Banking on the Future
The guest speakers (in alphabetical order) at this panel discussion were: Dr. Nikola Fabris, Vice-Governor for Financial Stability and Payment Systems at the Central Bank of Montenegro; Dr. Aneta Krstevska, Chief Economist at the Central Bank of the Former Yugoslav Republic of Macedonia; Dr. Platon Monokroussos, Deputy General Manager and Chief Market Economist at Eurobank Ergasias S.A.; Dr. Christos Papazoglou, Senior Economist at the Central Bank of Greece. (Gent Sejko, Governor of the Central Bank of Albania, who was scheduled to be a guest speaker and arrived at the conference venue in Athens, was called away in the morning to return to Tirana for an emergency meeting and was therefore unable to participate in the afternoon banking session.)
For the benefit of the audience, the moderator presented an introduction to each of the banking industry issues scheduled for discussion, and each introduction was followed by questions for the panel members. The introduction to each issue for discussion and the associated questions are set forth below while a video of the session is available here and on YouTube.
SUBJECT NUMBER 1 – Maintain or Gradually Increase Interest Rates
Just two weeks ago on 23 October 2015, China’s Central Bank cut their interest rate for the 6th time in one year. On 9 October 2015, the International Monetary Fund concluded its annual meeting in Lima with a warning to Central Bankers that the world economy risks another crash unless they continue to support growth with low interest rates. The IMF said that uncertainty and financial market volatility have increased, and medium-term growth prospects have weakened.
Yet, four former Central Bank Governors responded to the IMF’s message with a warning to current policymakers that they risked sowing the seeds of the next financial crisis by prolonging the period of ultra-low interest rates. In a study delivered to the IMF’s annual meeting, the G30 group of experts who contributed to the study said keeping the cost of borrowing too low for too long was leading to a dangerous buildup in debt. The study was written by four former Central Bank Governors, including Jean-Claude Trichet, former President of the European Central Bank, and Axel Weber, former President of the German Bundesbank, and now Chairman of UBS.
The report stated: “The supportive actions by Central Banks can be useful, but there are serious risks involved if governments, parliaments, public authorities, and the private sector assume Central Bank policies can substitute for the structural and other policies they should take themselves. The principal risk is that excessive reliance on ever more Central Bank action could aggravate the underlying systemic problems and delay or prevent the necessary structural adjustments.”
- In view of the current global economic conditions and the reliance of Balkan economies on international trade and foreign investment, what is your assessment of the potential benefits and risks to your respective national economies in the two possible cases of (i) maintaining low interest rates and (ii) gradually rising interest rates during the forthcoming year?
SUBJECT NUMBER 2: Monetary and Fiscal Policies
Through the use of monetary policies and recently enhanced financial stability mechanisms, Central Banks are the principal players in the development of financial and capital markets, and more broadly, sustainable economic development. Among their myriad of available tools, Central Banks can provide funds at below-market rates to encourage targeted lending or to complement existing priority lending targets. Central Banks can stimulate markets through asset purchases thereby releasing cash into the financial system; however, as the study by the four former Central Bank Governors stated, there are limits to what Central Bank monetary policies and complementary measures can accomplish in providing a foundation for the stability and development of capital and financial markets and sustainable economic growth.
Monetary policies combined with effective fiscal policies, which can achieve optimum results if they are coordinated, can support economic stability and development aims, especially including employment growth which is one of the most important issues in the region today. National governments have the authority to implement a variety of fiscal policy actions. For example, they can: determine national debt levels, raise or lower taxes as well as government spending, establish incentives for foreign direct investment, implement debt reduction plans, establish fiscal stimulus programmes or austerity measures, and so on.
- (a) What can we realistically expect from Central Banks and monetary policy in terms of delivering economic stimulus and generating growth, and (b) is there a trade-off between monetary policy and financial stability that limits the outer boundary of Central Bank choices and instruments?
- Since the onset of the global financial crisis, what key monetary policies have been most effective in support of national economic recovery and stability in your country?
- What instruments can additionally be used, beyond the traditional remit of money market interventions employed by central banks?
- During the forthcoming year, what fiscal policies under national government jurisdiction would effectively support the Central Bank’s monetary policies in order to create a synergistic effect in boosting economic recovery and development?
- Based on historical data and experience, are there any fiscal policies that would be best avoided in the near term because they might inhibit economic recovery and growth?
SUBJECT NUMBER 3: Non-Performing Loans
Moody’s Investors Service recently published a report entitled “Banking in the Balkans” which covers the Balkan countries except Greece and Turkey. Moody’s reported that their banking sectors have been recovering from the global financial crisis and there is increasing access to credit and available capital. The recovery is attributed to modest economic growth in Europe as well as the Balkan banks’ deployment of stronger liquidity and capital buffers which reduce the vulnerability of banks to risks associated with external conditions over which they have no control.
This report also identifies challenges faced by Balkan banks in their efforts to expand access to credit for consumers and businesses. Some of these challenges are derived from the risks inherent in the quality of the assets in bank portfolios, notably the high percentage of non-performing loans (NPLs) which are loans past due for more than 90 days.
Moody’s expects the formation rate of new NPLs to fall throughout most Balkan countries; however, NPL ratios are still expected to remain undesirably high despite widespread efforts to resolve the existing stock of NPLs, which during the last 2 years have ranged roughly between 15%-25% of outstanding loans in the countries covered by the report. (It should be noted that in early 2015, banking analysts reported that NPLs in Turkey were expected to reach only 3-4% of total assets, while NPL ratios in Greece continue to be higher than average as a result of the Greek financial crisis.) Measures to reduce NPLs typically include (a) expediting the sale of NPL collateral (which is property held by the banks as security for the loans), (b) sales of NPLs to investors other than banks and (c) strengthening laws that allow banks to move more aggressively on bad loans. This problem is hindering the banking sector’s ability to expand their loan programmes which are essential for economic growth.
- In your experience, what are the most effective measures to reduce the stock of NPLs.
- Are there any NPL reduction measures that are not currently being implemented and that you would like to see put into operation?
- What is your institution’s short term outlook for NPL reduction in your country’s banking system?
SUBJECT NUMBER 4: Capital Controls on Banks in Greece
This year, banks in Greece were impacted by conditions that were beyond the control of the banking industry as these conditions stemmed from the global financial crisis and caused reduced domestic economic activity which resulted in deposit outflows, a reduction in bank funding and liquidity, and the imposition of capital controls on banks in Greece by the Greek government. It should be noted that the capital controls to limit ATM withdrawals and overseas transfers do not apply to Greek bank-owned or controlled subsidiaries in Balkan countries such as Albania, FYR Macedonia, Serbia, Bulgaria and Romania which host Greek bank subsidiaries.
The negative impact of capital controls on 2015 Greek GDP is estimated to be 1%, according to a survey of economists by Bloomberg Business News; however, banks in Greece are under pressure to recapitalise by the end of 2015, as new regulations will come into force that will require depositors to contribute to the re-capitalisation process before euro-area rescue funds are contributed if the recapitalisation process has not been satisfactorily completed by the year’s end.
As many of the adverse conditions that gave rise to these consequences are improving, Greece is expected to return to economic growth in the second half of 2016 according to European Commission Vice-President Valdis Dombrovskis in October 2015.
- We live in an age of international trade. The business operations of thousands of enterprises in the Balkans and beyond its borders have been impacted by these capital controls and are awaiting their removal. Affected individuals and enterprises have been asking: What are the basic steps that need to be taken before the capital controls can be lifted?
SUBJECT NUMBER 5: Key factors to mobilizing untapped growth potential and stabilizing fiscal dynamics with Power Point Presentation by Dr. Platon Monokroussos