T.Parys GIBS 1/56 NBP CROSS-BORDER SUPERVISORY COOPERATION ISSUES AND CHALLENGES A HOST COUNTRY PERSPECTIVE: -main issues - main concerns - main challenges

T.ParysT.ParysGIBSGIBS

11/56/56

NBP

CROSS-BORDER CROSS-BORDER SUPERVISORY COOPERATIONSUPERVISORY COOPERATION

ISSUES AND CHALLENGESISSUES AND CHALLENGES

A HOST COUNTRY A HOST COUNTRY PERSPECTIVE:PERSPECTIVE:-main issues-main issues-main concernsmain concerns -main challengesmain challenges

Washington, 2006 June 7-9Washington, 2006 June 7-9Tadeusz Parys, General Inspectorate of Banking Tadeusz Parys, General Inspectorate of Banking Supervision – NATIONAL BANK OF POLANDSupervision – NATIONAL BANK OF POLAND


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MAIN POLISH BANKING SYSTEM MAIN POLISH BANKING SYSTEM FEATURES – COMPARING TO OTHERS FEATURES – COMPARING TO OTHERS IN THE EU IN THE EU

Well capitalised (capital adequacy Well capitalised (capital adequacy – – 15%)15%)

ROA-ROE – relatively high (1,6-17%)ROA-ROE – relatively high (1,6-17%) Cost/Income ratio – 62% - also Cost/Income ratio – 62% - also

relatively highrelatively high CR5 index – concentration – 49% CR5 index – concentration – 49%

(54%) not really high(54%) not really high Assets/GDP – only 61 %Assets/GDP – only 61 %

NBP


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MAIN POLISH BANKING SYSTEM MAIN POLISH BANKING SYSTEM FEATURES – COMPARING TO OTHERS FEATURES – COMPARING TO OTHERS IN THE EU (2)IN THE EU (2)

Is the biggest in CE/NMSIs the biggest in CE/NMS

……but small comparing to 15 EUbut small comparing to 15 EU

Dominated by foreign banks – Dominated by foreign banks – 73% - mainly EU (15)73% - mainly EU (15)

NBP


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MAIN POLISH BANKING SYSTEM MAIN POLISH BANKING SYSTEM FEATURES (3)FEATURES (3)

Dominated by foreign banks – 73% Dominated by foreign banks – 73%

thereforetherefore

Foreign banks – systematically importantForeign banks – systematically important

NBP


55/56/56

CA ratio - UE (2004)CA ratio - UE (2004)

NBP

10 11 11 1111 11 12 12 12 1212 12 12 12 12 13 1313 13 14 15 1517

1819

21

0

5

10

15

20

Fra

nce

Sw

eden

Latv

iaSlo

venia

Lith

uania

Est

onia

Port

ugal

Spain

Italy

Germ

any

Aust

ria

Neth

erland

Cze

chH

ungary

Irela

nd

Gre

ece

Belg

ium

Denm

ark

Cyp

rus

UK

2005 P

ola

nd

2004 P

ola

nd

Luxe

mbourg

Slo

venia

Fin

land

Malta

Source: ECB „EU Banking Sector Stability”, 2005

Banking system in Poland:


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ROE - UE (2004)ROE - UE (2004)

4 4

81010 11 11 11 12 1313 13

14 14 14 15 1516 16 17 17

2123

24 25 25

0

5

10

15

20

25G

erm

any

Finl

andi

aG

reec

eM

alta

Ital

yLu

xem

bour

Slov

enia

Port

ugal

Fran

ceD

enm

ark

Net

herla

ndBe

lgiu

mSl

ovak

iaAu

stria

Spai

nIr

elan

dSw

eden

Lith

uani

aUK

Pola

nd 2

004

Pola

nd 2

005

Latv

iaEs

toni

aCz

ech

Hun

gary

NBP

Source : ECB „EU Banking Sector Stability”, 2005

Cyprus



77/56/56

ROA - UE (2004)ROA - UE (2004)

NBP

1,6

0,1

2,0

1,4

0

0,5

1

1,5

2

Germ

any

Cyp

rus

Belg

ium

Luxe

mbour

Neth

erlands

Fra

nce

Denm

ark

Aust

ria

Italy

Gre

ece

Slo

venia

Sw

eden

Irela

nd

Fin

land

Port

ugal

UK

Spain

Lith

uania

Slo

vaki

aM

alta

Cze

chPola

nd/0

4La

tvia

Pola

nd/0

5H

ungary

Est

onia




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Cost/Income - UE (2004)Cost/Income - UE (2004)

NBP

3743

49 4954 55 56 56 57 5758 59 60 61 62 62 6263 63 63 65 65 6667 67 69

0

20

40

60

Malta

UK

Est

onia

Irela

nd

Luxe

mbourg

Spain

Denm

ark

Hungary

Fin

land

Latv

iaIt

aly

Port

ugal

Sw

eden

Cyp

rus

PL

2005

Slo

vaki

aG

recj

aCze

chAust

ria

Slo

venia

PL

2004

Belg

ium

Fra

nce

Lith

uania

Neth

erland

Germ

any




99/56/56

NBP

2226 3035424444 454950 5354

626464 6567 676769797983 8484

99

0,0

20,0

40,0

60,0

80,0

100,0

120,0

CR5 IndexConcentration: 5 biggest banks - UE –

(2004)




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Assets/GDP - UE (2004)Assets/GDP - UE (2004)

NBP

61

268

142

343

168

100

58

486

0

100

200

300

400

500Li

thua

nia

Pola

nd 2

004

Pola

nd 2

005

Hun

gary

Slov

akia

Esto

nia

Slov

enia

Czec

hLa

tvia

Gre

ece

Finl

and

Ital

ySp

ain

Swed

enPo

rtug

alFr

ance

Aust

riaG

erm

any

Cypr

usD

enm

ark

Belg

ium

Net

herla

nds

UK

Mal

taIr

elan

dLu

x-27

05

Source: ECB „EU Banking Structures”, 2005



1111/56/56

NBP

0,0

20,0

40,0

60,0

80,0

100,0

120,0

140,0

160,0

Poland

Czech

Hungar

y

Slovakia

Slovenia

Cypru

s

Malt

aLa

tvia

Lithu

ania

Estonia

Source: ECB „EU Banking Structures”, 2005; EUR millions

Banking systems assets – 10 EU NMS



1212/56/56

NBP

Source: ECB „EU Banking Structures”, 2005; EUR millions

Banking systems assets – EU 15 & PL

0,0

1 000,0

2 000,0

3 000,0

4 000,0

5 000,0

6 000,0

7 000,0

8 000,0

UK

Germ

any

Franc

eIta

lySpa

in

Nether

land

Belgium

Irelan

d

Luxe

mbo

urg

Austri

a

Denmar

k

Sweden

Greec

e

Greec

e

Finlan

d

Poland



1313/56/56

Foreign investors participation in some Foreign investors participation in some UUE E NMS(2004)NMS(2004)

NBP

19

48

63

68

73

92

93

96

99

0 30 60 90

Slovenia

Latvia

Hungary

Poland 2004

Poland 2005

Lithuania

Slovakia

Czech

Estonia

Source : ECB „EU Banking Structures”, 2005



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NBP

11,16%10,01%

6,38% 6,30% 5,60%5,53%

2,82% 1,74%0,75%0,97%

0%

2%

4%

6%

8%

10%

12%

BAN

K P

OLS

KA

KA

SA O

PIEK

ISA

Uni

Cred

ito

BAN

K B

PH S

A

HV

B G

roup

ING

BA

NK

ŚLĄ

SKI S

A

ING

Gro

up

BAN

K H

AN

DLO

WY

WW

ARS

ZAW

IE S

A

Citig

roup

BRE

BAN

K S

A

Com

mer

zban

k G

roup

share of foreign subsidiary in Polish banking systemshare of Polish subsidiary in parent bank

Subsidiaries of foreign financial group play significant role in Polish banking sector;

although, they are a fraction of parent assets


1515/56/56

NBPAssets of overall Polish banking sector are smaller than

assets of a single foreign parent bank

0,0%

10,0%

20,0%

30,0%

40,0%

50,0%

60,0%

Pol

and

vs

Com

mer

zban

k

Pol

and

vsU

nicr

edito

Pol

and

vsH

VB

Pol

and

vsU

CI/H

VB

Pol

and

vs IN

G

Pol

and

vsC

itigr

oup

Polish banking sector assets to some parent institution assets


1616/56/56

NBP

Foreign bank`s subsidiary – separate legal Foreign bank`s subsidiary – separate legal entity entity

Host country financial stability closely related Host country financial stability closely related to the standing of foreign parent bank and to the standing of foreign parent bank and indirectly to its main economyindirectly to its main economy

POLAND:POLAND:

Banks – largest institutions in financial sector Banks – largest institutions in financial sector

Foreign banks dominate banking sectorForeign banks dominate banking sector

Impact of systemic foreign banks` on

the stability of local financial sector


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No international schemes for sharing budgetary (fiscal) No international schemes for sharing budgetary (fiscal) costs of cross-border banking group failure, especially in costs of cross-border banking group failure, especially in event of systemic bank crisisevent of systemic bank crisis

No supranational liquidity supplierNo supranational liquidity supplier No international deposit insuranceNo international deposit insurance No legal liability of parent for deposits of subsidiary (only No legal liability of parent for deposits of subsidiary (only

“moral responsibility”) and no explicit liquidity support“moral responsibility”) and no explicit liquidity support……bbutut:: Responsibility of local deposit insurance agencyResponsibility of local deposit insurance agency Only local ELA potentially availableOnly local ELA potentially available Expectation of local government intervention in case of Expectation of local government intervention in case of

SIB crisisSIB crisis Legal and political responsability of a local, host supervisorLegal and political responsability of a local, host supervisor

NBP Role of local supervisor and central bank,Role of local supervisor and central bank, together withtogether with

local local compliance and corporate compliance and corporate governancegovernance – crucial to country’s financial – crucial to country’s financial

stabilitystability

No clear evidence how wellcross-border bank

insolvency framework would operate

Many subsidiaries and branchesof foreign banks

play systemically important role on local market


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NBP

21

15,5

11,19,6

6,95,5 5,2 4,8 3,9 3,6 3,1 2,8

0

5

10

15

20

25

Pekao

& BPH

PKO B

P

Pekao

Bank B

PH

ING B

SK

Handlow

yBRE

BZWBK

Mille

nnium

Kredyt

Bank

BGKBGŻ


Almost all biggest banks are foreign controlled


1919/56/56

NBP

What a host supervisor should/could expect ?

• that home supervisor(s) will share his perspective ?

• that home supervisor(s) will understand his concerns ?


2020/56/56

LEGAL vs BUSINESSLEGAL vs BUSINESS

NBP

Industry tendency to centralized management (at a group level)

centralized risk management

centralized liquidity management

LOCAL vs „GLOBAL”LOCAL vs „GLOBAL” different approachesdifferent approaches

Host supervisor vs Home supervisor ?Host supervisor vs Home supervisor ?A conflict or a cooperation ?A conflict or a cooperation ?


2121/56/56

LEGAL vs BUSINESSLEGAL vs BUSINESS

NBP

LOCAL LEGAL BARRIERS

Flow of informationFlow of liquidityFlow of responsability ???

LOCAL – HOST – SUPERVISORY MISSION & RESPONSABILITY !


2222/56/56

Scope of information exchange Scope of information exchange between Home and Host between Home and Host

supervisorssupervisors

Host supervisor needs info on “big Host supervisor needs info on “big picture” of group in relation to local picture” of group in relation to local subsidiarysubsidiary– Major changes in group structure Major changes in group structure – Assessment of group-wide models and Assessment of group-wide models and

functionsfunctions– Overall standing of group, whether parent in Overall standing of group, whether parent in

position to support subsidiary in case of need position to support subsidiary in case of need – Difficulties with potentially significant spill-Difficulties with potentially significant spill-

over effects within groupover effects within group

NBP


2323/56/56

Host supervisor still responsible for Host supervisor still responsible for entities it has authorised entities it has authorised

Responsibility of local deposit Responsibility of local deposit insurance agencyinsurance agency

Only local ELA potentially availableOnly local ELA potentially available Expectation of local government Expectation of local government

intervention in case of crisis intervention in case of crisis

NBP

Home and host supervisory cooperation – our concerns


2424/56/56

A „STAND-ALONE PRINCIPLE”A „STAND-ALONE PRINCIPLE”

A subsidiary:A subsidiary:

– must have ability to operate independentlymust have ability to operate independently– must have adequate core functionsmust have adequate core functions

A subsidiary A subsidiary is notis not a branch ! a branch !

NBP

Home and host supervisory cooperation – our concerns

SYSTEMATICALLY IMPORTANT FOREIGN BANKS SUBSIDIARIES


2525/56/56

Thanks for your attention !Thanks for your attention !

NBP

NBP

A PR SUPPLEMENT

Some opinions about Polish banking system


2727/56/56

Opinions about Polish banking Opinions about Polish banking system (1)system (1)

IMF: “Poland – Concluding Statement after the IMF IMF: “Poland – Concluding Statement after the IMF Staff Visit”, November 21, 2005 (ze strony Staff Visit”, November 21, 2005 (ze strony wwwwww))

““Poland has made enormous progress (...) since the Poland has made enormous progress (...) since the days of central planning – witnessed by solid democratic days of central planning – witnessed by solid democratic institutions, an independent central bank, a well-institutions, an independent central bank, a well-supervised financial system, and generally transparent supervised financial system, and generally transparent government accounts to name a few of special government accounts to name a few of special importance to the macro economy.”importance to the macro economy.”

IMF: “Concluding Statement of the IMF Mission to IMF: “Concluding Statement of the IMF Mission to Poland”Poland”, , September 11, 2002 (ze strony September 11, 2002 (ze strony wwwwww))

““Notwithstanding strains caused by an increase in Notwithstanding strains caused by an increase in irregular loans, Poland's banking system remains sound. irregular loans, Poland's banking system remains sound. (...)(...) We welcome the recent steps taken by the GINB to We welcome the recent steps taken by the GINB to promote better risk assessment of foreign currency-promote better risk assessment of foreign currency-denominated loans to unhedged borrowers. These steps denominated loans to unhedged borrowers. These steps demonstrate the supervisory authorities' commitment demonstrate the supervisory authorities' commitment to maintaining the soundness of the banking system to maintaining the soundness of the banking system and to reacting to new developments promptly”.and to reacting to new developments promptly”.

NBP


2828/56/56

Opinions about Polish banking Opinions about Polish banking system (2)system (2)IMF: “Republic of Poland: Financial System Stability Assessment”, IMF: “Republic of Poland: Financial System Stability Assessment”,

IMF Country Report No. 01/67, June 2001.IMF Country Report No. 01/67, June 2001. ““During the last 5 years, Poland has made significant progress in During the last 5 years, Poland has made significant progress in

building a stable and diversified banking system. Following the adoption building a stable and diversified banking system. Following the adoption of decentralized restructuring techniques in the early transition years, of decentralized restructuring techniques in the early transition years, the government attracted strategic foreign investors in all sectors of the the government attracted strategic foreign investors in all sectors of the financial system, in particular banking. The presence of strong foreign financial system, in particular banking. The presence of strong foreign participation has added to the stability of the system. Banking business participation has added to the stability of the system. Banking business in Poland is currently profitable. (...) Nevertheless, privatization to in Poland is currently profitable. (...) Nevertheless, privatization to financially committed shareholders is essential to protect further financially committed shareholders is essential to protect further deterioration in their franchise values, limit the costs to the state and deterioration in their franchise values, limit the costs to the state and contain any future risks to the sector”contain any future risks to the sector”

““Risk management capacity in banks has improved considerably with Risk management capacity in banks has improved considerably with the introduction of global know-how and generally proper regulation and the introduction of global know-how and generally proper regulation and supervision (...)”supervision (...)”

““Banks with majority foreign ownership are more profitable and efficient Banks with majority foreign ownership are more profitable and efficient as they generate more loans and net income per employee, despite as they generate more loans and net income per employee, despite higher personnel expenses.”higher personnel expenses.”

““Banking regulation and supervision has undergone substantial Banking regulation and supervision has undergone substantial improvements since the early 1990s. (...) Both the legal framework and improvements since the early 1990s. (...) Both the legal framework and the supervisory process underwent substantial change and refinement. the supervisory process underwent substantial change and refinement. (...) The banking supervision process has made substantial strides in (...) The banking supervision process has made substantial strides in developing internal procedures, building staff capacity, and developing developing internal procedures, building staff capacity, and developing effective supervisory tools to overcome shortcomings in the regulatory effective supervisory tools to overcome shortcomings in the regulatory structure. The CBS has adopted a clear set of objectives with the primary structure. The CBS has adopted a clear set of objectives with the primary goal of safeguarding the banking system while protecting the depositor”goal of safeguarding the banking system while protecting the depositor”

NBP


2929/56/56


European Commission’s Assessment of Progress Toward European Commission’s Assessment of Progress Toward Accession in the Area of Financial Services, za: N. Wagner, K. Accession in the Area of Financial Services, za: N. Wagner, K. Iakova, “Financial Sector Evolution in the Central European Iakova, “Financial Sector Evolution in the Central European Economies: Challenges in Supporting Macroeconomic Economies: Challenges in Supporting Macroeconomic Stability and Sustainable Growth”, IMF Working Paper Stability and Sustainable Growth”, IMF Working Paper 01/141, 200101/141, 2001

““Poland has already achieved a high degree of alignment with Poland has already achieved a high degree of alignment with respect to financial services. In 2000, there was an acceleration of respect to financial services. In 2000, there was an acceleration of the ongoing bank privatization and further progress with respect to the ongoing bank privatization and further progress with respect to supervision of financial markets. The advanced stage of bank supervision of financial markets. The advanced stage of bank privatization is one of the banking sector’s major strengths. The privatization is one of the banking sector’s major strengths. The financial sector is developing fast from a low base, in particular financial sector is developing fast from a low base, in particular through the increased presence of foreign strategic investors.”through the increased presence of foreign strategic investors.”

The US Department of State (ze strony www)The US Department of State (ze strony www) ““The Polish banking system is considered one of the best regulated The Polish banking system is considered one of the best regulated

and supervised in Central and Eastern Europe. In 2005, concentration and supervised in Central and Eastern Europe. In 2005, concentration of the banking sector in Poland decreased. At the end of June 2005, of the banking sector in Poland decreased. At the end of June 2005, the share of the ten biggest banks in the sector's assets reached 70.5 the share of the ten biggest banks in the sector's assets reached 70.5 percent (71.8 in 2004), and in credits -- 66.0 percent (66.6 percent in percent (71.8 in 2004), and in credits -- 66.0 percent (66.6 percent in 2004). The share of those banks has decreased systematically since 2004). The share of those banks has decreased systematically since 2001, the year of the most intensive mergers in the banking sector.”2001, the year of the most intensive mergers in the banking sector.”

NBP


3030/56/56


Foreign direct investment in the financial sector – Foreign direct investment in the financial sector – experiences in Asia, Central and Eastern Europe and Latin experiences in Asia, Central and Eastern Europe and Latin America, Bank for International Settlements, June 2005America, Bank for International Settlements, June 2005

““In Poland, the presence of foreign banks had increased financial In Poland, the presence of foreign banks had increased financial system diversity in terms of participants and products and system diversity in terms of participants and products and contributed to deeper financial markets.”contributed to deeper financial markets.”

Euro Info Centre Working Group Market Access, Country Profile Euro Info Centre Working Group Market Access, Country Profile Fact Sheet: Poland, December 2002Fact Sheet: Poland, December 2002

““The Polish banking system is considered stable, and – what is more The Polish banking system is considered stable, and – what is more – it is one of the best regulated and supervised banking systems in – it is one of the best regulated and supervised banking systems in Central and Eastern Europe. It is also in the throes of dynamic Central and Eastern Europe. It is also in the throes of dynamic change. The battle to win customers is becoming fiercer, and the change. The battle to win customers is becoming fiercer, and the range and quality of services is consistently increasing.”range and quality of services is consistently increasing.”

M. Farnoux (Banque de France), M. Lanteri, J. Schmidt (Banque M. Farnoux (Banque de France), M. Lanteri, J. Schmidt (Banque de France), Foreign direct investment in the Polish financial de France), Foreign direct investment in the Polish financial sector, Case study prepared for the CGFS Working Group on sector, Case study prepared for the CGFS Working Group on Financial Sector FDI, June 2004.Financial Sector FDI, June 2004.

““Moreover, right from the start, the opening of the banking sector to Moreover, right from the start, the opening of the banking sector to major international banking groups played a key role in the major international banking groups played a key role in the restructuring of the banking system and was seen as a unique restructuring of the banking system and was seen as a unique opportunity to create an efficient banking system providing services opportunity to create an efficient banking system providing services that could meet international standards.”that could meet international standards.”

NBP


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L. Bokros, A perspective on financial sector development in L. Bokros, A perspective on financial sector development in Central and Eastern Europe, w: L. Bokros, A. Fleming i C. Central and Eastern Europe, w: L. Bokros, A. Fleming i C. Votava, Financial transition in Europe and Central Asia. Votava, Financial transition in Europe and Central Asia. Challenges of the new decade. The World Bank 2001.Challenges of the new decade. The World Bank 2001.

““Foreign strategic investment in most lending banks has proved to Foreign strategic investment in most lending banks has proved to be an unqualified success in both Poland and Hungary, after several be an unqualified success in both Poland and Hungary, after several consecutive efforts of government-orchestrated and government-consecutive efforts of government-orchestrated and government-financed consolidation of insolvent state-owned banks. Foreign financed consolidation of insolvent state-owned banks. Foreign strategic partners have been able and willing to provide not only strategic partners have been able and willing to provide not only much-needed additional capital and management skills but also much-needed additional capital and management skills but also product development and innovation, modernization of risk product development and innovation, modernization of risk management and treasury operations, internal audit and control, management and treasury operations, internal audit and control, and information technology.”and information technology.”

C. Strirbu, Financial Market Integration in a Wider European C. Strirbu, Financial Market Integration in a Wider European Union, Hamburg Institute of International Economics, HWWA Union, Hamburg Institute of International Economics, HWWA Discussion Paper no. 297, 2004.Discussion Paper no. 297, 2004.

““Large bank privatLarge bank privatiisation programs were undertaken in almost all sation programs were undertaken in almost all countries during the early 1990s. While some countries (Hungary, countries during the early 1990s. While some countries (Hungary, Poland and Slovenia) were successful in stabilising their banking Poland and Slovenia) were successful in stabilising their banking systems with the help of these programs by the second half of the systems with the help of these programs by the second half of the 1990s, other countries faced continuing problems.” 1990s, other countries faced continuing problems.”

NBP

Documents

T.Parys GIBS 1/56 NBP CROSS-BORDER SUPERVISORY COOPERATION ISSUES AND CHALLENGES A HOST COUNTRY PERSPECTIVE: -main issues - main concerns - main challenges