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23rd Annual BSCEE Conference Lessons learned from the crisis and policies aimed at strengthening the resilience of the banking sector – the experience.

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Presentation on theme: "23rd Annual BSCEE Conference Lessons learned from the crisis and policies aimed at strengthening the resilience of the banking sector – the experience."— Presentation transcript:

1 23rd Annual BSCEE Conference Lessons learned from the crisis and policies aimed at strengthening the resilience of the banking sector – the experience of the Czech Republic and measures undertaken by the Czech National Bank Vítězslav Babický Financial Market Analyses Division Director Czech National Bank Ohrid, 15 June 2010

2 2 Agenda I. Overview of the Czech financial market and banking sector II. Global financial crisis from the supervisory perspective and actions taken by the CNB III. The CNB as the integrated supervisory authority and member of EU structures IV. Conclusions

3 3 I. Overview of the Czech financial market and banking sector The CNB supervises (the scope of supervision is, however, different): banking sector almost 85% Leasing, factoring, home credit services outside of the scope of the CNB supervision Credit unions counted together with banking sector, in terms of total assets negligible

4 4 I. Overview of the Czech financial market and banking sector Net profits of the banking sector (left axis, bil. CZK) Rentability of Tier 1 capital (ROE, %, right axis) Net profits growing up to 60 bil. CZK in 2009 (total assets bil. CZK) ROE stable over the crisis period

5 5 I. Overview of the Czech financial market and banking sector Capital adequacy (red colour, left axis) Share of banks with capital adequacy below 10% (blue) Level of capital adequacy is high enough and growing through the crisis period All banks with capital cushions after crisis

6 6 I. Overview of the Czech financial market and banking sector Quick liquid assets of banks (red) and building savings companies (blue) to total assets, and covering of the 3M position (lines, right axis) Banks during the crisis period keep enough quick liquid assets

7 7 I. Overview of the Czech financial market and banking sector New nonperforming loans (bil. CZK, left axis) Ratio of nonperforming loans (red line, right) Nonperforming loans are growing through the crisis period

8 8 II. Global financial crisis from the supervisory perspective and actions taken by the CNB Many governments were forced to react on the critical situation in order to rescue its banking systems through issuance of guarantees and by providing banks with state money – not the Czech Republic Credit policy of the commercial banks was tightened and granting of credits to the real economy was reduced due to the insufficient free funds and functionless interbank market. Moreover, commercial interest rates increased as banks revised and increased risk margins Related uncertainty about the future development and adverse sentiment led to the restriction in demand There was a slump of the prices on the financial markets, stock indices and commodity prices fell sharply – impact namely on collective investment schemes Above mentioned facts were reflected in the deceleration of the economic growth which then turned into a downturn and economic recession accompanied by higher rate of unemployment, negative effects on state budgets, etc.

9 9 II. Global financial crisis from the supervisory perspective and actions taken by the CNB CNB analyses and assesses the crisis on global financial markets since 2nd half of 2007 (analyses of investment portfolios of supervised institutions, exposures in toxic assets) Crisis escalated in 2nd half of 2008 and necessary measures were taken – the ČNB established exceptional reporting in the area of financial market supervision, regular repo operations with ČNB were introduced in order to strengthen the liquidity of the Czech financial market (government bonds as a collateral), accounting (HTM portfolio for insurance companies and pension funds), and other regulatory measures (e.g. changes in deposit guarantees ) The Czech Republic was hit only indirectly by the crisis, the banking and other financial market sectors are still healthy Government support of the Czech financial market was not needed Economic recession in surrounding countries is reflected in lower demand for export The crisis is demonstrated by lower rentability of investments and profits from financial placements The Czech Republic does not face the risks arising in other Central and Eastern European countries (e.g. high foreign currency loans) Domestic currency is an advantage

10 10 III. The CNB as the integrated supervisory authority and member of EU structures Crucial importance of communication during the crisis period CNB is active in the international cooperation in the field of financial market supervision: European Commission structures (Lamfalussy structure – 2nd level: EBC, ESC, EIOPC, FCC – expertise for the MF, 3rd level: CEBS, CESR, CEIOPS, IWCFC/JCFC) ECB structures (BSC: working groups WGMA, WGBD, WGCR) BCBS IOSCO IOPS IAIS Bilateral cooperation with other financial supervisors or international organisations Multilateral agreements – colleges of supervisors, crisis management

11 III. The CNB as the integrated supervisory authority and member of EU structures E.CouncilE.CommissionE.Parliament EBC 1 ESC 1 EIOPC 1 FCC 1 CEBS 2 CEIOPS 2 CESR 2 JCFC 2 (earlier IWCFC) E.Com - control of implementation Convergence 1 Ministry of finance 2 Supervisory Authorities L 1 L 2 L 3 L 4 Legislation Lamfalussy structure:

12 12 III. The CNB as the integrated supervisory authority and member of EU structures Reaction to the financial crisis: discussion on the new supervisory architecture on the EU level: Macro-prudential European Systemic Risk Board (ESRB) within ECB Micro-prudential European System of Financial Supervisors (ESFS) – EBA, ESMA, EIOPA + national supervisors Proposals also on crisis management and resolution framework Importance of balance between powers and responsibilities, balance between home and host supervisors; fiscal competence and responsibility for the financial stability remains at national level Regulation harmonized on EU level – CRD, Solvency II, UCITS, AIFM directive, rating agencies; discussion on bank levy, short-selling bans Main CNB advantage: fully integrated approach to the financial market supervision

13 13 III. The CNB as the integrated supervisory authority and member of EU structures 1 st stage of the integration (April 2006) Credit Unions Supervisory Office Czech Securities Commission Insurance and pension funds supervision Banking supervision

14 14 III. The CNB as the integrated supervisory authority and member of EU structures The integration of all supervisory authorities into the CNB led to better use of synergies in the individual financial market segments supervision, greater harmonisation of regulatory rules and supervisory procedures, lower supervision cost. Financial Market Committee was established as an advisory body of the CNB Board for financial market supervision.

15 15 III. The CNB as the integrated supervisory authority and member of EU structures 2 nd stage of the integration (January 2008): Banking Regulation and Supervision Dept. Capital Market Regulation and Supervision Dept. Insurance Regulation and Supervision Dept. Financial Market Supervision Dept. Financial Market Regulation and Analyses Dept. Licensing and Enforcement Dept. Sectoral supervision Functional supervision January 2008

16 16 III. The CNB as the integrated supervisory authority and member of EU structures The goal of the second stage of the integration is to create the truly integrated supervision of the Czech financial market by:  creating a single, common institutional culture,  identifying and resolving unwarranted regulatory differences between the sectors,  balancing sector-specific technical issues with consistency of the whole process so that ultimately the same activities will be supervised in the same way, thereby avoiding arbitrage opportunities as much as possible. For comprehensive information about integration see: Erbenova, M (2006): Integrating Financial Market Supervision in the Czech Republic, Law in transition, EBRD, available via internet:

17 17 III. The CNB as the integrated supervisory authority and member of EU structures In exercising its supervisory powers and in its activities generally, not only strives to ensure that the supervised entities comply with the relevant regulations, but also pays attention to:  enhancing the institutional infrastructure of the Czech financial market,  increasing the transparency and competitiveness of this market  and its credibility in the eyes of the public as well as  attractiveness to business. For comprehensive information about the CNB as well as about the financial market and financial supervision see

18 18 Conclusions Financial markets in the Czech Republic are resistant to the financial crisis which has its causes namely in developed countries Functional model of the financial market supervision helps to adequate supervisory reactions on the financial market CNB is prepared well for the market turmoils in the globalized economy

19 19 Thank you for your attention Vítězslav Babický Tel. (420) Financial Market Analyses Division Director Czech National Bank

20 20 I. The CNB as the integrated supervisory authority of the Czech financial market Statute: The Czech National Bank is the central bank of the Czech Republic and the supervisor of the Czech financial market. In the same time it is a part of the European System of Central Banks (ESCB), which comprises the ECB and the NCBs of all EU Member States. Mandate for financial market supervision as stipulated by Act No.6/1993 Coll., on the CNB: The CNB supervises the activities of entities operating on the financial market, analyses the evolution of the financial system, sees to the sound operation and development of the financial market in the Czech Republic, and contributes to the stability of its financial system as a whole.

21 21 I. The CNB as the integrated supervisory authority of the Czech financial market, cont. The CNB's strategic vision for the area of financial market supervision: To work to ensure the stability of the financial system and the safe and smooth development of the financial market in the Czech Republic taking into account that a stable financial system and a dynamically developing financial market, based, among other things, on sound and prospering financial institutions respected by the general public, contribute significantly to the long-term growth of the economy and are in the interests of businesses and the public alike.

22 22 I. The CNB as the integrated supervisory authority of the Czech financial market, cont. In its capacity of the integrated supervisor of the Czech financial market, the CNB basically:  supervises the financial market of the Czech Republic,  contributes to its regulation by issuing so called secondary legislation, i.e. regulations known as “provisions” and “decrees”,  cooperates with government (Ministry of Finance) in the area of primary legislation, i.e. laws that create basic framework of financial regulation and are approved by the Parliament,  develops international cooperation especially multilateral cooperation within the framework of the Lamfalussy process and ESCB as well as bilateral cooperation with supervisory authorities of (not only) EU Member States.

23 23 II. Organisational structure of the financial market supervision Current organisational structure of financial supervision is  based rather of functions of financial market regulation and supervision than on sectoral structure of financial system,  the result of the second stage of integration of financial market supervision in the Czech Republic Broader context: Integration of financial market supervision was a two stage pro c ess : 1) Transfer of power and concentration of staff, know how etc. under umbrella of the CNB as a result of policy decision and legislative process (May April 2006). 2) Thereafter “real integration“ (new organisational structure since January 2008) and further development in the medium term.

24 24 II. Organisational structure of the financial market supervision, cont. 1st Stage According to the Financial market supervision integration act, passed in February 2006 by the Czech Parliament, on 1 April 2006 the CNB took over all the activities of the: Czech Securities Commission, Finance Ministry´s Office of the State Supervision in Insurance and Pension Funds, Office for Supervision of Credit Unions Emphasis was laid on ensuring continuity of all supervisory functions and had no negative effects on the exercise of supervision or the operation of the financial sector.

25 25 II. Organisational structure of the financial market supervision, cont. Bank Board Financial Market Regulation and Analyses Department Licensing and Enforcement Department Financial Market Supervision Department Cash and Payment System Department Regional branches of the CNB Consumer Protection Department Extract:

26 26 II. Organisational structure of the financial market supervision, cont. Financial Market Regulation and Analyses Department Financial Market Regulation Division Financial Market Analyses Division Supervision Support Division

27 27 II. Organisational structure of the financial market supervision, cont. Licensing and Enforcement Department Licensing Division Securities and Regulated Markets Division Enforcement Division

28 28 II. Organisational structure of the financial market supervision, cont. Financial Market Supervision Department Credit Institutions Supervision Division Insurance Sector Supervision Division Capital Market Supervision Division Risk Management and Internal Control Supervision Division Proceedings Rules and Professional Care Control Division

29 29 II. Organisational structure of the financial market supervision, cont. Cash and Payment System Department Division 1 (cash) not directly involved in financial supervision Division 2 (payment media protection) not directly involved in financial supervision Payment Systems Policy and Development Division

30 30 II. Organisational structure of the financial market supervision, cont. Regional branches of the CNB Branches: Are located in the following cities: Praha (Prague), Brno, Ostrava, Plzeň, České Budějovice, Hradec Králové and Ústí nad Labem have numerous functions related to cash circulation and client's accounts are responsible for supervision of foreign exchange offices (including cooperation with Licensing and Enforcement Department if shortcomings aredetected). Moreover the Branch Plzeň keeps register of insurance intermediaries.

31 31 I II. The CNB's activities in the field of financial market supervision The CNB supervises (the scope of supervision is, however, different): Banks (21) - licensing and prudential supervision, consumer protection. Branches of foreign banks (18) - notification and limited prudential supervision, consumer protection. Credit unions (17) - licensing and prudential supervision, consumer protection. Insurance companies (35, 1 reinsurance company) - licensing and prudential supervision, consumer protection. Branches of foreign insurance companies (17) - notification and limited prudential supervision, consumer protection. Pension funds (10) - licensing and prudential supervision, consumer protection.

32 32 III. The CNB's activities in the field of financial market supervision, cont. The CNB supervises, the scope of supervision is, however, different (cont.) Security exchange - licensing, prudential supervision (operational risk) and supervision of market behaviour, consumer protection. Off-exchange market operator - licensing, prudential supervision (operational risk) and supervision of market behaviour, consumer protection. Settlement system operators (3) - licensing, prudential supervision (operational risk), consumer protection. Investment services providers (39) of which 11 banks and 28 non- bank firms – licensing, prudential supervision, supervision of market behaviour, consumer protection. Management companies (22) - licensing, prudential supervision, supervision of market behaviour, consumer protection.

33 33 III. The CNB's activities in the field of financial market supervision, cont. The CNB supervises, the scope of supervision is, however, different (cont.) Investment funds (27) - licensing, prudential supervision, supervision of market behaviour, consumer protection. Open-end mutual funds (139) - licensing, prudential supervision, supervision of market behaviour. Closed-end mutual funds (2) - licensing, prudential supervision, supervision of market behaviour. Depositories (8) - licensing, prudential supervision, supervision of market behaviour, consumer protection. Payment systems - operational risk, consumer protection Issuers of e-money - prudential supervision (operational risk), consumer protection. Insurance intermediaries and independent loss adjusters ( ) – registration, consumer protection. Investment intermediaries (9 121) – registration, consumer protection.

34 34 III. The CNB's activities in the field of financial market supervision, cont. The CNB does not supervise all institutions that offer financial services in the Czech market because: Numerous financial institutions from EU countries are able to provide financial services in the Czech Republic after notifying the CNB of this activity under the freedom to provide services (without establishing a branch) pursuant to Article 21 of Directive 2000/12/EC. Such activities do not fall within the CNB's supervision. Number of notifications as of December 2009  Credit institutions: 275  of which e-money institutions: 12  Insurance companies: 614  Funds: 1,457  Investment companies: 49  Investment intermediaries: 884  Payment institutions: 19

35 35 III. The CNB's activities in the field of financial market supervision, cont. The CNB does not supervise all institutions that offer financial services in the Czech market because (cont.): The supervision of branches of EU based financial institutions is limited (for example in the case of credit institutions the supervision is in principle limited to liquidity issues). In the area of consolidated supervision of financial groups the CNB acts in most cases as a host supervisor. There are numerous subjects that provide financial services and are not supervised by the CNB, namely non-bank lenders, leasing and factoring companies.

36 36 III. The CNB's activities in the field of financial market supervision, cont. Off-site surveillance consists mainly of:  Regular monitoring of activities of supervised financial institutions including monitoring of market behaviour in organised capital market.  Reviews of compliance with the prudential rules and limits.  Imposition of remedial measures when deficiencies are identified. Off-site surveillance is based on continuous appraisal of all available information taken from various sources, in particular:  Statements and reports regularly submitted by supervised financial institutions.  Monitoring of securities trading.  Auditors´ reports.  Results of on-site examinations.  Visits in supervised financial institutions.  And other (meetings with management, public sources).

37 37 III. The CNB's activities in the field of financial market supervision, cont. The on-site supervision tasks are tailored according to the business and risk profile of supervised entity. Generally spoken, an on-site examination can involve:  Examination of credit risk management.  Examination of market risk management.  Examination of adequacy of technical reserves (insurance companies).  Examination of trading records.  Verification of internal audit and control systems.  Verification of anti-money laundering system.  Verification of operational risk management, security and functionality of IT systems.

38 38 III. The CNB's activities in the field of financial market supervision, cont. CEBS: Group de Contact, Expert Group on Prudential Regulation, Expert Group on Financial Information CESR: CESR-Fin, CESR-Pol, CESR-Tech, Investment Management Expert Group, Econet, MiFID Level 3, Post-Trading Expert Group, Prospectus Contact Group, Transparency Group Recently 8 standing committees CEIOPS: Financial Requirements Expert Group (QIS), Internal Model Expert Group, Internal Governance, Supervisory Review and Reporting Expert Group, Insurance Group Supervision Committee, Committee on Consumer Protection Prospects of transformation to EBA, ESMA, EIOPA Cooperation in ESRB

39 39 IV. Global financial crisis from the supervisory perspective The financial crisis was triggered on the US subprime mortgage market in U.S. real estate prices peaked in mid Following steep decline made refinancing more difficult and volume of mortgages in delinquency grew up quickly. This was followed by the collapse on the CDO markets that caused giant losses of many big internationally active banks. Subsequent lack of trust among the financial institutions about their ability to fulfil their liabilities led to the liquidity crisis. Liquidity crisis caused huge financial problems to many banking institutions throughout the world. Some of them bankrupted, including the largest world investment banks. The financial crisis caused e.g. bankrupt of Lehman Brothers, Merrill Lynch was saved by take-over from the side of BoA, the largest US savings bank Washington Mutual also bankrupted, US government had to provide assistance to the largest world insurance company AIG, etc.).


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