,technology, and internationalnetworks into a country, thusimproving the efficiency and qualityof financial intermediation ingeneral and of credit provision inparticular.

“Introducing foreign-owned banks… broke the symbiotic linkbetween government and stateenterprises and newly privatizedenterprises. Foreign bankownership helped harden budgetconstraints and attainmacroeconomic stability”(Mitra et al., 2010).

Foreign bank ownership evolutionin Central and Eastern Europe

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Estonia LatviaLithuania Czech RepublicHungary PolandSlovakia

Source: IMF


Presence of large banking institutions in CEE region

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PolandCzech

RepublicSlovakia 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


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Foreign banks active in CESEE: CESEE Subsidiaries' Assetsand Shares in Total Group Assets, 2011

Source: IMFNotes: 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.


Agenda




4 Mitigating risk


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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

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Bulgaria Czech RepublicPoland HungaryRomania

Changes in foreign funds in selected CEE countries (September 2008 = 100%)

Prior to the crisis, rapid capital inflows resulted in a strong increase inexternal debt levels, especially in the form of bank intercompany loans.

Between 2008 and 2013, some CESEE countries experienced significantcontraction in foreign funding.

Comparing to September 2008, foreign funds in Poland increased, whilein the other countries of the region declined gradually.

Source: National Central Banks


Source: IMF

Change in funding from BIS-reporting countries' banks (2003-2008) as percent of GDP

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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.


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FX lending – indirect credit channel

FX loans in Central and Eastern Europe were partly supply-driven with foreign banksexploiting cheaper international funding sources and domestic banks tapping the FXswap market to issue loans matching the currency structure of their fundingliabilities.

CEE countries are exposed to varying degrees of risks steaming from FX lendingbecause of different policy regimes they operate under (currency board, peg orinflation targeting)


Sou

rce:

IMF

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Due to high and rising interdependence between domestic financialmarkets (especially amongst the emerging economies) unfavourableevents which change the market participants’ perception of risk in one ofthem could cause similar consequences for the others (Goldstein andPauzner 2004; Ozkan and Unsal 2012).

For this reason a sudden adjustment of asset prices in one foreignfinancial market may trigger a similar adjustment in the domestic financialmarkets. Such disturbances could lead to increased losses of localfinancial institutions, e.g. due to changes in the valuation of their assets.

Market channel for emerging economies


Note: Data for exchange rates normalised to 100 as at 1 January 2007.Source: Thomson Reuters.


A sharp increase in global riskaversion after the collapse ofLehman Brothers initiateda „flight to quality” in the globalfinancial markets.

Foreign investors rapidly closedtheir positions in emergingmarkets, which strongly affectedthe domestic currencies(including the Polish zloty).

The Polish zloty was perceivedas a proxy currency for theregion, owing to the high liquidityof its market. This statuscontributed to a significantdepreciation of the Polish zlotyand a prolonged period ofexchange rate volatility.

Exchange rates of selected currencies of CEE countries, 2007-2009

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EUR/PLN EUR/CZK EUR/HUF

Bankruptcy of Lehman Brothers15 September 2008

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After the collapse of LehmanBrothers increased global riskaversion and market participants’concerns about the possibleimpact of the crisis on emergingeconomies contributed to the„flight to quality”.

This affected T-bond markets ofthese countries (including Poland),leading to a rapid foreign capitaloutflow and a sharp rise in yields.

However, market participants soonbegan to distinguish betweenindividual emerging markets.Interest rate disparity anda relatively good economicperformance of CEE countries atthat time boosted the demand fortheir T-bonds. As a result, theirprices soon recovered to pre-crisislevels.

Source: Thomson Reuters.

Yields on 10Y government bonds of selectedcountries of the region, 2007-2009

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Poland Czech Republic Hungary

Bankruptcy of Lehman Brothers15 September 2008

%

Yields on 5Y government bonds of selected EU countries, 2010-2012


Source: Thomson Reuters.

From April 2010 to September2012 sovereign debt crisis in theeuro area contributed tosignificant volatility of yields ingovernment bond markets ofsome European countries.

Market participants’ favourableperception of the Polisheconomy significantly dampenedthe impact of financial contagionon the domestic bond market.

Consequently, yields on Polishgovernment bonds remainedrelatively stable throughout thecrisis, compared to some euroarea countries and othercountries of the region.

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Germany France Italy Spain Poland Hungary

Request of Greece forIMF's financial help23 April 2010

Political crises in Greeceand Italyearly November 2011

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Agenda




4 Mitigating risk


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Macroprudential policies

To mitigate future risks associated with excessive cross borderfunding volatility and FX loans, countries in the region will need tomake more aggressive use of macroprudential policies, like:

Tools seeking to influence lenders’ behavior, such as cyclicalcapital requirements, leverage ratios,

Tools focusing on borrowers’ behavior, such as ceilings onloan-to-value ratios (LTVs) or on debt-to-income ratios (DTIs)


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FX lending: examples of measures taken in Poland

Since 2008 – moral suasion of Financial Supervision Authority andNational Bank of Poland to curb FX lending to households

Financial Supervision Authority’s updated „Recommendation S” onmortgage lending adopted on June 18 and effective in 2014 containsa provision that no FX mortgage loans should be extended tohouseholds without a natural hedge.

Since about 2 years new FX mortgages origination has almoststopped and outstanding stock gradually declined.

An issue arises however how to cope with still high stock of FXlending?


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More domestic ownership in banking systems?

As a aftermath of the global crisis and received rescue packagessome 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, thanpossible buyers could be domestically-owned financial institutions.

However in this scenario, a potential problem of creating TBTFinstitutions still exists.


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Funding challenges

”The new normal” for the banking sector in the CEE regionassumes that lending growth will be bounded by deposit basegrowth.


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