Download Financial Stability Review 2016

Financial Stability Review 2016
Vitas Vasiliauskas, Chairman of the Board of the Bank of Lithuania
7 June 2016
Structure of the presentation
State of the financial system
Risks to the financial system
Resilience to shocks
Instruments to strengthen stability 2
Financial Stability Review 2016
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Financial Stability Review 2016
STATE OF THE FINANCIAL SYSTEM
Economy grew, interest rates dropped
Interest rates for loans to non‐financial corporations in euro area countries
In 2015, Lithuania's economy grew at the euro area rate (1.6%)
Percentage
8
The financial standing of enterprises and households improved
7
6
5
4
Global economic growth remains weak
3
2
1
0
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Euro area range
Euro area median
Lithuania
4
Financial Stability Review 2016
Source: ECB and Bank of Lithuania calculations.
Note: different shades of dissemination reflect the 10 per cent value ranges,
distanced from the median.
2016
Low interest rates positively affected credit demand
After a 2‐year break, crediting began to grow Banking system — stable, sector is profitable
The capital adequacy ratio of the banking sector and its requirements
30
The capital adequacy ratio increased to 24.8 per cent
Percentage
25
Financing from foreign banks decreased
20
15
10
The sector's profit increased by 0.9 per cent, but the profit of five banks decreased
5
5
0
2013
2014
2015
Banking sector cepital adequacy ratio
Minimum capital adequacy requirement
Requirement, incl. capital conservation buffer
Financial Stability Review 2016
2016
The state of borrowers improved — bad loans reduced
The banking sector's share of non‐
performing loans
16
Percentage
14
12
The level of non‐
performing loans decreased to 5.6 per cent
10
8
6
4
2
0
2013
6
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2014
2015
2016
Crediting in Lithuania is recovering
The loan portfolio of credit institutions
The annual growth of loans to the non‐financial private sector has been positive for 10 months Percentage
(GDP growth)
EUR billions
11,0
10,5
43
10,0
33
9,5
9,0
Enterprises
23
Lending to both households and enterprises increased (+5.7% and +4.0% respectively)
8,5
13
8,0
7,5
3
Borrowing is encouraged by the improving financial situation of the private sector
7,0
-7
6,5
GDP growth rate
6,0
2008
2009
2010
7
Source: The Bank of Lithuania.
Financial Stability Review 2016
2011
2012
2013
-17
2014
2015
2016
Banks expect that the loan portfolio will continue to grow
The housing market recovered — price growth is expected, but not a bubble Housing price index and number of transactions in Lithuania In 2015, housing prices rose (3.3%)
Number, thousands
Index, January 2007 = 100
5,0
132
Number of housing deals
4,0
116
3,0
100
2,0
84
Housing prices
8
1,0
68
0,0
52
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Sources: State Enterprise Centre of Registers, Statistics Lithuania, OberHaus and Bank of Lithuania calculations.
Financial Stability Review 2016
Having dropped in early 2015, the activity of the housing market recovered
Most rapid price growth — in Vilnius
Increasingly more better‐
quality housing is being sold
Expectations for housing price growth are increasing
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RISKS TO THE FINANCIAL SYSTEM
Key systemic risks: unstable RE price dynamics in Sweden and low interest RE market and indebtedness imbalances in the Nordic countries
Protracted period of low interest rates Credit risk resulting from decreased demand in export markets
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Sharp increase in risk premiums
In Sweden, RE prices are rapidly growing
Housing price indexes for the Nordic countries and Lithuania
Index 2007=100
In 2015, housing prices in Sweden continued to grow rapidly (+13.0%) 150
The indebtedness of Scandinavia's residents remains high
140
130
120
Potential negative consequences for Lithuania:
110
100
Decreasing crediting volume
90
80
70
More expensive financing and greater lending price
60
50
2007 2008 2009 2010 2011 2012 2013 2014 2015
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Sweden
Finland
Lithuania
Source: OECD
Norway
Denmark
Increased deposit volatility
The low interest rate environment reduces bank income, encourages investor risk appetite
The pressure on the banking net interest margin will increase in the future
The gap between flat rental yield and the deposit rates is increasing
Percentage
Percentage
6
10
8
5
4
6
Yield on interest-earning assets
3
Incentive to invest in RE
is growing
4
2
Net interest margin
2
1
0
2012
Price of interest-costing
liabilities
2013
2014
Source: Bank of Lithuania calculations.
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0
2015
2016
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Average interest rate on new long term deposits*
Average flat rent yield in Vilnius**
* monthly average interest rate 3-month moving average.
** yield is expressed as average flat rental and selling prices ratio, based on
data from Aruodas.lt.
Sources: Aruodas.lt, Statistics Lithuania and Bank of Lithuania calculation.
Credit union sector particularly vulnerable, key changes are necessary
Operating performance of credit unions
EUR millions
Individual credit union capital adequacy ratio changes over 2015
Decreased Increased
2
0
-2
-4
-6
-8
-10
-12
-14
-16
-18
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2008 2009 2010 2011 2012 2013 2014 2015 2016
Q2
Current year's retained losses
Current year's retained losses
Sources: Bank of Lithuania calculations.
-40 -35 -30 -25 -20 -15 -10
-5
0
p.p.
Source: Bank of Lithuania and Bank of Lithuania calculations
5
10
Cybercrime is growing, significance —
increasing
Number of payment and recorded e‐
incidents in Lithuania
Number, millions
Thousands of recorded incidents
120
14000
12000
100
10000
80
6000
4000
40
2000
0
20
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Cross-border payments
Payments in Lithuania
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Potential impact is growing —
more services are provided electronically
8000
60
14
The number of electronic link incidents is increasing (in 2015 — +15%)
Electronic communications incidents recorded
It is important to actively implement the country's cybersecurity assurance plans, ensure efficient cooperation between different institutions 15
Financial Stability Review 2016
RESILIENCE TO SHOCKS Banks are able to “absorb” material losses
The range of the capital adequacy ratio of the banking sector under the adverse scenario
Percentage
25
20
15
According to the adverse scenario:
in 2016, GDP would drop by 5.3 per
cent,
in 2017 — 4.4 per cent; export
would drop, income and
consumption would decrease, RE
prices reduce
Bank credit losses would
amount to EUR 642 million
10
The capital adequacy ratio
would decrease
by 16.6 per cent.
5
0
Q1
2016
16
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Q2
2016
Q3
2016
Q4
2016
Q1
2017
Q2
2017
Capital adequacy ratio dispersion
Minimum requirement for capital adequacy
Weighted average of capital adequacy ratio
Sources: bank data and Bank of Lithuania calculations.
Q3
2017
Q4
2017
The banking sector would
require around EUR 0.6 million
in additional capital.
The system would withstand depositor panic
The decrease in dispersion of the deposits assessed during the liquidity risk testing The bank liquid assets would be enough to withstand a 17–44 per cent deposit decrease over the month
Percentage
50
40
29
30
20
15
10
0
17
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Deposit withdrawal that banks could withstand with
liquid assets
Deposit withdrawal that banks could withstand without
reaching the required level
Source: Bank of Lithuania calculations.
Note: the columns note the deposit decrease dispersion among
banks, the dots — the banking sectors weighted average.
Two banks are relatively less resilient to liquidity shocks, but they belong to foreign bank groups
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SOLUTIONS FOR STRENGTHENING FINANCIAL STABILITY Major changes in strengthening the financial system
2016
• Necessary to implement structural CU reform
• The other systemically important institution capital buffer will come into force
• The BoL will take decisions on the need for a systemically important capital buffer
2015
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Financial Stability Review 2016
• Ready to apply the Anti‐cyclical capital buffer
• Review of RLG: decrease of interest rate growth and excess borrowing risks
• Contributions to the deposit insurance fund are calculated by taking into account the bank and CU risk
• The BoL is given the function of financial institution restructuring
Goal: to ensure stable operation of the CU sector and its competitiveness
Goal: ensure the resilience of systemically important financial institutions
Goal: sustainable credit developments
Goal: price deposit insurance by risk, harmonise application in the EU
Goal: decrease the negative impact on the economy and public finances when banks experience solvency difficulties
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Financial Stability Review 2016
Thank you for your attention!