Retail investor behaviour at times of financial crisis: Czech Republic September-October 2008

1. Retail investorbehaviour at times of financial crisis:Czech RepublicSeptember-October 2008 Radek Urban, ISČS

2. Summary • what crisis? • media • banks • other agents • markets • authorities • … still too soon to declare victory 2

3. What crisis? • no default, no takeover, no nationalisation • low penetration of investments in household assets • low percentage of equities in investments • no bank stopped withdrawals, no lines at branches • no mutual fund stopped redemptions • no TV coverage – other stories of the tabloid culture • reserved perception of media coverage • ….but still, increase in currency in circulation 3

4. Media – the „washing powder effect“ • mass market effect: „If it was on TV (in the press), I go to my shop (branch) and buy.“ • Media consumers do not differentiate who „paid“ for the news: • „ Who can lose savings?“„Who can lose assets?“ „Who has lost already?“ „Who will need government help?“ • Disclosure debate • Performance debate • Valuation debate • Credit quality debate • Liquidity debate 4

5. Banks . . . strong positioned • self funding position of Czech banks means no liquidity issues • high dependence on branch networks, low dependence on agent distribution networks = different communication channels • first week of nervousness, no real panic: client withdrawals and client claims peaked already • increased questions about deposit insurance and its parameters • increased interest in safe-deposit boxes • Incresed questions on off-shore banking in neighbouring countries • high motivation to channel money from investment products to bank deposits 5

6. Other agents . . . part of banking groups • money market funds lost some 5% of assets • most money market funds had credit exposure and repriced down by some 2% • battered investors in equity funds do not redeem • but buying has not started yet • bond and balanced funds not in the spotlight • life companies and pension funds are considered long-term • some two thirds of assets flowing from off-balance sheet products end up on balance sheets of group banks = function of very high market concentration 6

7. Markets . . . far from liquid • TED spread not a proper measure: corporate bonds illiquid for quite some time • government bonds suffered from massive bid-offer spread widening • repo market was never properly functioning as banks used to have enough credit lines • central bank stepped in with the repo window • still not enough bids as real money investors wait and see • equity market liquid at low prices • FX market liquid . . . but is Herstatt risk present? 7

8. Authorities . . . an anchor in a stormy sea government: sticks to principles in an environment where others maybe don´t central bank: calms depositors and market participants deposit insurance fund: witnesses high sensitivity on deposit insurance percentage (90% vs. 100%) 8

9. Too soon to declare victory . . . as of today Today or tommorrow there may be another surprise in the markets; and when we are through, textbooks will have to be rewritten. 9