Evolution of the Supervisory Function within the CNB

Seminar marking

the 20th anniversary of the Czech and Slovak Central Banks

October 2nd, 2013David RozumekDavid RozumekExecutive Director Executive Director Financial Market SupervisionFinancial Market Supervision

I.

The Czech Financial Sector

Czech Financial Sector

0,6%

7,7%

4,4%

3,2%

5,5%

78,5%

BanksCredit unionsInsurance CompaniesPension fundsInvestment companies, investment and mutual fundsLeasing companies and other lending institutions

• The Czech financial sector is dominated by banks

Capital Adequacy of Czech Banks

• As of July 2013, capital adequacy was 17.6% (Tier 1 ratio 17.3%)Capital adequacy and leverage ratio(%)

Source: CNB

0

4

8

12

16

20

1/09 7/09 1/10 7/10 1/11 7/11 1/12 7/12 1/13 7/13

Capital adequacy

Capital adequacy Tier 1

Leverage ratio

.

Capital and capital requirements for the banking risks(CZK billions)

03/0906/0909/0912/0903/1006/1009/1012/1003/1106/1109/1112/1103/1206/1209/1212/12

Source: CNB

0

50

100

150

200

250

300

350

400

06/08 06/09 06/10 06/11 06/12 06/13

Operational and other risks Market risks

Credit risk Regulatory capital

Profitability of the Banking Sector

• The Czech banking sector remains profitable during crisis despite the adverse economic conditions which feeds into capitalization

Net profit in the Czech banking sector(CZK billions)

Source: CNB

0

10

20

30

40

50

60

70

80

90

100

07/07 07/08 07/09 07/10 07/11 07/12 07/13

Net profit (3M annualised) Net profit (1M annualised)

Capital and capital adequacy in the Czech banking sector(CZK billions; %)

Source: CNB

0

2

4

6

8

10

12

14

16

18

0

50

100

150

200

250

300

350

400

06/07 06/08 06/09 06/10 06/11 06/12 06/13

Regulatory capital

Capital adequacy (%, right-hand scale)

Capital adequacy Tier I (%, right-hand scale)

Profitability of the Banking Sector

• RoE and RoA still rather high in international comparison

Return on Equity (in %)

Source: IMF FSI

-25-20-15-10

-505

101520

CZ AT DE PT SI SK HU PL EA

2011 2012

Return on Assets (in %)

Source: IMF FSI

-1,0

-0,5

0,0

0,5

1,0

1,5

CZ AT DE PT SI SK HU PL EA

2011 2012

Czech Banks‘ Funding

• Funding structure is sound• Key ratios have not change much over years …

Liquidity ratios in the banking sector(%)

Source: CNB

100

120

140

160

180

200

220

0

10

20

30

40

50

60

70

7/07 7/08 7/09 7/10 7/11 7/12 7/13

Quick liquid assets / total assets

Liabilities on demand / total liabilities incl. credit institutions

Quick liquid assets / clients' deposits

Deposits / Loans (clients) (right-hand axis)

Deposit-to-loan ratio in selected economies (in %)

Source: ECB

0

20

40

60

80

100

120

140

CZ SK DE PL EA AT HU PT SI

Credit Risk Indicators

• Non-performing loans (NPL) going up in the corporate segment while stable in the housing sector ...

Credit Risk Indicators

• NPL coverage has stabilized, but structure of NPL got worse ...Provisions and coverage of NPLs by provisions(%)

05/0406/0407/0408/0409/0410/0411/0412/0401/0502/0503/0504/0505/0506/0507/0508/05

Source: CNB

0

10

20

30

40

50

60

70

80

90

100

0,0

0,5

1,0

1,5

2,0

2,5

3,0

3,5

4,0

4,5

5,0

07/05 07/06 07/07 07/08 07/09 07/10 07/11 07/12 07/13

Loan loss provisions rate

NPL coverage ratio (right-hand scale)

Structure of NPLs (%)

Substandard Doubtful Loss NPLs, total

2009 37.4 21.1 41.4 100.0

2010 39.2 13.4 47.4 100.0

2011 32.6 14.0 53.5 100.0

2012 27.1 14.3 58.6 100.0

Not past dueUp to 3M past

dueMore than 3M

past dueNPLs, total

2009 52.4 9.2 38.4 100.0

2010 51.6 9.9 38.5 100.0

2011 46.1 9.4 44.5 100.02012 43.7 9.5 46.8 100.0

Source: CNB, CNB calculation

Developments in Credit

• Recent data confirm just a slow loan growth

Year-on-year growth rates of a bank loans in the Czech Republic

(in %)

Source: CNB

3,6%

-0,8%

3,7%

-10

-5

0

5

10

15

20

25

30

35

40

01/10 07/10 01/11 07/11 01/12 07/12 01/13 07/13

Total loans Non-financial corporations Households

Year-on-year credit growth to households

(in %)

Source: CNB

3,7%

-0,6%

4,9%

-5

0

5

10

15

20

25

30

35

40

01/10 07/10 01/11 07/11 01/12 07/12 01/13 07/13

Households

Consumer loans

Housing loans

Consumer loans (after adjustment for one-off transfer)

Stress Tests 2013: Results

• The stress tests and other analyses demonstrate that the Czech financial sector is well prepared for potential stresses.

• Banks have a large capital buffer which enables them• to absorb adverse shocks and• maintain the sector’s overall capital adequacy sufficiently above the

regulatory threshold of 8% even in a very unfavorable scenario.• To maintain high public and investor confidence in the stability of

the Czech banking sector in the current adverse economic environment, banks must maintain a high capacity to absorb potential credit and market losses.

• No acute risks to financial stability requiring immediate action are identified.

II.Supervision of

the Czech Financial Sector

Integration of Supervision

• Supervisory institutions – till 1.4.2006• CNB – banks• Office of State Inspection in the Insurance and Pension (Ministry of Finance) –

Insurance companies and Pension funds• Office for Supervision of Credit Unions – credit unions • Czech Securities Commission – investment funds, mutual funds, stock exchange,

brokers and intermediaries, etc. • Supervisory institution – integrated supervisor – since April 2006 till now

• CNB is the only one supervisor • banks, foreign bank branches, credit unions• insurance companies, foreign insurance company branches, reinsurance company,

pension funds depositories• securities companies, investment funds, investment companies, mutual funds, brokers

and intermediaries• payment institutions

Functional Model of Supervision

• Functional model – since January 2008• Financial Market Regulation and Analyses Department• Licensing and Enforcement Department• Financial Market Supervision Department

Financial Market SupervisionDepartment

Credit InstitutionsSupervision Division

Insurance SectorSupervision Division

Capital MarketSupervision Division

Proceedings Rulesand

Professional CareControl Division

Risk ManagementControl Division

Financial Market SupervisionDepartment

Credit InstitutionsSupervision Division

Insurance SectorSupervision Division

Capital MarketSupervision Division

Proceedings Rulesand

Professional CareControl Division

Risk ManagementControl Division

Cross-sector Functional Model

• Since March 2011• Financial Market Supervision Dpt.

Off-site On-site

Prudential supervisionPrudential

Supervision Division

Prudential Inspection Division

Conduct of business supervision

Conduct of Business

Supervision Division

Conduct of Business Inspection Division

CNB – Integrated Supervisor

• Easy day-to-day communication + information-sharing synergies• Easier communication with supervised entities, foreign supervisors• Stronger position in the crisis situation• Enables to monitor the whole financial market (financial stability

perspective)• Ability to analyze the impact of development in one sector to other

sectors or the whole economy• Strong technical and professional support• Unification of reporting formats for different sectors where suitable• Unification of supervisory techniques for different sectors where suitable• Faster development of supervisory methods, internal procedures etc.

Integrated Supervisor in Independent Central Bank

• Easy sharing information from money market, payment system (existence of Chinese walls) – crucial for banking supervision

• Combination of financial stability and supervisory point of views – common working groups (stress testing exercises for banks and insurance companies)

• Independent and apolitical decision-making process• Allows to focus on systemic risk• Adequate financial sources enable hiring experienced staff and

using necessary technical support

Cooperation

• Colleges• Technical assistance to third countries (Egypt, etc.)• Active participation in EBA

• Board of Supervisors• Management Board

• CNB representative member of the first EBA mediation panel

• SCRePol• Standing Committee on Regulation and Policy

• Mediation Panel• CNB representative member of the first EBA mediation panel

Challenges posed by Banking Union

• Regulatory area• EBA regulatory role even more important (draft BTS)

• No major challenge (formal double simple majority voting in EBA, but established practice of reaching decisions on consensual basis and level of harmonization reached so far makes decision-making easier)

• Supervisory area• Might face some challenges concerning Q&A and SSH (Single Supervisory

Handbook) in relation to individual supervisors and SSM• Concerns implementation practice and colleges

• Up to now weights of individual authorities were balanced• Newly one supervisor (ECB) will be much stronger and bigger than any other

• Risk of a wrong set-up with regard to the SSM• Two-speed Europe• Tensions between two blocks (participating and non-participating MSs)• For one block it will be easier to over-rule the other block• Instead of single market we will end up with more fragmented markets within

the EU

Lessons To Be Learned

• Importance of having• Conservative financial sector

• Dominated by banks which are• well capitalized and• have sound funding structure

• Integrated supervision• Alignment of supervisory techniques, methods and

procedures across sectors• Information sharing, communication and reporting

advantages• Supervisory and financial stability synergies

www.cnb.cz

David RozumekExecutive Director

Financial Market SupervisionDepartment

david.rozumek@cnb.cz

Thank you for your attention

The CNB disclaims responsibility for any private publication or personalThe CNB disclaims responsibility for any private publication or personal statementstatementss of any CNB employee. of any CNB employee.The views in this presentation are the views of their authors and do not necessarily reflect those of the CNB.The views in this presentation are the views of their authors and do not necessarily reflect those of the CNB.