Vladimír Tomšík
(Bankovnictví, 26.5.2011, str. 1 Top finance - úvod/introduction)
From the outside, 2010 was a year of continued stabilisation in the Czech financial sector following the turbulent events of the global financial crisis. although the economic results of banks did not attain the record levels seen in 2009, they still remain above normal levels, and the return on equity of Czech banks continued to be one of the highest in europe. At the end of 2010, a slight recovery had occurred in lending, and after the crisis diminished, the volume of classified loans, which has been constantly rising since the start of the crisis, also stabilised with a delay. Both are the result of economic recovery that was and will probably remain modest. Nevertheless, it will be sufficient at the end of this year for the Czech economy to reach the level of 2008.
Should we expect a regulatory tsunami?
Although all of this points to stabilisation, it should not distract from the fact that the whole financial intermediation sector will soon be confronted with significant changes. It can be said with some exaggeration that the financial sector will be faced with a regulatory tsunami. The gravity of the financial crisis called for a strong political reaction in developed countries on many levels – on the national level, the EU level, and even the reaction of the G20 group. However, this political reaction is characterised by an obvious incongruity in the proposed measures. While some of the measures were considered prior to the crisis and should develop and modify, for example, the concept of capital adequacy, other proposals are rather an ad hoc reaction to immediate political appeals. At the end of last year, new institutions inside the EU for the supervision of the financial market were prepared and will actually be implemented this year. The international supervisory structure is now composed of several elements. The first of these is the European Systemic Risk Board (ESRB), which should function in a macroprudential or rather preventative manner. Additional elements include the international bodies for supervision over the individual segments of the financial market: the European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority (EIOPA), and finally the European Securities and Markets Authority (ESMA). Even though supervision will remain primarily the domain of national regulators, the potential powers of the new supervision institutions are significant, and their actual activities still need to be established.
Expected changes and CNB attitude
Although the development of the financial crisis in the Czech Republic was fairly atypical (in the crisis year 2009, the banking sector earned unprecedented profits and all banks easily complied with the capital adequacy requirements), we obviously cannot avoid some profound changes. The level of unification of the regulations in the area of financial intermediation and collective investment in the European Union will continue to increase. There are proposed changes in almost all directives that relate to financial markets, and after being passed, these changes will be reflected in the national legislation. Some of the submitted drafts include harmonisation in the area of resolving cross-border financial crises, changes in the systems of deposit insurance, changes in capital adequacy, changes in collective investment, etc. However, on the level of G20, an appeal for even more profound reforms has appeared, which is not immediately related to the past financial crisis, but the crisis has cleared the path for these proposals. This concerns efforts to regulate commodity derivatives, high-frequency trading with investment instruments, and last but not least, proposals for introducing certain transaction taxes and other special taxes for financial institutions. The CNB’s stance on these proposals was and still remains very sceptical, and it is important to say that even the position of the G20 group is not unified. The quality of the proposed measures varies greatly: while some of the measures were well-considered and are directed towards strengthening the capital of banks and limiting moral hazards, others are disputable to say the least. The impact of the Czech Republic on the final versions of directives obviously corresponds to our negotiating power inside the EU, and understandably, new legal regulations will be a complicated process of compromise that will be more or less distant from the conceptions of the domestic regulator or lawmaker. However, for banks, management companies, investment firms, insurance companies, and other entities on the financial market, this will mean, in any event, a certain burden in the form of learning and adapting to the new legal regulations. With respect to the nature of the Czech financial sector, issues relating to the regulation of financial groups that do business in the Czech Republic through their subsidiary companies will be an especially sensitive topic. For the CNB, it is essential to respect subsidiaries as independent entities and to ensure that the relations inside the financial group correspond to this.
Focus on financial stability
Therefore, it is evident that stabilisation in the financial sector does not mean just a return to the pre-crisis situation, because this is not possible from the legal point of view or when taking into account reality. First and foremost, it is obvious that the focus on financial stability can no longer slacken – on the part of neither regulated entities, the regulator nor monetary policy-makers. Turbulence brought with it strong motivation to perfect bank stress tests, to use them more frequently, and even to instil this type of instrument for monitoring financial stability into the wider consciousness of the public. The CNB has been carrying out bank stress tests since 2003, while gradually tuning and smoothing out the methodology, and since 2009, they have been implemented on a quarterly basis. The principle of bank stress tests is to verify how the economic results and balance sheets of banks would react to various development scenarios. These various scenarios have an impact on the development of the domestic and foreign economy, not only in the volume of non-performing loans and related losses, but they also affect changes in the prices of shares held by the banks and lessen the likelihood of interbank contagion. The stress scenarios used by the CNB are quite strict. They are even substantially stricter than the stress scenarios used in European tests. Consequently, they are scenarios of events that we consider improbable but possible, and therefore worth testing to see what would happen to the banks’ balance sheets in such cases. The results of such adverse chains of events would be significant credit and market losses for Czech banks. However, even despite these losses, the banking sector, according to the last stress tests, would remain stable as a whole, especially due to the high capital adequacy that Czech banks have at this time. A lack of capital would appear in a few entities, but a capital injection in the sum of less than 1 per cent of GDP would be enough to fulfil capital adequacy requirements. One current risk for financial stability shows up rather as a combination of bank optimism relating to the end of the crisis and the payment of extraordinary dividends to parent companies. Payments of extraordinary dividends weaken the capital cushion and make banks more vulnerable to any macroeconomic risks.
The risks for future development
Macroeconomic risks appear in several areas. First of all, high global commodity prices worsen the terms of trade for our economy and could in various ways inhibit growth in the economies of our foreign trade partners and, in turn, also in the Czech Republic. In the same way, we are not isolated from increases in European interest rates or from the fiscal difficulties of the peripheral countries of the eurozone. Other macroeconomic risks are domestic. Fiscal consolidation that is inevitable from the long-term perspective will slightly dampen domestic demand this year. It affects in particular household consumption. It is also possible that, even though the total volume of classified loans has already reached its limit, the share of non-performing household loans will continue to rise for consumer credit as well as mortgages. this is also related to the development of real estate prices, which continues to be uncertain because relatively low rental returns in comparison with alternative opportunities do not thus far rule out additional price decreases. this in combination with fiscal cuts means that construction and development will apparently remain very vulnerable industries. Political instability in the czech republic has become a normal occurrence in recent years. in and of itself, it should not be a substantial risk for the financial sector. however, the regulatory uncertainty that is associated with it for the years immediately following is unusually high. changes in tax rates, adjustments to building savings, the interaction of income taxes with mortgages, with supplementary pension insurance and with life insurance, introducing (or not introducing) a new pension pillar in the form of a fund – all of this for the time being remains in uncertain waters. in summary, while financial market participants confronted substantial changes in prices and financial results during the crisis, in the post-crisis period, they will be exposed more to substantial regulatory changes.