1. it is the administrators of the system, not capitalism that is guilty (i) 1. it is the...
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1. It is the administrators of the system, 1. It is the administrators of the system, not capitalism that is guilty (I)not capitalism that is guilty (I)
The crisis: not a market failure
Three technical causes: abundant liquidity,
bad loans, frenetic securitization
Three underlying causes: central banks,
politicians, and regulators and supervisors
1. It is the administrators of the system, 1. It is the administrators of the system, not capitalism that is guilty (II)not capitalism that is guilty (II)
Politicians in the USA adopted The Community
Reinvestment Act, 1977
CRA requires banks to extend credits
using also social criteria
Continuing banks’ business was made conditional
on fulfilling CRA requirements
1. It is the administrators of the system, 1. It is the administrators of the system, not capitalism that is guilty (III)not capitalism that is guilty (III)
Central banks:
Liquidity injections whenever a new financial crisis
emerged
Reduced credit cost
Regulators and supervisors:
Lagging behind market innovations
2. There is a special interaction 2. There is a special interaction between major events and theories or rules (I)between major events and theories or rules (I)
It affects assumptions of a theory and the speed with which a consensus is reached in practice
Before the Great Depression: classical theory was the only orthodoxy:
Economic agents optimize a utility function to their own benefit
Prices clear all markets
Failed to explain the high and persistent level of unemployment during the Great Depression
2. There is a special interaction 2. There is a special interaction between major events and theories or rules (II)between major events and theories or rules (II)
Keynesian theory came with two new assumptions:
Prices do not clear markets and do not secure a right balance between demand and supply
People cannot always make the best decision to their own interest, thus leaving room for public policies
Major failure in the 1970s with the Great Inflation
Replaced by the new classical theory
Today, the classical approach of public policies is replaced by the Keynesian approach again
3. Keynesian interventions: 3. Keynesian interventions: a big step in the wrong direction (I)a big step in the wrong direction (I)
Authorities in the USA, Japan, and in some European countries decided that public money would replace private money
Thus, some sectors were allowed to receive money from public funds, avoid asking for money from private banks
Helping declining industries by governments is detrimental to new profitable sectors
3. Keynesian interventions: 3. Keynesian interventions: a big step in the wrong direction (II)a big step in the wrong direction (II)
But resorting to Keynesian measures leads to:
Losing confidence in free markets, as it happened
after World War II
Higher inflation, as it happened in the 1970s
The ever-higher prosperity of the last three
decades was provided by free markets
4. Regulations will always be lagging behind4. Regulations will always be lagging behind
Today we have rules but they do not dictate what we can or cannot do
Regulations say what criteria we should fulfill and what standards we should meet, whatever we choose to do
They favor competition among firms and more freedom to choose for consumers
Free people with enthusiasm, imagination, new ideas, energy
5. Good times do not last forever5. Good times do not last forever......
It is in the nature of the human being to behave irrationally during boom periods, as if nothing can change the present
Private agents
Excessive risk taking, benefiting of non-transparent institutions, incomplete understanding of new financial instruments
Public authorities
Capital flows-bonanza is not an implicit approval by foreigners of domestic reform delays
6. ...which means that there will be a new crisis 6. ...which means that there will be a new crisis
Greenspan: “All financial crises are different
but they have a common cause”
This is the great capacity of human beings
to assume that periods of prosperity do not end
How do all these relate to banks?How do all these relate to banks?
Bankers knew that their actions
were risky
Many thought that they would feel
when it was time to retreat
Source: National Bank of Romania, National Institute of Statistics
6.39.1
13.414.6
2.1
3.44.1
10.6
12.0
14.4
17.7
18.8
1.2 1.3 1.0 0.9 0.9
0.2 0.90.50.20.14.2
1.00.5
39.3
35.9
26.8
20.8
16.6
0
5
10
15
20
25
30
35
40
45
2004 2005 2006 2007 2008
percent of GDP
loans to non-financial corporations
housing loans to households
household consumer loans
other household loans
other loans
Loans to the private sector
Households' loans and deposits
80
70
60
50
40
30
20
10
0
10
20
30
40
50
60
70
2004 2005 2006 2007 2008 Jul.2009
Source: National Bank of Romania
leu billion
80
70
60
50
40
30
20
10
0
10
20
30
40
50
60
70
leu-denominated deposits leu-denominated loans
net position, lei net position, FX
foreign-exchange-denominated deposits foreign-exchange-denominated loans
leu billion
Non-financial corporations' loans and deposits
60
50
40
30
20
10
0
10
20
30
40
50
60
70
2004 2005 2006 2007 2008 Jul.2009
Source: National Bank of Romania
leu billion
60
50
40
30
20
10
0
10
20
30
40
50
60
70leu-denominated deposits leu-denominated loans
net position, lei net position, FX
foreign-exchange-denominated deposits foreign-exchange-denominated loans
leu billion
Loans to the private sector
-20
0
20
40
60
80
100
120
140
160
2005 2006 2007 2008 2009
Source: National Bank of Romania, National Institute of Statistics July
loans to the private sector
household loans
household consumer loans
housing loans to households
loans to non-financial corporations
real annual percentage change based on CPI (Dec. of previous year = 100)
Loans to the private sector
Source: National Bank of Romania, National Institute of Statistics
-20
0
20
40
60
80
100
120
140
De
c.0
5
Jun
.06
De
c.0
6
Jun
.07
De
c.0
7
Jun
.08
De
c.0
8
Jun
.09
leu-denominated loans
total
foreign-exchange-denominated loans
-20
0
20
40
60
80
100
120
140
De
c.0
5
Jun
.06
De
c.0
6
Jun
.07
De
c.0
7
Jun
.08
De
c.0
8
Jun
.09
households
total
non-financial corporations & financialcorporations other than MFIs
real annual percentage change*
*) based on CPI
real annual percentage change*
The Romanian banking sector: main challengesThe Romanian banking sector: main challenges
Improving competition
From competing fiercely for larger market share to...
Product innovation
More proper risk estimation
Reducing costs to borrowers
Acquiring an appropriate volume of good quality
collateral
What have banks done over the last 11 months?What have banks done over the last 11 months?
Started competing on deposit rates…
What do people say about interest rate as a factor of savings in Romania?
They say that this is very important but other factors also matter:
Fees magnitude
Confidence
Interest rates in the banking system
8
10
12
14
16
18
20
Au
g.0
8
Se
p.0
8
Oct
.08
No
v.0
8
De
c.0
8
Jan
.09
Fe
b.0
9
Ma
r.0
9
Ap
r.0
9
Ma
y.0
9
Jun
.09
Jul.0
9
Source: National Bank of Romania
8
10
12
14
16
18
20
interest rates of credit institutions* on loans
interest rates of credit institutions* on time deposits
percent per annum percent per annum
* average values; non-financial corporations and households, lei-denominated outstanding transactions
Financial expectations 12 months ahead
-40
-30
-20
-10
0
10
20
30
40
Jan.04 Jul.04 Jan.05 Jul.05 Jan.06 Jul.06 Jan.07 Jul.07 Jan.08 Jul.08 Jan.09 Jul.09
16-29 years
30-49 years
50-64 years
over 65 years
balance of answers, percent
Source: European Commission - DG ECFIN(+) improvement, (-) worsening
Banking indicators
22.5326.01
29.98
35.97
29.50
33.58
68.2571.31
67.96
62.11
54.5153.49 59.42
45.64 46.60
53.17
59.0962.50
20
30
40
50
60
70
80
De
c.0
4
De
c.0
5
De
c.0
6
De
c.0
7
De
c.0
8
Jul.0
9
Source: National Bank of Romania
percent
investment and loans to other banks/ totalassets
loans granted to clients/ total attractedand borrowed sources
loans granted to clients/ total assets
1.031.03
0.66
0.32
0.220.200.260.28
1.120.64
-2.90
12.66
15.62
10.249.43
17.04
0.100.05
-0.251.561.011.281.601.98
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4D
ec.
04
De
c.0
5
De
c.0
6
De
c.0
7
De
c.0
8
Ma
r.0
9
Jun
.09
Jul.0
9
Source: National Bank of Romania
-5
0
5
10
15
20
25
30
35
overdue and doubtful loans /total loans portfolio (net value)
ROE (net income / total equity); rhs
ROA (net income / total assets); rhs
percent percent
Analysis ratios for the banking system (1)
20.64
21.07
18.12
13.78 13.76 13.16 13.51
2.39
2.13
2.31
2.28
2.592.47
2.31
10
15
20
25D
ec.
04
De
c.0
5
De
c.0
6
De
c.0
7
De
c.0
8
Ma
r.0
9
Jun
.09
Source: National Bank of Romania
1.0
1.5
2.0
2.5
3.0
solvency ratio liquidity indicator (rhs)
percent
Analysis ratios for the banking system (2)
percent
share in total banks (%); July 2009
Total assets
Loans to the Private Sector
Non-bankclients'deposits
Banks with majority foreigncapital 85.1 87.2 81.6
Banks with majority domesticprivate capital 8.2 8.2 10.6
Banks with majority domesticstate-ownedcapital 6.7 4.6 7.80
10
20
30
40
50
60
70
80
90
100
De
c.9
1
De
c.9
8
De
c.0
0
De
c.0
3
De
c.0
4
De
c.0
7
De
c.0
8
Jul.
09
Source: National Bank of Romania
loans to the private sector
total assets
non-bank clients' deposits
percent
Share of majority state-owned banks in total credit institutions
Features of banking sector and shareholding structureFeatures of banking sector and shareholding structure**
Features of the banking sector
43 credit institutions (of which 11 branches of foreign banks and 1 credit cooperative)
Banking assets – total bank net assets: EUR 78.2 billion
Top-five banks account for 54.2% of bank assets
Solvency ratio = 13.5%
Foreign entities make up most of the shareholding
Market share: 86.0% – credit institutions with majority
foreign capital
7.1% – credit institutions with majority domestic private capital
6.9% – credit institutions with majority state-owned capital
Shareholding structure of credit institutions in Romania
10.2
12.5
77.3
state-owned capital domestic private capitalforeign capital
(% in total capital)
* June 2009
percent
Dec.07 Mar.08 Jun.08 Sep.08 Dec.08 Jun.09
1. 13.78 12.99 12.78 11.85 13.76 13.51
2. 7.32 7.20 7.30 7.10 8.13 6.92
3. 59.09 62.06 63.47 65.04 62.50 59.11
4. 29.98 27.54 26.09 24.79 26.01 23.91
5. 0.22 0.21 0.30 0.24 0.32 1.03
6. 0.17 0.19 0.25 0.22 0.29 0.75
7. 1.63 2.03 2.78 2.43 3.19 8.98
8.
9.
10.
11. 1.01 1.51 1.44 1.77 1.56 0.05
12. 9.43 16.45 15.82 19.41 17.04 0.64
13. 38.70 34.98 33.23 31.74 34.43 33.62
14. 2.13 2.29 2.30 2.45 2.47 2.39
15. 108.7 116.1 119.6 124.7 122.0 119.2Note:
(1) Indicators calculated based on accounting prudential reports.
ROE (Net profit / Own capital, average)
(2) Indicators calculated based on loan classification reports (pursuant to Regulation 5/2002, as subsequently amended and supplemented). Loan exposures are classified by credit institutions in line with debt servicing, debtor’s financial standing and the principle of downgrade by contamination.
Liquidity
Cash ratio
Liquidity ratio (effective liquidity / required liquidity)
Loans to clients / Deposits from clients
Unadjusted exposure to loans and interests classified under “substandard”, “doubtful” and “loss” / Total classified loans and interests, including off-balance-sheet items (2)
Provisioning of risk-weighted exposure to bank and non-bank loans, and interbank placements classified under “substandard”, “doubtful” and “loss” (Provisions for loans and placements / Adjusted exposure to loans and placements classified under “substandard”, “doubtful” and “loss”)
Profitability
ROA (Net profit /Total assets, average)
BANKING INDICATORS (Banks, Foreign Bank Branches and CREDITCOOP)
Indicators
Leverage ratio (Tier 1 capital /Total assets, average)
Asset quality
4.55 5.05
Capital adequacy
Solvency ratio (>8%)
Loans (gross value) / Total assets (gross value) (1)
Interbank placements and loans (gross value) / Total assets (gross value) (1)
Past-due and doubtful loans / Total loan portfolio (net value) (1)
Past-due and doubtful claims / Total assets (net value) (1)
Past-due and doubtful claims (net value) / Total own capital (1)
Unadjusted exposure to loans and interests classified under “doubtful” and “loss” / Total classified loans and interests, including off-balance-sheet items (2) 5.95 10.33
9.12 9.20 9.77 10.51 12.54 17.86
3.76 4.23
86.2 89.6117.0 90.5 91.0 89.7