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Lessons learned from the crisis
and policies aimed at
strengthening the resilience of the
banking sector – the HFSA case
Katalin Mero
Hungarian Financial Supervisory Authority
XXIII BSCEE Conference, 2010 June
The Crisis and Hungary
Pre- Lehman period -mild effect
Post-Lehman period- strong effect
 no direct exposures to subprime mortgage  no liquidity at any price
 Dried up interbank markets, high and volatile CDS
market – decoupling theory
spreads (more than 600 bp at the peak), freezing of
 effects: increased funding costs (150the swap markets
200bp rise in CDS spreads) and
 Currency depreciation (10 % in 4 days), more
shortening funding maturities
burden on FX loans, deteriorating portfolio
 300 bp CB intrest rate increase in October 2008
(up to 11,5%), more burden on HUF loans,
deteriorating portfolio
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5 year sovereign CDS spreads in some
CEE countries
900
basispoint
basispoint
900
800
800
700
700
600
600
500
500
400
400
300
300
200
200
100
100
Bulgaria
Hungary
Poland
Slovakia
Czech Republic
Oct/09
Jul/09
Apr/09
Jan/09
Oct/08
Jul/08
Apr/08
Jan/08
Oct/07
Jul/07
Apr/07
Jan/07
Oct/06
Jul/06
Apr/06
Jan/06
Oct/05
Jul/05
Apr/05
0
Jan/05
0
Romania
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Inmediate crisis responses by HFSA
• Asses the direct quantitative impacts - negligible
• Strengthen the supervision of liquidity management of the banks
• HFSA SREP Guidlines appendix on highly risky portfolio segments
and extra capital requirements
• Recomendation and Dear CEO letter on responsible lending
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HFSA classification of highly risky portfolio
segments
Portfolio segments of banks
Required excess capital
Japanese yen denominated loans
50-100 % of the capital requirement
under Pillar I.
Retail loans provided on loose conditions (e.g. lending
conditions (e.g. lending without certification of income
certification of income or own contribution, retail
contribution, retail lending with LTV ratio above 80 %,
ratio above 80 %, etc)
50-100 % of the capital requirement
under Pillar I.
Capital calculated on the basis of
Lending to debtors resident in a country with lower
country with lower sovereign credit rating than Hungary specific method determined by the
Supervisory Authority
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HFSA actions after the Lehman shock
• Case of property investment funds – suspension and change repurchase rules from
T+3 to T+90 days
• Daily liquidity reporting requirement, daily supervisory evaluation of the liquidity
and general situation of largest banks (two ad-hoc working group)
• Asking commitment declaration from the parent banks of largest Hungarian
subsidiary bank
• Supervisory VaR model for FX risk calculation under the SREP risky portfolio
Annex
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New metodology for forcasting and managing
institution level crises – the decision-making
model
• Identification of the critical risk factors by supervised sectors according
to the risk menu of HFSA
• Five levels of evaluation (low, modest, significant, high ,incurred) by
risk categories
• General evaluation of the institution (weighted avarage)
• Supervisory measures linked to given levels
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Business
processes and
capital
Environment
Corporate governance
Market presence
Sectors
 Demand
 Asset markets
 Service provider
market
 Product and sales
competition
 Retail customers
 Institutional customers
 Legal and regulatory
environment
Ownership
 Structure of ownership
 Governance and control
 Owners’ relations
Strategy
 Institutional strategy
 Reputation
 Market position
Financial and
Products
operational risks*
 The products and
services of the institution  Credit risk
 Market risk
 Operational risk
 Liquidity risk
 Insurance risk
Internal governance
 Corporate structure, organisation
 Structure of management system,
management and supervision functions
 Publicity and transparency
Customers
 Marketing, customer
acquisition
 Customer information
 Complaint management
Internal control system
 Risk management system
 Compliance
 Internal audit
Fraud management
 Detection of frauds
committed against
customers
 Detection of money
laundering
 Insider trading, market
influencing, violation of
company acquisition
rules, detection of
unlicensed activities
Capital and
earnings
 Capital
adequacy
 Reserves
 Earnings
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Example: Classification Levels of Liquidity Risk
Low:
Determinant refinancing by owners;
High ratio of stable funds to the balance sheet total
Negligible mismatch between the maturity of assets and liabilities;
Planned and well predictable cash-flow;
Minimal differences in content between the composition of cash outflows and cash inflows;
•High volume of existing reserves;
High ratio of liquid assets.
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Moderate:
Significant refinancing by owners;
Comforting ratio of stable funds to the balance sheet total
Insignificant mismatch between the maturity of assets and
liabilities;
Well predictable cash flow;
Limited differences in content between the composition of
cash outflows and cash inflows;
The proportion of products with guaranteed returns is not
significant;
Portfolio concentrations are not typical;
High volume of existing reserves;
Adequate ratio of liquid assets.
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Significant:
Significant refinancing by owners;
Ratio of stable funds to the balance sheet total is modest;
Significant mismatch between the maturity profiles of
assets and liabilities;
Cash-flow difficult to predict;
Large differences in content between the composition of
cash outflows and cash inflows;
Products with guaranteed returns are typical;
Portfolio concentrations;
Satisfactory volume of existing reserves;
Modest ratio of liquid assets.
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High:
Significant refinancing by owners;
Ratio of stable funds to the balance sheet total is low
Large mismatch between the maturity of assets and
liabilities;
Cash-flow is not planned and difficult to estimate;
Significant transfers in maturities, short-term liabilities
used to fund long-term assets;
Dominance of products with guaranteed returns;
Concentrated liabilities, large single deposits;
High volume of existing reserves;
Insignificant ratio of liquid assets.
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Supervisory measures linked to given levels
Six levels of measures defined related to the previous
classification of risk levels (low, moderate, significant,
high, incurred)
•
•
•
•
0 simple access to information
1 intense obtain of information
2 encourage to find a solution
3 enforce the decreasing of given risk level, penalties,
retaliative actions
• 4 direct intervention
• 5 crisis management
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2. level (moderate) – Encourage to find a
solution
•
•
•
•
•
Sending of Management/Supervisory letter,
Obligation: deadline must be defined,
Financial recovery plan,
Prudential meeting,
Prohibition of behaviour against national law
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5. Level (incurred)–Crisis management







Appointed supervisory commissionaire
Exercise of voting rights suspended
Transfer of assets required
Withdrawal of licence
Withdrawal of authorization
Liquidation procedure opened
Procedure of winding-up initiated
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Regulatory answers to the crisis 1.
Act CIV. of 2008 on strengthening the
financial stability:
• Two major tools: governmental guarantee,
state capital increase
• Temporary
• It is renewed half-yearly on Commission’s
approval
• Renewal is applicable only for state capital
increase
Stronger remedial powers have been granted
to the HFSA in 2009:
• thresholds for the mandatory
appointment of a supervisory
commissioner have been defined,
• more precise responsibility rules for
commissioners,
• restriction of carrying out whole
institutions’ or sectors’ activities
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Regulatory answers to the crisis 2.
• Change the status of HFSA
• Establishment of Financial Stability Board
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Regulatory answers to the crisis 3.
Draft of a comprihensive banking resolution framework:
• Preconditions are clearly stated by law (non-cooperative, sytematically
important credit institutions)
• Tasks and responsibilities of authorities are also well defined
• Two main tools: P&A transaction and bridge bank solution
• Expropriation some of shareholders’ rights - compensation
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