Eva Zamrazilová, CNB Board Member
Vienna, 16th November 2011
The programme for tomorrow is the development of the insurance market in Central and East European countries.
As recent surveys show, top executives are indicating two major risks or challenges that the industry will have to face in the near future. The first is the regulatory framework, and the second is the macroeconomic prospects of the region. Since this is fully in line with my own views, I would like to say something about both of them in my short speech.
First, the prospects for growth in the region. Let me start by briefly summarising some well-known basic facts that are determining the outlook for the region this year and the next. As the advanced economies of the Eurozone are approaching a sharp slowdown next year, the region is bound to be adversely affected by both the trade and financial channels.
Within central Europe the hardest hit will most likely and logically be the export-led economies of the Czech Republic, Hungary, Slovakia and Romania. But even those economies where growth is driven mainly by domestic demand, such as Poland, will not escape a marked slowdown in economic activity.
As a result, major analytical agencies and institutions have been significantly revising their economic forecasts for CEE economies. The growth outlook for the region has already been reduced several times this year following the escalation of negative news from the global economic environment and in particular from the eurozone. New information is coming in on a daily basis, and forecasters have been overtaken by events. For the moment it seems that growth in the region will slow significantly from 3% in 2011 to about 1.5% in 2012. I would like to stress that that even this quite gloomy forecast is subject to high uncertainty, with more risks on the downside than on the upside.
Let me now talk about business. In surveys estimating future problems in the insurance sector, regulatory demands have risen to the top of the list. This is not very surprising, as this is a wider issue encompassing the whole financial sector. The financial crisis has triggered enormous regulatory activity in the area of financial services. We hear the notion of “more and better regulation” everywhere. The aim of the new regulatory architecture is basically to improve supervision, strengthen financial institutions and create more transparent financial markets.
In this respect I would like to address three issues: first, the relationship between the causes of the crisis and the new regulations; second, the overall impact of the new regulations; and third, the new institutional framework. I’m afraid we still have no clear analysis as to why this crisis has been so deep and so painful and so long. What we do have is more a description than a deep analytical insight into what has been happening. Let me give one example. Academics and policymakers differ on the question of the role of loose monetary policy. Some of them are convinced that low interest rates contributed substantially to the crisis, while others deny the impact of the long period of low rates, instead blaming bad regulation for everything. And that is just one example. So, if a satisfactory analysis has not yet been completed, how can we be sure that the new regulatory measures really address the core problems?
Moreover, I’m afraid that nobody has conducted a solid analysis of the synergistic effects of the new regulations on financial markets. Let me mention one example again. The analyses of the impact of Basel III on the banking sector and the real economy produced by various institutions differ substantially and offer quite different pictures. However, there is no doubt that the new regulatory measures will increase the costs of financial institutions, and it seems obvious that tougher regulatory demands will hit small players harder than big ones. This will probably not lead to higher competitiveness and may be a barrier for new companies to enter the market.
The question remains, however, whether these additional costs will be outweighed by the benefits of a safer financial landscape. But it is not even possible to say right now whether the financial landscape will really be safer. The problem is that the authorities are creating a false impression that the new regulations will protect us from further crises. To sum up, it is not possible to say now whether, at the end of the day, the effects of the new regulatory framework will be a help or a hindrance. Consequently, it is also impossible to say whether the aim of stronger financial institutions will be achieved.
My last issue concerns the new institutional framework of supervision. This year saw the establishment of the ESFS, with the ESRB on the macro-prudential level and three sectoral European supervisory authorities, one of them being EIOPA. In this area, the biggest risk is and will be the transfer of power from national authorities to the supranational level while leaving responsibility with domestic authorities. This simply means that if bad decisions are made on the supranational level, the resulting financial burden will remain on domestic taxpayers. So, we do not agree that an ESA should be able to issue a decision about a national institution supervised by a national authority. We insist that there should remain a balance between power and responsibility and that decision-making should remain limited to the national level.
Let me note that this principle is even more important in the insurance sector. Local conditions and national specifics play a more important role in this part of the financial sector than in the banking or capital markets. Consequently, in my opinion the problem of the transfer of powers to supranational authorities is extremely pressing.
To sum up, it will be very difficult to withstand the pressure from both sides – the regulatory demands and the really gloomy outlook for macroeconomic performance. This leads me to my final comment, which is about procyclicality. The problem is that, in general, the level of regulation increases at times of stress and conversely becomes more lenient in good times. Effectively, this makes regulatory policies procyclical. So the lesson from this crisis should be, among other things, that the good times never last forever and that the authorities should use them to make good reforms rather than to abolish useful rules that may seem useless in boom times.