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Liquidity risk Lessons learned from crisis Polish experiences Andrzej Stopczyński,PhD Managing Director of Banking Supervision PFSA June, 2010.

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Presentation on theme: "Liquidity risk Lessons learned from crisis Polish experiences Andrzej Stopczyński,PhD Managing Director of Banking Supervision PFSA June, 2010."— Presentation transcript:

1 Liquidity risk Lessons learned from crisis Polish experiences Andrzej Stopczyński,PhD Managing Director of Banking Supervision PFSA June, 2010

2 Agenda  Outlook before crisis started  Regulatory status in summer 2008  Interbank Market  Consequences  Actions  Lessons learned

3 Outlook before crisis started Liquidity supply -Deposits (mainly individuals) -Credit lines from the financial institutions (parent undertakings) -Credits form the other banks -SWAPS and other “technical solutions” Structure -Short term financing for long term credits -FCY Loans (Mortgage) in substantial part funded by PLN deposits swapped to CHF in relatively short term transactions Other features - Very limited existence of complicated financial instruments and securities of the other financial institutions

4 4 Outlook before crisis started

5 5  Share of liquid assets diminished from ca 40% (2005) to 26% (2009)  Level of coverage of 1-month liabilities by liquid assets accounts to ca 50%  Due to fast development of financial markets and good situation on capital market during , the share of core deposits diminished from ca 40% to less than 30%. Fast wages growth and observed in 2008 damage on equity market (which caused significant outflows from investment funds) increased the level and share of bank deposits. As at the end of 2009 the share of core deposits in total balance sheet amounted to 33%.

6 Regulatory status in summer 2008  Resolution introduces:  liquidity level measurement obligation  quantitative liquidity norms  reporting obligation  future liquidity level monitoring obligation  PFSA information obligation, each time one (or more) of supervisory liquidity measures is below level set by Regulation – in such a case bank is obliged to do it’s best to bring supervisory liquidity measures to required level as soon as possible  Supervisory liquidity measures should be regarded as minimal supervisory requirements and not as recommended tools of liquidity management in banks Banks and branches of foreign credit institutions are obliged to manage their liquidity risk in order to maintain current, short-term, mid-term and long-term liquidity

7 Regulatory status in summer 2008 Supervisory liquidity measures – definitions #1  Banks (assets over 200 mPLN ):  Short-term measures:  M1 – short-term liquidity gap – difference between sum of core and supplementary liquidity reserve and the value of instable external funds (minimal value 0)  M2 – short-term liquidity ratio– quotient of sum of core and supplementary liquidity reserve and the value of instable external funds (minimal value 1)  Long-term measures:  M3 – ratio of illiquid assets to own funds – quotient of bank’s own funds (less market risk capital requirements and settlement/delivery risk and counterparty risk capital requirements) to illiquid assets (minimal value 1)  M4 – ratio of illiquid and partially liquid assets to own and stable external funds – quotient of bank’s own funds (less market risk capital requirements and settlement/delivery risk and counterparty risk capital requirements) and external stable funds to illiquid and partially liquid assets (minimal value 1)  Banks (assets under 200 mPLN ):  M1 – ratio of core and supplementary liquidity reserve to total assets – quotient of sum of core and supplementary liquidity reserve to total assets (minimal value 0,2),  M2 – ratio of illiquid assets to own funds – quotient of bank’s own funds (less market risk capital requirements and settlement/delivery risk and counterparty risk capital requirements) to illiquid assets (minimal value 1)

8 Regulatory status in summer 2008 Supervisory liquidity measures – definitions #2  Branches of foreign credit institutions (assets over 200 mPLN ):  M1 – short-term liquidity gap – difference between sum of core and supplementary liquidity reserve and the value of instable external funds (minimal value 0)  M2 – short-term liquidity ratio– quotient of sum of core and supplementary liquidity reserve and the value of instable external funds (minimal value 1)  Branches of foreign credit institutions (assets under 200 mPLN ):  M1 – ratio of core and supplementary liquidity reserve to total assets – quotient of sum of core and supplementary liquidity reserve to total assets (minimal value 0,2)

9 Interbank market

10  The crisis of the trust was imported and resulted in cut off counterparty limits  Money market available up to 1 week and for limited number of banks  Repo became the most popular transaction  A huge spread on FX swap prices as result of high counterparty risk  Rapid depreciation of PLN in Q4 2008

11 Consequences  First shock was buffered by positions built up to meet supervisory measures -Banks have got substantial buffer of liquid assets. -Preventive actions of banks in order to meet liquidity measures (credits in other institutions, limiting certain activities) -Financing by short-term liabilities (deposits) long-term assets (real estates) – become very visible, -Formalized financial back-up from parent undertaking through credit lines

12 Consequences  Banks started increasing deposit rates to protect deposit volumes (so called in newspapers „deposit war”)  Credit action rapidly decreased Growth of loan portfolios stopped. Banks were enlarging the volume of liquid assets (T-Bonds, T-Bills, NBP notes)

13 Actions Stricter supervision of banks’ liquidity: -More frequent reporting -Recommendations and measures Restrictions on paying dividends to build up capital buffer Trust Package of NBP: - Broadening the list of assets that can be collateral for transactions with National Bank of Poland (NBP) -Increase of repo transactions tenors -FX Swaps Taking up organizational and regulatory actions to ensure financial stability (i. e. creating Committee of Financial Stability) -

14 Lessons learned  Lack of liquidity may be a real problem not only the issue of funding cost  Collapse of markets may substantially decrease liquidity of some assets  In time of crisis simple solutions seem to work better than sophisticated ones  Supervisory measures on liquidity are absolutely necessary  Central banks have to be ready to animate interbank market

15 Thank you for your attention!


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