1. The Banking Union: pros and cons

2. A few statistics about the Czech banking industry (or „Czech“ banking industry??)

3. The European banking sector in figures – selected countries

4. BANK REGULATORY CAPITAL TO RISK-WEIGHTED ASSETS, %

6. Stress tests: update 19.06.2012 - Assumptions

8. Stress tests: update 19.06.2012 - Results

10. Czech Banking Sector: summary of situation, trends and risks Assets to GDP: 114 % Over 80% of banking assets are foreign-owned More than adequate capital adequacy (Capital Ratio 15.7 %) Very good systemic liquidity position: loan-to-deposit ratio around 79 %, liquid assets to total assets 27.2 % local banking sector/market attractive, 3 new active players on the market last year very competitive, concentration is falling, interest rates (and risk surcharges) too Despite the recession, the credit portfolio quality improving (substantially with corporations, a bit less with households), NPLs below 6 % Stress tests (tougher than European) continuously good results (latest round in March 2012) Risks stem from the external environment (economic: EMU, local economy slowdown) Regulatory and legislative risks: an un-coordinated regulatory tsunami, Basel III/CRD IV vs. EBA requirements, FTT, etc

11. Regulatory tsunami: what future for banks?

12. 12 Key regulatory initiatives CRD IV/ Basel III Corporate Governance and Remuneration Policies Revision of MiFID and Market Abuse Directive SIFI Bank Recovery and Resolution Deposit Guarantee and Investor Compensation Schemes Consumer Protection Financial Transaction / Activity Tax

13. Background  Response to the crisis  AIM - strengthen the resilience of the banking sector → reduce the probability and severity of future financial crises and remove current regulation shortcomings  RISKS:  Adoption of measures that would not be taken in a more stable period.  Adoption under time pressure raises doubts about the proper calibration, timing and globally consistent implementation.  Limiting the banks ability to grant credits to individuals and/or companies and/or governments → negative impact on real economy.

14. 14 Our Czech opinion  Not absolutely against new regulation initiatives - but more regulation may not equal to better regulation.  (Even strong) regulation is ineffective without proper supervision.  Level playing field - to avoid regulatory arbitrage.  No complex impact study of all initiatives.  Regulatory changes will reduce the profitability of both assets and capital; the consequences thereof will fall upon not only shareholders but also clients, and thus, in the broader context, upon the entire economy.

15. 15 Our Czech opinion (ctd) As our economy is almost fully financed through bank loans maintaining the lending capacity of banks is vital.  Czech banking sector, mainly consisting of subsidiaries and branches of banks domiciled in other EU Member States, is likely to be affected more by secondary impacts than by primary ones (e.g. by parent banks approach to management of their groups, slower growth in Western Europe).

16. How many unions for the EU? (Monetary, Banking, Fiscal, Political? …)

17. Questions Is the eurozone a monetary union with all necessary attributes? Is the institutional framework of the union sufficient? Is there enough co-ordination of economic policies? Is the eurozone an OCA? If the answer to those questions is negative, what is needed to strenghten the eurozone? Is the Banking union THE answer?

18. Answers … The single market in the EU is quite developed, but barriers and limits remain Even if institutional, legal and technical barriers disappeared, there will will be national specifics and natural limits (language, cultural diversity, different habits etc..) The rule-based fiscal framework has clearly failed to support the stability of the monetary union After more than 10 years of its existence, the Eurozone is still not an OCA, divergences across the regions have actually increased, rigidities prevail and policies have not been adapted to provide for an common policy framework … Clearly, fiscal policies are on the top of agenda for eurozone reformers

19. Fiscal policy for a monetary union The rule- based approach has failed: explain how … Ideally, fiscal policies would be centralised at least as much as in federations (ex: the US): this is, however, not likely to happen any time soon in the EU So, we are searching for a solution in between these two concepts

20. Elements of fiscal policies „in between“ ESM (European stabilisation mechanism): an inter-governmental agreement outside of the EU legal framework The fiscal compact (treaty of fiscal responsibility): outside of the EU legal framework Eurobonds?

21. The new fiscal compact The process has been reversed: the sanction, imposed by the EC comes first, the discussion second (that is a major change compared to the excessive deficit procedure) Automatic initiation of corrective fiscal action if fiscal discipline breached Commitment to insert those rules in national legislation (controlled by the European Court of Justice)

22. Single EU supervisor Single EU deposit guarantee scheme Common resolution authority and fund Single rule book Banking Union The Banking Union

23. ECB as the Single Supervisor: our doubts and questions …  All banks in the Euro area – Is it manageable and practical?  Non-Euro Member States can opt-in  Fair balance between obligations and powers?  Perception of banks supervised by ECB and banks supervised by national supervisors?  ECB to carry out the tasks in close cooperation with national supervisors – Any bright line or overlaps, double requirements?  The group interest and view prevails: this is our key concern: when action to support supranational groups is undertaken, the stability of the group will get the priority (over and to the detriment of stability of daughter companies (national markets)?

24. Single EU deposit guarantee scheme and Common resolution authority and fund mutualisation of deposit guarantee schemes and future resolution funds: money of national depositors can be used across the boarder (possibly even without consent of national authorities) this is a matter of depositors´ confidence and political consideration (taxpayers´ money moves across the boarder) The Common resolution authority can over-rule the competencies (and responsibilities) of national authorities (for example imposing intra-group transfers) Decision authority and responsibility separated

25. The single rulebook This is fine, we believe in the level-playing field National discretions lead to perverse regulatory competition and incentives for regulatory arbitrage Yet, the rules should allow for diversity of national financial markets (which is a major source of resilience and stability)

26. Liikanen group – next step of banking sector regulation?

27. General background The Liikanen group has been established with the mandate to review the need for structural reforms of the banking industry in the EU Would such reforms increase the resilience, financial stability of the sector, improve the efficiency of business and strengthen the consumer protection? If yes, the group should make proposals as to the content of necessary initiatives Final report was delivered at the beginning of October 2012

28. Sources of inspiration and stated purpose Volcker rule (some activities prohibited), Dodd- Frank act (limitations on size), Vickers report (ring-fencing some activities) Purpose: –Limit aggregate risk in the banking system –Limit risk of contagion in case of individual failure –Reduce moral hazard (bankruptcy of large entities possible because of reduced implicit state guarantees) –Promote market competition –Maintain integrity of single market

29. The Vickers report (UK Independent Commission on Banking) 1.Loss absorption capacity -More capital (tier 1 at least at 10%, primary absorption capacity at 17% to 20%, including bail-in bonds) -Stricter leverage ratio requirements 2. Structural changes - retail ring-fencing (separation from „wholesale banking): separation legal, economic and operational - regulatory requirements apply to ring-fenced part of business, links to the rest of group to be considered as third party exposure

30. The (US) Volcker rule Separation of some investment activities from commercial banks : –Proprietary trading limited –Limit on acquisitions of hedging funds and private equity funds Size limitation: –No institution should be „too big to fail“ –The FRB (Federal Reserve Board) must not approve mergers or acquisitions if the resulting entity should represent more than 10% share of the respective market

31. Liikanen report (published on October the 2nd) 1.Legal separation of certain particularly risky financial activities from deposit taking banks 2.Role of Recovery and Resolution frameworks further increased (= wider separation as in 1) if required by the resolution authority) 3.Amendments to provide more clarity to the bail-in instruments 4.More robust risk weights for the determination of capital requirements on trading assets and real estate related loans 5.Further corporate governance reforms

32. Liikanen report (assessment) 1.Ring fencing of risky activities: probably not an issue for us (quantitative thresholds sufficient) 2.Additional ring fence dtto 3.Bail-in instruments: might have an impact on the cost of funding (differentiated across our region) 4.Impact likely, will need further evaluation 5.Corporate governance reforms: probably not the central issue for us given the business models applied in our region

33. Discussion: arguments of supporters The key aspect is in the „too big to fail“ argument, consequences: - asymmetry of funding cost distribution to the benefit of big players, distorting the financial market - distortions in risk management of portfolio (excessive risk taking), suppression of the basic function of banking (= maturity transformation), deviation from value added financing towards „casino“ type behaviour - distorting regulatory rules in favour of big players - out of 29 world wide SIFIs, 17 are located in Europe - the size of European SIFIs has come well in excess of any national authority to manage bank's resolution …

35. Selected group of European banks: structure of portfolio (= all banks traded on stock exchanges) Total 32 banks of which: 10 larger of which: 10 smaller 36 % 9 % 36 % 75 % There are in total cca 8000 banks in EU: the difference in the above indicator would be even greater since even the 10 smaller banks belong to the 0,5 % of the larger EU banks

37. Arguments of opponents The European financial sector is very diversified both in terms of structure and the business models used, however universal banks prevail No specific component of the market was source of the recent crisis (or hit more particularly by it): it this therefore not possible to conclude that the European market would be facing a structural problem Actually, the opposite is true: this diversity is source of resilience: administrative intervention could weaken resilience In addition, the EU economy is more dependent on banking Intermediation than, for instance, the US one The single market argument: cross-boarder transactions are source of diversity: administrative intervention could weaken resilience

38. Banking assets to GDP represent 150% in the USA

39. Assets of commercial banks in EU and in USA (thousands of billions USD)

40. In addition … There can be no retail activity without investment activity, examples: –Interest and exchange rate hedging to corporate clients –Dtto to public entities (state or municipal bonds …, infrastructural projects like PPPs) –Individuals (hedging mortgages …) It is not easy (=it is almost impossible) to distinguish the purpose of investment transactions (helping financing the economy as opposed to „casino“ transactions) If the underlying purpose is to help financing economy, then banks need to cover their own risk (otherwise this may (always will) have an impact on their stability)

41. A fundamental argument … So far, the approach to regulatory reforms (the Basel regulation in all its stages) was aimed at improving the identification of risks and stimulating the banks to better control (manage) risk The philosophy of Vickers, Volcker … and possibly Liikanen is different and introduces a totally different regulatory paradigm) –No more risk management, but risk elimination (pushing it out of parts of the financial system) –Achieved using administrative tools (no more stimulations) However, risk is inherent component (and driving force) of any business activity (including the basic banking function: transformation of maturities): we, coming from where we come, should say a word about risks of administrative inrtervention into economy …