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Madis Müller. Finance Estonia Forum 2014

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Finance Estonia Forum 2014, 19.11.2014

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Madis Müller. Finance Estonia Forum 2014

  1. 1. FinanceEstonia Forum 2014 Madis Müller 19 November 2014
  2. 2. 2 The decline in government bond yields driven by the accommodative monetary policy 40% 35% 30% 25% 20% 15% 10% 5% 0% Interest rates on ten-year government bonds 2010 2011 2012 2013 2014 Portugal Ireland Italy Greece Spain Germany
  3. 3. Differences in the cost of borrowing for corporates remain substantial 3 8 7 6 5 4 3 2 1 0 Interest rates on long-term bank loans to the non-financial corporate sector 2008Jan 2008Apr 2008Jul 2008Oct 2009Jan 2009Apr 2009Jul 2009Oct 2010Jan 2010Apr 2010Jul 2010Oct 2011Jan 2011Apr 2011Jul 2011Oct 2012Jan 2012Apr 2012Jul 2012Oct 2013Jan 2013Apr 2013Jul 2013Oct 2014Jan 2014Apr 2014Jul Cyprus Germany Spain Greece (GR) Ireland Italy Portugal
  4. 4. What has been driving the change in credit standards? 4 15 10 5 0 -5 -10 Changes in credit standards applied to the approval of loans or credit lines to enterprises; diffusion index Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2012 2013 2014 Cost of funds Risk perceptions Competition Credit standards - actual Source: ECB, Bank Lending Survey
  5. 5. Banks still struggling with bad loans, while the weak economy adds pressure on profitability 5 25% 20% 15% 10% 5% 0% -5% Return on Equity of large EU banking groups 2006 2007 2008 2009 2010 2011 2012 2013 1H 2014 1-3 quartile median Source: European Systemic Risk Board
  6. 6. European Single Supervisory Mechanism (SSM) operational from 4 November 2014 • new system of banking supervision for Europe • comprises of the ECB and national supervisory authorities of euro area countries • with an objective to ensure the safety and soundness of the European banking system and increase financial integration and stability • one of the two pillars of the EU banking union, along with the Single Resolution Mechanism „We think that with the SSM, we have the best of both worlds: the expertise of national supervisors and also some distance in the decision-making process that will allow us to avoid national bias.“ D. Nouy, Chair of the Supervisory Board of the SSM, interview with Äripäev (03/09/2014) 6
  7. 7. The Comprehensive Assessment by the ECB supporting the confidence in European banks • The resilience of 130 of the biggest banks in the euro area as at the end of 2013 was analysed • 25 banks had a shortfall in capitalisation of a total of 24,6 billion euros – 15,2 billion euros of this already built up this year • Estonian banks (Swedbank, SEB Bank and DNB Bank) passed the assessment successfully Reduction in CET1 ratio by country of participating bank - adverse scenario SSM median 7 16% 14% 12% 10% 8% 6% 4% 2% 0% -2% -4% SI GR CY BE IE PT NL LU IT DE LT AT LV FI FR MT SK ES EE Source: ECB
  8. 8. Efforts to reinvigorate non-bank lending in Europe • Securitisation: – the initiatives by: • the Association of Financial Markets in Europe/European Securitisation Forum (AFME/ESF) • the European Commission • the Bank of England’s and the ECB’s pro-securitisation report • EU Commission’s initiative on the Capital Markets Union – a proposal with details yet to be developed • The asset-backed securities purchase program and the covered bond purchase program by the ECB – potential positive spillover effects on all types of assets (incl. corporate bonds) – the total of 400 billion EUR of ABS and 600 billion EUR of covered bonds qualify as purchasable assets – the programs will last at least two years 8
  9. 9. Efforts to reinvigorate non-bank lending in Europe (cont.-d) … while the growth in “shadow banking” has picked up already. 9
  10. 10. Estonian banking sector strong in terms of capital and profitability 10 0% 10% 20% 30% 40% MT EE LU HR IE DK LT LV BE SK BG CZ RO FI DE HU UK PL EU euro area GR FR CY SI NL PT AT ES SE IT Source: ECB Banks' Tier1 ratio (2013) Banks' return on assets (2013) -3,4% -8,0% EE PL CZ LT SK LV MT BG SE LU FI BE ES FR NL DK EU UK RO euro area HR DE HU GR AT PT IT IE CY SI -1.0% -0.5% 0.0% 0.5% 1.0% 1.5% 2.0%
  11. 11. Increase in domestic savings in Estonia has continued 11 3,500 3,000 2,500 2,000 1,500 1,000 500 0 2007 2008 2009 2010 2011 2012 2013 2014 EUR million Assets of investment and pension funds third pillar pension funds second pillar pension funds real estate and hedge funds interest funds stock funds 12,000 10,000 8,000 6,000 4,000 2,000 0 2007 2008 2009 2010 2011 2012 2013 2014 EUR million Bank deposits of corporates and households other deposits time and saving deposits overnight and demand deposits Source: Eesti Pank
  12. 12. Do Estonian businesses have sufficient access to funding? 12 40% 30% 20% 10% 0% -10% -20% 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Corporate sector debt liabilities´ structure 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 domestic financial sector domestic non-financial enterprises other domestic sectors foreign debt annual growth of debt (right scale) Source: Eesti Pank
  13. 13. Bank lending – no visible problems 13 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Factors limiting production growth in industry 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 none demand labour equipment other financial Source: European Commission
  14. 14. Capital markets – no visible progress The last IPO on the stock exchange in 2010; bond market still dormant 14 250 200 150 100 50 0 6,000 5,000 4,000 3,000 2,000 1,000 0 2007 2008 2009 2010 2011 2012 2013 EUR million EUR million Market capitalisation and monthly turnover of shares listed on the Tallinn Stock Exchange other stocks (left scale) Tallinna Kaubamaja (left scale) Tallinna Vesi (left scale) Tallink Grupp (left scale) Olympic Entertainment (left scale) Eesti Telekom (left scale) 250 200 150 100 50 0 1200 1000 800 600 400 200 0 2007 2008 2009 2010 2011 2012 2013 2014 EUR million EUR million Total volume of bonds issued and new bonds issued quarterly total volume of bonds issued (left scale) issued new bonds (right scale)
  15. 15. But – early promising signs! • The Baltic Innovation Fund (BIF): – EUR 200 million invested in Baltic private equity and venture capital funds over 4 years • Review of regulation on investment funds – draft legislation proposed by the Ministry of Finance • easier to start different types investment funds • review of investment constraints on pension funds, allowing for more investment in local assets 15
  16. 16. • Do we need an active Estonian capital market or easy access to funding for Estonian companies? – room for more regional cooperation? • Do we know where is the demand for alternative sources of funding for businesses most pressing? – access to equity and mezzanine probably more constrained than straight debt? • Do we have local savings to meet that demand? – seems to be the case… • How to make the demand and supply meet? – necessary to educate both sides? • Role of the government – focus on the regulatory framework rather than outright funds 16 Questions we still need to discuss:

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