Download Shadow Banking and Financial Stability

BANCABANCA
NAŢIONALĂ
A ROMÂNIEI
NAŢIONALǍ A ROMÂNIEI
1
Outline
 International focus on regulating the shadow banking system
 Reasons
 Regulatory challenges
 Shadow Banking in Romania
 Overall perspective
 NBFI focus
 Conclusions
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Reasons for regulating the SB
Shadow banking has been placed high on the agenda for regulating bodies
including the Financial Stability Board (FSB) and the European Commission
(EC) as:
 The risks of the shadow banking system became apparent during the
financial crisis, making it clear that this segment of the financial system
requires greater attention.
 Since then, there has been a growing recognition that shadow banking
system may pose even greater systemic risk than traditional banking,
because its activities are exposed to similar financial risks but are not
subject to the same degree of oversight and regulation.
 Moreover, the Basel III implementation may provide further incentives for
banks to shift part of their activities outside the regulated environment →
activity will always flow to the less regulated sector
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What are the risks?
From a financial stability perspective the main risks of shadow banking are:
 the potential for excess leverage;
 amplification of procyclicality;
 the vulnerability to bank-like runs - without having liquidity requirements
nor access to safety net, deposit guarantee schemes or to CB as lender of
last resort;
 transmission of systemic risks - contagion effects due to market dynamics
- interlinkages (ownership, financial rel.);
 regulatory arbitrage – SB activities may be used to circumvent the tighter
regulation imposed on banking institutions;
 the reputational risk that shadow banking may entail for regular banks.
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Does this mean shadow banking is bad?
It is widely agreed that financial intermediation outside the regular banking
offers some benefits, and hence can represent a valuable part of the financial
system as:
 Provides substitutes to bank deposits for large investors;
 Its specialized expertise enables to channel resources toward specific
needs more efficiently;
 Represents an alternative source of funding for the real economy and
contributes to economic growth;
 Also, provides funding and risk diversification through:
 credit extension to certain sectors that might otherwise not have
access to credit
 a range of tools for liquidity, maturity and credit risk management
Therefore the challenge for regulators is to maximize its efficiencies while
minimizing its risks
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Defining shadow banking
 FSB (October 2011) broad definition: “a system of credit intermediation
involving entities and activities outside the regular banking system”.
 EC (Green Paper, March 2012): entities that “operate outside of the
banking system and engage in one of the following: accepting funding with
deposit-like characteristics, performing maturity and/or liquidity
transformation, undergoing credit risk transfer and using direct or indirect
financial leverage” and/or engage in activities that “could act as important
sources of funds for non-bank entities”, including “securitisation, securities
lending and repurchase transactions (repos)” .
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EU recent regulatory developments on shadow banking
 Direct regulation

Alternative Investment Fund Manager Directive
 Indirect regulation
 Credit Rating Agencies (CRAs) regulation and reducing reliance on CRAs
 CRD IV and Solvency II
 Enlarging the scope of current prudential regulation
 MiFID review
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Next steps towards strengthening the regulatory framework
 Based on the initial recommendations set out in the October 2011 Report,
five workstreams have been launched by the FSB to develop policy
recommendations in the following five areas:
(i) Banks’ interactions with shadow banking entities;
(ii) Money market funds (MMFs);
(iii) Other shadow banking entities;
(iv) Securitization;
(v) Securities lending and repos.
 Apart from this, the European Union is also working on legislative
proposals that are expected to be presented till the end of 2012.
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Outline
 International focus on regulating the shadow banking system
 Reasons
 Regulatory challenges
 Shadow Banking in Romania
 Overall perspective
 NBFI focus
 Conclusions
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How large is the shadow banking system in Romania?
Chart 1. Overview of developments in the
Romanian financial sector total assets
100
bill. RON
60
350
bill.RON
50
300
250
40
200
50
30
150
100
20
Source: NBR, Flow of Funds
NBFI
MMF
dec. 2011
sep. 2011
iun. 2011
mar. 2011
dec. 2010
sep. 2010
iun. 2010
mar. 2010
dec. 2009
0
sep. 2009
Other monetary financial institutions
Other financial intermediaries
Financial auxiliaries
Insurance corporations and pension funds
Financial sector total assets in GDP
10
iun.2009
0
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
0
dec.2008
50
mar.2009
400
Chart 2. Developments in the non bank financial
intermediaries sector (total assets)
Other investment funds
Source: NBR, Monetary statistics
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What are its interlinkages with the banking system?
Chart 3. Share of exposures and funds raised
from domestic financial institutions in the
balance sheet of credit institutions
7
percent
6
5
4
3
2
1
0
2009
2010
2011
ASSETS
2009
2010
2011
LIABILITIES
 Of particular importance from a
financial stability view is were
shadow banking intersects with
regulated banking system.
 The small share of exposures
to and funds raised from the
domestic financial institutions in
the aggregate balance sheet of
the banking system points to a
relatively low contagion risk
threatening
the
financial
stability.
credit institutions
insurance companies and private pension funds
other financial institutions
equity capital in financial institutions
Source: NBR
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Main components of the Romanian SB
Shadow banking in Romania is relatively simple. It does not involve long,
complex or opaque chains of intermediation as it is often seen in advanced
economies.
Mapping the shadow banking system:
 Entities:
 Non-bank Financial Institutions (NBFI) – i.e. leasing, finance, factoring
companies, guarantees granting funds
 Money Market Funds
 Activities:
 Repo – end of 2011 outstanding position 450 mil. EUR, most in the
interbank markets
 Securities lending - 53,2 mil. EUR between banks, 75 mil. EUR with OFI
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NBR’s monitoring of shadow banking
 Direct Monitoring / Supervision and Regulation of NBFI
 Indirect Monitoring
The exposures and the funds raised by credit institutions from domestic
financial institutions is aimed at identifying risk concentration that may
have systemic effects considering the banking sector’s importance to the
Romanian financial system.
 Macro-prudential Assessment
Financial Stability Report (FSR) assesses the stability of the overall
financial system, including shadow banking.
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Money market funds
 At the end of 2011, there were 14 MMFs, more than half of them being
part of banking groups.
Asset structure of MMF
Holders of MMF units/shares
Fixed income securities
54%
Households
73%
Term deposits
43%
Non-fin. companies
20%
Institutional investors
7%
 Starting with February 2012 the MMF were reclassified to other
investment funds categories.
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NBFI: regulation and supervision
 Starting with 2006 the NBFI are regulated and supervised by the NBR with
the aims to promote a sound credit growth in economy, increase
transparency and strengthen financial stability.
 The oversight of NBFI are tailored according to the size and complexity of
carried out activities:
 General Register
 Special Register
 Entry Register
 The current regulatory provisions require the NBFI to observe:
 Qualitative requirements (e.g. governance standards)
 Quantitative requirements (e.g. large exposure, provisioning, capital
adequacy ratio)
 Credit granting rules – also applicable to credit institutions
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NBFI: financial stability analysis
 In order to assess the soundness of the NBFI sector from a financial
stability standpoint the following issues are considered:

Developments: size, growth, concentration;

Exposures: debtors, currencies, loan type;

Risks and vulnerabilities: credit risk, currency and maturity mismatches;

Leverage and funding structure;

Financial results;

Interlinkages with domestic credit institutions and systemic risks.
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Credit intermediation outside the banking system
50
lei bill.
percent
20
18
40
16
35
14
30
12
25
10
20
8
15
6
10
4
5
2
0
0
Mar.2008
Jun.2008
Sep.2008
Dec.2008
Mar.2009
Jun.2009
Sep.2009
Dec.2009
Mar.2010
Jun.2010
Sep.2010
Dec.2010
Mar.2011
Jun.2011
Sep.2011
Dec.2011
Mar.2012
Jun.2012
45
balance of loans
total assets
market share (rhs)
Source: NBR
Chart 5. Loans and GDP dynamics
(annual growth)
30
percent
percent
9
20
6
10
3
0
0
-10
-3
-20
-6
-30
-9
Mar.2009
Jun.2009
Sep.2009
Dec.2009
Mar.2010
Jun.2010
Sep.2010
Dec.2010
Mar.2011
Jun.2011
Sep.2011
Dec.2011
Mar.2012
Jun.2012
Chart 4. Developments in the NBFI
sector
GDP growth (rhs)
loans granted by NBFIs
loans granted by credit institutions
Source: NBR, NIS
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Risks and vulnerabilities of NBFI
Chart 6. Non-performing loans
Credit risk is the main challenge for
lei bill.
the entities in this sector. Loan
percent
6
5
25
portfolio
20
deteriorate, the NPL ratio rising
15
above the level reported by the
10
banking sector.
quality
continues
to
4
3
2
5
1
iun.2012
mar.2012
dec.2011
sep.2011
iun.2011
mar.2011
dec.2010
sep.2010
iun.2010
mar.2010
dec.2009
iun.2009
sep.2009
mar.2009
dec.2008
sep.2008
iun.2008
0
mar.2008
0
Balance of non-performing loans
NPL ratio - credit institutions (rhs)
NPL ratio - NBFI (rhs)
Source: NBR
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NBFI’s funding structure
Chart 7. Breakdown of borrowings
by country of origin
lei bill.
for 56 percent of NBFIs’ share
Jun.2010
capital, the liabilities breakdown
Jun.2011
points towards the marginal role
Jun.2012
played by local credit institutions
in the sector’s financing and the
weight of resources raised from
Source: NBR
Turkey
Italy
Switzerland
Luxembourg
France
UK
The Netherlands
Romania
European markets.
Austria
10
9
8
7
6
5
4
3
2
1
0
 While domestic capital accounts
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Conclusions: Does SB in Romania pose systemic risks?
 Considering that shadow banking system in Romania is relatively small,
potential risks emerging from this segment of financial sector are not posing
systemic disruptions to the banking sector, neither to the real economy.
Focusing on NBFIs (the main component of SB):
 Although NBFIs conduct their activity especially with the entities affiliated to
credit institutions, their financing resources are drawn particularly from external
markets: from the parent credit/financial institution, as well as from other
institutions outside the group.
 Domestic credit institutions’ exposure to the NBFIs is low, standing at
approximately 1.5 percent of total non-government loans.
 Nevertheless, worsening of NBFIs’ financial conditions could have a
detrimental effect on the entire group via the indirect channel, following the
emergence of reputational risk.
 On the other hand, increased reliance of both credit institutions and the NBFIs
on the external financing is a vulnerability of the domestic financial system in
the event of external liquidity shocks, which could weigh on the Romanian
economy’s financing costs and availability.
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Thank you!
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