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The economic and financial
crisis from the point of view
of Czech banks
Miroslav Singer
Vice-Governor, Czech National Bank
Chamber of Commerce Switzerland – Czech Republic
Prague, 12 May 2009
M. Singer: Banking and financial sector of the Czech Republic:
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Outline
• Banking sector during crisis
• CNB forecast (May 2009)
Structure of presentation
External
financial sector
External
demand
Real economy
Firms
Domestic
financial sector
Households
Supervision of
financial sector
Monetary policy
CNB
M. Singer: The economic and financial crisis from the point of view of Czech banks
3
Structure of presentation
External
financial sector
External
demand
Real economy
Firms
Domestic
financial sector
Households
Supervision of
financial sector
Monetary policy
CNB
M. Singer: The economic and financial crisis from the point of view of Czech banks
4
Impacts of financial crisis on
domestic financial sector
• Collapse in confidence between financial institutions
(at time of Lehman Brothers failure) generated:



Increased risk premium on markets
Fall in liquidity
Increased volatility
• Cooling of housing market
• Stock market fall (limited significance in Czech Rep.)
The financial crisis snowballed, having major impacts
on some sectors
M. Singer: The economic and financial crisis from the point of view of Czech banks
5
Risk premia on interbank market
(in %)
4,0
3,0
2,0
1,0
0,0
-1,0
01/07
04/07
07/07
10/07
01/08
USD 3M kreditní prémie
EUR 3M kreditní prémie
04/08
07/08
10/08
01/09
CZK 3M kreditní prémie
PLN 3M kreditní prémie
Pramen: Bloomberg, Reuters
Pozn.:kreditní prémie se počítá jako rozdíl mezibankovní sazby a
odpovídající O/N swapové sazby
L.B.’s collapse led to sharp growth in risk premia
M. Singer: The economic and financial crisis from the point of view of Czech banks
6
Volatility on domestic and foreign
markets (historical volatility over last 90 days)
5,0
1,6
4,5
1,4
4,0
1,2
3,5
3,0
1,0
2,5
0,8
2,0
0,6
1,5
0,4
1,0
0,5
0,2
0,0
05/06
0,0
09/06
01/07
05/07
09/07
Volatility index (globální)
01/08
05/08
09/08
01/09
Volatility index (ČR)
Pramen: Reuters, Thomson Datastream
Pozn.: volatility index globální = součet historické volatility S&P500, DJ
Stoxx50, kurzů USD/EUR a YEN/USD, 10Y vládních dluhopisů Němcka a
USA, ceny zlata, ropy, a 3M Euriboru a 3M Liboru za posledních 90 dnů.
Volatility index český = součet historické volatility akciového indexu PX,
kurzu CZK/EUR, 10Y vládního dluhopisu, a 3M Priboru.
Market uncertainty led to increased volatility
M. Singer: The economic and financial crisis from the point of view of Czech banks
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Structure of presentation
External
financial sector
External
demand
Real economy
Firms
Domestic
financial sector
Households
Supervision of
financial sector
Monetary policy
CNB
M. Singer: The economic and financial crisis from the point of view of Czech banks
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Domestic financial (banking) sector
• Has excess liquidity (CNB withdraws money)
• Is relatively “isolated” (has enough funds to provide
loans from primary deposits)
• Has traditional conservative model (sufficient growth
opportunities)
• Has low NPL ratio
• Banks have not provided foreign currency loans to large
extent (are not dependent on functioning of exchange
rate risk hedging markets)
• Ratio of “toxic” assets is negligible (< 1% of assets)
• Is well capitalised and remains profitable
The Czech financial system is less vulnerable than
elsewhere
M. Singer: The economic and financial crisis from the point of view of Czech banks
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Profit in banking sector
160
Banking sector in CR
(bn. CZK)
Big banks in CR
(bn. CZK)
Foreign mother
banks - results of
groups (bn. EUR)
140
120
100
80
60
40
20
0
Total net
income
Pre-tax
prof it
Net prof it
2006
Total net
income
Pre-tax
prof it
2007
Net prof it
Total net
income
Pre-tax
prof it
Net prof it
2008
Source: CNB, published results of bank groups
Unlike their foreign parents, Czech subsidiaries
suffered hardly any profit losses in 2008
M. Singer: The economic and financial crisis from the point of view of Czech banks
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Liquidity ratio in banking sector
(in %)
100
80
60
40
20
0
12/2005
6/2006
12/2006
6/2007
12/2007
6/2008
12/2008
Loans / deposits
Source: CNB
Quick liquidity assets / total assets
Liabilities on demands / total deposits incl. credit institutions
The liquidity situation remains favourable – banks
have a high proportion of quick assets
M. Singer: The economic and financial crisis from the point of view of Czech banks
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Withdrawal and provision of liquidity
(in CZK bn)
mld. CZK
440
420
400
380
360
340
320
300
280
260
240
220
200
180
160
140
120
100
80
60
40
20
0
I-08
mld. CZK
75
60
45
30
Provision of liquidity (right axis)
Sterilization (left axis)
15
0
II-08
III-08
V-08
VI-08
VIII-08
IX-08
X-08
XII-08
I-09
III-09
IV-09
The good liquidity situation is also demonstrated by
the low take-up of the CNB’s new liquidityproviding facilities by banks in recent months
M. Singer: The economic and financial crisis from the point of view of Czech banks
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Deposit-to-loan ratios in new EU
member states (in %)
180
Deposits/loans 2005
Deposits/loans 2006
150
Deposits/loans 2007
120
90
60
30
0
CZ
SK CY PL
BG RO HU MT LV
SI
LT
EE
EU
Source: ECB
The Czech Republic had the highest deposit-to-loan
ratio …
M. Singer: The economic and financial crisis from the point of view of Czech banks
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Forex loan ratios for households and
corporations (2007, in %)
90
80
70
60
50
40
30
20
10
0
EE
LV
LT
BG
RO
Households
HU
SK
PL
CZ
Firms
Source: European Commission
… and a virtually zero share of foreign currency
loans in loans to households
M. Singer: The economic and financial crisis from the point of view of Czech banks
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Net external positions of selected
countries’ banking sectors
(in % of GDP and in USD bn, 2008)
15
as % of GDP
bn. USD
10
5
0
-5
-10
-15
-20
-25
-30
-35
CZ
PL
SK
BG
HU
LT
EE
RO
LV
Source:
IFS, IMF
The Czech Republic is the only new EU member state
that is independent of external funds (positive net
external position)
M. Singer: The economic and financial crisis from the point of view of Czech banks
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Structure of presentation
External
financial sector
External
demand
Real economy
Firms
Domestic
financial sector
Households
Supervision of
financial sector
Monetary policy
CNB
M. Singer: The economic and financial crisis from the point of view of the Czech banks
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Growth forecasts
7
2006
2007
2008
2009fO08
2009f
2010f
5
3
1
Cze c
h Re
p.
J apa
n
USA
ea
ed ec
.
Euro
ar
-5
Adv a
nc
-3
Wo rl
d
-1
-7
Source: IMF, World Economic Outlook, April 2009
Growth will be negative in many countries in 2009
M. Singer: The economic and financial crisis from the point of view of Czech banks
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External demand
(Consensus Forecasts)
2
1
meziroční změna v %
0
March 2008
June 2008
-1
September 2008
October 2008
-2
November 2008
December 2008
-3
January 2009
February 2009
-4
March 2009
April 2009
-5
III/08
IV/08
I/09
II/09
III/09
IV/09
I/10
II/10
III/10
IV/10
All the external demand growth forecasts for 2009 are
heading downwards and the recovery is “receding”
M. Singer: The economic and financial crisis from the point of view of Czech banks
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New orders from abroad, direct
export sales and domestic energy
consumption (y-o-y in %)
110
100
90
80
70
60
12/2007
03/2008
06/2008
09/2008
12/2008
New orders from abroad
Direct export sales
Domestic energy consumption
Source: CSO
New orders from abroad recorded a fall at the turn
of the year
M. Singer: The economic and financial crisis from the point of view of Czech banks
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Structure of presentation
External
financial sector
External
demand
Real economy
Firms
Domestic
financial sector
Households
Supervision of
financial sector
Monetary policy
CNB
M. Singer: The economic and financial crisis from the point of view of Czech banks
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Growth in loans to firms and
households (y-o-y in %)
40
35
30
25
20
15
10
5
0
01/05
07/05 01/06 07/06
Loans total
01/07 07/07
Firms
01/08 07/08 01/09
Households
Source: CNB
Loans to firms and households rose at quite a high
rate even in January and February 2009
M. Singer: The economic and financial crisis from the point of view of Czech banks
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Non-performing loans
(% of total loans in segment)
5
4
3
2
1
Loans to residents
Non-financial corporations
Households
12
/2
00
6
2/
20
07
4/
20
07
6/
20
07
8/
20
0
10 7
/2
00
12 7
/2
00
7
2/
20
08
4/
20
08
6/
20
08
8/
20
0
10 8
/2
00
12 8
/2
00
8
0
The NPL ratio is rising only slowly, mainly because
of deteriorating corporate loans
M. Singer: The economic and financial crisis from the point of view of Czech banks
22
12M default rate on bank loans to
corporations and NPL ratio (in %)
12-month default rate
1 month annualised default rate trend
14
NPL ratio
12
10
8
6
4
2
0
10/02
10/03
10/04
10/05
10/06
10/07
10/08
Source: CNB
The CNB expects the default rate to be just over
7% at one year
M. Singer: The economic and financial crisis from the point of view of Czech banks
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12M default rate on bank loans to
households and NPL ratio (in %)
5,5
5,0
4,5
4,0
3,5
3,0
2,5
2,0
08/2007
02/2008
Credits total
Consumer credits
08/2008
02/2009
Credits on housing
Share of NPL
Source: Czech Credit Bureau, CNB
In the case of households, the default rate at one
year should stay below 4%
M. Singer: The economic and financial crisis from the point of view of Czech banks
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Financial system: summary
• In response to rising risks, the domestic banking sector is
continuing to reduce the rate of financing of the economy and
to tighten the non-interest conditions in many segments of the
credit market
• However, banks are not the cause of the slowing economic
growth; the main cause is the worsening situation abroad (the
falling credit growth is largely due to falling demand for loans)
• Loan interest rates are mostly flat – the CNB’s rate cuts are
being offset by growing bank risk margins
• A gradual rise in the default rate on bank loans and other debt
can be expected; this will be reflected in worsening results and
balance sheets of banks and other financial institutions
• The domestic financial sector should be capable of
withstanding incoming shocks to a large extent
The Czech financial system remains stable and
public confidence in banking institutions persists
M. Singer: The economic and financial crisis from the point of view of Czech banks
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Structure of presentation
External
financial sector
External
demand
Real economy
Firms
Domestic
financial sector
Households
Supervision of
financial sector
Monetary policy
CNB
M. Singer: The economic and financial crisis from the point of view of Czech banks
26
CNB measures to support liquidity
• Introduction of liquidity-providing facility (banks can
obtain liquidity from CNB for 2 wks or 3 mths) in
oreder to boost money market – modest
improvement seen
• Option of using govt bonds as collateral in such
operations in order to increase liquidity
• CNB and FinMin planning to introduce HTM for
insurers and pension funds
The measures taken have improved the functioning
of the financial market; the present instruments
seem adequate and there are no signs of liquidity
problems in the financial sector
M. Singer: The economic and financial crisis from the point of view of Czech banks
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Monthly government bond trading
volumes (in CZK bn)
90
80
70
60
50
40
30
;
20
10
II09
III
-0
9
IV
-0
9
I-0
9
II08
III
-0
8
IV
-0
8
V08
VI
-0
8
VI
I-0
8
VI
II 08
IX
-0
8
X08
XI
-0
8
XI
I-0
8
I-0
8
0
Source: CNB
The CNB’s measures have helped to preserve
market liquidity on the secondary government bond
market
M. Singer: The economic and financial crisis from the point of view of Czech banks
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CNB measures: intensive monitoring
• Daily information gathering (introduced 1 day after decisioní):



Cash requirements (1 and 2 days ahead)
Money market and govt bond market (in real time)
Financial institutions (banks and other key players) with 1-day
lag: 1) liquidity, 2) intra-group exposures, 3) deposits, 4) limits,
5) withdrawals from money market funds
• Ad hoc gathering of information on toxic asset holdings (after
CDOs, Iceland, Lehman Brothers collapse, etc.); information
from all parts of financial groups (i.e. banks, insurers,
investment funds, pension funds) at same time on same day
• Consultations between Governor and Vice-Governor and
Banking Association (weekly or fortnightly)
The CNB has had instant information at its disposal since
the crisis began
M. Singer: The economic and financial crisis from the point of view of Czech banks
29
Regulatory lessons of the crisis
• Need to achieve effective consolidated supervision on
country level:


Ideally in strong, independent central bank (integrated
supervision + instant info on markets)
Before any unification of supervision takes place at European
level, supervisors should be consolidated at national level
(Europe currently has 80 supervisors); could take 3–5 years
• Consolidation at supranational level needs to leave room for
diversity of regulatory and supervisory opinion (even on
fundamental issues) within framework of identical principles
The ability to finance any damage caused by
supervisory failure must be the main principle of
the distribution of responsibilities (cf. Iceland)
M. Singer: The economic and financial crisis from the point of view of Czech banks
30
Regulatory lessons – cont.
• Czech Rep. does not recommend:
 Regulations requiring deposit payout in 10 (+10)
days due to liquidity constraints (currently
unworkable)
 Hasty consolidation of supervision at supranational
level – would be counterproductive
• Czech Rep. recommends:
 Cutting costs for financial sector:
Removal of national discretions
Reporting
Ratings, suggestions (bank employees vs. rating
agency employees)
We need to pursue practical, useful and
achievable objectives
M. Singer: The economic and financial crisis from the point of view of Czech banks
31
CNB position on de Larosière report
• Report is good basis for further discussion on shape of
financial regulation and supervision in EU
• Its many proposals and recommendations: a) sometimes
overstep group’s mandate, b) fail to define priorities, c) do not
cover entire financial sector
• Some key recommendations lack detailed specification,
making it difficult to assess their feasibility:

Creation of European Systemic Risk Council – CNB agrees
provided numerous issues are clarified (status; ECB
interventions; relationship to national supervisors, etc.)
• Creation of European System of Financial Supervisors – CNB
disagrees (national vs. supranational supervisors; legislation;
LoLR)
The report is useful, but unacceptable in its full form
M. Singer: The economic and financial crisis from the point of view of Czech banks
32
Structure of presentation
External
financial sector
External
demand
Real economy
Firms
Domestic
financial sector
Households
Supervision of
financial sector
Monetary policy
CNB
M. Singer: The economic and financial crisis from the point of view of Czech banks
33
Interest rates during crisis
• Like other central banks, CNB has cut monetary policy
rates several times: by 0.75 p.p. on 7 Nov. 2008, by 0.50
p.p. on 18 Dec. 2008, by 0.50 p.p. on 6 Feb. 2009 and by
0.25 p.p. on 11 May 2009
• Koruna depreciation in Jan and Feb narrowed room for
lowering rates in March
• Decisions to lower rates fostered by:




Adverse external outlook
Low external inflation pressures
Fall in foreign market interest rates
Renewed appreciation of koruna and its relative stability
recently
Further CNB rate cuts cannot be ruled out if the
negative external trends intensify and the
inflation pressures weaken further
M. Singer: The economic and financial crisis from the point of view of Czech banks
34
Monetary policy uncertainties
• Monetary policy-making is complicated by several
factors in crisis:




High volatility of most macroeconomic variables
(especially exchange rate)
Structural breaks in economic series, making
modelling difficult (or impossible)
Uncertain intensity of transmission of koruna
exchange rate to inflation
Looser linkage between CNB rates and market rates
Monetary policy faces extraordinarily high
uncertainties during the crisis
M. Singer: The economic and financial crisis from the point of view of Czech banks
35
Repo and market rates
4,75
4,50
4,25
4,00
3,75
3,50
3,25
3,00
2,75
2,50
2,25
2,00
1,75
1,50
1,25
5.5.09
21.4.09
7.4.09
24.3.09
10.3.09
24.2.09
10.2.09
27.1.09
13.1.09
30.12.08
16.12.08
2.12.08
18.11.08
4.11.08
1M
12M
2W REPO
Source: CNB
The acute phase of the crisis marked an increase
in the difference between the CNB’s monetary
policy rates and market rates – that difference has
recently narrowed somewhat
M. Singer: The economic and financial crisis from the point of view of Czech banks
36
Monetary policy and communication
• In recent months, monetary policy-makers have
been communicating more than in the past:

Verbal interventions:
Governor in July 2008 (during appreciation bubble)
Vice-Governor in February 2009 (when koruna was
weak)

When confronting campaign in which foreign media
classed Czech Rep. alongside countries with far
worse economic fundamentals
In the past 3 months, CNB communication has been
an effective addition to its standard monetary policy
instruments
M. Singer: The economic and financial crisis from the point of view of Czech banks
37
Monetary policy and koruna
exchange rate
• Floating rate has become adjustment mechanism
during crisis (cf. Slovakia)
• Depreciation of koruna during 2008 H2 and at start
of 2009 supported price competitiveness of
producers and exporters and also helped to
reduce disinflationary demand pressures (inflation
was 0.6% in euro area and 2.3% in Czech Rep. in
March )
The floating rate is an “automatic MP instrument”
between the Bank Board’s monetary policy meetings
M. Singer: The economic and financial crisis from the point of view of Czech banks
38
M. Singer: The economic and financial crisis from the point of view of Czech banks
2009m04d24
2009m03d30
2009m03d05
2009m02d10
2009m01d16
2008m12d23
2008m11d28
2008m11d05
2008m10d13
2008m09d18
2008m08d26
2008m08d01
2008m07d09
2008m06d16
2008m05d22
2008m04d28
2008m04d03
2008m03d11
2008m02d15
2008m01d23
2007m12d28
2007m12d05
2007m11d12
2007m10d18
2007m09d25
2007m08d31
2007m08d08
2007m07d16
2007m06d21
2007m05d29
2007m05d04
2007m04d10
2007m03d14
2007m02d19
2007m01d25
2007m01d02
CZK/EUR rate
(1 Jan. 2007-30 Apr. 2009)
30
29
28
27
26
25
24
23
22
Source: Eurostat
The rapid appreciation of the koruna in 2008 H1
has been replaced by a rapid depreciation
39
Czech economy: summary
Immunity factors:
•
•
•
•
•
•
Microeconomic flexibility
Highly competitive structure
Macroeconomic balances
Sound financial sector
Low external debt
Sustained low inflation and
low inflation expectations
• Relatively low public finance
deficits
• Flexible exchange rate
Risks:
• 2008 exchange rate shock
and forwards
• High share of net exports in
GDP
• High proportion of cyclically
sensitive sectors in economy
• Insufficiently flexible labour
market
• Political situation (caretaker
government)
• Selective “support” policies
The Czech economy is weathering the crisis better
than many other countries
M. Singer: The economic and financial crisis from the point of view of Czech banks
40
CNB Forecast
May 2009
M. Singer: The economic and financial crisis from the point of view of Czech banks
41
The forecast for headline inflation
8
Monetary
policy
horizon
6
4
Inflation target
2
0
-2
II/07
III
IV
I/08
II
90%
III
70%
IV
50%
I/09
II
III
IV
I/10
II
III
IV
30% confidence interval
The inflation will be low during 2009 but will reach
the inflation target at the end of 2010
M. Singer: The economic and financial crisis from the point of view of Czech banks
42
The forecast for GDP
8
6
4
2
0
-2
-4
-6
II/07
III
IV
I/08
II
90%
III
70%
IV
50%
I/09
II
III
IV
I/10
II
III
IV
30% confidence interval
The economic growth will be negative in 2009 but
positive in 2010
M. Singer: The economic and financial crisis from the point of view of Czech banks
43
The forecast for interest rates
(3M PRIBOR)
6
5
4
3
2
1
0
II/07
III
IV
I/08
II
III
IV
90%
70%
50%
I/09
II
III
IV
I/10
II
III
IV
30% confidence interval
Consistent with the forecast is a decline in market
interest rates (3M PRIBOR) in 2009 and their
modest increase in 2010
M. Singer: The economic and financial crisis from the point of view of Czech banks
44
The forecast for exchange rate
(CZK/EUR, quarterly averages)
30
28
26
24
22
20
II/07
III
IV
I/08
II
90%
III
70%
IV
50%
I/09
II
III
IV
I/10
II
III
IV
30% confidence interval
Koruna will appreciate somewhat in the short run
but will remain stable afterwards
M. Singer: The economic and financial crisis from the point of view of Czech banks
45
Forecast in numbers
• Headline inflation in:
2010 Q2 1.1%
2010 Q3 1.7%
• GDP growth in:
2009 -2.4%
2010 1.4%
• Nominal interest rates (3M PRIBOR) in
2010 Q2 2.0%
2010 Q3 2.1%
• Exchange rate (CZK/EUR) in:
2009 26.6 CZK/EUR
2010 25.9 CZK/EUR
Thank you
Miroslav Singer
[email protected]
Tel: +421 224 412 008
Česká národní banka
Na příkopě 28
115 03 Praha 1
M. Singer: The economic and financial crisis from the point of view of Czech banks
47