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EU and regional developments Opportunities and risks
Othon Anastasakis, SEESOX University of Oxford
EU opportunities
• EU discussion on its long term future amid different scenarios. • Reconfiguration of the Franco-German relationship. • Electoral victories of pro-European over populist forces in big
European states. • Positive data on the European economies: upgraded growth
prospects; falling unemployment (the lowest since 2009); and strong industrial production.
• A more optimistic climate compared to a year before!
EU risks
• Brexit and UK loneliness. • Eurosceptic parties on the rise across Europe. • Rise of the protest vote in Central Europe. • Secessionist risks in Spain. • Unemployment in the eurozone still high. • Social inequalities. • Regional disparities.
Global Risks
• Problems with the Western alliance in the security field. • Disagreements with the US over trade, environment. • Geopolitical competition with Russia. • Tensions between the West and Turkey. • Islamic fundamentalism and terrorism. • Refugee flows from the Mediterranean.
Regional Western Balkan opportunities
• Stable and moderate governments in power. • A pro-EUropean elite consensus. • Juncker reassurances for WB enlargement. • EEAS commitment for the security of the region. • Berlin process and anticipated benefits: connectivity, education,
infrastructure; 900 millions in commitments. • China and Gulf states as opportunities for investment. • Better economic prospects.
Common country risks in the region
• Rule of law (impunity, corruption and organised crime). • Democratic backsliding. • The appeal of illiberalism. • Persistent nationalism. • Islamic radicalisation. • Alienation between citizens and their elites.
Regional risks
• Bilateral issues (Serbia-Kosovo normalisation, Macedonian name, border issues, Yugoslav war legacies).
• Enlargement fatigue. • Public disillusionment with the EU in the region. • Competition from Russia. • Turkey’s alienation from Europe. • China as a risk on the EU reform agenda. • Dilemma: Authoritarian versus democraric capital.
Need for…
• Credible commitment from the EU. • Refocus of the enlargement agenda. • Expanding regional cooperation where there is potential. • Increasing economic opportunities for local brains and brain
drains. • Berlin process: tangible projects; success stories; connectivity
with the enlargement agenda. • Support for democracy, rule of law and civil society.
Bank of Albania Annual Conference
Banking Developments & Financial Market Infrastructure
Tirana, Albania
09th November 2017
Dr Jens Bastian
Independent Economic Consultant
China’s Emerging Financial Footprint Risks and Opportunities in Southeast Europe
China’s Return to Albania
China Pacific Construction Group (CPCG) building
expressway linking Montenegro and Albania
• 3,2 billion USD investment – 280 km long
Oil exploration rights acquired by China's Geo-Jade
Petroleum
China Everbright and Friedmann Pacific Asset
acquisition of Tirana International Airport SHPK
PowerChina, a construction holding, has irrigation
projects in Albania
China State Construction (CSC) 16-Mile Arber Road
project to Macedonia
Investment in Port of Shëngjin
Albanian parliamentary chairman Ilir Meta in 2016 (Photo Albanian government press office)
Source: Wikipedia, 2017
The strategic logic of China’s Balkan Silk Road
Establish anchor investments as ‘ice-breakers’ and ‘pull-factor’
• Port infrastructure (e.g. Greece, Albania)
Gradually create a cluster of investments in specific sectors
• Most advanced in transport infrastructure and energy sector
Initiate a financial footprint
• Chinese loans to countries in southeast Europe
Establishing a banking sector footprint
Bank of China branch opened in
Belgrade, January 2017
Exim Bank financing motorway
construction in Macedonia,
Montenegro
China Development Bank lending
for Stanari thermal power plant in
Republika Srpska
China Development Bank MoU
with Bank of Greece, July 2016 As seen in Skopje, FYR Macedonia, June 2017
Creating Chinese-led investment funds
China – Central + Eastern European Investment Cooperation Fund
• Established 2012
• Registered in Luxemburg
• Funding: USD 500 million
• Export Import Bank of China
• Exim Bank Hungary
Second Investment Cooperation Fund
• Launched end-2016
• Sino - CEE Financial Holdings Ltd
• Funding: €10 billion
6th Summit in Budapest, Hungary, November 2017
Secretariat located in Beijing
Sino – Hungarian financial cooperation
Sept. 2013: People’s Bank of China signed a 10 billion Yuan currency swap with finance ministry (USD 1,45 billion)
April 2016: Hungary became first CEE country to issue yuan - denominated sovereign bond
• Three-year Dim - Sum bond
• Yield of 6.75 percent
• Raised 1 billion yuan (USD 154 million)
July 2017 Hungary sold debt in China • Raising Renminbi 1 billion
• Three-year bond
Rationale for Hungary’s renminbi issuance is geostrategic not financial
Infrastructure opportunities turning into financial risks?
• Montenegro and China’s Exim Bank signed in 2014 an 800 million euro deal to finance a highway linking the port of Bar with Serbia
– Exim Bank provides loan for 85 percent of the total
– Six-year grace period
– Repayment of 20 years
• China provides flexible funding if countries use Chinese workers and equipment
• World Bank withdrew a $50 million budget support loan to Montenegro
– The highway deal adds to high debt levels of 58 percent of national output
– IMF warns deal threatens fiscal stability
Construction of the Bar - Boljare highway
Addressing barriers through policy dialogue Rising trade imbalances between China and
countries along the Balkan Silk Road
Increasing credit exposure to Chinese banks
Are Chinese investments state-funded
subsidies undercutting European competitors?
Where are the boundaries between?
• Development aid,
• Profit-oriented investment,
• Projects motivated by resource security,
• Alleged influence-buying?
What does the future hold?
Trade by destination and origin will continue to shift towards China
Southeast Europe will further diversify its sources of capital
• China’s FDI to the region will increase
• Chinese loans to Southeast Europe
• Financing public infrastructure projects
The growth potential of Chinese tourism
China’s growing footprint in the region presents challenges and opportunities for
• The EU, the IMF, the EBRD, the RCC
• Central banks in Southeast Europe
Thank you for your attention!
Dr Jens Bastian
Independent Economic Consultant
Athens, Greece
E-mail: [email protected]
Opportunities and Risks for Western Balkans
Bank of Albania Annual Conference Tirana, November 2017
Bas B. Bakker Senior Regional Resident Representative
for Central and Eastern Europe
Life in Western Balkans has become brighter
2
Nightlights intensity
2002 2013 Change 2002-2013
-6
-4
-2
0
2
4
6
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
After recessions in 2009 and 2012, the region is growing again, supported by activity in main trading partners
3
GDP Growth in Western Balkans (Percent)
ITA DEU
Max
Min
Western Balkans average
And unemployment is finally coming down—although it remains too high
4
0
5
10
15
20
25
30
35
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
MKD
BIH
SRB
ALB
Unemployment Rate (Percent)
MNE
Immediate outlook is good
5
0,0
0,5
1,0
1,5
2,0
2,5
3,0
3,5
4,0
EuroArea
USA BIH MKD MNE SRB UVK ALB
Real GDP growth (Percent)
2018
2017
0,0
0,5
1,0
1,5
2,0
2,5
3,0
3,5
4,0
MKD UVK EuroArea
BIH ALB USA MNE SRB
CPI Inflation (Percent)
2018
2017
What are the remaining challenges and vulnerabilities?
Address overhang of the 2009-12 crisis, including in The banking system The public finances
Complete transition Speed up convergence
6
The Banking System (This is discussed in depth in upcoming REO)
7
In run up to global financial crisis large inflows of foreign bank funding fueled and financed a credit boom.
8
0
1
2
3
4
5
6
7
8
SRB MKD BIH MNE ALB
GDP Growth (Percent)
2002 2008
Bank funding dropped in the global crisis
9
1/ Does not include Kosovo; includes Serbia and Montenegro from 2007.
0
5
10
15
20
25
2000 2002 2004 2006 2008 2010 2012 2014 2016
Capital Inflows to Western Balkans 1/ (Percent of GDP)
The result was a sharp drop in credit growth, in large part supply driven
10
NPLs rose and profits plunged
11
NPLs have come down, but remain high
12
0
5
10
15
20
25
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
MKD UVK
MNE BIH
SRB
ALB
Non-Performing Loans to Total Loans (Percent)
Banking sector challenges
Banks need to address NPLs Banks need to manage deleveraging and expand
funding sources Address non-bank obstacles to credit
13
Dealing with NPLs require multipronged approach
14
Summary of Key Policy Actions and Recommendations Fostering Bank Balance Sheet Repair
ALB SRB BIH MNE UVK MKD
Loan classification and provisioning
Write-offs
Sale/Transfer of NPLs
Bankruptcy Law
Private bailiffs law
Taxation
Cadastral information
Policy measure completed Policy measure ongoingPolicy measure recommended Source: Regional Economic Outlook, CESEE, November 2017
Banks need to manage deleveraging and expand funding sources
Deleveraging: Monitor banks; ensure that bank maintain
contingency plans Remain in close communication with parent
banks and home supervisors New funding:
Tackling overbanking to attracting fresh foreign capital
Develop local capital markets
15
Governments need to address non-bank obstacles to credit
Improve land and property titling Accelerate slow court procedures Upgrade insolvency frameworks:
Personal bankruptcy Limit power of minority holdouts in corporate
restructuring
16
Public finances
17
Fiscal deficits have come down, particularly in countries with IMF Programs
18
-8
-7
-6
-5
-4
-3
-2
-1
0
1MNE MKD UKV ALB SRB BIH
8.5 7.0
General Government Balance (Percent of GDP)
trough
2007
2017
Countries with ongoing or recently completed IMF programs
However, public debt is far above pre-crisis levels
19
Public Debt (Percent of GDP)
0
10
20
30
40
50
60
70
80
UKV MKD BIH ALB SRB MNE
peak
2007
2017
Much of which is financed externally
20
External Public Debt in Western Balkans (Percent of GDP)
0
5
10
15
20
25
30
35
40
45
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
External Public Debt (Percent of GDP)
0
10
20
30
40
50
60
70
BIH MKD ALB SRB MNE
2017
2007
-7
-6
-5
-4
-3
-2
-1
0MNE MKD UKV ALB SRB BIH
Unfortunately, little further consolidation is planned
21
-8
-6
-4
-2
0
2
4
6
8
10
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
GG Balance in Western Balkans (Percent of GDP)
Average
Min
Max
2017
2019
External vulnerabilities
22
Current account deficits have come down and are now almost fully financed by FDI
23
-20
-15
-10
-5
0
5
10
15
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Current Account and Capital Flows (-) in Western Balkans (Percent of GDP)
FDI
Reserves
CA
Portfolio Other
External debt remains relatively high as lower bank funding has been offset by higher public debt
24
External Debt in Western Balkans (Percent of GDP)
0
10
20
30
40
50
60
70
80
90
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Offi
cial
Ba
nk
Oth
er
Completing transition
25
In past two decades Western Balkans have not done as well as the NMS: at similar income levels they have grown less
26
GDP PPP per capita in 1996 vs. its change in 1996-14
Note: Data for UVK not available. Source: Penn World Tables.
ALB
BIH
MKD
MNE SRB
BGR
CZE
EST
HRV HUN
LTU
LVA
POL
ROU
SVK
SVN
BLR
MDA
RUS
TUR AUT
BEL
CYP DNK
FIN
FRA DEU GRC ISL
ITA
MLT NLD
PRT ESP
SWE
GBR
0
50
100
150
200
250
0 5 10 15 20 25 30 35
Chan
ge in
GD
P PP
P pe
r cap
ita 1
996-
2014
(P
erce
nt)
Real GDP PPP per capita in 1996 (in thousands of 2011 USD)
Western Balkans are poor because relatively few people work and capital stock per worker is low (TFP is low as well)
27
ALB
AUT
BEL BGR
BIH
CZE
DEU DNK
ESP
EST
FIN
FRA
GBR
GRC
HRV
HUN IRL
ITA
LTU LVA
MDA
MKD MNE
NLD
POL
PRT ROU
RUS
SRB SVK SVN
SWE
TUR
UKR
20
25
30
35
40
45
50
0 100 200 300 400 500 600 700
Empl
oym
ent t
o po
pula
tion
ratio
in 2
016
(Per
cent
)
Capital per worker in 2014 (Thousands of PPP dollars)
Capital per Worker vs. Employment to Population Ratio
Note: Data for UVK not available. Source: ILO and Penn World Table.
2,0
2,5
3,0
3,5
4,0
BLR
UVK BIH
SRB
MD
A
UKR RU
S
MN
E
ALB
MKD SVN
ROU
BGR
HRV CZ
E
HU
N
LVA
LTU
SVK
POL
EST
EU accession process should lead to improved institutions / completion of transition
28
Average of Six EBRD Transition Indicators in 2014
EU countries
non-EU countries
Note: 2007 for Czech Republic.
Better policies would help, whether or not WB become EU members
What can be done to boost investment and create jobs so people stay?
Improve investment climate Better protection of property
rights Improve legal systems and
other government services Address infrastructural gaps
Address efficiency gaps in public investments and tax collection
29
Boosting government effectiveness would also help
30
ALB
AUT
BLR
BEL
BIH
BGR HRV
CYP
CZE
DNK
EST
FIN FRA
DEU
GRC HUN
ISL
ITA
LVA LTU
MKD
MLT
MDA
MNE
NLD
POL
PRT
ROU
RUS
SRB
SVK SVN
ESP
SWE
CHE
TUR
UKR
GBR
y = 17,19x + 17,55 R² = 0,78
0
10
20
30
40
50
60
-1,0 -0,5 0,0 0,5 1,0 1,5 2,0 2,5
Government Effectiveness vs. GDP per capita in PPP dollars, 2015
GD
P pe
r cap
ita
(Tho
usan
ds o
f PPP
dol
lars
)
Government Effectiveness (WGI) Ranges from approximately -2.5 (weak) to 2.5 (strong) governance performance
Note: Data for UVK not available.
Thank you
Euroization, Euro Area Monetary policy and its consequences for Banking and financial system market risks in the SEE region
9 November 2017 Tirana
Bank of Albania Annual Conference
Franz Nauschnigg Head of Division, Counsel to the Board European Affairs and International Financial Organizations Division www.oenb.at
www.oenb.at [email protected] - 4 -
Monetary policy expansionary interest rates, APP
APPs:
2009 – 2010: CBPP1 60 bn EUR
2010 – 2012: SMP 218 bn EUR
2011 – 2012: CBPP2 16 bn EUR
2012: OMT announcement sufficient
2015 APP 60 bn €/month, 80 bn, now 60 bn,
next year till Sept 30 bn.
Avoided deflation, strengthens growth, spills
over into SEE
-1
0
1
2
3
4
5
6
-1
0
1
2
3
4
5
6
2000 2002 2004 2006 2008 2010 2012 2014 2016
%%MLF DFR MRO EONIA
www.oenb.at [email protected] - 5 -
…and the balance sheet expands further
Sources: ECB. Latest observation is 5 September.
-2,000
-1,600
-1,200
-800
-400
0
400
800
1,200
1,600
2,000
2,400
2,800
-2,000
-1,600
-1,200
-800
-400
0
400
800
1,200
1,600
2,000
2,400
2,800
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
main refinancing operations 1-maintenance period refinancing operations3-month longer-term refinancing operations 6-month longer-term refinancing operations12-month longer-term refinancing operations targeted longer-term refinancing operationsoutright purchases (CBPPs, SMP, ABSPP, PSPP, CSPP) fine tuning providing operations3-year longer-term refinancing operations fine tuning absorbing operationsnet recourse to deposit facility daily reserve surplus under zero deposit rateliquidity needs (autonomous factors + reserve requirements)
Beginning of the financialturbulence
Intensification of the financial
turbulence
Start of the sovereign debt
crisis
Initiation of gradualphasing
out
First TLTRO
First 3-year LTRO
APPOMT Second TLTRO
Eurosystem’s balance sheet (EUR billions)
www.oenb.at [email protected] - 6 -
Bank lending rates on loans for non-financial corporations
(percentages per annum)
pass-through via the bank lending channel
MFI loans to non-financial corporations in selected euro area countries
(annual percentage changes)
-0.5
0.5
1.5
2.5
3.5
4.5
5.5
6.5
7.5
-0.5
0.5
1.5
2.5
3.5
4.5
5.5
6.5
7.5
2008 2010 2012 2014 2016
DE ES FR IT
EA DFR MRO rate
CE, QE, NIRP
Source: ECB. Notes: The indicator for the total cost of lending is calculated by aggregating short- and long-term rates using a 24-month moving average of new business volumes. Latest observation: July 2017.
Source: ECB. Notes: Adjusted for loan sales, securitisation and cash pooling activities. Latest observation: July 2017.
-15
-10
-5
0
5
10
15
20
-15
-10
-5
0
5
10
15
20
2008 2010 2012 2014 2016
DE ES FR IT EA
CE, QE, NIRP
www.oenb.at [email protected] - 9 -
Euroization popular especially in SEE
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2011
2012
2013
2015
2016
2011
2012
2013
2015
2016
2011
2012
2013
2015
2016
2011
2012
2013
2015
2016
2011
2012
2013
2016
2011
2012
2013
2015
2016
2011
2012
2013
2015
2016
2011
2012
2013
2015
2016
2011
2012
2013
2015
2016
2011
2012
2013
2015
2016
Bulgaria Czech Republic Croatia Hungary Poland Romania Albania Bosnia andHerzegovina
FYR Macedonia Serbia
Local Currency Euro US Dollar CHF Other
Suppose you had 2 average monthly salaries to deposit in a savings account. W ould you choose to deposit this amount in …
Chart 1
Source: OeNB Euro Survey.
Note: Respondents answering "Don't know" or "No answer" are excluded.
www.oenb.at [email protected] - 10 -
0
10
20
30
40
50
60
70
80
90
100
CZ HU PL AL BA BG HR FYROM RO RS
2007 2014
Currency substitution index
%
Currency and deposit substitution indexes show different picturesChart 3
0
10
20
30
40
50
60
70
80
90
100
CZ HU PL AL BA BG HR FYROM RO RS
2007 2014
Deposit substitution index
%
Source: OeNB Euro Survey, national central banks.Note: Currency substitution index = ratio of euro cash to euro cash plus national currency in circulation (average of October and November). Deposit substitution index = ratio of foreign currency deposits to total deposits of the household sector (annual average). For details see Scheiber and Stix (2009).
SEE substantial but declining euro cash holdings – deposit euroization rather stable
www.oenb.at [email protected] - 11 -
Cash holdings more frequent than actual payments in euro
Source: OeNB Euro Survey fall 2014, regional averages calculated by authors’
Cash holdings in euro Actual payments in euro over the last six
months
% of respondents % of respondents
www.oenb.at [email protected] - 12 -
Measures of network externalities
Source: OeNB Euro Survey fall 2014, regional averages calculated by authors.
Subjective measure
„common to pay in euro“
Objective measure
actual payment behavior of 20 neighbors
% of respondents Index=100
www.oenb.at [email protected] - 13 -
Important role of Euro area banks in SEE
0102030405060708090
100
Albania Bosnia andHerzegovina
Macedonia, FYR Montenegro Serbia
Euro area banks Austrian banks
Consolidated foreign claims on selected SEE countries 2017-Q2, ultimate risk basis, in % of all reporting countries' claims on resp. country
Source: BIS, OeNB.
www.oenb.at [email protected] - 14 -
Important role of Euro are banks in SEE
02.0004.0006.0008.000
10.00012.00014.00016.00018.00020.000
Albania Bosnia andHerzegovina
Macedonia, FYR Montenegro Serbia
Euro area banks Austrian banks
Consolidated foreign claims on selected SEE countries 2017-Q2, ultimate risk basis, in EUR mn
Source: BIS, OeNB.
Banking and Financial System Market Risks, Comprehensive Discussion of Liquidity Risk & Solvency
Risks, Economic & Financial Stability Risk, Fiscal & Sovereign Risks
Periklis DROUGKAS Chairman
Albanian Association of Banks
1
Banking sector in Albania
The Albanian Banking sector comprises 16 banks divided, according to BoA, into 3 groups: • Group 1: Market share up to 2% possessing the 4.7% of banking sector’s total
assets • Group 2: Market share from 2-7% possessing the 27.1% of banking sector’s total assets • Group 3: Market share over 7% possessing the 68.2% of banking sector’s total
assets By capital origin • Banks with foreign capital constitute 82.6% of the sector’s total assets. • Banks with Albanian capital constitute 17.4% of the sector’s total assets The share of the banking activity to GDP: approx. 92% 2
The Financial Stability Risks Map
The Financial Stability Map Source: Bank of Albania, Financial Stability Reports, 2017, 2016, 2015
0123456789
10
DomesticEconomy
Households
Enterprises
Government
ExternalEconomy
BankCapitalisation
and Profitability
Liquidity andFinancing
Banking SectorStructures
2017 Q2 2016 Q2 2015 Q2
The Financial Stability Risks Map
The Perception on Financial Stability Risk Factors • The risks to the financial stability have declined except of those risks
emanating from: i. Liquidity and Financing Sources ii. Households Sources
• The risks emanating from the banking sector are overall assessed as
moderate to low risks. • Meaning that the sector is contributing to the financial stability and to
the prosperity of the country
4
Financial Stability Risks from Banking Sector
The Perception on Financial Stability Banking Risk Factors
0
1
2
3
4
5
62017 Q2
2016 Q22015 Q2
Financial Stability Map - Banking Risks
Bank Capitalisation and Profitability Liquidity and Financing Banking Sector Structures
Financial Stability Risks from Banking Sector
• The banking sector risks in general present a decreasing trend • The trend reflects:
• the successful anti-crisis measures taken by the Bank of Albania regarding the lending and investment activities of the banking sector.
• the wise risk management and cautious control of activities of the banks.
6
The Systemic Risk of the Banking Sector
• The banking sector is assigned a positive assessment of the systemic risks originated by the:
• Macroeconomic developments
• Globally: i. An accelerated or balanced economic growth (also in the next
years)
• Domestically: i. The economic growth rate from 3.94 to a higher one, and ii. The fiscal consolidation process (2016 – budget excess)
7
The Systemic Risk of the Banking Sector
• The banking sector has a positive assessment of the systemic risks originated by the:
• Financial Market:
i. Normal operations with new issues of government securities, ii. Increasing interest rates for securities
• Interbank Market:
i. Limited operations with an increased trend ii. Interest rates not fixed by the market offer and demand
• FX market:
i. Normal operations ii. Appreciation of ALL
• Payment system: Secured and efficient
8
The Systemic Risk of the Banking Sector
• The banking sector has the following assessment of the systemic risks originated by the:
• Lending process: high due to high NPL ratio
• Execution of collaterals: high due to difficulty on execution, bailiffs, bankruptcy law, etc.
• Political risk: sensitive due to the temporary uncertainty from the past elections
• External shock risks: downward trend confirming the banking sector resilience to external risks.
9
The Main Banking Sector Risks
Operational Risk
Market Risk
Credit Risk
Liquidity Risk
Very Low
Decreasing
Low
Low
10
Market Risk
Very low
• The banks operating in Albania are not listed banks – the equity market risk is zero
• The market risk from the Albanian Government securities is not important (limited)
• The market risk from other Governments and corporate securities is very low (under strict control from BoA and the Banking Groups)
• The exposure of the banking books to the foreign currency and interest rates volatility is very low.
11
Credit Risk
Decreasing
• The NPL ratio: fell significantly
• NPL amounts: decreased
• Cash coverage ratio for the overdue loans: improved, but • The risk on law enforcement and the difficulties of the execution of
collaterals remain high and unchanged
12
Credit Risk
The high NPL ratio dictated:
• BoA : to issue new regulation and amend the existing ones
• The Government: a) to amend the legal framework regarding the debt
collection and b) to amend the bailiff office procedure's (not a successful initiative)
• The banks community: a) to improve the collections procedures, b) to improve the credit standards and c) to implement new credit control tools,
13
Liquidity Risk
Low
• The liquidity ratios of the individual banks and the integrated liquidity ratios for all banks stand significantly above the minimum regulatory requirements
• Risk: the negative gaps deriving from the mismatch of residual maturities of assets and liabilities
• Mitigating tools: Not applicable, but time deposits reduction and increase of demand and current accounts in the system is advisable.
14
Operational Risk
Low • The capital coverage of banks for the Operational Risk is considered as
adequate, therefore satisfactory and stable throughout 2017
• The capital requirements covering the operational risk stayed the same.
• The capital adequacy ratio of the period is not affected due to low operational losses.
15
Proposal
Further to the existing financial stability report produced by the Bank of Albania, which is a thorough presentation of the financial sector risks, there is the need of an enhanced transparency on the financial stability reporting. BoA , FSA and Banking Sector should establish a set of indicators that portray risks and profitability of the financial system that can be used by all economy agents and public
16
Banks speak with one voice!
Thank you
17
Banking System and New Regulatory Frame
Did we internalize the 2007 lesson?
Natasha Ahmetaj
I. Banking presence in Albanian life I/1. Credit to GDP 35% vs. Avg. 50% in the region
0
10
20
30
40
50
60
70
80
90
Euro
are
a
Esto
nia
Turk
ey
Slov
ak R
ep.
Croa
tia
Bosn
ia &
Her
zeg.
Bulg
aria
Pola
nd
Mon
tene
gro
Czec
h Re
p.
Latv
ia
Mac
edon
ia
Slov
enia
Serb
ia
Lith
uani
a
Koso
vo
Hung
ary
Alba
nia
Ukr
aine
Rom
ania
Mol
dova
Bela
rus
In percent of GDP In percent of bank assets
Credit to the Domestic Private Sector, May 2017 (Percent)
Sources: IMF, Monetary Financial Statistics, and IMF staff estimates.
I. Banking presence in Albanian life I/2. Financial inclusion: Highest trust, lowest inclusion in the region
Sources: World Bank, Global Financial Inclusion database, and IMF staff estimates.
I. Banking presence in the Albanian life I/3. Delivering stability to the financial system
0,0
0,1
0,2
0,3
0,4
0,5
0,6
0,7
0,8
0,9
1,0
01/2
000
06/2
000
11/2
000
04/2
001
09/2
001
02/2
002
07/2
002
12/2
002
05/2
003
10/2
003
03/2
004
08/2
004
01/2
005
06/2
005
11/2
005
04/2
006
09/2
006
02/2
007
07/2
007
12/2
007
05/2
008
10/2
008
03/2
009
08/2
009
01/2
010
06/2
010
11/2
010
04/2
011
09/2
011
02/2
012
07/2
012
12/2
012
05/2
013
10/2
013
03/2
014
08/2
014
01/2
015
06/2
015
11/2
015
04/2
016
09/2
016
02/2
017
Banking sector Money market FX market Financial Stress Index
I. Banking presence in Albanian life I/4. Positive role of Monetary Policy in lending cost
-20
-10
0
10
20
30
40
50
60
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Albania Housinginvestment,%annual
Durablegoods,% annual
0
5
10
15
20
25
30
0
2
4
6
8
10
12
Jan-
04
Gsh
-04
Mar
-05
Tet-
05
Maj
-06
Dhj-0
6
Kor-
07
Shk-
08
Sht-
08
Pri-0
9
Nën
-09
Qer
-10
Jan-
11
Gsh
-11
Mar
-12
Tet-
12
Maj
-13
Dhj-1
3
Kor-
14
% % NPL ratio, rhs Lending rate
Policy rate Deposit rate
II. Post crises paradigm Changes in cross-border behavior: Cross border lending to deleveraging Foreign affiliates to shrinking Changes in World Financial Flow composition
44%
25%
12%
45%
0%5%
10%15%20%25%30%35%40%45%50%
Banks FDI
World financial flows composition
Before2008
After 2008
Source: Bussiére et.al (2017)
III. Banking System-main goals ahead III/1. Increasing the resilience for large banks
More high quality capital: EU banks Tier1 From 7% to 13.5%
Improve b-sh structure: Less dependence on runnable funding
Some FSI for Albanian systemic banks vs. sector
16,4%
14,8%
16,3%
38,9%
00%
10%
20%
30%
40%
50%
Regulatory capital/RWA NPL/total loans RoE, annual basis Liquid assets /short termliabilites
Min value, systemic banksMax value, systemic banksBanking Sector
III. Banking System-main goals ahead III/2. Monitoring level of competition
2.1. Addressing To-Big-To-Fail problem
Establishing Resolution regime to offset TBTF Moral Hazard
2.2. Monitoring the system concentration:
High market share of the largest banks Close to moderate concentration of deposits
800
900
1.000
1.100
1.200
1.300
1.400
1.500
1.600
1.700
03/1
3
06/1
3
09/1
3
12/1
3
03/1
4
06/1
4
09/1
4
12/1
4
03/1
5
06/1
5
09/1
5
12/1
5
03/1
6
06/1
6
09/1
6
12/1
6
03/1
7
06/1
7
09/1
7
ALL_Deposits FX_Deposits Deposits
High competition No concentration Moderate concentration High concentration<1000 1000-1500 1500-2500 > 2500
68,070,072,074,076,0
03/0
712
/07
09/0
806
/09
03/1
012
/10
09/1
106
/12
03/1
312
/13
09/1
406
/15
03/1
612
/16
09/1
7
% Share of 5 largest banks
III. Banking System-main goals ahead 2.3. Optimizing the size: Half of 101 banks larger than USD 100 billion, failed during financial crises. Implementing higher prudential requirement: The majority of them, Lehman Brothers included, had not breached any of prudential regulations in place ex-crises. Risk is multidimensional-capital is not enough: 4 of them met the capital requirement of New Basel III.
Last December Banco Popular still had a Tier 1 capital over 12% and six months later it went bankrupt.
Source. Haldane A. (2016)
III. Banking System-main goals ahead 2.4. Competition and Stability trade-off Banking activity has double nature Competition is engine of economic progress: Is it true for banking? The failure of a SiBi can damage its competitors and lead to instability. Competition can increases the level of risk in two ways: By decreasing bank profitability and so lowering capital buffers By taking more risk. Limiting competition may affect the efficiency. 2.5. Preserving Stability-It is all about balances Completing macro-prudential framework Enriching macro-prudential tool-kit for systemic risk Modeling the financial cycle (Angeloni. I)
III. Banking System-main goals ahead III/3. Managing legacy of crises
Resolution of NPL
…to foster credit …to improve banks profitability
-10%
-5%
0%
5%
10%
15%
Low NPL Average NPL High NPL
Albania, annual credit growth
III. Banking System-main goals ahead III/3. Managing legacy of crises
Promoting Asset Management Companies
Gross NPL/ Total assets: EU: 4%; USA: 0.8%; Albania: 6.3%
Better NPL accounting by IFRS9 implementation
A recent IFRS 9 impact assessment based on 54 EU banks suggests it will lead to an increase of 13% of provisions on average.
Source. Draghi M.(2017)
III. Banking System-main goals ahead III/4. Dynamic Rules-internalizing the lessons.
Bankers may tent to overestimate potential profit and underestimate risk.
The failure of a single bank can damage the entire system.
Banking is becoming more and more complex and the rules just mirror that complexity.
The rules bring benefits: stronger rules foster trust, which in turn bring more business.
Capital is expensive, but well capitalized banks are well prepared to withstand shocks and credit economy when times get tough.
We should not follow the same pattern of “post crises usually comes strengthen of rules. After crises fades the deregulations starts.”
“If history repeats, and unexpected always happens,
how incapable must man be
of learning from experience.”
G. B. Shaw
Thank you!
