By Vladimír Tomšík (Bankovnictví 25.5.2012)
2011 was another year of continued stabilisation on the Czech financial market following the turbulent events of the global financial crisis. Although bank profits last year fell by almost 4 per cent, this was primarily caused by writing off the value of Greek bonds. If it were not for these events, the economic results of banks would have exceeded those of the previous year. The profitability of shareholders’ equity in Czech banks is very high by European standards. However, at the end of 2011, there was an economic slump that will most likely show up this year as a shallow recession. Even though a certain part of this may be blamed on the necessary fiscal measures of the government, a dominant factor is understandably the development throughout all of Europe. While the ECB was still increasing its interest rates in April and July of last year, it was clear at the end of the year that rates must be quickly lowered once again. Most of the European stock markets during the year lost more than a fourth of their value, and economic outlooks sharply deteriorated. In spite of this development, lending in the Czech banking sector continued to recover. Lending improved for non-financial institutions as well as households. Although an overall lending growth rate of around 6 per cent is substantially less than the growth rate for the volume of loans prior to the outbreak of the crisis, in comparison with the practically stagnating volume of loans in the Eurozone, this is by no means a bad result.
More stringent banking supervision.
From the perspective of financial market supervision, there were no earth-shattering events last year. The CNB continued to strengthen banking supervision, to carry out stress tests, and to closely monitor the capital adequacy of banks. As at the end of 2011, capital adequacy exceeded 15 per cent, while regulatory requirements are at 8 per cent. Thus the capital adequacy of banks is almost double this amount, and Czech banks had surplus capital of CZK 144 billion. The increased demands on regulatory capital, which is happening throughout the EU, should proceed at a relatively smooth pace in the Czech Republic. In addition, the extraordinary monitoring situation for building societies continued in connection with changes in the terms of building savings. An increased level of supervision over insurance companies focused on the adequacy of premiums for liability insurance relating to the operation of motor vehicles and the sufficiency of technical reserves for certain insurance companies. Last year, the central bank contributed to the implementation of the rapidly changing rules of the EU in the area of financial markets and modifications to the regulatory framework in the Czech Republic. The bank cooperated with the Czech Ministry of Finance and other government bodies in preparing the new acts; it contributed to preparing certain acts regulating the business of financial institutions and other entities subject to regulation and supervision. Some of the important legislative changes included the amendments to the Act on Banks, the Act on Cooperative Savings Banks, and the Capital Market Act, which have incorporated into our legislation amendments to the Directive on Capital Requirements (Directives 2006/48/EC and 2006/49/EC, referred to as CRD III). These changes regulate the new competencies of the CNB, for example, determining the significance of branch offices, the remedial measures for ensuring sufficient amounts and composition of capital, and the activities of the committee of supervisory authorities. During November and December, a mission of the International Monetary Fund (IMF) took place as a part of the Financial Sector Assessment Program for in the Czech Republic. The objective of the IMF mission was especially to assess the stability of the Czech Republic’s financial system, to identify the risks confronted by the financial sector, and to evaluate the existing instruments and procedures for resolving systemic problems in the financial sector. The results will be published this year.
New European institutions.
On 1 January 2011, several new European institutions had commenced their operations. These along with the national financial market supervisory authorities will comprise the European System of Financial Supervision (ESFS). In addition to the national supervisory authorities, this system will include the European Systematic Risk Board (ESRB) and the European Supervisory Authorities (ESAs). The ESAs are made up of the European Banking Agency (EBA), the European Securities and Markets Agency (ESMA), the European Insurance and Occupational Pensions Authority (EIOPA), and their Joint Committee (JC), which functions as a forum for cooperation between the ESAs. The ESFS is an important change in the institutional structure of financial market supervision. As a part of the activities of the ESFS, the CNB has always made an effort to prevent the gradual transfer of power from the national supervisory authorities to the European authorities (and in turn, the division of power from operational responsibility and financial market stability), to limit the growth of excessive regulation and reduce the administrative burden for the national supervisory authorities and financial institutions, to strengthen financial institutions and their effective supervision, and to find adequate solutions for cross-border issues in the area of financial markets. The CNB strongly advocates the EBA’s role as only coordination and not as decision-making. The EBA has no accountability. This accountability always lies at the national supervision level, and it is, therefore, essential that they have the authority as well.
What should we expect?
The macroeconomic environment is less favourable this year than we anticipated a year ago. However, economic stagnation should be replaced by recovery at the end of this year - and a slight increase in GDP of 2 per cent can be expected next year. Nevertheless, even this growth will not be sufficient enough to reduce unemployment and to significantly improve the profitability of non-financial firms. Therefore, a significant decline in the share of classified loans in the portfolios of banks cannot be expected in the upcoming quarters. This applies also to household loans, because the disposable income of households will be sluggish this year and apparently even next year. In addition, the real estate market has not yet shown any signs of recovery, so for the time being, the continuation of declining prices and reductions in the value of real estate collateral cannot be ruled out in this sector.
Rapid legislative development.
Legislative changes that will affect the financial sector in the upcoming period are not only domestic in nature. There are also changes that are a result of rapid legislative development in the EU. The domestic developments include in particular the planned launch of the pension reform from the beginning of next year. The act on pension savings and the act on supplementary pension savings regulate the transformation of pension funds and the founding of new pension companies and establish the conditions for participation in the pension and participant funds and their operational rules. The adjustments to current pension funds will make the division of participants’ assets and fund management more transparent. The new pension companies are soliciting for the relevant licenses. The establishment of a fund system should continue to gradually boost the bond market in particular. However, it is also true that the launching the pension reform could lead to a certain reduction in fiscal revenues in a period when public budgets are strained. An additional important change in domestic legislation relates to building societies. The aim is to allow building societies to function as banks and to allow banks to sell this product as if they were building societies. Among the legislative changes on the European level, I would like to mention in particular the culminating negotiations concerning the draft directive and decree on capital requirements in the area of banking (CRD IV) and the draft directive Omnibus II for insurance. Besides the more technical directives and amendments, there is also a debate taking place in the EU relating to the conceptually completely new and very controversial proposals. Examples of these proposals include measures introducing a special banking tax and financial transaction tax. The CNB is not only sceptical of the proposals, but flat out rejects them. Although 2011 brought many new events and changes to the financial sector, the Czech financial sector as a whole has remained healthy and stable with sufficiently strong capital. From this point of view, it does not appear that 2012 will bring any unpleasant surprises.
The article was written on 7th May 2012