Banks’ Adjustment to Basel III
Reform
A Bank-Level Perspective for Emerging Europe
Vladimir TOMSIK
Vicegovernor
Czech National Bank
Basel Consultative Group Meeting
Dubai, January 16-17, 2017
Basel III and Capital Accumulation
Basel III reform relies on higher capital quality and higher
capital ratios.
However, initial concerns about potential macroeconomic
costs.
Strategies of capital accumulation:
1. Issue new equity (benign)
2. Cut dividend payments (benign)
3. Increase retained earnings by
a) Higher operating efficiency (benign)
b) Increase lending margins /spreads (costly)
4. Reduce risk-weighted assets by
a) Shifting portfolios towards less risky assets (costly? benign?)
b) Cutting the size of the loan portfolios/assets (costly)
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Basel III and Capital Accumulation
Ex-ante assessment of potential macroeconomic
costs
• Macroeconomic Assessment Group (2010) and
Basel Committee on Banking Supervision (2010)
• 1 pp increase in capital ratios would raise spreads by
around 15 bps, pushing down lending volume by
approximately 1.5 percent.
Ex-post assessment did not support initial
concerns.
• Cohen (2013) and Cohen and Scatigna (2014)
• Focused on 94 world largest banks.
• Mainly retained earnings used to accumulate capital.
• Both lending spreads and lower dividend payouts used.
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Capital Accumulation in EU Emerging
Market Countries
Our work
• Identify strategies of capital accumulation followed
by commercial banks, …
• … applying the analysis of Cohen and Scatigna (2014)
to …
• … nine emerging markets countries in the EU – BLG,
CZE, HUN, LAT, LIT, POL, ROM, SLO, SVK.
• Five largest banks in each country – above 50 percent
in all countries.
• Balance sheets and income statements data in 2008—
2014 collected from Bankscope.
Forthcoming IMF WP – Michal Andrle (IMF),
Vladimir Tomsik (CNB), and Jan Vlcek (CNB)
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Capital to Risk Weighted Assets
Capital to Risk Weighted Assets (percent, Basel II definition)
25
2008
2014
20
15
10
5
0
BLG
CZE
HUN
LAT
LIT
POL
ROM
SLO
SVK
• The share of capital to risk weighted assets (CAR)
increased in all countries, from the level of around 10—
15 percent in 2008 to about 15—25 percent in 2014.
• However, capital ratios differ in levels as well as in
dynamics across countries.
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CAR Change Decomposition
Banks raised capital ratios mainly through
• Accumulation of capital (positive blue bars) and ...
• … reduction of the riskiness of their portfolios (positive red bars,
strategy 4a) on the back of increasing size of their balance sheets
(negative green bars).
• Conclusion: The most costly strategy (strategy 4b), the reduction of
assets, did not take place (except SLO).
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Capital Accumulation Decomposition
• Profitable banking sectors used retained earnings (strategy 3) to
accumulate capital.
• Less profitable or banking sectors facing losses rely mainly on newly
issued equity (strategy 1).
• Banks seem to be reluctant to reduce dividends (strategy 2),
keeping the dividend payout ratio mostly stable along time.
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Net Income Decomposition
Net Income, percent
Net Interest Income, percent
5
3
2
4
1
3
0
2
2004--2007
-1
2008--2014
1
-2
-3
0
BLG
CZE
HUN
LAT
LIT
POL
ROM
SLO
SVK
BLG
Net Operating (Non-Interest) Income, percent
CZE
HUN
LAT
LIT
POL
ROM
SLO
SVK
SLO
SVK
Net Other Income (Taxes, Revaluations, ... ), percent
0.5
0
0
-1
-0.5
-2
-1
-3
-1.5
-4
-2
BLG
CZE
HUN
LAT
LIT
POL
ROM
SLO
SVK
BLG
CZE
HUN
LAT
LIT
POL
ROM
• Profitability (net income on assets) declined in most of countries.
• While the evidence on net interest rate income is mixed, …
• … lower operating costs (strategy 3a) were not able to offset higher
losses from revaluations and taxes.
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Net Interest Income Decomposition
Loans to Assets, percent
Implicit Spreads, b.p.
80
1500
2004--2007
70
2008--2014
60
1000
50
40
30
500
20
10
0
0
BLG
BLG
CZE
HUN
LAT
LIT
POL
ROM
SLO
CZE
HUN
LAT
LIT
POL
ROM
SLO
SVK
SVK
• Banks in the examined countries did not reduce the share of
loans in total assets. Strategy 4b was not followed.
• We do not observe an increase of implicit lending spreads in
2008—2014 above the pre-crisis average, except HUN.
Strategy 3b not followed.
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Summary Findings
Banks accumulated capital using benign
strategies from macroeconomic perspective.
Concerns that banks would shrink their balance sheet
by reducing their lending did NOT materialize.
• CAR increased mainly through
1. Retained earnings, and
2. Lower riskiness of assets.
• Retained earnings generated by net interest income and
higher operational efficiency.
• Only banking sector struggling with profitability resorted
to the issuance of new equity or shrunk the size of their
balance sheets.
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Thank you for your attention
www.cnb.cz
Vladimir Tomsik
Vicegovernor
Czech National Bank
[email protected]
Analysis is described in details in the forthcoming
IMF WP 2016 „Banks' Adjustment to Basel III
Reform: A Bank-Level Perspective for Emerging
Europe“, authors are Michal Andrle (IMF), Vladimir
Tomsik (CNB), and Jan Vlcek (CNB)
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