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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: M. M. Singer: Singer: Financial The Present Consumer Inflation Capital economic Crisis: Market Conditions, and and protection Impacts Likely Monetary financial in Impacts the onMonetary crisis Czech the inPolicy on CR financial from the and Republic CR in the Policy Lessons aand point services: Small Lessons and of forview Open the Outlook CNB for Supervisors of Economy theapproach Supervisors Czech for CR banks latest development key challenges 1111 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 7 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 8 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 9 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 10 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 11 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 12 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 13 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 14 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 15 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 16 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 17 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 18 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 19 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 20 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 21 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 23 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 24 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 25 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 27 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 28 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