The Banking Union: pros
and cons
A few statistics about the Czech
banking industry
(or „Czech“ banking industry??)
The European banking sector in figures – selected countries
BANK REGULATORY CAPITAL TO RISK-WEIGHTED ASSETS, %
Stress tests: update 19.06.2012 - Assumptions
Stress tests: update 19.06.2012 - Assumptions
Stress tests: update 19.06.2012 - Results
Czech Banking Sector: summary of situation, trends and risks
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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
Regulatory tsunami: what
future for banks?
Key regulatory initiatives
Financial
Transaction /
Activity Tax
SIFI
Bank
Recovery and
Resolution
Deposit
Guarantee and
Investor
Compensation
Schemes
Corporate
Governance
and
Remuneration
Policies
CRD IV/
Basel III
Revision of
MiFID and
Market Abuse
Directive
Consumer
Protection
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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.
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.
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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).
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How many unions for the EU?
(Monetary, Banking, Fiscal,
Political? …)
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?
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
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
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?
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)
The Banking Union
Banking Union
Single EU
supervisor
Single EU
deposit
guarantee
scheme
Common
resolution
authority
and fund
Single
rule book
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)?
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
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)
Liikanen group – next step of
banking sector regulation?
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
Sources of inspiration and stated
purpose
• Volcker rule (some activities prohibited), DoddFrank 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
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
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
Liikanen report (published on October
1.
2.
3.
4.
5.
the 2nd)
Legal separation of certain particularly risky financial
activities from deposit taking banks
Role of Recovery and Resolution frameworks further
increased (= wider separation as in 1) if required by
the resolution authority)
Amendments to provide more clarity to the bail-in
instruments
More robust risk weights for the determination of
capital requirements on trading assets and real estate
related loans
Further corporate governance reforms
Liikanen report (assessment)
1.
2.
3.
4.
5.
Ring fencing of risky activities: probably not an issue
for us (quantitative thresholds sufficient)
Additional ring fence dtto
Bail-in instruments: might have an impact on the cost
of funding (differentiated across our region)
Impact likely, will need further evaluation
Corporate governance reforms: probably not the
central issue for us given the business models applied
in our region
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 …
Selected group of European banks: structure of portfolio
(= all banks traded on stock exchanges)
Total 32 banks
of which: 10 larger
36 %
36 %
of which: 10 smaller
9%
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
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
Banking assets to GDP represent 150% in the USA
Assets of commercial banks in EU and in USA
(thousands of billions USD)
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)
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 …