POST-CRISIS OPPORTUNITIES FOR CENTRAL ASIAN BANKS

1. POST-CRISIS OPPORTUNITIES FOR CENTRAL ASIAN BANKS • Presentation of Istvan LENGYEL • Secretary General • Banking Association for Central and Eastern Europe

2. CENTRAL ASIAN BANKS AND THE CRISIS • Two very different patterns of pre-crisis development • Kazakhstan: excess to large-scale foreign funding of the largest banks, boorowing-driven aggressive strategies, high loans-to-deposits ratio (at the peak over 200%, very high pre-crisis growth rates (2006: +96% p.a.) • Other Central Asian countries:Lower growth rates, more limited access to foreign borrowing, lower LTD (Kyrgyzstan - September 2008: 104%) BUT: SUBSTANTIAL DIFFERENCES BETWEEN COUNTRIES BELONGING TO GROUP 2 (Kyrgyzstan, Tajikistan, Turkmenistan)

3. CENTRAL ASIAN BANKS AND THE CRISIS • LESSONS OF THE CURRENT CRISIS • MACROECONOMICS: in this crisis, countries with more closed economies were hit less BUT • indirectly (through decreasing workers’ remittances, export earnings) the crisis also reached relatively closed economies - BANKING SYSTEM: relatively small size of the banking system was another advantage • banks relying more on domestic funding suffered less BUT • international turbulences, fear of problems in banks also spread to banks which seemed to be relatively isolated from world financial markets DECISIVE ROLE OF THE STATE AND BANK REGULATORS IN AVOIDING LARGE-SCALE PANIC

4. WHAT HAVE WE LEARNT (HOPEFULLY)? • Modern world is highly interconnected and interrelated • Information spreads with incredibly high speed (Is Hungary the next Iceland?) • Events are driven by correct or incorrect information • Markets are driven by greed and fear • Markets are not efficient • Self-regulation does not work • Deregulation creates new bubbles (is China the next one?) STILL With proper policies, financial discipline and self-restrict of foreign borrowing, countries may counter-balance market forces

5. PERSPECTIVES OF CENTRAL ASIAN BANKS STRATEGIC STARTING POINT – WHERE SHOULD WE GO? • Classical principles of banking are not dead • The crisis was the result of ignoring these principles • Learning process by CEE/CIS banks should not stop BUT Critical understanding of Western banks’ experience is needed Western banks should also learn from us

6. STRATEGIC PROBLEMS AND POSSIBLE ANSWERS LOW CAPITALISATION 2. LACK OF LONG-TERM FUNDING SOURCES Recapitalisation from domestic sources, state intervention, foreign ownership INCREASED ROLE OF INTERNATIONAL FINANCIAL INSTITUTIONS Pension reform, life insurance, Bausparkasse system IFIs, intergovernmental funds PERSPECTIVES OF CENTRAL ASIAN BANKS

7. 3. EXPENSIVE DOMESTIC FUNDING 4. LOW PROFITABILITY, DIFFICULTIES IN BUILDING UP CAPITAL, INVESTING IN BRANCH NETWORK DEVELOPMENT, IT AND OTHER SYSTEMS 5. LACK OF TAILORED DEPOSIT AND LOAN PRODUCTS 6. LOW LEVEL OF RISK MANAGEMENT Proper macroeconomic policies, reasonable budgetary policy, support of savings, deposit insurance Cheaper funding, cost-efficiency, control over asset quality, training Product development, training Investment in RM, staff training TRAINING OF THE MANAGENT AND THE SHAREHOLDERS PERSPECTIVES OF CENTRAL ASIAN BANKS

8. PERSPECTIVES OF CENTRAL ASIAN BANKS • TRAINING IS OF KEY IMPORTANCE IN DEVELOPING THE BANKING SECTOR IN CENTRAL ASIA • A CRITICAL APPROACH IS NEEDED • THE GOAL OF THE TRAINER SHOULD BE TRANSFER OF EXPERIENCE, KNOWHOW AND KNOWLEDGE ALWAYS TAKING INTO CONSIDERATION LOCAL EXPERIENCE AND KNOWLEDGE (Should ex-Lehman bankers teach risk management?)

9. SUMMARY CENTRAL ASIAN BANKS HAVE UNIQUE OPPORTUNITIES OF DEVELOPMENT THEY MAY AVOID REPEATING PROBLEMS COMMITTED BY THEIR PEERS IN THE REGION AND IN THE WEST TO REALIZE GROWTH OPPORTUNITIES, SUPPORT OF THE GOVERNMENT, THE CENTRAL BANK AND INTERNATIONAL FINANCIAL INSTITUTIONS IS NEEDED BANKS SHOULD INVEST (MAYBE JOINTLY WITH THE GOVERNMENT) IN THE EDUCATION OF CLIENTS CLOSE CO-OPERATION WITH THE PRESS IS ALSO NEEDED TO PROVE THAT BANKS ARE SOCIALLY USEFUL, RESPONSIBLE INSTITUTIONS!