Developing Health Financial Sector in Emerging Markets Vladimir TOMSIK Vice-Governor, Czech National Bank International Financial Congress: The Future of Financial Markets St. Petersburg, June 30 – July 1, 2016

Stable and profitable banking system, Introduction Following “Guidelines for Development of Russian Financial Market in 2016—2018”, the Bank of Russia seeks to: Promote financial market instruments, Facilitate debt and equity financing, and risk hedging, and Create conditions for financial sector growth … … THROUGH … Stable and profitable banking system, Sound financial regulation and supervision, and Financial consumer protection and financial literacy.

Czech and Russian financial sector – stylized facts. Introduction Czech and Russian financial sector – stylized facts. Can we share our experience mutually? What our experience is developing: Market based banking sector, Sound supervision and regulation, and Consumer protection and literacy.

Financial Sector – – Stylized Facts the Czech Republic and Russian Federation

Bank Dominated Financial Sector in Both Countries Source: BIS data and Financial Sector Database of the World Bank Czech Financial System in 2015, shares in percent Source: CNB

Financial Depth Converging to Advanced Countries Source: World Bank, Financial Sector Database Source: BIS

Lessons learned and challenges Building Health Financial System Lessons learned and challenges

A) Transformation to Market Based Banking Sector Transformation from “mono-bank” to a market based banking system. Banking sector crisis in both countries although different factors behind. Czech case: A large number of small banks sought to get a market share but at the costs of going beyond the prudent threshold. Russian case: Economic slowdown, fiscal deficits, Asian financial crisis. Czech experience: Total consolidation costs estimated about 25 percent of GDP by Bárta and Singer (2006). However, a large part of the costs related to bad loans provided during the former regime.

A) Transformation to Market Based Banking Sector Czech Republic: Reforms, privatization based on high participation of foreign (Western European) banks, and strong bank supervision applied. Russia: IMF program, bailout, and strong bank supervision. Only a mild increase in foreign bank participation. Note: Baltics—EST, LVA, and LTU. CE5—CZE, HUN, POL, SVK, and SLO. CIS—BL, MDA, RUS, and UKR. SEE EU—BLG, CRO, and ROM. SEE xEU – ALB, SRB, BIH, UKV, MKD, and MNE. CZE RUS Source: International Monetary Fund, 2014. 25 Years of Transition – Post-Communist Europe and the IMF. Regional Economic Issues – Special Report.

A) Transformation to Market Based Banking Sector Both countries resolved the banking crisis successfully measured by NPL. Foreign banks have brought know-how and substantial improvement of performance in the Czech case. Source: World Bank, World Development Indicator Database

A) Transformation to Market Based Banking Sector Map of EU Member States where state aid was provided to the financial sector in 2008–2014 (in red) Czech case: No public support/aid in the crisis as the banks remained resilient. The Czech Republic did not joined the Vienna Initiative. The crisis did not significantly shift intragroup lending – Czech banks remained net creditor in cross-border interbank lending. False believe that financial integration has made banks more prone and vulnerable to external shocks. Source: European Commission. Customizable map: www.aneki.com

B) Sound Supervision and Regulation Both central banks operate as a single supervisory authority of the financial market. The CNB as a single supervisory authority since 2006. The Bank of Russia has become a single regulator in September 2013. The creation of a single regulation institution seeks to minimize systemic risk and to improve the protection of investors and depositors. Many developed countries have united their regulators to avoid issues associated with insufficient and fragmented regulation spotted by the 2008 crisis.

B) Sound Supervision and Regulation CNB’s experience with a single supervisory scheme is positive – mainly advantages of additional synergic effects. Easy day-to-day communication + information-sharing synergies. Easier communication with supervised entities, foreign supervisors. Stronger position in the crisis situation. Enables to monitor the whole financial market (financial stability perspective). Ability to analyze the impact of development in one sector to other sectors or to the whole economy. Strong technical and professional support. Unification of reporting formats and supervisory techniques for different sectors where suitable.

B) Sound Supervision and Regulation Ongoing international regulatory reform – Basel III. Russia/Bank of Russia is a key international partner shaping the design of the reform as a member of: Financial Stability Board Basel Committee on Banking Supervision G20 The Czech National Bank also actively contributes to the reform effort through its membership: Basel Consultative Group European Banking Authority European Systemic Risk Board, etc.

C) Consumer Protection and Financial Literacy The document “Guidelines for the Development of the Russian Financial Market in 2016—2018” claims rather low household activity on the financial market outside of commercial banks. Similar case in the Czech economy – financial wealth mainly in deposits. Financial literacy and consumer protection might help. To what extent and what specific rights of financial consumer should be protected?

C) Consumer Protection and Financial Literacy CNB is obliged: to receive and deal with suggestions by consumers and their associations; to supervise compliance with new obligations; to avert any immediate danger to a consumer’s property by suspending the provision of services or by closing business premises; to impose corrective measures and penalties. No price or interest rate ceilings – the CNB makes sure that costumers are well informed in advance.

Summary

International coordination important in Summary Prudent regulation and supervision as a key for sound financial system. International coordination important in Designing sound and prudent regulatory framework and Sharing experience. Positive experience with integrated supervisor – significant synergic effects. Adequate attention to financial literacy and consumer protection.

Thank you for your attention www.cnb.cz Vladimir TOMSIK Vice-Governor of the CNB vladimir.tomsik@cnb.cz