Transcript Financial system in B&H in combination with the financial crises and

Financial Crisis and their
affects on the Financial System
& Real Sector in B&H
Damir Njuhović, PhD Candidate at
SSST/Buckingham University
International Burch University, Sarajevo date:
17.04.2012
Three broad topics
1. History of Financial system in B&H
2. How did 2007/2008 Crisis start / spill over to
B&H / result in new Crisis 2011/2012
3. The consequence on B&H economy (banks and
real sector)
 Practical examples & possible way forward
B&H financial system prior to crisis
System before 1992- a socialist regime (pre 1992)
 Centralized system with one bank at the Republic level
 Huge industrial systems with “Leading companies”
 Functioning of system, approval process, coordination
between republics
 System following 1996 until 2000 (1996-2000)
 New emerging banks
 Small accumulation of deposits – low trust
 Restricted foreign credit lines
 Introduction of currency board
Financial system from 2000 onwards
 Entrance of Foreign banks 2001 onwards
 Standards for loan approval (market aggressive behavior)
 HVB retail and Hypo Corporate
 Price setting behavior but no Bond market until 2009
 Competition prices went from 25% to 7-8% in 2008
 Also improvement in supporting institutions, court,
financial reports etc.
 Opening of stock market 2002/2003
Situation as it is before crisis
 Uncoordinated privatization practice:
- unconnected companies within large industry
system
- many SME’s (riskier) and lost market especially
foreign penetration
 Many new Banks at country level
- no umbrella bank / uncoordinated practice by
banks commercially based
- different strategies (retail, treasury, large, foreign
companies etc…)
Finances available through
 Bank credit (by far most common form)
 Leasing (financial / operational) + R/E recently
 Factoring (only “Prvi Factor” present part of NLB Group)
since 2007
- some current banks plan to organize factoring
 Micro Financial Institutions (MFI’s)
 Private equity & Capital markets
- IPO (Initial Public Offering very low activity, restricted
exit for potential equity investors)
- Corporate bond market underdeveloped with few issues
How does Financial support
approval process function
 Request, source Treasury if LT, internal meetings,
risk consultation, layer consultation collateral
wise, short credit analysis, indicative offer,
 Client meeting, Law department, credit analysis
(financial, quantitative),
 Risk, overall application, risk
 Credit Committee final decision, law department.
Beginning of crisis 2008
 What is the trigger of the crisis?
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- Asset securitization (what is it and how it has occurred?)
What is it?
- Bundling and transfer of cash generating assets on capital
market
- Assets legally separated from originator and rated as such
- Originator withholds first loss peace and slices portfolio
to get better rating
Government sponsored agencies stimulated AS
Interest rates versus mortgage prices
USA Bank loans amount to 10% GDP while bonds /
securities to 150% GDP
 Basel I all loans in same basket irrespective of risk up to
2005
 AS enabled huge leverage and asset increase while RWA
was controlled
 Basel II (2005-2008)
- allowed IRA in each bank to access risk
- properly secured mortgage loans low risk
- industry loans higher risk
 But was late as RWA / asset gaming continued until
2007/2008 (see graph)
 Spill over effect from USA real estate market to the rest of
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world
Huge liquidity squeeze in combination with the run on
deposits end of 2008 Consequential loan reduction to
withhold Bank solvency in B&H
Highly restricted credit lines from abroad
Lost trust between Banks
Overall 2008 crisis is Liquidity crisis
Beginning of “new” crisis 2011/2012
 Fiscal stimulus to real sector and banks resulted in over
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indebtedness
Over indebted countries largely on a periphery of EU (less
industry/competitiveness)
Especially dangerous countries using EUR as a monetary
mean
Unequal competitiveness in Europe
- those that adopted EUR as official currency and
- those over indebted in foreign currency loans – small
devaluation possibility
What about USA and their indebtedness – is it coming?
Question and answer session
New Basel III regulation (see table)
 TCE / RWA = min. 7%
 roughly 7 times increase in tangible capital to
Basel II
 TCE counts as only loss absorbent part of equity
 shortened period to adapt until 01.jan.2013
 in EU 9% tangible capital adequacy ratio
introduced (until 30.06.2012)
 huge competition for capital – lack of capital
 Banks required to withhold 30 day system wide
liquidity shock
 RWA - Risk Weighted assets
 before crisis much slower growth in respect to
total assets
 after crisis quick growth (i.e. performance
guarantee which counts 20% RWA in good times
counts 100% in bad times)
 growth of RWA / assets on graph still not
observed – suspicion for RWA gaming
 European banks started to look seriously
undercapitalized
Low correlation in crisis and non
crisis periods RWA:
Basel III impact largely on SME’s in B&H
 adequate capitalization of NWB’s in respect to
rising NPL
 limited help from parent expected
 therefore very strict approval criteria
 undercapitalized parent banks – limited operations
in SEE
 especially towards riskier businesses
 new capital everybody competing for
 new liquidity requirements – limits long term
loans / restructuring
The consequences for B&H
How did crisis spill to B&H?
- export reduction (heavy industry affected most)
- lack of new credit lines in combination with deposit
withdrawal
 Results in rising illiquidity in domestic market
 Vienna Initiative – build up of cash position in CBBH
(lack of good projects)
 Reorientation of commercial banks on retail sector – it is
short sighted vision!
 Lost relationship with SME’s (98% of companies in B&H)
 Hard to regain relationship – un transparent information
from SME’s
 Low credit growth / stagnation
 Loan price increase / however limited to cover as
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competition is high
Deteriorating fiscal position
Lack of collateral – value revised in combination with
illiquidity
Over indebted companies lacking market for their products
(uncompetitive in foreign markets)
RWA gaming in B&H (table)
Limited collateral disposal in highly illiquid environment
- assets more relevant as measure of RWA
Practical examples (see paper)
Examples of how companies from different sectors of the
economy were affected & dealt with crisis:
 IT Sector (retail, wholesale & software programming)
 Wood industry
 Supermarket retail chains (food, hardware – expand or be
acquired)
 Pharmaceutical industry (expand or be acquired)
 Real estate (liquidity squeeze) &
 Cement industry (fall in sales, secured receivables)
Practical examples continued
 Auto industry (VW, Cimos, Alloy Weal)
 Heavy metal, coal and coke industry
(ArcelorMittal, GIKIL, Coal mines)
 Food industry (Mims group, organic food – not
organized etc…)
 To big to fail companies
 Foreign versus domestic companies:
- parent help expected
- coordinated restructuring action at parent level
Possible way forward
 Organization of industrial development bank
 Coordination at country level and reunification of
broken supplier / buyer chains
 FDI but distinction between market and export
orientated
 Liquid capital markets (bond / equity)
 Factoring as in Mexico (reliance on credible big
buyer)
Limitations
 Source of cheap funding in illiquid environment
 Lack of potential investors (country rating, lost
trust, pension reform,
- life insurance as alternative institutional investor
– needs time for people to adopt to new system)
 Destroyed supplier / buyer chain many
companies already sold,
- lost market, need to regain reputation again,
- experienced workers getting older and older……
 Fixed exchange rate to EUR (CB) – one of
greatest limitations
- productivity growth should follow growth of
productivity in exporting countries otherwise
unemployment rise / wage cuts to boost
competitiveness……
 Solution to re orientate to less advanced countries
in Africa / Asia
 or seek cheaper funds from EU & top edge
technology…….
CBBiH – Central Bank role
 Only one mean to affect monetary politic through obligatory
reserve relaxation on short term and long term deposits
 No effect from S/T deposits relaxation:
- current crisis is not Bank liquidity crisis
- to overcome illiquidity in real-sector structural reform needed
(improve receivable collection method / factoring) or as some
suggest:
- relaxation of CB terms and conditions and printing money based
on FX reserves which are currently 1:1 to domestic currency in
oscillation – possible source of instability in future
 Lender of last resort function done by Foreign banks and credit
lines – compensate for Trade imbalance
Question and answer session
Conclusion
 Destroyed industrial systems – 98% SME’s (lost adequate
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supply chain)
Various different banks with different strategies
Restricted L/T financing
Restricted overall financing Basel III on SME’s
Liquidity not problem but ratio Capital / RWA
Proportional reduction in RWA (danger relationship will
be lost)
Fixed exchange rate not competitive on international
market
FDI predominantly market orientated