Download Kick-Off Briefing

Policy options for the banking
sector in the Western Balkans
May 14, 2009
Overview of pre-crisis conditions
• Dramatic growth in credit fueled consumption
• Privatization and deregulation of banking sector led to
dominance of foreign banks in most countries
• Macroeconomic imbalances in some countries (i.e.,
BiH)
• Improving supervisory and regulatory capacity in most
countries, but still significant gaps existed
• Most countries highly dependent on Trade and FDI
Pre-crisis state made the Balkans vulnerable to a global
financial crisis and a slowdown in trade, but less so than
other ECA countries (e.g., Hungary, Ukraine, Latvia)
Deceleration in Credit Growth
Change in Annual Private Credit Growth Rate from 3Q07 to 3Q08
Albania
BiH
Macedonia
Montenegro
20%
Kosovo
Serbia
4%
1%
33%
29%
0%
-20%
-2%
-9%
-2%
-40%
-60%
-120%
-128%
-140%
54%
29%
41%
185%
3Q 2007
Annual
Growth =
Significant growth in consumption and asset prices was
driven by the rapid growth in credit. However,
decelerating private credit growth is likely to reverse this
growth in consumption and asset prices.
Foreign Currency Lending Could Increase Pressure on Households and Enterprises
Percentage Private Credit in Foreign Currency (or Indexed), 2007*
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Serbia
Bosnia
Macedonia
Albania
* Data for Bosnia is from 2006
Significant lending in foreign currency creates significant
exchange rate risk in almost all countries except for
Montenegro that utilizes the Euro. Exchange rate
movements could increase carrying costs for borrowers.
Foreign Ownership of Bank Assets
Total Foreign Ownership of Bank Assets, Percentage 2007
100
90
80
70
60
50
40
30
20
10
0
Albania
Bosnia
Kosovo
Serbia
Macedonia
Montenegro
Declines in credit growth occurring as foreign banks pull
back support from their subsidiaries in the Balkans.
Likely Further Declines in Liquidity and Access to Finance
Parent Banks with subsidiaries active in the Balkans
likely to continue to decrease support due to:
– Sharp increase in NPLs in their CEE subsidiaries, with
insufficient loan-loss provisions, demanding additional
capital and liquidity support.
– Increasing FX mismatches;
– Rollover risks and deposit runs;
– Risks of seeing their ratings downgraded, their funding
costs increase and eventually their market access
curtailed;
– Shrinking market capitalization and inability to help
subsidiaries;
– Reputational risks from letting subsidiaries fail.
Declining Liquidity in System
Loan to Deposit Ratio, FY07 to FY08
160%
150%
140%
130%
Albania
Macedonia
Montenegro
Kosovo
Serbia
120%
110%
100%
90%
80%
70%
2007
Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08
Jul-08
Aug-08 Sep-08
Decreasing liquidity in almost all countries due to deposit
withdrawals and decreased support from parent banks (as
measured by increased loan to deposit ratio). However,
ratios remain healthy (except for Montenegro) and are much
better than in other ECA countries (e.g., Ukraine = 207%,
Hungary = 180%)
However, Banking problems have been minimized except for Montenegro
• Limited major government interventions in the Banking
sector (except for Prva Bank in Montenegro)
• Prudent reserve requirements and other supervisory
measures enacted prior to the crisis in most countries has
helped to mitigate the impact of the crisis on the banking
sector.
• Actions taken by a number of countries since crisis has also
helped to mitigate the impact, such
– Increased deposit guarantees (Montenegro, BiH, Serbia)
– Updating of liquidity requirements (Serbia, Macedonia)
– Improved monitoring and reporting (Albania, Serbia
– Bank closures and support for critical financial
institutions (Montenegro, Serbia)
• Foreign ownership has also helped as the Balkans
constitute a small percentage of the parent bank assets
However, declining growth prospects could create banking sector problems going forward
• Although banking systems are unlikely to be a major source
of problems in the upcoming year, the transmission channels
are likely to occur via decreased access to finance (and
increased cost of finance), significant currency risks,
and increased NPLs if the prospects of enterprises and
household throughout the region continue to decline.
• Enterprise risk is due to a number of factors including:
– Declining growth, export and trade
– Decreased access to finance (including working capital)
– Declining prospects in key industries (e.g., commodities,
tourism, construction)
Potential Instruments to Respond
•
Lending and
Technical
Assistance
•
•
•
•
Bank Group
Coordination (IFC
and MIGA) & with
Other MDBs
•
•
•
Credit Lines to Increase Access to Finance
(Armenia, Turkey, Bosnia, Croatia, Poland &
Moldova under preparation)
DPLs with Focus on Financial Sector
Restructuring (Ukraine, Hungary, Latvia,
Montenegro?)
Discussion of new instruments, e.g., regional
horizontal facility
Technical assistance under the Balkan Facility
TA component of investment lending focused on
support for export related enterprises (Moldova)
IFC strengthening key institutions (e.g.,
Raiffeisen) in the ECA region
MIGA guarantee facility
Partnerships with EIB and EBRD
Annex: Country Background
Serbia
• Main risks:
o Rapid credit growth in recent years
o Significant lending in foreign currency or indexed to foreign currency
o Much of the banking system is foreign owned, and support from parent banks may decline
• Risks to Banking System Tempered due to:
o Government instituted tight prudential policies in previous years (e.g., increased reserve
requirements for foreign currency loans)
o Although access to funding from parent banks may decline, failure of subsidiaries is unlikely to occur
unless significant losses occur
o Large current liquidity (liquidity rate of 31% as of October 2008) and capital buffers (CAR of 26% as
of October 2008)
• Actions since the crisis to safeguard the Banking System: The GoS and NBS responded promptly to
boost confidence and stability of the system following the loss of 15 percent of foreign currency deposits
during October, 2008. The response included:
o Increase of deposit insurance coverage to Eur 50,000 per deposit (from Eur 3,000)
o Enhanced supervision with development of liquidity and early warning indicators monitored on a
daily basis
o Increased share of foreign currency mandatory reserves (from 20 to 40%) kept in domestic currency
to increase banks’ foreign currency liquidity and withdraw excess dinars from circulation
Risks to the banking system are low, but problems could occur if NPLs rise due to a
slowdown in the economy and trade or currency fluctuations
Montenegro
• Main risks:
o Majority of banking system is foreign owned, leading to risks related to decreased parent bank support
o Private sector growth has declined rapidly, from over 170 percent in 2007 to less than 25 percent in
2008 (initial estimates) reflecting decline in deposits and lower risk appetite from foreign and domestic
banks
o Rising NPL ratios, which are likely to continue to increase as banks are heavily exposed to sectors that
are experiencing slowdowns (e..g, construction, tourism)
o Key Financial Sector Indicators are deteriorating, including bank profitability and provisioning
o Average banking system solvency is 16 percent, but IMF estimates that a 10 percent loan loss will
reduce it to 10 ½ percent, barely above the prudential minimum
o Government provided 44million Euro loan to second largest bank (Prva Bank) in December and
problems appear to have spread from liquidity to solvency concerns.
• Risks to Banking System Tempered due to:
o Euroization shields Montenegro from currency crises
o Although access to funding from parent banks may decline, failure of subsidiaries is unlikely to occur
unless significant losses occur
• Actions since the crisis to safeguard the Banking System: The Central Bank responded following a crisis
in confidence that started in September and led to significant deposit withdrawals, including:
o Guaranteed all bank deposits, and on a case-by-case basis, interbank lending until end-2009
o Provided collateralized loan of 44million Euro to Prva Bank
o Created short-term liquidity support facility enabling solvent banks to borrow against prime collateral for
up to 30 days.
Risks to the banking system are substantial as credit growth is declining rapidly,
NPLs are rising, and financial sector indicators are declining.
Albania
• Main risks:
o Rapid credit growth in recent years, which has slowed in recent month
o Majority of banking system is foreign owned, which creates risks related to decreased
support from parent banks
o Non-performing loans have increased, but remain low relative to other countries in the
region
• Risks to Banking System Tempered due to:
o
o
o
o
Larger percentage of credit growth funded via deposits than in neighboring countries
Credit growth is declining, but still remains substantial
Credit as a percentage of GDP remains relatively low (<40%)
Core indicators of financial soundness indicate that the system is solvent, liquid and
profitable
o Although access to funding from parent banks may decline, failure of subsidiaries is
unlikely to occur unless significant losses occur
• Actions since the crisis to safeguard the Banking System:
o BoA has stepped up cross-border coordination efforts with regional supervisors
o Improved supervision and liquidity management tools
o Increased maturity and volumes of liquidity it provides banks through the repurchase
market
Risks to the banking system are low, and mainly revolve around loss of support
from parent banks or an increase in NPLs that could occur if the economy worsens
Macedonia
• Main risks:
o Majority of banking system is foreign owned, leading to risks related to decreased
parent bank support
o Private credit growth has been substantial in recent years
• Risks to Banking System Tempered due to:
o Financial intermediation remains low, with credit approximately 40 percent of GDP
o Banking system appears to be sufficiently capitalized and other financial soundness
indicators are not problematic
o NPLs remain relatively low
o Given the growth in deposits, banks have not had to overly rely on external financing
• Actions since the crisis to safeguard the Banking System:
o Altered liquidity risk requirements to improve maturity matching of assets and liabilities
in both domestic and foreign currencies
o Instituted exposure limits for domestic banks related to individual foreign banks
Financial system appears to be sound, with main risks related to foreign ownership
and the potential for increased risks if the economy continues to slow
BiH
• Main risks:
o Majority of banking system is foreign owned, leading to risks related to decreased
parent bank support
o Substantial (~40%) lending has been fueled by foreign borrowing from parent banks
rather than deposit growth
o Private credit growth has been substantial in recent years
o Credit growth rate has declined in recent months, and is expected to continue to slow
as banks become more risk averse
• Risks to Banking System Tempered due to:
o Banking system appears to be sufficiently capitalized and other financial soundness
indicators are not problematic
o NPLs remain relatively low
o Parent banks are unlikely to allow subsidiaries to fail
• Actions since the crisis to safeguard the Banking System:
o Crisis of confidence led to significant withdrawals in late 2008, but government increase
in deposit guarantee helped to stabilize the system
Banking system appears to be sound, but access to finance is declining due to a
pull-back from parent banks