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Regulatory framework in emerging markets: outlining the crises impact Prof. Iryna D’yakonova, Ukrainian Academy of Banking, Ukraine & Tatiana Scherbina, Ukrainian Academy of Banking, Ukraine Aims • Investigating the affects of the economic crisis (2007)on Banking Supervision in developing countries • Identifying specific features in Ukrainian regulative framework Banking Supervision Systems in EU’s countries Country Model Task-oriented Sectoral Austria Belgium Greece Denmark Estonia Ireland Spain Italy Cyprus Latvia Lithuania Mega-regulator + + + + + + + + + + + Banking Supervision Systems in EU’s countries Country Model Task-oriented Sectoral Luxemburg Malta Germany Netherlands United Kingdom Poland Portugal Slovakia Slovenia Hungary Finland France Czech Republic Swiss Bulgaria Romania Mega-regulator + + + + + + + + + -+ + + + + + + + + The Financial Architecture in some countries according to the structure index Place Bank-oriented architecture Market-oriented architecture Developed countries Bank-oriented architecture Market-oriented architecture Developing countries 1 Panama Netherlands Bangladesh Denmark 2 Tunis Thailand Nepal Peru 3 Cyprus Canada Egypt Chile 4 Portugal Australia Costa Rica Jamaica 5 Austria Republic of South Africa Barbados Brazil 6 Belgium South Korea Honduras Mexico 7 Italy Swiss Trinidad and Tobago Philippines 8 Finland Great Britain Mauritius Turkey 9 Norway Singapore Kenya - 10 New Zealand USA Ecuador - The Capital Structure of Banking System, 2004 Foreign owned banks 10% Ukrainian banks 90% Main indicators of banks activity in groups according to source of capital origin as on 01.07.2010 (bil. UA) № 1 2 3 3.1 Criterion which includes: Ukrainian banks State owned banks Private owned banks Banks with western capital Banks with Russian capital Total Number of banks in group 115 5 110 39 10 164 Total Assets 431,11 152,69 278,42 367,59 78,62 877,31 Group ratio, % 49,14 17,40 31,74 41,90 8,96 100,00 Net worth 77,60 38,13 39,47 38,25 9,71 125,56 Group ratio, % 61,81 30,37 31,44 30,46 7,73 100,00 Loan portfolio 312,32 106,48 205,84 295,46 63,34 671,12 Group ratio, % 46,54 15,87 30,67 44,03 9,44 100,00 including consumer loans 55,58 11,14 44,44 135,20 8,68 199,47 Group ratio, % 27,86 5,58 22,28 67,78 4,35 100,00 Growth of banks external debt (bil. USA) 45 39 40 35 31 30 25 20 13,9 15 10 6,2 5 1,7 2,6 - 01.01.2004 01.01.2005 01.01.2006 01.01.2007 01.01.2008 01.01.2009 Structure of loans Population 16% by the end of 2008 Population 39% Non-financial corporations84% by the end of 2004 61% Non-financial corporations Bank loans according to source of capital origin bil. hrn 400 368,3 350 321,3 301,1 307,4 312,3 300 295,5 250 206,7 199,6 200 147,4 150 99,4 89,7 100 62,6 61,2 50 15,2 1,1 63,3 39,2 27,1 2,1 4,2 17,6 0 2004 2005 2006 2007 2008 2009 І- banks with Ukrainan sourse of capital origin ІІ - banks with western sourse of capital origin ІІІ - banks with Russian sourse of capital origin І півр.2010 Background for the crisis: - total dollarisation of the economy; - increase in the share of foreign capital in the banking system to 40%; - foreign currency loans; - inadequate growth in consumer lending (over 100% per year), mostly in foreign currency; - insufficient crediting at reasonable interest rates of the real economy; - excessive external debt of corporate and banking sectors, which exceeded the external debt of the state almost in twice; - artificial strengthening of hryvnia to U.S. dollar in the summer of 2008; - negative trade balance. Ukraine banking structure pre and post economic crisis • The world crisis in Ukraine started in financial sector and then spread through the rest of the economy. • Flight of deposits and high level of corporate debts caused to the lack of liquidity in Banking system • Exchange devaluation followed by inability to provide stable servicing the loans. Banking regulation in Ukraine pre-crisis • The banking system of Ukraine consists of the National Bank of Ukraine (NBU) and other domestic banks and subsidiaries of foreign banks operating in Ukraine • The banking system enjoys a strategic position in the economy, which is explained by its major functions such as: securing the stability of the national currency; accumulation and redistribution of financial resources of the general population and companies into credits and investments; regulation of supply and demand of money in the economy; organization and harmonization of payments in the economy. Board of directors on banking regulation and supervision structure till 2008 Board of directors on banking regulation and supervision Department of banks’ registration and licensing Department of banking regulation and supervision Department of banking activity expiration Department of banking methodology regulation and supervision Department on the matters of banking system usage for the legalization of criminal income and terrorism financing Organizational structure of banking regulation and supervision of the Central Office (Bodies) of the National Bank of Ukraine as at 12.03.2011 General department of banking supervision Banks registration, licensing and reorganization department Financial Monitoring department Deputy Head of the NBU The regulatory and methodological support for banking regulation and supervision department Foreign exchange transactions control, methodology and licensing department Legislative changes • requirements to the commercial banks in the field of banking activity regulation • determining the order of state participation in banks capitalization • complex of measures for providing stability of the banking system in a period of financial crisis Deposit protection scheme • The Deposit Guaranty Fund is created for protecting the rights of individual depositors (natural persons) in 1998 • The participants are domestic commercial banks and the branches of foreign/international banks in Ukraine Changes in deposit protection • the size of compensation is increased from 50 000,0 to 150 000,0 of hryvnyas • NBU pays annual contributions to Deposit Guaranty Fund • the Fund has an ability to be credited by NBU on refinancing interest rate terms Key questions in Baking Supervision: • Lack of independence – institutional – operational – financial independence • Regulatory structure – Ukraine – without considerable changes after crisis – What framework is better?