1 / 17

ECB-CFS Research Network Conference

ECB-CFS Research Network Conference. Some Supervisory Lessons from the Development of Money Market Liquidity during the Current Turmoil : the Experience of the Czech Republic. 20 October 2008. Miroslav Singer Vice-Governor, Czech National Bank. Overview.

marc
Download Presentation

ECB-CFS Research Network Conference

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. ECB-CFS Research Network Conference Some Supervisory Lessons from the Development of Money Market Liquidity during the CurrentTurmoil: the Experience of the Czech Republic 20 October 2008 Miroslav Singer Vice-Governor, Czech National Bank

  2. Overview • Current turmoil and the CZK money market liquidity • Financial crisis and CNB measures • Factors supporting resistance of the Czech banking sector to liquidity strain • Some regulatory lessons – International perspective • Some regulatory lessons–Czech Republic perspective • CNB's position to EU agenda

  3. 1. Current turmoil and the CZK money market liquidity • CZK money market rates (PRIBOR) were largely correlated with EUR rates (EURIBOR) (correlation in range 0.53 – 0.63) • However, the CZK market has not shown any major liquidity strain until recently (unlike EUR market) Within common EU economic environment the Czech financial market is less affected

  4. 1. Current turmoil and the CZK money market liquidity, cont. • Absence of liquidity strain is indicated by the fact that: • The CNB was repeatedly absorbing usual amounts of liquidity through repo operations (see Figure 1) • The spread between 1Y PRIBOR and overnight index swap, which approximates in the unsecured interbank market the premium for liquidity and counterparty risk, was usually lower than its EURIBOR counterpart (see Figure 2) • The spreads were only weakly and negatively correlated (-0.082), which indicates the absence of any common trend CNB is still absorbing usual amountsof liquidity from the market

  5. 1. Current turmoil and the CZK money market liquidity, cont. Figure 1 Volume of daily sterilisation (in bil. CZK) Sterilisation still well above 300 bil. CZK

  6. 1. Current turmoil and the CZK money market liquidity, cont. Figure 2 Spreads between 1Y interest rates and overnight index swap(in b.p.) Monthly average spreads for CZK are currently lower

  7. 2. Financial crisis and CNB measures • October 14 announced the Bank Board decision to launch regular liquidity supplying repo operations effective from October 15 • Three times a week (Monday, Wednesday, Friday) • Usually two weeks maturity • Bank’s bids will be fully satisfied at 2W repo rate + 10 b.p. • List of eligible collateral published on CNB website • First auction with total amount of 4.66 bil. CZK supplied Regular CNB liquidity supply facility is expected to ease inter-bank market

  8. 3. Factors supporting resistance of the Czech banking sector to liquidity risk – Low interest rate environment Figure 3 Interest rates in CR and Eurozone (in %) CZK interest rates are below EUR rates

  9. 3. Factors supporting resistance, cont. – Banks exposures and liquidity risk • Banks had no direct credit derivative exposure, only some minor indirect exposures (approx. 0.30% in terms of banking sector's total assets) • In comparison with 1997 crisis, the domestic banking sector was in a favourable liquidity position at the end of September: • sizeable client's deposits • considerable amount of quick assets • sufficient coverage of deposits by quick assets • substantial loan coverage by primary funds despite noteworthy credit expansion driven by mortgage and consumer loans to households (see selected indicators) Until recently the Czech banks have weathered the storm well

  10. 3. Factors supporting resistance, cont. – Selected indicators Actual indicators are better than in 1997

  11. 4. Some regulatory lessons –International perspective • The principal lessons for the management of liquidity of credit institutions: • Stress testing to better deal with possible crisis situations • Interaction between funding and market liquidity risk, • the latter has been in recent years highlighted by: • shift from traditional retail deposit-based funding to more volatile market-based funding • increased cross-border use of collateral • increased use of complex financial instrument, e.g. credit derivatives Good stress testing and fundingare of crucialimportance

  12. 4. Some regulatory lessons–International perspective, cont. • Currently, the regulatory lessons are being transformed into international standards whose amendment is being discussed: • The Basel Committee’s Principles for Sound Liquidity Risk Management and Supervision (to be presented for approval at our XV ICBS Conference). This paper represents a substantial revision of previous principles for liquidity that were published in 2000 • European Banking Committee paper proposing changes to the CRD liquidity risk management requirements. This paper reflects CEBS Technical Advise to European Commission on Liquidity Risk Management (June 2008) European and international authorities are very active in the regulatory field nowadays

  13. 5. Some regulatory lessons– CzechRepublic perspective • Considering the dominance of foreign ownership (97.6. % in terms of total assets), the CNB deems necessary: • Strict regulatory requirements for management of liquidity of local credit institutions • Not to compromise regulatory rules that prevent excess transfer of liquidity (and capital) at the group level • To keep an appropriate balance between home and host supervisor's powers (liquidity competence for host supervisors) Preservation of intra-group exposure limits is crucial

  14. 6. CNB position to EU agenda – liquidity regulation • EU cross-border banking groups lobbying for removal of regulatory limits on intra-group asset exposures is the source of great CNB concern: • Channel for cross-border transmission of liquidity disturbances and consequently also increasing risk of a cross-border systemic crisis • Unsolved problems related to the provision of assistance in the event of a liquidity crisis (back transfer of intra-group funds provided by a bank cannot represent a viable solution of the problem for a crisis situation) • Great increase of reputational risk in case of individual group member problems • Increased probability of hidden inefficiency and serious deficiencies in one part of a group thanks to access to cheap intra-group financing • Rising asymmetry between host supervisory powers and responsibility in the absence of clear rules for distributing costs for group members’ failures Lessons from crises must be distinguished from the industry interests

  15. 6. CNB position to EU agenda – financial market supervision The CNB endorses in the area of liquidity risk supervision(as well as in other key areas, e.g. capital adequacy supervision) inter alia: 1) Development of cooperation (including a common supervisory culture) between supervisory authorities 2) The voluntarydelegation of tasks between supervisors based on the legal conditions in the individual countries and on supervisory needs 3) The effective exchange of information among supervisors in normal times and among supervisors, central banks and ministries of finance in times of stress Cooperation based on mutual trust, and effective exchange of adequate information, and …

  16. 6. CNB position to EU agenda – financial market supervision, cont. 4) The functioning of colleges of supervisors with reservations concerning the idea of upgrading colleges to a decision making body and: • rules for reporting and disclosure of information by subsidiaries • application of large exposure limits on cross-border groups • the additional capital requirements above the regulatory limits 5) The introduction of the uniform EU prudential reporting formats (but not uniform group-based reporting formats for cross-border groups that would hinder collecting comparable data for analysis of financial system on the national level) 6) Further aiming at elimination of national discretion … well-balanced powers and responsibilities

  17. Thank you for your attention Miroslav Singer Czech National Bank Na příkopě 28 115 03 Prague 1 Miroslav.Singer@cnb.cz Tel: (420) 224412008

More Related