610 likes | 792 Views
Assessing Financial Stability Polish Experience – Supervisory Outlook Grzegorz Bielicki Director Off-Site Supervision Department General Inspectorate of Banking Supervision National Bank of Poland. International Conference on Financial Stability and Implications of Basel II
E N D
Assessing Financial Stability Polish Experience – Supervisory OutlookGrzegorz BielickiDirector Off-Site Supervision DepartmentGeneral Inspectorate of Banking SupervisionNational Bank of Poland International Conference on Financial Stability and Implications of Basel II Istanbul 16-18 May 2005
NBP Overview • Financial system in Poland • structure of the system • implications for financial stability • institutional framework • Assessing financial stability by Polish central bank • organisational framework • scope of analysis • leading indicators • key reports • Strategic issues • contingency planning and crisis management • IAS • Basel II • home-host relations • Summary of current situation & main sources of risk • Conclusions
NBP Financial system in Poland • Financial system is small by amount of total assets (ca EUR 180 bn) and as a portion of GDP (ca 80%) On the other hand number of institutions is relatively significant (57 commercial banks, 596 cooperative banks, 83 credit unions, 68 insurance companies, 15 pension funds, 120 investments funds) • Financial system is heavily bank-orientated however other types of financial institutions develop strongly since the end of the 1990s. • Banks assets cover almost 75% of total assets • Insurance companies are second player in the market • Pension funds are growing very rapidly, stimulated by the social security system reform in 1999 • Investment funds stimulated by interest rate cuts (2001-2003) and the introduction of tax on deposit interest
NBP Total assets of financialinstitutions in Poland (PLN billion)
NBP The largest bank is still bigger then total assets of other financial sector components(2004, PLN billion)
NBP Financial system in Poland (continued) • Due to lack of local capital privatisation of financial sector dominated by foreign investors (as in other NMS of EU) Main investors: UniCredito, HypoVereinsbank, Citigroup, ING, Allied Irish Bank, Commerzbank, KBC, BCP • Few significant players • PKO Bank Polski (the largest bank in NMS), Pekao, Bank BPH, PZU (the largest insurance company in NMS), ING BSK • 6 banks among Top 100 banks in Europe by market cap • Medium concentration in banking and high in other segments • 5 largest banks control 50% of total assets (CR10 - 72%) • PZU controls 45% of insurance market • 2 largest pension funds control 50% of total assets • Satisfactory transparency of the system due to listed 9 of 10 largest banks on the Warsaw Stock Exchange
NBP Share of foreign investors in total banking sector assets in the NMS of EU(by % of controlled assets) Source: ECB
NBP Geographical distribution of foreign investorsin the Polish banking sector assets(by % of controlled assets)
NBP Market cap of European commercial banks(PKO Bank Polski occupies 40-50 position) HSBC EUR 140.5 bn PKO Bank Polski EUR 6.3 bn Pekao EUR 5.0 bn Bank BPH EUR 3.3 bn UniCredito EUR 28.5 bn HVB EUR 14.3 bn Other Polish banks Commerzbank EUR 9.7 bn Source: Bloomberg (May 12, 2005)
NBP CR5 Index in EU Source: ECB
NBP Implications for financial stability in Polandarising from the structure of financial sector • Stability of banking sector is crucial for stability of the whole financial sector (key role of the banking supervision authorities) • Concentration requires „close look” to key players • Ownership structure requires „close look” on the activity of parent banks (special role of cooperation with home country supervisors) • Relatively small financial market means that financial crisis in other emerging markets economies could affect Poland in short term (due to low liquidity of the market and treatment by foreign investors all emerging markets as „one piece”) On the other hand it could be easier to handle crisis (cost of the crisis in the mid 1990’s was ca 3.5% of GDP)
NBP Costs of the banking crisis(as % of GDP) Source: Honohan, Klingebiel “Controlling the Fiscal Costs of Banking Crises”, World Bank
NBP Financial sector - institutional framework Primary banking sector regulator Commission for Banking Supervision (CBS) Insurance and Pension Funds Commission National Bank of Poland (NBP) Monetary Policy Council (MPC) Banking Guarantee Fund Ministry of Finance Securities & Exchange Commission
NBP Organisational structure of the central bankin the context of the assessing financial stability Governor of NBP Chairman of CBS, MPC and NBP MPC CBS NBP General Inspectorate of Banking Supervision – banking sector • Financial System Department – banking sector and financial system • Payment System Department - payment and settlement system • Domestic Operations Department – money market and banking sector liquidity • Macroeconomic and Structural Analysis Department – monetary policy • Bureau of Macroeconomic Research - macroeconomic modelling
NBP General Inspectorate of Banking Supervision (GINB)executive arm of CBS(467 staff) Commission for Banking Supervision National Bank of Poland General Inspector of Banking Supervision member of CBS Licensing Division Macro-prudential Unit 14 analysts Supervisory Policy Division Banking System Off-Site Analysis Division Micro-prudential Units 41 off-site analysts On-site Examination Division Co-operative Banking Division
NBP General Inspectorate of Banking SupervisionKey functions • Licensing banks, monitoring ownership structure and adequacy of management • Drafting prudential regulations for banking system (in compliance with EU standards) • On-site examination • Off-site supervision • micro-analysis (individual bank) • macro-analysis (trends, sources of risk, assessment the impact of monetary policy, tax policy and regulatory activity on the banking sector situation) • supervision on consolidated basis
NBP Inspections run by GINB in commercial banks (270 on-site examiners) Top 10 banks and banks with overall CAEL rating 4 or 5 are subject to full-scope examination every 2 yrs
NBP Financial System Department of NBP(38 staff) Deputy Governor of NBP Financial System Department Financial Stability Unit Financial Markets Development Unit Operational Analysis Unit moved recently to Domestic Operation Department Financial Market Analysis Unit
NBP Financial System Department of NBPKey functions • analysing stability of the financial system • analysing development of the financial system • analysing financial markets from the perspective of monetary policy • developing and operating the system of identification of systemic threats and developing and coordinating management of crisis situations by the central bank
NBP General Inspectorate of Banking Supervisionvs.Financial System Department of NBPin the context of the assessing financial stability • General Inspectorate of Banking Supervision • main focus on the banking sector • complex analysis of individual banks Financial System Banking Sector • Financial System Department • - main focus on the whole financial system • complex analysis of the whole system
NBP AssessmentFinancial StabilityThe scopeof macro-prudential analysis Macro-economy Financial markets Financial institutions special focus on banking sector Assessment Financial Stability Foreign parent banks monitoring Others Institutional & legal framework
NBP Financial stability assessment in Poland is similar to international standards • Supervision techniques inspired by international experience • focus on risk approach and in-depth, comprehensive exams in banks • in the 1990’s Polish supervisors were trained in the US • Participation in international bodies • Financial Soundness Indicators (FSI) used in Poland are similar to FSI used by IMF In 2001 IMF made Financial System Stability Assessment of Poland (FSSAP) Conclusion: ”The mission concluded that no major immediate issues in terms of systemic stability were apparent”
NBP Key Macro-economy Indicators
NBP Key areas of analysis of non-banking financial institutions and financial markets
NBP Key areas of analysis of individual bank CAMELIFO Approach Evaluation ofstatistical models used by banks to asses market risks Capital Assets Management Market position & reputation Earnings Liquidity Ratings – FITCH, Moody's, S&P Interest Rate Risk Financial Soundness of Parent Bank FX Risk Supervisory Tools 1/ UBPR 2/ Supervisory Profile 3/ Executive Summary Operational Risk
NBP Key areas of analysis of the banking sectorare similar to individual bank analysishowever macro view perspective is applied Structure of the sector & distribution channels Balance sheet & off-balance sheet items (structure, key trends) Earnings (structure, key trends, efficiency) Liquidity Risk Credit Risk (FX loans, large exposures, industry risk) Market Risk (FX risk, IRR, equity price risk, property price risk) Capital position and loss-absorbing capacity Unique database covering significant exposures (65% of total loans) Uniform Bank Performance Report scenario analysis VaR techniques stress testing distance to default
NBP Key Products
NBP Strategic Issues • Contingency planning & crisis management • IAS implementation • Basel II & CRD • Cross border banking • Outsourcing • Consumer protection Home-Host issues
NBP Contingency planning & crisis managementare necessary for safety of financial system • Prudential supervision, risk analysis and oversight of the payment system are essential but not sufficient for financial stability • Crisis management and resolutions are absolutely necessary to create safety net On country level • Emergency Liquidity Assistance (ELA) is the main device of central banks to deal with banking crisis On EU level • Memorandum of Understanding on high level principles of co-operation between the banking supervisors and central banks of the European Union in financial crisis situation (sign in 2003, Poland entered the MoU in July 2004) • Memorandum of Understanding on co-operation between the banking supervisors, central banks and finance ministers of the European Union in financial crisis situation (to be signed in May 2005)
NBP IAS implementation (in the part adopted by the European Commission) • IAS implementation • majority IAS aspects already covered in the amendment of Polish Accounting Act in 2001 and 2004 • banks which control 75% of total banking sector assets will report under IAS • In short run IAS implementation can deteriorate data comparability and complicate on-going analysis but in longer run will have positive impact on assessment of financial stability and ensure better comparability than historic accounting First report from one of Top10 bank encouraging (differences reported are marginal)
NBP New Basel Accord & Capital Requirements Directive (CRD) • Preparation in Poland – special interdepartmental project team in the banking supervision • General perception of Basel II and CRD positive, however, some areas of concern: • high complexity, which could be a problem for small banks (especially cooperative banks) • implementation costs for supervisors and banks • lower capital requirements for more advanced banks - trade-off: less capital vs. better risk management • cross border issues (home-host - relations & responsibilities)
NBP New Basel Accord & Capital Requirements Directive (CRD)(continued) • New challenges • Pillar 1 – introducing new methods for calculation credit risk capital requirements (STA, FIRB, AIRB), and capital requirements for operational risk • Pillar 2 – ICAAP, SREP, economic capital, supervisory measures, risk not covered by Pillar 1 • Pillar 3 – market discipline, disclosure requirements • cross border issues (home-host) • Results of QIS 3 • 12 banks cover 80% of total banking sector assets • STA approach more favourable for Polish banks then FIRB • total capital requirements rose by 10%, while in FIRB by 37% • CAR dropped by 1.2 in STA and 4.0 in FIRB Main reasons for differences: conservative approach in FIRB models and data from the bottom of the business cycle
NBP Results of QIS3Comparison Polish banks with G10, EU & Others(Group 2 – Tier 1 < EUR 3 bn)
NBP Results of QIS3 - STA vs. FIRB(no bank reported CAR below 8) Main reasons for differences: 1/ conservative approach in FIRB models 2/ data from the bottom of business cycle
NBP Pillar 2Internal Capital Adequacy Assessment Process (ICAAP) and Supervisory Review Evaluation Process (SREP) • Key objectives: • create incentive for banks to develop modern risk control, risk management systems, and capital planning processes • align better supervisory assessment and bank internal capital process • ICAAP – internal bank process: setting up internal (economic) capital against its risks and for other purposes (e.g. better rating) • Main challenges now: • ICAAP in small institutions. Problem with assessment of economic capital in simple institutions • Non-easily quantifiable risks – pro-cyclicality and reputation risks • Comparability, level playing field in SREP • Supervisors role as regards Pillar II: to challenge banks` ICAAP in context of Pillar I and II risks • Corporate governance part of the Pillar II assessment
NBP Home – Host supervisory relationsmore important under Basle II Perhaps time to revise Basle Concordat of 1983 to reflect in more balanced way recent trends in emerging markets and information flow Home to Host • Last 15 yrs – dynamic expansion of multinational banks into other countries • Need to coordinate better supervisory efforts • In many non-G10 countries due to privatisation of major local banks - international banks control local, systemically important banks (SIB) • Due to Basle II – many processes of implementation coordinated and developed at group level • The more delegation of Basle II work to consolidated (Home supervisor) – the more coordination needed and more information flow from Home to Host • But also input needed from Host to Host to capture local risks (local models, local data) • Need to re-balance international standards of supervisory cooperation to reflect better needs of Host supervisors regarding their SIBs
NBP Crucial role of local supervisor and central bankas well ascompliance and corporate governance on local levelfor country’s financial stability Many subsidiariesand branches of foreign banks play systemically important role on local market No clear evidence of cross-border banking group failure • No international schemes for sharing of budgetary (fiscal) costs of cross-border banking group failure, especially in case of systemic bank crisis • No supranational liquidity supplier • No international deposit insurance • No legal liability of parent for deposits of subsidiary (only “moral responsibility”) and no explicit liquidity support but • Responsibility of local deposit insurance agency • Only local ELA potentially available • Expectation of local government intervention in case of SIB crisis
NBP Subsidiaries of foreign financial groupplay significant role in Polish banking sectoralthough they are a fraction of parent balance sheet
NBP Total assets of Polish banking sector are lower thentotal assets of parent institution
NBP Subsidiaries of foreign financial groupsplay systemic rolein NMS and some old EU members Source: ECB
NBP Overview of key trends in Polish economy & financial markets 2004 • GDP grew by 5.3% driven by EU accession, exports (30.3% in PLN), individual consumption (3.2%) and investments (5.1%) • Industrial output rose by 12.3% and connected with CIT reduction (from 28% to 19%) push corporate profits to record high • FDI flow continue • CPI rose by 4.4% (now declining) and caused tightening in monetary policy by 125 bps (in 2005 lose by 50 bps) – monetary target 2.5% (+/-1%) • PLN appreciation (13.5% against EUR, 20.1% against USD) • Recovery on the bond market (10YTB – 5.8%) • Solid returns on the equity market (WIG rose by 26.9%) • Consumer confidence index improved after EU accession • Expectation for upgrade to A- by S&P in the next 12-months
NBP After 2001-2002 slowdown economy recovered and get a momentum(growth rates & unemployment rate)
NBP FDI flows continue Cumulated FDI (over 1 mn) since 1993 amounted USD 80.6 bn It is expected that in 2006 FDI should exceed USD 10 bn French 19.9% Netherlands 13.8% US 12.6% German 12.6% Financial sector 23.4%
NBP Corporate, banking & insurance companiesprofitsreached record levels
NBP Interest rates continue to drop in the long term
NBP After sell-off in mid 2003 - mid 2004 periodbond market rebounded and yields go to EU levels(yields 10 Treasury bonds) Source: Bloomberg
NBP PLN exchange rates against major currencies are stable in the long term
NBP Equity markets in Eastern Europeoutperform markets in matured economies since 2002(banking stocks form 45% of total market cap)
NBP General trends in the Polish Banking Sector • Ownership structure dominated by foreign financial groups, consolidation stopped (depends on foreign banks decisions) • After poor period profits jump to record highs, efficiency ratios on average EU levels • Retail banking main driver of banking income and main area of banking competition (especially mortgage loans), while corporate loans shrunk • Credit risk remain main source of risk, FX risk and other market risks are relatively low • Strong improvement in loan portfolio quality • Difficulties in raising deposits from households
NBP Corporates reduce loans and increase depositson opposite households reduce deposit and increase lending's (loans & deposits growth rates)