Download Stability as a key factor of the success of the Czech financial system

Stability as a key factor of the
success of the Czech financial
system and economy
Miroslav Singer
Governor, Czech National Bank
“Challenging Times – Banking Past and Future”
Czech Banking Association
Prague, 22 October 2012
M.
Singer
Recent
Inside
Sound
Czech
or
Republic:
money:
Developments
as
Outside
a
key
key
Czech
factor
Current
factor
the
Euro
experience
of
inof
the
the
Situation
the
Area
success
Czech
success
and
Economy,
Outlook
Risks
and
Outlook
M.
–
-–
Czech
Czech
Present
Republic:
Republic:
Conditions,
Staying
Future
Monetary
challenges
Ahead
Policy
of
the
and
and
Curve
opportunities
Outlook
with
Regard
in
Czech
to
Republic
Monetary
Policy
M.
Singer:
Financial
Crisis:
Likely
Impacts
on
the
CR
and
Lessons
for
the
Supervisors
M.
Singer
Singer
–
–Stability
Czech
The
Czech
Czech
economy
Republic:
economy
and
Can
development
and
record
crisis
in
low
Eurozone:
in
rates
Europe:
be
CNB
sustained?
Outlook
view
and
Challenges
M.Singer
M.
Singer:
Singer:
The
Present
Consumer
economic
Crisis:
Conditions,
and
protection
Impacts
financial
on
Monetary
crisis
the
in
CR
financial
from
and
the
Policy
Lessons
point
services:
and
of
for
view
the
Outlook
CNB
Supervisors
of
the
approach
Czech
for sector
CR
banks
M.
Singer
–Financial
Macroeconomic
developments,
monetary
policy
and
financial
11
1
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1
Introduction
• Czech economy has experienced four shocks since
beginning of transformation:
1990–1991: transformation recession
 1997–1998: twin (currency and banking sector) crisis
 2001–2002: appreciation bubble and economic slowdown
 2008–2009 and 2012: financial and debt crisis
• Common feature of 1997–1998 and 2001–2002 shocks:

mistakes made by main domestic economic policymakers
• Content of presentation:



Causes of instability before and during twin crisis
Regaining macroeconomic and financial stability
Lessons
M. Singer – Stability as a key factor of the success
2
Causes of twin crisis I:
Macroeconomic developments
• Strong demand




High wage growth (much higher than productivity growth)
High growth of private and public investment (infrastructure)
Strong credit growth
Strong capital inflow (high interest rate differential)
• Weak supply side (underdeveloped markets, badly defined property
rights, malfunctioning legal and institutional framework, etc.)
 Emergence of external imbalance
• Situation also complicated by errors in main statistical
series (GDP, foreign trade, current account) preventing
correct assessment of state of Czech economy
In 1996 the overheating proved to be
unsustainable: the situation required adjustment
and appropriate policy responses
M. Singer – Stability as a key factor of the success
3
Inflation in Czech Republic
22
20
18
16
in %
14
12
10
8
6
4
2
0
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
4/12
Source: CZSO
Inflation during 1994–1997 was relatively stable
(though a bit higher) and slightly decelerating
M. Singer – Stability as a key factor of the success
4
“Impossible Trinity”
• Fixed exchange rate regime
• Money targeting
• Capital account liberalisation (managed and spontaneous);
basically ended by entry into OECD in October 1995

• “Impossible Trinity”: (problematic) coexistence of:
 Free capital flows
 Fixed exchange rate
 Independent monetary policy
Capital account liberalisation undermined cohesion of
monetary policy framework  necessitated change
of exchange rate regime
M. Singer – Stability as a key factor of the success
5
Efforts to rectify imbalances
• Increase in interest rates (beginning of 1996)
• Widening of fluctuation band (end of February 1996, to ±7.5%)
• 1st stabilisation package in April 1997 (but not credible)
This was not enough to persuade markets!
 speculative attack (in May 1997)  abandonment of peg
 managed float  depreciation of koruna  inflationary
expectations  inflation
• 2nd stabilisation package in June:


Macro measures: fiscal tightening, wage freeze, import deposits
Micro measures: legal and institutional reforms
• Introduction of inflation targeting (since January 1998)
The price for rectifying the imbalances was the
crisis of 1997–1998
M. Singer – Stability as a key factor of the success
6
Anatomy of banking sector crisis
Capital inflow
Rapid credit
growth
Inadequate risk
assessment
Non-market factors
Inadequate
banking
supervision
Property and
capital market
bubbles
Accumulation
of bad loans
Fraudulent
behaviour
Rapid growth in bad loans became the main source
of difficulties in the banking sector
M. Singer – Stability as a key factor of the success
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Twin crisis: causes
• Until first third of 1997, macroeconomic imbalances and banks’
problems developed more or less in parallel
• Outbreak of currency crisis and slide into recession caused two
crises to merge into one
• Sharp depreciation + dramatic interest rate increase + fiscal
restrictions  shock to banking sector of magnitude not usually
simulated in bank stress tests
• Twin crisis was caused solely by inappropriate policies:


a) underestimation of symptoms of overheating and external
imbalances; b) underestimation of Impossible Trinity and c) late exit
from fixed exchange rate regime
deferral of privatisation of large banks in 1994–1995
The twin crisis was an unforced crisis of domestic origin
M. Singer – Stability as a key factor of the success
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Towards overall stability
M. Singer – Stability as a key factor of the success
9
Liquidity ratios in the banking sector
Liquidity ratios in the banking sector
(%)
170
60
160
50
150
40
140
30
130
20
120
10
110
0
7/06
100
7/07
7/08
7/09
7/10
7/11
7/12
Quick liquid assets / total assets (right-hand axis)
Liabilities on demand / total liabilities incl. credit institutions
Quick liquid assets / clients' deposits
Deposits / Loans (clients) (right-hand axis)
Source: CNB
Source: CNB
Key ratios have not changed much over recent
years and remain high
M. Singer – Stability as a key factor of the success
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Ratios of deposits to loans in
selected
Ratio
of deposits to loanscountries
granted in selected EU countrie
(%; end of 2011; deposits/loans to residents)
140
120
100
80
60
40
20
0
CZSKPL R BGHU SI LTEELV
BEATFR IT
UKSEDK
EAEU
Source: ECB
Note: EA = euro area; EU = average for all EU countries.
The ratio of deposit to loans is very favourable
in the Czech Republic
M. Singer – Stability as a key factor of the success
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Net profit in the Czech banking sector
Net profit in the Czech banking sector
(CZK billions)
100
90
80
70
60
50
40
30
20
10
0
07/06
07/07
07/08
07/09
Net profit (3M annualised)
07/10
07/11
07/12
Net profit (1M annualised)
Source: CNB
Source: CNB
The Czech banking sector remains profitable despite
the adverse economic conditions
M. Singer – Stability as a key factor of the success
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Capital adequacy and leverage ratio
Capital adequacy and leverage ratio
(%)
20
16
12
.
8
4
0
1/08
7/08 1/09 7/09 1/10
Capital adequacy
7/10
1/11 7/11 1/12 7/12
Capital adequacy Tier 1
Leverage ratio
Source: CNB
Source:
CNB2012, capital adequacy was 16.4%
As of
July
(Tier 1 ratio 15.6%)
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Banking sector now
• Banking sector underwent fundamental restructuring
over several years
• Range of financial services offered has expanded
greatly
• Banking sector is currently well capitalised, highly
profitable and resilient to shocks
• Its resilience is regularly tested in tough stress tests
conducted by CNB
In the second half of the 1990s the banking sector was
a source of disturbances and a cause of twin crisis,
whereas now it is a buffer against external shocks
M. Singer – Stability as a key factor of the success
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First phase of integration of
supervision: 1 April 2006
Capital Market
Supervision
Office for Supervision of
Credit Unions
Insurance and Pension
Funds Supervision
Banking Supervision
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Second phase of integration of
supervision
Sectoral model
Banking Regulation
and Supervision
Department
Functional model
Financial Market
Supervision
Department
Capital Market
Regulation and
Supervision
Department
Insurance
Companies
Regulation and
Supervision
Department
1 January 2008
Financial Market
Regulation and
Analyses
Department
M. Singer – Stability as a key factor of the success
Licensing and
Sanctions
Procedures
Department
16
Role of supervision: 1990s and now
• Factors formerly weakening role of banking supervision:



Limited circle of people, who inevitably knew each other
State representatives sitting “on other side of table” (in banks)
“No time” for standard supervisory procedures (only choice available
in some phases: bail it out or close it down)
• Role of supervision now:



No major or systemic sources of risk in banking sector
Integration of supervision (2006) was big step forward in
safeguarding financial sector stability (closer relationship with
monetary policy)
Foreign ownership of sector reduces conflict of interests of
supervisory staff
• Main risk: shift of supervision to supranational level
Domestic financial market supervision conditions are
better now than they were in the 1990s
M. Singer – Stability as a key factor of the success
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Macroeconomic stability
• Macroeconomic stabilisation fostered by:


Macroeconomic restrictions (monetary and fiscal) in 1998
Introduction of consistent framework in 1998
(inflation targeting + floating exchange rate)
• Switch from peg to float turned real appreciation process into
combination of low inflation and nominal appreciation of koruna
• After two decades of disinflation, inflation targeting and float
allowed CZ to achieve price stability comparable with advanced
economies (inflation target 2% for CPI as from start of 2010)
The present flexible and stable microeconomic
framework is an effective shock adjustment mechanism
M. Singer – Stability as a key factor of the success
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Consumer price index in CZ
(y-o-y changes in %)
16
14
10
8
6
4
2
0
5
10
3
8
6
1/
10
11
4
9
2
7
12 5
/0
5
10
3
8
6
1/
03
11
4
9
2
7
12 5
/9
8
10
3
8
-2
1/
96
y-o-y changes in %
12
Source: CZSO
After the switch to inflation targeting (1998) inflation
fell from 9–10% to a level regarded as price stability;
the volatility was due mostly to exogenous shocks
(VAT, crude oil, food, etc.) and the exchange rate
M. Singer – Stability as a key factor of the success
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Equilibrium and nominal exchange
rate of koruna (CZK/EUR)
42
42
40
40
38
38
36
36
34
34
32
32
30
30
28
28
26
26
24
24
22
22
97
98
99
00
01
02
Equilibrium band
03
04
05
06
07
08
09
10
11
12
Nominal CZK/EUR
Note: Equilibrium band based on BEER (Behavioural Equilibrium Exchange Rate) and
FEER (Fundamental Equilibrium Exchange Rate) Source: Komárek L., Motl M.
(2012)
The exchange rate of the koruna has been close to
its equilibrium values since 1997
M. Singer – Stability as a key factor of the success
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Refining inflation targeting regime
• Switch from net inflation targeting to headline inflation targeting
(2002)
• Switch from conditional to unconditional forecasts (2002)
• Gradual introduction of model-based forecasts
• Gradual incorporation of BB members into forecast creation process
• Number of monetary policy meetings reduced from 12 to 8 per year
• Transparency of inflation targeting regime systematically increased:
publication of interest rate path (2008) and exchange rate path (2009),
publication of BB voting by name (2008), publication of graph of risks
to inflation projection (2011)
• CNB is now one of the most transparent banks in the world
The CNB strives to ensure that its monetary policy
is credible and provides the best possible anchor for
inflation expectations
M. Singer – Stability as a key factor of the success
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Monetary policy transmission
mechanism: New approach
Monetary
policy
Central
bank
Microprudential
policy
Financial
sector
Real
economy
Macroprudential
policy
Macroprudential policies are being implemented to
change the behaviour of the financial sector in a way
which will enhance the efficiency of monetary policy
and prevent financial instability
M. Singer – Stability as a key factor of the success
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Summary and lessons
1/2
• Sound and stable currency is result of:
1) appropriate monetary policy framework
2) correctly implemented macroeconomic policies
3) appropriate regulation and careful supervision of financial sector
• Fixed exchange rate was very useful and stabilising for initial
phase of economic transformation (it provided economy with
one of few anchors available at that time)
• Twin crisis (1997–1998) was caused by domestic factors and
inappropriate domestic policies (too long-lasting fixed
exchange rate strategy and deferred privatisation of banks)
• Clean-up and fundamental restructuring of banking sector were
condition for economic growth
• Lesson from 2002: Monetary policy must be aware of risk of
float and cannot behave as if exchange rate does not exist
M. Singer – Stability as a key factor of the success
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Summary and lessons
2/2
• 2009: depreciation of koruna – shock absorber
• Despite some volatility, flexible exchange rate of koruna was
key intermediation mechanism of real and nominal
convergence
• Former sources of shocks (monetary policy framework and
financial sector) turned into absorbers of external shocks
• Unification of supervision into CNB was effective tool for
absorbing impacts of financial crisis
• Transfer of financial market supervision to supranational
level will pose risk to financial stability
In the 1990s the risks of instability were mostly of a
domestic nature, whereas external risks now
predominate and will continue to do so
M. Singer – Stability as a key factor of the success
24
Thank you
Miroslav Singer
[email protected]
Tel: +420 224 412 000
Česká národní banka
Na Příkopě 28
115 03 Praha 1
M. Singer – Stability as a key factor of the success
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