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Financial Institutions Markets and Regulation
Thorugh Central Eastern European eyes
Király, Júlia (International Business ...
Selected topics through CEE eyes
FX lending: a special original sin
• (Market failure) Bad incentives – bubble
• (Market f...
I. FX LENDING
Banai-Kiraly 2014, Banai-Kiraly-Varhegyi 2009,
FX denominated retail lending boom in the CEE countries 1997-2013
4Kiraly CEE experience
FX loans for households/ total
ho...
FX deposits only partly fund FX loans
Funding of foreign currency loans
(Percent of GDP)
-10
0
10
20
30
40
50
60
70
80
90
...
FX lending to unhedged individuals (and SMEs) – a special form of the
original sin
Original sin: „If a country could not p...
SIDE EFFECT: overindebtedness due to FX lending (special bubble)
Case 1: the borrower is „buying” installment – i.e. borro...
Regulatory responses
Macroeconomic reforms!
Capital control (ban of FX loans) – not a possible solution within the EU
Deve...
A special interbank market: the swap market
Funding the FX loans in the banking sector:
 Deposits (on B/S) – safe solutio...
II. Home and host
Banai-Kiraly-Varhegyi 2009; Csajbók-Király 2012
Foreign ownership in the EU banking sector
11Kiraly CEE experience
Home-host market failure: reverse contagion
Before the crisis: loose credit control, cheap funding, over-equilibrium credi...
Home-host market failure: „Regulatory race to the bottom”
Raab is a river between Austria and Hungary
There are leather-wo...
Banking Union: Home and Host
Bankunion = union for the eurozone
To enter or not to enter ?
Intragroup liquidity management...
Selected topics
FX lending: a special original sin
Financial globalization: home and host banking
Some special issues – fr...
Additional references
Banai Ádám, Kollarik András, Szabó-Solticzky András: The topology of the Hungarian
Swap Market (in H...
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Financial Institutions Markets and Regulation Thorugh Central Eastern European eyes | COEURE Workshop on Financial Markets

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COEURE Workshop on Financial Markets

By: Király, Júlia, International Business School, Budapest

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Financial Institutions Markets and Regulation Thorugh Central Eastern European eyes | COEURE Workshop on Financial Markets

  1. 1. Financial Institutions Markets and Regulation Thorugh Central Eastern European eyes Király, Júlia (International Business School, Budapest) juliakiraly99@gmail.com
  2. 2. Selected topics through CEE eyes FX lending: a special original sin • (Market failure) Bad incentives – bubble • (Market failure) A special interbank market – the swap market Financial globalization: home and host • Reverse contagion • Regulatory race to the bottom • Bankunion Some special issues – from the point of view of a commercial banker 2Kiraly CEE experience
  3. 3. I. FX LENDING Banai-Kiraly 2014, Banai-Kiraly-Varhegyi 2009,
  4. 4. FX denominated retail lending boom in the CEE countries 1997-2013 4Kiraly CEE experience FX loans for households/ total households loans
  5. 5. FX deposits only partly fund FX loans Funding of foreign currency loans (Percent of GDP) -10 0 10 20 30 40 50 60 70 80 90 Czech Republic Poland Romania Serbia Lithuania Hungary Bulgaria Ukraine Latvia Estonia Domestic forex deposits Foreign deposits Total 5Kiraly CEE experience
  6. 6. FX lending to unhedged individuals (and SMEs) – a special form of the original sin Original sin: „If a country could not persuade its own citizens to lend in local currency at long maturities, it could not convince foreigners to do the same” = MACRO IMBALANCE  Lack of long term local currency denominated funds – cheap foreign funds (typical for the pre crisis period) PROBLEM OF THE LOCAL ECONOMY (can not be cured by regulation – good economic policy!)  Financial globalization – free flow of capital (in Europe: financial integration due to European Union, lack of any capital constraints) PROBLEM OF FINANCIAL GLOBALIZATION (Cure: capital control?)  Wide network of foreign owned banks with cheap parent funds PROBLEM OF FINANCIAL GLOBALIZATION (See later) 6Kiraly CEE experience
  7. 7. SIDE EFFECT: overindebtedness due to FX lending (special bubble) Case 1: the borrower is „buying” installment – i.e. borrows more than planned (individual indebtedness will be higher than planned) Case 2: due to loosening credit requirements even those will have access to credit, who would never be let under normal circumstances (the number of debtors increase) Case 3: the probability of default increases due to predator loans (high LTV, high PTI, NINJA loans, 30-35 year maturity) = MACRO IMBALANCE DUE TO BAD INCENTIVES (can be corrected? How effective are macroprudential measures? Do banks circumvent the regulation? ) 7Kiraly CEE experience
  8. 8. Regulatory responses Macroeconomic reforms! Capital control (ban of FX loans) – not a possible solution within the EU Developing the long term LC market (easing mortgage bond market entry) Optimizing FX lending regulation: capital (2nd pillar) & liquidity (FX-NSFR; mortgage lending regulation) Optimizing FX lending consumer protection (LTV and PTI control) A special approach (Mero-Piroska 2015) „locally initiated macroprudential tools were often used to satisfy local policy makers’ own agendas: financial nationalism in Hungary and protectionism in Slovakia.” 8Kiraly CEE experience
  9. 9. A special interbank market: the swap market Funding the FX loans in the banking sector:  Deposits (on B/S) – safe solution (?) – maturity mismatch ? (cure: long LC funding requirement?, FX based LCCR?)  Swap (off B/S) – „toxic funding”! Dried up market segment! (topology (Banai et al 2014) , interconnectedness – contagion) Immediate responses in Hungary to liquidity crisis – October 2008  (Local currency: new tender facilities (2W, 6M), cutting the reserve rate, expansion of the range of collateral)  Foreign currency: HUF/EURswap tenders (O/N, 1W, 3M, 6M); EUR/CHF swap tenders (Home-host cooperation? and the ECB?) 9Kiraly CEE experience
  10. 10. II. Home and host Banai-Kiraly-Varhegyi 2009; Csajbók-Király 2012
  11. 11. Foreign ownership in the EU banking sector 11Kiraly CEE experience
  12. 12. Home-host market failure: reverse contagion Before the crisis: loose credit control, cheap funding, over-equilibrium credit growth High exposure of Euro zone to CEE countries: fear of sudden stop High level of FX loans: fear of sudden stop Solution: VIENNA INITIATIVE (EBRD, IMF, WB, IFC, local authorities and the private sector) 12Kiraly CEE experience 5 year CDS spreads
  13. 13. Home-host market failure: „Regulatory race to the bottom” Raab is a river between Austria and Hungary There are leather-work plants in Austria along the Raab Strictly regulated against pollution How did the foam emerge on the Hungarian side? Regulatory race especially dangerous to the more vulnerable country 13Kiraly CEE experience
  14. 14. Banking Union: Home and Host Bankunion = union for the eurozone To enter or not to enter ? Intragroup liquidity management: „free to chose ?” Intragroup capital management: European level resolution ? 14Kiraly CEE experience
  15. 15. Selected topics FX lending: a special original sin Financial globalization: home and host banking Some special issues – from the point of view of a commercial banker - Paradigm shift (and the „regulatory risk”) - Over-capitalization - Banking and insurance (activity restrictions) - Be simple – be effective (find the good incentive system) - Let the market go! - „Regulatory risk”: permanent change („dynamic regulation”); human burden; 15Kiraly CEE experience
  16. 16. Additional references Banai Ádám, Kollarik András, Szabó-Solticzky András: The topology of the Hungarian Swap Market (in Hungarian) MNB Working Papers 108 2013 Banai, Á., Kiraly J, Várhegyi, É.: „ A special aspect of the past 20 years: dominance of foreign banks in merging Europe with special regards to Hungary” CICM Conference paper 2009. September Banai,Á., Kiraly, J.: Foreign Currency Lending: The "flow" and the "stock" problem. National Bank of The Republic of Macedonia: 2nd Research Conference "Policy Nexus and the Global Environment: A New Consensus Emerging from the Crisis?", NBRM, Skopje, 2014 Csajbók, A., Király J: “Cross-border coordination of macroprudential policies” in Claessens, Stijn – Evanoff, D. – Kaufman, G – Kodres, L (ed) Macroprudential regulatory policies. World Scientific Publishing CO 2012 pp 65-89 Mero, K., Piroska, D. (2015): Central and Eastern European countries’ twist with macroprudential policies – the cases of Hungary and Slovakia Manuscript 16Kiraly CEE experience

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