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"New style" of financial services to help cure the crisis ...


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"New style" of financial services to help cure the crisis ...

  1. 1. “ New style” of financial services to help cure the crisis without contributing to the next one The Future of the World Financial Architecture and of the World’s Main Currencies in Assuring Economic Growth Prague, March 23-25, 2010 Piroska M. Nagy Senior Advisor, EBRD
  2. 2. Key Points <ul><li>Emerging Europe: proven resistance in crisis </li></ul><ul><li>But post-crisis clean-up is still significant </li></ul><ul><li>Prepare for the post-crisis world: </li></ul><ul><ul><li>Need for improved business model - local currency capital markets and LCY lending in the non-Czech Emerging Europe </li></ul></ul><ul><ul><li>Impact of Basel 3 </li></ul></ul><ul><li>Still large convergence potential in Emerging Europe </li></ul><ul><li>A whole new post-crisis world… </li></ul><ul><li>… to take advantage of </li></ul>
  3. 3. The global environment of finance <ul><li>More sustainable, but possibly slower growth </li></ul><ul><ul><li>Protracted recovery </li></ul></ul><ul><ul><li>Increased regulation </li></ul></ul><ul><li>Exit from government support </li></ul><ul><ul><li>for financial institutions </li></ul></ul><ul><ul><li>for macroeconomic demand </li></ul></ul><ul><li>Need to regain public confidence </li></ul><ul><li>Overall: adjust to a lower profitability world for banks </li></ul>
  4. 4. Implications and special issues for Emerging Europe <ul><li>Successful crisis management – proven track record </li></ul><ul><li>Impact of post-crisis clean-up </li></ul><ul><ul><li>Distressed asset management </li></ul></ul><ul><ul><li>Recapitalization </li></ul></ul><ul><ul><li>Risk Mitigation </li></ul></ul><ul><li>Need for sustainable lending </li></ul><ul><ul><li>Local currency lending/local capital market development </li></ul></ul><ul><li>Impact of regulation </li></ul><ul><ul><li>Increased role of non-banks and non-bank products </li></ul></ul>
  5. 5. Post-Crisis Cleanup: Legacy of the Crisis <ul><li>NPLs peaking now, high but not as high as generally feared; large country differences </li></ul><ul><li>Loan losses accumulated over the past 1-2 years </li></ul><ul><li>Low economic growth reduces client creditworthiness </li></ul><ul><li>Concerns about collateral valuation given declines asset values (e.g. real estate, equipment) </li></ul>
  6. 6. Post-Crisis Clean-up: Who provides credit guarantees <ul><li>To/Through Banks : </li></ul><ul><li>Credit guarantee companies </li></ul><ul><ul><li>Public sector </li></ul></ul><ul><ul><li>Private sector / mutual associations </li></ul></ul><ul><li>CDS market </li></ul><ul><li>Export credit agencies </li></ul><ul><li>Development banks </li></ul><ul><li>To Corporates: </li></ul><ul><li>Credit insurers (e.g. Euler-Hermes, Coface) </li></ul><ul><li>Export credit agencies </li></ul><ul><li>Development banks </li></ul>
  7. 7. Post-Crisis Clean-up: Risk mitigation/credit guarantees <ul><li>Public sector: encourage lending to targeted sectors (exporters, SMEs) </li></ul><ul><ul><li>Reduce the risk to banks where credit crunch is related to high risk perception – EBRD Credit condition survey of Feb 2010 </li></ul></ul><ul><ul><li>Mitigate to a small degree but mostly socialize the risk </li></ul></ul><ul><li>Private sector: engage in profitable, actuarially sound insurance transactions </li></ul><ul><ul><li>Mitigate risk through underwriting and monitoring standards </li></ul></ul><ul><ul><li>Price and charge for risk </li></ul></ul>
  8. 8. Post crisis clean-up: Distressed asset management <ul><li>Clear need on the basis of past crisis experience </li></ul><ul><li>But little has been done thus far </li></ul><ul><li>- IFC </li></ul><ul><li>- EBRD </li></ul>
  9. 9. Post-Crisis Clean-Up: Potential role for IFIs <ul><li>Single exposure risk sharing </li></ul><ul><li>Portfolio risk sharing </li></ul><ul><li>Additional capacity in the existing guarantee sector </li></ul><ul><li>SME recapitalization </li></ul><ul><li>Distressed asset management </li></ul>
  10. 10. Sustainable lending: Local currency Key to success <ul><li>Analyse the FX problem and sequence measures : </li></ul><ul><ul><li>If macro credibility is the problem, address that first </li></ul></ul><ul><ul><li>If underdeveloped local currency markets: address that </li></ul></ul><ul><ul><li>If moral hazard, externalities: regulate </li></ul></ul><ul><li>Involve all stakeholders – collective action problem </li></ul><ul><li>Keep the policy eye on the ball: a longer term project </li></ul>
  11. 11. Local currency market development – a road map <ul><li>Country-by-country approach </li></ul><ul><li>Joint country assessments by IFIs and possibly European institutions </li></ul><ul><li>Policy package with priorities </li></ul><ul><li>Distribution of tasks among stakeholders </li></ul><ul><li>Implementation </li></ul>
  12. 12. Local Currency - distributing tasks <ul><li>Governments, IMF, EC, ECB - macroeconomic policy frameworks   </li></ul><ul><li>Governments, IMF, World Bank, EBRD - LC public debt management </li></ul><ul><li>European Commission - regulating FX exposures and helping with legal frameworks </li></ul><ul><li>Home and host regulators - develop/coordinate regulatory approaches to FX lending </li></ul><ul><li>EC, WB, EBRD - advising on legal/institutional changes to develop local currency capital markets; physical infrastructure; instruments </li></ul><ul><li>Investing IFIs (EBRD, EIB, IFC (IBRD?)) </li></ul><ul><ul><li>Issuing LC bonds </li></ul></ul><ul><ul><li>Lending in LC </li></ul></ul><ul><ul><li>Investing into market structures </li></ul></ul><ul><ul><li>Helping with derivatives markets when needed  </li></ul></ul>
  13. 13. Local Currency - Banks’ role <ul><li>Internalize higher credit risks of FX – lower risk thus margin on unhedged LC loans </li></ul><ul><li>Discontinuing riskiest FX asset classes </li></ul><ul><ul><ul><ul><li>short term, unsecured consumer loans; </li></ul></ul></ul></ul><ul><ul><ul><ul><li>currencies (non-Euro) </li></ul></ul></ul></ul><ul><li>Improve disclosures and stress testing </li></ul><ul><li>When conditions are right, enter the long end of the LC market for funding and lending - </li></ul>
  14. 14. Regulation Key Elements of Basel III (reminder) <ul><li>Raise quantity and quality of capital </li></ul><ul><ul><li>Exclude minority shareholdings from Tier 1 capital </li></ul></ul><ul><ul><li>Exclude goodwill from Tier 1 capital </li></ul></ul><ul><ul><li>Exclude subordinated debt from Tier 2 capital </li></ul></ul><ul><ul><li>Capital charges on counterparty risk </li></ul></ul><ul><li>Raise liquidity </li></ul><ul><li>Reduce leverage </li></ul><ul><li>Strengthen banks’ risk management and disclosure </li></ul>
  15. 15. Regulation: Consequences in Eastern Europe (1) <ul><ul><ul><li>Overall backup: good capital levels and good quality of capital (not too much Tier 2 and Tier 3) and also liquidity </li></ul></ul></ul><ul><ul><ul><li>But impact may be large </li></ul></ul></ul><ul><ul><ul><li>Excluding minority stakes from common Tier 1 cap: </li></ul></ul></ul><ul><ul><ul><ul><li>Justified by crisis experience? </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Will likely hamper development of local equity markets </li></ul></ul></ul></ul><ul><li>Excluding goodwill from Tier 1 capital: </li></ul><ul><ul><li>Particular impact in some countries (Ukraine) </li></ul></ul>
  16. 16. Regulation: Consequences in Eastern Europe (2) <ul><li>Capital charges on counter party risks: </li></ul><ul><ul><li>May reduce parent bank funding of subsidiaries </li></ul></ul><ul><ul><li>May hinder local currency capital market development </li></ul></ul><ul><li>Excluding subordinated debt from Tier 2 </li></ul>
  17. 17. Regulation: Importance of less regulated segments: non-banks <ul><li>Banks: shifting to intermediation between borrowers/savers and non-banks financial sector </li></ul><ul><li>Pension funds and insurance industry </li></ul><ul><li>Government bond markets </li></ul><ul><li>Corporate bond issuance in local currency </li></ul><ul><li>Emerging Europe: room for a regional bond fund a la Asian Bond Fund? </li></ul>
  18. 18. Regulation: Missing elements for Emerging Europe <ul><li>Liquidity coverage ratio needs more emphasis on composition of liabilities, requiring better currency-by-currency matching of liabilities and assets. </li></ul><ul><li>Foreign exchange loans to borrowers without income in the same foreign currency </li></ul><ul><li>Cross-border supervision, crisis management, and crisis resolution (model in EE: “Vienna Initiative”) </li></ul>
  19. 19. A more sustained convergence play to return
  20. 20. Conclusions <ul><li>A still tougher short term should become bight around the corner </li></ul><ul><li>Proven crisis-resistance </li></ul><ul><li>More sustainable model with local currency opportunities </li></ul><ul><li>Some consolidation within the industry with new business and product opportunities </li></ul>
  21. 21. Thank you! Piroska M. Nagy [email_address] ;