Tag Archives: banking

MAS Makes Senior Management Changes

The Monetary Authority of Singapore (MAS) today announced four new senior management appointments as part of an ongoing process to renew MAS’ leadership bench. There will also be two changes in senior appointments. The new appointments and changes will take effect on 1 April 2021.

Deputy Managing Director

2      Ms Ho Hern Shin, currently Assistant Managing Director (Banking & Insurance), will be appointed Deputy Managing Director (Financial Supervision). She will take over from Mr Ong Chong Tee, Deputy Managing Director (Financial Supervision), who is leaving MAS.

Assistant Managing Directors

3      Three Executive Directors will move up to take on Assistant Managing Director positions:

  • Mr Marcus Lim, currently Executive Director (Banking Department I), will be appointed Assistant Managing Director (Banking & Insurance), taking over from Ms Ho Hern Shin.
  • Ms Cindy Mok, currently Executive Director (Monetary & Domestic Markets Management) and Executive Director (Organisation Development & Communications), will be appointed Assistant Managing Director (Finance, Risk & Currency), taking over from Mr Bernard Wee. 
  • Mr Wong Zeng Yi, currently Executive Director (Banking Department II), will be appointed Assistant Managing Director (Organisation & People Development), taking over from Mr Lim Tuang Lee.

4      Two senior management staff will be re-designated:

  • Mr Lim Tuang Lee, currently Assistant Managing Director (Organisation & People Development), will be re-designated Assistant Managing Director (Capital Markets). He will be taking over from Mr Lee Boon Ngiap, Assistant Managing Director (Capital Markets), who is leaving MAS.
  • Mr Bernard Wee, currently Assistant Managing Director (Finance, Risk & Currency), will be re-designated Assistant Managing Director (Markets & Investment).  He will be taking over from Mr Leong Sing Chiong, Deputy Managing Director (Markets & Development), who has been covering this role since 1 February 2021.

5      Mr Ravi Menon, Managing Director, MAS, thanked Mr Ong Chong Tee and Mr Lee Boon Ngiap. 

6      Mr Menon said, “Chong Tee served as Deputy Managing Director for 16 years, across all four of MAS’ key functions: first, in the areas of monetary policy, investment management, and financial development; and then, in financial supervision. He led the MAS teams in navigating the global financial crisis of 2009, ensuring monetary stability and safeguarding our investment portfolio. He subsequently led the implementation of the post-crisis regulatory reforms in MAS, including new rules for bank capital and liquidity. Chong Tee has been an active member in many international regulatory forums, such as the Basel Committee for Banking Supervision and several Financial Stability Board Standing Committees. Chong Tee is a respected leader and a trusted colleague.”

7      Mr Menon added, “Boon Ngiap has been one of MAS’ most versatile leaders, making strong contributions in banking and insurance supervision, capital markets regulation, financial centre development, and domestic monetary management.  As Assistant Managing Director (Capital Markets), Boon Ngiap led the regulation of capital markets and the supervision of capital markets intermediaries and infrastructure, and championed consumer financial education initiatives.  Boon Ngiap represented MAS at the board meetings of the International Organisation of Securities Commissions.”

8      “MAS is deeply grateful to Chong Tee and Boon Ngiap for their leadership and significant contributions over 35 years each of dedicated service.  We wish them the best for their future,” said Mr Menon.

Additional information on new Deputy Managing Director Ms Ho Hern Shin:


Ms Ho Hern Shin, 51, has served in different functions in MAS, including overseeing the licensing and supervision of banks, insurance companies and payments systems in Singapore. She has also overseen specialised teams in MAS that formulated policies and supervised financial institutions in the areas of anti-money laundering, technology risk and cybersecurity, as well as environmental risks. Ms Ho also held positions in HR and organisational development in MAS.

Michelle W. Bowman: My Perspective on Bank Regulation and Supervision

At the Conference for Community Bankers sponsored by the American Bankers Association (via prerecorded video)

Good morning. I want to thank the American Bankers Association for inviting me to speak to you today. Two years ago, I gave my first speech as a Federal Reserve governor at this conference in San Diego, and it is always great to be with you—even if remotely from our recording studio at the Board.

It’s fair to say that a lot has happened over the past two years. It is an understatement to say that the COVID-19 pandemic has created significant challenges inside and outside the banking sector. Bankers significantly adapted operations to continue serving their communities and customers. You overcame staffing challenges and other hurdles, kept the virtual doors open, worked with your customers, and provided assistance to workers and businesses through the Paycheck Protection Program. Those efforts have made, and continue to make, a huge difference in the lives of many people affected by the pandemic, and I thank you.

Since becoming a member of the Federal Reserve Board, I have made it a priority to enhance the Federal Reserve’s dialogue with community bankers. I have embarked on an effort to meet with the leaders of every community bank and regional bank supervised by the Federal Reserve. This valuable interaction helps build an understanding of issues affecting small and regional banks, support supervisory decision-making, and shape some of my perspective. It has also helped the Federal Reserve identify initiatives to support the vital role of community banks in serving the financial needs of communities.

Today, I would like to share my approach to supervision and regulation, which has helped guide the Fed’s efforts to improve oversight of community banks over the past few years and shaped our priorities for 2021 and beyond. In most cases, my points about banking regulation also apply to supervision. I will then focus on several Federal Reserve initiatives that are underway to support community banks during the pandemic and into the future.

The first principle is fundamental to regulation but sometimes bears repeating—regulation should always strike the right balance. For banking regulation, that means a balance between actions that promote safety and soundness and actions that promote an acceptable and manageable level of risk-taking. The challenge is doing neither too little to be effective to achieve the public benefit of government oversight, nor too much to prevent the regulated businesses from meeting their customers’ needs. Some regulation is appropriate and necessary but striking the right balance means that at some point regulation can go too far and end up reducing the public’s welfare. In recent years, the Federal Reserve and other agencies have made oversight more effective by better differentiating prudential regulation and supervision based on the asset size of banks, the complexity of their activities, and the related risks they pose to the financial system. This is especially important for community banks, most of which managed risks well before and during the 2008 financial crisis and have managed their risks well since. Achieving these principles also requires following consumer protection laws and regulations, including fair lending laws, to ensure fairness and broad access to credit and financial services that enable economic opportunity for individuals and communities.

The second principle is that the regulatory framework should be effective, but also efficient, and that means assessing the impact of the requirements. For the Federal Reserve, it means that we consider both a rule’s benefit to safety and soundness and any potential negative effect, including limiting the availability of credit and services to the public, and the implications of compliance costs on banks. The wisdom in this approach is evident when considering the effect of a regulation on community banks and their role in providing financial services to their communities. Community banks have often been one of the few or only sources of credit and financial services to their customers. Their smaller operational scale relies on fewer staff to reach a more disbursed customer base with limited resources for compliance activities. Regulations should consider the potential impact on the availability of services in a community, as well as the costs to the bank of implementing a rule, particularly in more rural locations. It is necessary that a full and careful practical analysis of costs and benefits be a part of every rulemaking.

The third principle is that regulation and supervision should be consistent, transparent, and fair. Regulators are obligated by law to act in this manner, and it also makes good practical sense. These principles enhance safety and soundness and consumer compliance by making sure supervisory expectations are clear and that banks understand and respect the regulatory requirements. Supervisors should not and cannot be everywhere at every moment. But they should be available to provide clarification or answer questions when needed. A clear understanding of the rules and our expectations and a respect for the reasonable application of them is an effective approach to ensure effective compliance. By promoting respect and trust between regulators and the supervised institution, banks are more likely to communicate throughout the examination cycle to inform supervisors of changes they may be considering or challenges they may be facing and how best to resolve or approach them from a regulatory perspective.

A final principle that flows from consistency, transparency, and fairness is that rules and supervisory judgments must have a legitimate prudential purpose, and in the majority of cases must not be solely punitive. The goal should be to encourage sound business practices and activities by supervised institutions. By clearly communicating our objectives, we build respect for the rules and make it more likely that any remedial actions against an institution will not be necessary because we encourage compliance through our supervisory approach. When a supervisory action or formal enforcement action is required to address violations at an institution, those actions should be framed in a way that seeks to promote safe, sound, and fair practices and not simply as punishment.

These principles that guide my approach to regulation and supervision are consistent with many of the major steps that the Federal Reserve has taken to improve community bank oversight since the implementation of the rules following the 2008 financial crisis. Some predate my arrival at the Fed, and some I have played a significant role in achieving. Most of these actions involve tailoring rules that treated community banks in the same way as larger, more complex institutions. For example, the Volcker rule was aimed at curbing proprietary trading by large banks, but it ended up creating significant compliance costs for community banks, which are not involved in this type of trading.

Many of the most important improvements to the Federal Reserve’s regulatory framework involve tailoring rules to fit to the size, business model, and risk profiles of community banks. For example, we raised the asset threshold for small banks to qualify for an 18-month exam cycle and similarly raised the threshold for small bank holding companies to be exempted from consolidated risk-based capital rules. The concept of tailoring is also expressed in our community bank supervisory framework, which has been updated to implement the Bank Exams Tailored to Risk (BETR) program. The BETR program allows examiners to identify higher and lower risk activities and, in turn, streamline the examination process for lower risk community banks, thereby reducing burden. In fact, Federal Reserve examiners have tailored examinations by spending approximately 65 percent less time on low/moderate risk state member bank exams than they do on high-risk exams. We also implemented the community bank leverage ratio that allows institutions to opt out of risk-based capital requirements. The Federal Reserve and the other agencies also raised the threshold for when an appraisal is required for residential real estate loans and tailored safety-and-soundness examinations of community and regional state member banks to reflect the levels of risk present and minimize regulatory burden for banks.

These improvements in regulation and supervision have helped right the balance I spoke of earlier between safety and soundness and consumer protection, on the one hand, and the ability to provide financial services and best meet the needs of their customers. We have also considered the impact of our actions, seeking to revise rules that impose significant costs to community banks but provide limited benefit to safety and soundness, consumer protection, or financial stability.

As a part of this approach, I have also prioritized efforts to improve the consistency, transparency, and reasonableness of regulation and supervision. One of those efforts is promoting greater consistency in supervisory practices across the Federal Reserve System. For example, we are actively working to improve the timeliness of providing banks with consumer compliance exam findings. Further, we are exploring ways to strengthen our ability to understand, monitor, and analyze the risks that are affecting community banks. A key aspect of consistency is ensuring the same supervisory approach and outcomes for similarly situated institutions, with the goal of ensuring, for example, that a “one” composite or component rating in a particular region would be the same for an institution with similar activities and practices in another region. This applies to all areas of our supervisory responsibility, whether safety and soundness, consumer compliance, or analyses of financial stability risk.

I’d like to expand on one important area of focus, which is essential to the future success of the community banking sector: accessible innovation and technology integration. This subject is one that I speak about frequently with stakeholders and our staff at the Board. We are committed to developing a range of tools that will create pathways for banks to develop and pursue potential partnerships with fintech companies. This includes clearer guidance on third-party risk management, a guide on sound due diligence practices, and a paper on fintech-community bank partnerships and related considerations. These tools will serve as a resource for banks looking to innovate through fintech partnerships.

Technological developments and financial market evolution are quickly escalating competition in the banking industry, and our approach to analyzing the competitive effects of mergers and acquisitions needs to keep pace. The Board’s framework for banking antitrust analysis hasn’t changed substantially over the past couple of decades. I believe we should consider revisions to that framework that would better reflect the competition that smaller banks face in an industry quickly being transformed by technology and non-bank financial companies. As part of this effort, we have engaged in conversations and received feedback from community banks about the Board’s competitive analysis framework and its impact on their business strategies and long-term growth plans. We are in the process of reviewing our approach, and we are specifically considering the unique market dynamics faced by small community banks in rural and underserved areas.

Soon after the pandemic began early last year, the Federal Reserve took several actions to support community banks and their ability to help affected customers. We paused examinations and issued supervisory guidance that made it clear that we would not criticize or take public enforcement actions against a bank that was taking prudent steps to help customers and making good faith efforts to comply with regulations. This certainty of regulatory treatment created an environment that built trust between regulators and bankers. It enabled banks to continue to meet the needs of their customers who were struggling with circumstances through no fault of their own.

Let me conclude by again commending the important role that community banks have played in providing financial services during these challenging times. You responded quickly to the needs of your customers and communities to provide financial services with limited, if any, interruption. You persevered to implement the largest proportion of Paycheck Protection Program funds to small businesses, whether they were your existing customers or new customers. These relationships are the hallmark of community banking, and as we look toward the future, community banks will continue to play an essential role in supporting customers, delivering financial services, and providing resources to their communities and customers.

Let me stop here and thank the organizers for another opportunity to speak to you at this important conference. I look forward to your questions, Rob.

Vitas Vasiliauskas: Introductory remarks – Cyprus Annual Banking Conference and FinTech EXPO

Introductory remarks by Mr Vitas Vasiliauskas, Chairman of the Board of the Bank of Lithuania, at the Cyprus Annual Banking Conference and FinTech EXPO, 15 January 2021.

Good morning, dear listeners, fellow Governors,

I would like to thank the Governors for their insights in this panel, and also the organisers of the conference for inviting me.

Discussing the role of banks in the time of COVID-19 is indeed vital. Banking is as important to the economy as the heart is to the human body.

And just like cardiovascular diseases, which are the leading cause of mortality in Europe, diseases of the banking sector often stand behind the deepest crises in our history. In 1930s, the Great Depression was significantly amplified by bank runs. In 2008, subprime mortgage loans extended by banks created the US housing bubble that brought down the entire global financial system. In Europe, a heavily bank-based system, the infamous sovereign-bank nexus resulted in a prolonged European sovereign debt crisis.

The COVID-19 crisis was not, of course, caused by the banking system. But it could have greatly amplified the shock if it was not resilient enough. Moreover, a weak banking system would diminish prospects of a sustained recovery.

This is why the role of banks is so critical in the current context. In this light, I would like to make three points in my brief intervention:

· First, we learnt our lessons from the previous crisis – and this contributed to banks’ resilience during the current one.

· Second, swift regulatory responses to such shocks as COVID-19 can further help the banking system support the shaken economy.

· And third, a truly sustainable long-term economic recovery after this crisis depends on solving equally long-term issues in the European banking system.

Let us begin with the resilience of banks which has so far prevented a health crisis from turning into a full-blown systemic financial crisis. The Basel III reforms made sure that the global banking system was significantly better capitalised than at the onset of the global financial crisis. The Common Equity Tier 1 (CET1) ratio in the EU banking sector – a key indicator of financial soundness – rose from 9% in 2009 to nearly 15% in the fourth quarter of 2019, before the COVID-19 crisis hit. With this amount of capital, banks can generally continue their lending to the economy even if truly adverse scenarios materialise, as shown by the ECB’s vulnerability analysis published in July 2020.

This shows that in the field of banking regulation, we did not waste the previous crisis and learnt our lessons well.

My second point relates to regulatory response. The relief package that the ECB Banking Supervision announced in March was designed to ensure that banks can keep lending to the contracting economy. For instance, banks were allowed to temporarily operate below the level of capital defined by the bank-specific Pillar 2 capital requirements, namely Pillar II guidance.

In Lithuania, macroprudential policy was a key domain of the regulatory response package. Prior to 2020, critics would say that our macroprudential set-up was perhaps too wide-ranging. But this crisis showed, I believe, that our policy stance was the right one.

First, it helped prevent a deterioration in lending standards and a build-up of systemic risk in the run up to the COVID-19 shock. And second, when the time came, we implemented counter-cyclical policy decisions in line with the intended functioning of the framework. For instance, in mid-March, the Bank of Lithuania fully released the counter-cyclical capital buffer from 1% to 0%.

Overall, the relaxation of various requirements has increased the lending potential of banks in Lithuania by €2 billion, or by a third, compared to 2019. Of course, we are talking about potential here, not the real world. But the real-world data has been encouraging, at least in terms of lending to households, which has broadly returned to the pre-pandemic levels.

Going forward, policymakers should not “waste a good crisis” this time as well, and take a fresh look at the existing macroprudential framework. We could even consider novel ways of applying macroprudential tools – such as the application of borrower-based measures during the cycle, e.g. relaxing the loan-to-value or debt-service-to-income requirements in times of crisis.

Finally, I would like to make a point on the long-term issues of the European banking sector. The first issue here is inadequate bank profitability. In this regard, there is a need for consolidation via mergers and acquisitions to make the European banking sector leaner. Completing the Banking Union by creating a European Deposit Insurance Scheme (EDIS) would open doors for true cross border consolidation in Europe.

The second issue is non-performing loans (NPLs) – a long-standing problem in the European banking sector. To tackle the potential rise in NPLs, the next round of government support should put more emphasis on solvency rather than liquidity support. In my opinion, the EU should return to the idea of establishing a European Solvency Support Instrument. There is also a great need of convergence of various insolvency frameworks across the Member States.

Tackling these issues would allow banks to keep lending for a sustained recovery.

Luis de Guindos: The euro area financial sector in the pandemic crisis

Speech by Mr Luis de Guindos, Vice-President of the European Central Bank, at the 23rd Euro Finance Week, Frankfurt am Main, 16 November 2020.

I am honoured to open the 23rd Euro Finance Week. My remarks today will focus on two main issues. First, I will provide an overview of the current economic situation in the euro area, and focus on how the pandemic has amplified existing vulnerabilities in the financial system. And second, I will highlight the important role that financial regulation and prudential policy have played in response to the pandemic so far, and argue that further policy measures are needed.

An uneven recovery across sectors and countries increases the risks of fragmentation

The pandemic crisis has put great pressure on economic activity, with euro area growth expected to fall by slightly less than 8% in 2020. While the gradual relaxation of social distancing measures created a strong yet incomplete rebound in economic activity in the third quarter, that recovery started losing momentum. The tighter containment measures recently adopted across Europe are weighing on current growth. With the future path of the pandemic highly unclear, risks are clearly tilted to the downside. Economic uncertainty is being augmented by geopolitical risks, such as the possibility of a no-deal Brexit. While its impact on the euro area economy should be contained, such an outcome could amplify the macro-financial risks to the euro area economic outlook. On the upside, news about a potential vaccine fosters hope of a faster return to pre-pandemic growth levels.

The severity of the pandemic shock has varied greatly across euro area countries and sectors, which is leading to uneven economic developments and recovery speeds. Countries more heavily affected by the coronavirus crisis and the associated containment measures suffered the sharpest falls in economic activity in the first half of 2020. And growth forecasts for 2020 also point towards increasing divergence within the euro area. The recent European initiatives, such as the Next Generation EU package, should help ensure a more broad-based economic recovery across various jurisdictions and avoid the kind of economic and financial fragmentation that we observed during the euro area sovereign debt crisis.

The economic impact of the pandemic is highly skewed at the sector level. Consumers have adopted more cautious behaviour, and the recent tightening of restrictions has notably targeted the services sector, including hotels and restaurants, arts and entertainment, and tourism and travel. Output losses and the expected recovery will be significantly more uneven across sectors than in previous crises, as a result.

The pandemic has amplified existing vulnerabilities in the euro area financial system

Fiscal support has played a key role in mitigating the impact of the pandemic on the economy and preserving productive capacity. This is very welcome, notwithstanding the sizeable budget deficits anticipated for 2020 and 2021 and the rising levels of sovereign debt.

While policy support will eventually need to be withdrawn, abrupt and premature termination of the ongoing schemes could give rise to cliff-edge effects and cool the already tepid economic recovery. Loan guarantees, tax deferrals and direct transfers have alleviated immediate liquidity constraints for many firms, thus keeping a lid on insolvencies during the acute phase of the crisis. However, corporate bankruptcies are projected to increase in 2021. Credit risk has risen for SMEs in particular, as they are more dependent on bank financing than large firms. A premature withdrawal of loan guarantee schemes may induce banks to tighten credit standards. This would result in a credit crunch for non-financial corporations and translate into a sharp rise in company defaults.

The pandemic has also weighed on the long-term profitability outlook for banks in the euro area, depressing their valuations. From around 6% in February of this year, the euro area median banks’ return on equity had declined to slightly above 2% by June. The decline in profitability is being driven mainly by higher loan loss provisions and weaker income-generation capacity linked to the ongoing compression of interest margins. Looking ahead, bank profitability is expected to remain weak and not to recover to pre-pandemic levels before 2022. This profitability outlook is reflected in rock-bottom bank valuations, with the stock prices of euro area banks recovering less than the overall market over the summer.

Non-performing loans (NPL) are likely to present a further challenge to bank profitability. But there is typically a lag between a contraction in economic activity and the formation of new NPLs. The policy support provided to borrowers through moratoria and public guarantees may imply that this lag will be longer than in past downturns, and NPLs may start to materialise in the course of next year. Banks have already anticipated some future credit losses by increasing their provisions. This is in response to a doubling in the value of loans where credit risk has significantly increased since origination, also known as Stage 2 assets. And despite these efforts, loan loss provisions of euro area banks, could still be below needs suggested by fundamentals. Newly originated loans have also tended to have greater credit risk, with banks reporting a higher probability of default according to their internal ratings-based portfolios in the second quarter of the year. This is in line with results of the ECB’s vulnerability analysis. Under the baseline scenario, credit losses would continue increasing and the solvency position of the significant euro area banks would deteriorate by mid 2022.

Moving on, the non-bank financial sector continued to be an important source of financing for companies and thereby helped support the economic recovery. Non-banks have absorbed the vast majority of the new debt securities issued by non-financial corporates in the euro area this year – notably also from sectors more sensitive to the economic fallout from the pandemic.

At the same time, non-banks also played a more negative role in amplifying the market turmoil this spring. Investment funds, including money market funds, experienced outflows of a magnitude last seen during the global financial crisis. This only stopped once the ECB launched its pandemic emergency purchase programme (PEPP). The PEPP indeed proved to be a turning point in financial markets. Flows into investment funds turned positive again in the subsequent months, quickly compensating for all the redemptions experienced in February and March. However, these flow dynamics imply that investment funds shed large volumes of assets procyclically, in the first quarter of the year, before becoming a net buyer again once market valuations started to recover.

One major reason why investment funds are particularly liable to amplify adverse market dynamics is their structurally low liquidity buffers. Low cash holdings force investment funds to sell relatively illiquid assets in the event of outflows, which serves to depress asset prices. Although funds temporarily increased their holdings of liquid assets in response to this year’s market stress, their cash positions have already returned to pre-pandemic levels. This again leaves the sector vulnerable to large redemptions in the event of any renewed stress in the financial markets. Moreover, financial vulnerabilities were aggravated by investment funds continuing to increase their exposure to credit risk. More than three-quarters of the bonds purchased by funds after March 2020 were rated BBB or below.

Policy considerations for the banking sector

Starting in March 2020, European and national prudential authorities took swift and extraordinary policy measures to address the impact of the pandemic on the euro area banking sector. Thanks to this prompt policy reaction, coupled with the forceful fiscal and monetary support measures that have been put in place and the stronger capital positions that banks have built since the global financial crisis, banks have contributed to absorb the shock of the pandemic by meeting increased demand for credit.

Looking ahead, it will be essential for banks to be willing to make use of the available capital buffers to absorb losses without excessive deleveraging. Over the medium term, a rebalancing between structural and cyclical capital requirements is desirable to create macroprudential policy space. A greater share of releasable buffers would enhance macroprudential authorities’ ability to act countercyclically.

But we must not lose sight of key structural weaknesses in the European banking sector that were evident even before the crisis hit. For quite some time now, European bank valuations have been depressed by very low profitability caused by excess capacity, limited revenue diversification and low cost efficiency. The need to tackle these structural issues is now more urgent than ever.

Although banks have stepped up cost-cutting efforts in the wake of the pandemic, they need to push even harder for greater cost efficiency. Consolidation via mergers and acquisitions is another potential avenue for reducing overcapacity in the sector. The planned domestic mergers in some countries are an encouraging sign in this regard.

Furthermore, a comprehensive approach at national and EU level will be needed if distressed assets on bank balance sheets increase significantly. Market-based solutions should take a leading role, and actions at the European level to make secondary markets for NPLs more efficient and transparent would be desirable. Further actions might include guidance on best practices for government-sponsored securitisation schemes, or new solutions that would help troubled but viable firms to restructure outstanding debts and raise new equity.

Finally, we also need to make progress on the banking union, which unfortunately remains unfinished. Renewed efforts are urgently required to improve its crisis management framework. This includes finalising the agreement on the European Stability Mechanism as a backstop to the Single Resolution Fund and ensuring an orderly and efficient exit of small and medium-sized banks in particular, by harmonising the powers to transfer assets and liabilities in liquidation with the support of deposit guarantee funds. We also need to facilitate the flow of capital and liquidity within banking groups, subject to adequate financial stability safeguards and establish the third pillar of banking union – the European deposit insurance scheme.

Policy considerations for the non-bank sector

The developments in the investment fund sector highlight the fact that the current policy framework relies to a large extent on ex post liquidity management tools such as suspensions or gating, which asset managers can use at their discretion. However, we saw that these tools were not enough to alleviate the liquidity strains from a system-wide perspective and can have adverse effects on investors scrambling for liquidity. Only the decisive policy action by central banks helped stabilise financial markets and improve liquidity conditions across a broad range of markets and institutions.

This suggests that a comprehensive macroprudential approach for non-banks needs to be devised. Policies should address system-wide risk and reflect the fact that the sector comprises a diverse set of entities and activities. This would ensure that the non-bank sector is better able to absorb shocks in the future. Authorities should be equipped with a range of policies to effectively mitigate the build-up of risks during periods of exuberance.

In particular, the liquidity of investment funds’ assets should be closely aligned with redemption terms. Funds should also be required to hold a sufficiently large share of cash and highly liquid assets to manage increased liquidity needs stemming from outflows or margin calls in periods of stress. During the spring turmoil, increasing margin calls helped to ensure that the extraordinary market volatility did not result in concerns about counterparty risk. At the same time, it contributed to amplify the liquidity pressures in the system for non-bank financial intermediaries in particular. This warrants further analysis to assess whether adjustments to margining practices and the related regulatory approaches are needed to reduce excessive procyclicality in initial margins.

As money market funds also demonstrated significant vulnerabilities during the recent market turmoil further work should focus on enhancing liquidity requirements and reconsidering the share of their liquid assets.

Conclusion

Let me conclude.

As I’ve outlined, the banking sector has weathered the crisis to date fairly well, despite a number of risks and vulnerabilities. It has helped to absorb the shock and avoided a credit crunch that would have been detrimental to the economy. Going forward, it is urgent to tackle structural weaknesses in the European banking sector, by reducing overcapacity and enhancing cost-efficiency to address its persistently low profitability. Furthermore, it will be important for banks to be willing to use their capital buffers to absorb losses and continue to support lending. On the non-bank side, investment funds continue to be vulnerable to sudden outflows during periods of market stress due to their relatively small liquidity buffers. A review of the liquidity requirements for money market funds and their portfolio composition is also necessary. This calls for the timely roll-out of a comprehensive macroprudential framework for non-banks.

GREECE IN THE POST-PROGRAMME PERIOD: CHALLENGES AND PROSPECTS TOWARDS A SUSTAINABLE GROWTH MODEL

Speech by Bank of Greece Governor Yannis Stournaras at the 86th Annual Meeting of Shareholders

2019 marks the beginning of new course for the Greek economy. Following the successful completion of the last economic adjustment programme in August 2018, the activation of the enhanced surveillance framework and with Greece now subject to the improved institutional framework for economic governance in the European Union and the euro area, the Greek economy is called upon to operate in a new economic policy context. It is our duty, as individuals, businesses, political and institutional stakeholders, to prove that we have taken ownership of the lessons of the crisis.


2018 saw the recovery of the Greek economy gain traction, with a GDP growth rate of 1.9%. The key drivers of growth were a rise in exports of goods and services, reflecting a greater extroversion of the economy, and a pick-up in private consumption supported by employment growth and an increase in households’ disposable income. 

The smooth execution and completion of the economic adjustment programme, improvements in confidence and the ensuing strengthening of growth led to a return of deposits to banks. This, in turn, enabled an increase in bank liquidity, a significant reduction and almost elimination of emergency liquidity assistance (ELA) from the Bank of Greece, a small recovery of bank credit, as well as a further relaxation of capital controls. 

All of the above led to upgrades of the credit rating of the Greek sovereign and enabled Greece to return to international financial markets a year later, in February 2019, when, taking advantage and of the favourable global investment climate, the Greek government successfully issued a five-year bond. The successful issue of a five-year government bond was the first positive step on the way back to normality. 

Moreover, the successful 10-year bond issue in March 2019, for the first time since the start of the public debt crisis in 2010, marked a more decisive step in the same direction, i.e. towards reconnecting Greece with the markets. The legal provision recently passed by Parliament on primary residence protection also contributes in this direction, as it reforms the relevant legislative framework, incorporating specific eligibility criteria and safeguards. 

The debt relief measures agreed in June 2018, together with the increased disbursements from the European Stability Mechanism (ESM) for the creation of a cash buffer, have significantly improved the sustainability of public debt in the medium term. However, given that Greek government bonds are still rated at below investment grade and in the absence of access to a precautionary credit line, Greek bonds remained ineligible for the ECB’s quantitative easing programme (QE) that would have helped strengthen economic activity and further improve the credit standing of Greek bonds. Greek government bond yields are still high and volatile. They are sensitive to potential disturbances in international financial markets and are influenced by increased uncertainty regarding the maintenance of reform momentum. In fact, the yield spread of Greek 10-year government bonds remains elevated, at just under 400 basis points, despite the recent decline in yields. This persistent phenomenon is a matter that needs our serious attention. 

2019 will be another challenging year for the Greek economy. In the external environment, the slowdown of world trade amid rising protectionism could dampen export growth. 

On the domestic front, increased uncertainty about the continuation of reforms coupled with credit constraints are weighing on investment. High taxation in recent years has taken a toll on the growth dynamics of the economy, the competitiveness of Greek enterprises and confidence, and has caused tax fatigue leading to a contraction of the tax base and an exhaustion of the taxpaying capacity. 

In 2019, the growth momentum of the Greek economy is expected to continue at the same pace as in 2018, despite a further slowdown of growth rates worldwide and, especially, in the euro area. However, this forecast is conditional upon the resolute pursuit of structural reforms, the implementation of the privatisation programme without delays and the strengthening of productive investment. These conditions are essential to completing a successful transition to a sustainable and extroverted growth model. 

More specifically, according to Bank of Greece forecasts, GDP at constant prices is expected to grow by 1.9% in 2019, driven mainly by exports and private consumption. However, in order to make up for the huge losses suffered by the Greek economy in terms of output and employment during the long period of recession, higher growth rates are needed. 




The low level of investment, insufficient domestic savings, the high – albeit declining – stock of non-performing loans, the large loss of physical and human capital during the recession, as well as the apparently low expectations regarding medium-to-long term potential output growth as a result of adverse demographic trends and the sluggish adoption of new technologies in production processes, all weaken the growth dynamics. Meanwhile, the outlook for the economy still depends largely on foreign investor confidence and on foreign capital inflows. 

Turning to the domestic environment, and the fiscal front in particular, the possible implementation of Council of State Plenum rulings that earlier pensions cuts and the abolition of pensioners’ bonuses were unconstitutional, poses the greatest fiscal risk in the immediate future. 

Furthermore, the fact that Greece is entering an electoral cycle increases the risk of a slowdown of the reform effort and of fiscal relaxation, compounding economic uncertainty. Thus, backtracking on agreed policies would undermine the significant progress achieved so far. 

DEVELOPMENTS AND PROSPECTS OF THE GREEK ECONOMY IN 2019 

Actual GDP developments in 2018 and the outlook for 2019 indicate that the Greek economy is back on a track of positive growth. The challenge now is to preserve and reinforce the growth momentum so as to enable strong growth rates over a long period. 

The reason for this is that growth has yet to gain sufficient traction, as reflected in a negative rate of change in investment, a negative household saving rate and a still high – albeit decreasing – rate of unemployment. The continued underexecution of the Public Investment Programme is also dampening growth. 

The growth prospects for 2019 will, to a large extent, remain conditional on the course of the global economy and of the euro area economy in particular, as well as on the continuation of the reform effort. 

Economic expansion in the euro area is projected to continue in 2019, but at a significantly more moderate pace (1.1%), as recent data point to a considerable weakening relative to the strong growth rates of previous years. In order to avert the risk of a further economic slowdown in the euro area and to ensure the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term, the Governing Council of the European Central Bank (ECB) decided in March 2019 to maintain accommodative monetary policy by keeping the key ECB interest rates unchanged until the end of the year and by launching a new series of quarterly targeted longer-term refinancing operations (TLTRO-III) with a maturity of two years. This decision should improve financial conditions in Greece and support the growth effort. The ECB Governing Council additionally stressed, as it has been doing for some time now, that fiscal policy in euro area member states with adequate fiscal space should be supportive of economic growth. 




The Greek economy in the current year is forecast to be driven mainly by export growth, albeit at a slower pace, and a rise in private consumption. Private consumption will be supported by the continued robust performance of the tourism sector, the ongoing recovery of the labour market and the improved disposable income of households, while investment will benefit mainly from a stabilisation of the real estate market. 

HICP inflation fell to 0.8% in 2018, from 1.1% in 2017. The absence of significant further increases in indirect taxation during 2018, the sharp drop in international crude oil prices as from October 2018 and strong base effects were among the main factors behind weaker inflation developments. Looking forward, HICP inflation in 2019 is expected to fall to lower levels, as a result of low international crude oil prices, a slowdown in global activity and trade, as well as strong competition in the domestic retail food market. 

FISCAL POLICY 

In 2017, for the third consecutive year, the general government primary balance exceeded the programme target. An overperformance is also expected for 2018, according both to the Introductory Report on the 2019 Budget and to Bank of Greece forecasts. 

However, the Public Investment Programme was once again underexecuted in 2018. Moreover, considerable delays were observed in the clearance of general government arrears to suppliers, despite targeted disbursements under the loan agreement. These developments, which have been observed repeatedly in recent years, tighten credit supply constraints, thereby depriving the real economy of much-needed financing resources and weighing on long-term growth, as also pointed out by the European Commission in its Enhanced Surveillance Report. 

For 2019, an expansionary fiscal package amounting to roughly 0.6% of GDP is envisaged, partly offset by a curtailment of 0.3% of GDP in Public Investment Programme expenditure. 
More importantly, possible further fiscal expansion in the run-up to the elections could put public finances at risk. 

THE BANKING SYSTEM

Bank of Greece Governor Yannis Stournaras

Developments in the Greek banking system during 2018 were marked by an accelerating return of bank deposits, banks’ improved liquidity situation and diversification of funding sources through access to the interbank market and away from emergency liquidity assistance (ELA) of the Bank of Greece, a small recovery of bank credit and the maintenance of capital adequacy ratios at satisfactory levels. However, bank profitability remained weak. 

In early 2018, an EU-wide stress test exercise was conducted, including Greece’s four systemic banks, in order to assess bank resilience to hypothetical shocks over the period 2018-2020. The stress test exercise identified no capital shortfall in any of the participating Greek banks. 
Non-performing loans 

The high stock of non-performing loans (NPLs) on banks’ balance sheets remains the major challenge for Greek banks and a serious constraint on their lending capacity. Banks are using the options provided by the improved legal and regulatory framework, which has removed significant institutional and administrative impediments to NPL reduction. These important reforms have begun to bear fruit, as indicated by the reduction of the stock of NPLs to €81.8 billion at end-December 2018 (or 45.4% of total loans), down from a peak of €107.2 billion in March 2016. However, the NPL stock is still excessively high. 

At the end of March 2019, Greek banks submitted to the ECB and the Bank of Greece their revised operational targets for NPL reduction, incorporating any recent changes in their strategies since September 2018 and any revised macroeconomic assumptions. According to the previous submission in September 2018, the banks aimed to reduce the aggregate stock of NPLs to €34.1 billion by end-2021, bringing the NPL ratio down to 21.2% of total loans. With the new submission, the Banks aim to reduce the NPL ratio even further, to slightly below 20%. Despite the significant reduction, this ratio is still roughly six times the EU28 average, meaning that the NPL reduction needs to be further accelerated.





The successful resolution of the NPL problem is one of the major challenges facing the Greek economy in its effort to achieve sustainable growth, given that bank lending is the main source of financing for non-financial corporations (NFCs), owing to their structure and size, and for households. Freeing the banks of the NPL burden would help reduce the financial risks and funding costs faced by banks, thereby improving their internal capital generation capacity on a sustainable basis and enabling them to resume their intermediation role. In addition, alleviating the NPL burden would strengthen banks’ resilience and shock-absorbing capacity against potential future shocks; support operating profitability and put the conditions in place for a gradual increase in loan supply and a decrease in lending rates to enterprises and households, thereby enabling the smooth financing of the real economy.


The Greek authorities will soon need to decide on new, more systemic tools that would complement the banks’ own efforts. The Bank of Greece has for quite some time now proposed a systemic solution, which provides for the transfer to Special Purpose Vehicles (SPVs) of a significant part of NPLs along with part of the deferred tax credits (DTCs) on banks’ balance sheets. This solution has the advantage of addressing two very serious problems at the same time: NPLs and DTCs. The government and the Bank of Greece are working together towards the submission for approval of such systemic solutions by the competent European authorities and their ultimate adoption with a view to successfully tackling the NPL problem. 

Furthermore, as mentioned previously, the new legislation on primary residence protection is a first step towards an overhaul of the personal insolvency framework in pursuit of a holistic solution to the problem. The implementation of the new framework, which incorporates specific eligibility criteria and safeguards, aims to protect the more vulnerable social groups, to avoid creating moral hazard at the expense of non-delinquent borrowers and to ensure that the impact on bank capital is manageable. 

PRIVATE INSURANCE UNDERTAKINGS

 
As a consequence of Solvency II, the Greek private insurance market matured further in 2018, with improvements in governance structures and human resources. Risk and solvency assessment capabilities were also improved, with a view to better capital and risk management and more effective protection of policy-holders. In 2018, insurers continued their efforts to reduce the long-term guarantees embedded in their products. In this context, the time horizon of coverages has been reduced, and the financial guarantees offered reflect more accurately the prevailing economic conditions. These practices have had a positive impact on the undertakings themselves, by enhancing their solvency position, and on policy-holders, by ensuring lower insurance costs and better quality of insurance products. Nevertheless, insurance undertakings must take care not to lose their long-term perspective.


In the life insurance sector, insurance undertakings are increasingly designing and providing insurance-based investment products. This business strategy supports the financial strength of insurance undertakings, while also enabling them to offer higher returns to policy-holders, although exposing them to higher investment risks. Against this background, it is of crucial importance that insurers provide accurate and relevant information to prospective customers, enabling them to understand the risks involved and avoid losses. In addition, with Law 4583/2018, Directive (EU) 2016/97 on Insurance Distribution was transposed into national legislation, and the Bank of Greece was entrusted with the supervision of insurance intermediaries and distributors. 

The outlook for the domestic insurance market is promising. In particular, based on the recent proposal for an EU regulation on a Pan-European Personal Pension Product (PEPP), Greek insurance undertakings could assume a new role and offer personal pension products to customers seeking to supplement their pension entitlements. Likewise, insurance undertakings could be part of a broader scheme providing protection against natural disasters, climate change-related and environmental risks in general. 

Moreover, insurance undertakings can take advantage of new technologies, such as big data analytics, artificial intelligence and machine learning, to improve risk assessment and pricing. 

RISKS AND SOURCES OF UNCERTAINTY

 
Despite the progress made so far, as shown by key economic aggregates, risks remain, both domestic and external. 
On the external front, risks could arise from a possible further slowdown of global economic activity in 2019 amid increasing trade protectionism, geopolitical risks and vulnerabilities in emerging market economies. The slowdown of the European economy is also a significant source of concern, which together with heightened uncertainty over the outcome of the Brexit process, could negatively affect the growth of Greek exports and tourism. 




Turning to the domestic front, the possible implementation of Council of State Plenum rulings that earlier pensions cuts and the abolition of pensioners’ bonuses were unconstitutional, poses the greatest fiscal risk in the medium term. The associated additional expenditure would weigh negatively on the public debt sustainability analysis and would feed uncertainty about the fiscal policy and the financial sustainability of the pension system. 

Other domestic risks include the potential implications of high taxation and the overall fiscal policy mix, as well as the backtracking on reforms or delays in their implementation. In addition, in the labour market, the increase in the minimum wage, legislated last January, though expected to bring about short-term gains by supporting disposable income and thereby private consumption, is expected in the medium term to hurt employment, mainly of youth, and competitiveness. In any event, any raise of the average wage must be consistent with labour productivity growth, so as to preserve the gains in competitiveness and employment achieved through a painstaking reform effort since 2010. 

CHALLENGES FOR GROWTH 
Greece is confronted with a dual challenge: on the one hand, to achieve strong and sustainable growth rates and, on the other, to ensure high primary surpluses in order to meet its fiscal commitments, as defined in the Eurogroup decision of June 2018 and by the broader framework of European fiscal rules. 
During the long period of adjustment, the Greek economy succeeded in correcting several macroeconomic imbalances. However, Greece continues to face vulnerabilities which can, to a large extent, be considered a legacy of the crisis, although the multiple and interrelated nature of these vulnerabilities reveals chronic weaknesses.


In greater detail: 
The permanent return of the Greek State to international financial markets on sustainable terms is the greatest challenge ahead. The existence of a cash buffer, though useful, is only a temporary means for refinancing State borrowing requirements, and would prove rather ineffective in the event of future shocks in international markets. By no means, therefore, can the cash buffer substitute for a return to the markets at regular intervals and on sustainable terms. 
The high public debt-to-GDP ratio increases public and private sector borrowing costs and puts a drag on growth. Although Greece’s debt sustainability improved markedly with the measures adopted by the Eurogroup since 2012 and up, most recently, to June 2018, debt reduction ultimately hinges upon both achieving the fiscal targets and remaining committed to the reform effort so as to ensure robust GDP growth. 
The maintenance of large primary surpluses over an extended period of time (3.5% of GDP annually until 2022 and 2.2% of GDP on average over the period 2023-2060), especially when accompanied by high taxation, weighs on growth and consequently on debt sustainability. 
The high stock of non-performing loans (NPLs) on banks’ balance sheets hampers the financing of growth, as it ties up bank capital and financing resources in non-productive activities. The successful resolution of this problem is absolutely necessary in order to improve the quality of bank assets. This, in turn, would enhance the access of healthy entrepreneurship to bank credit. 
The rate of unemployment remains not only high, but the highest across the European Union. High unemployment, in particular youth and long-term unemployment, gives rise to inequalities that threaten social cohesion, devalues human capital, saps away any motivation for better education and work, and feeds the brain drain. 
Low structural competitiveness, with in fact a trend towards deteriorating. 
The still negative rate of change in investment, considering the need to replenish Greece’s capital stock, especially in the wake of a protracted period of disinvestment. Moreover, continued underexecution of the Public Investment Programme holds back growth, as it reduces aggregate demand, leads to a deterioration of public infrastructure and increases businesses’ operating costs. 
Insufficient domestic savings. The rise in nominal disposable income per capita, in particular in the lower income brackets, supported by employment growth especially among youth and workers with part-time and intermittent employment contracts, was chiefly channelled into consumption. Thus, the household saving rate has remained in negative territory. 
Delays in the delivery of justice. According to the Enforcing Contracts Indicator used in the World Bank’s Doing Business report for 2019, compared to the OECD average, the time for trial and to enforce the judgment is three times longer in Greece, while the time for resolving insolvency is twice as long. Therefore, the rapid and fair settlement of legal disputes in a transparent and stable legal framework is crucial to strengthening the rule of law, thereby also improving investor confidence. 
The quality of institutions and respect for independent authorities. Countries with weak institutions lack in flexibility and adaptability, making potential economic disturbances more likely to occur and more difficult to address. 
Adverse demographic developments. Over the past decade, Greece’s demographics have deteriorated dramatically, as evidenced by the decline and rapid ageing of the population and a very low fertility rate. This trend in demographic data was further exacerbated by the recent wave of migration of part of the population of reproductive age. The demographic crisis is one of the most serious challenges that Greece’s society and economy will need to address in the immediate future, as the rapid contraction and ageing of the population adversely impacts potential output and the pace of economic growth in the medium-to-long term. 
The slow digital transformation of the economy. According to the Digital Economy and Society Index (DESI), Greece ranked second to last among the EU28 in 2018, meaning that the digital transformation of the Greek economy remains slow. As a result, Greece is still considered ‘digitally immature’. Consequently, policy action must be taken to eliminate this technological lag and reduce digital illiteracy. 
Climate Change and the challenge of sustainable development. Redefining the concept of growth in a sustainability context and embracing the principles of a circular economy will be crucial to our future. According to the World Economic Forum’s Global Risks Report for 2019, three of the top five risks for the world economy are environmental and all three relate to climate change. 

PREREQUISITES FOR SUSTAINABLE GROWTH




 
Addressing the above challenges effectively will require, as a minimum, the following set of policy actions: 

First, a continuation and completion of structural reforms, so as to safeguard the achievements made so far, reinforce the credibility of economic policy and further improve Greece’s credit standing, paving the way to a permanent return to international financial markets on sustainable terms. In this context, top priority must be given to reforms that enhance public administration efficiency, legal certainty, especially in land use, and the faster delivery of justice. 

Second, reducing the high stock of non-performing loans, so as to free up funds for viable businesses, facilitate the restructuring of the business sector and strengthen healthy competition. Meanwhile, the legal framework reforms currently under way should improve payment morale. 

Third, a change to the fiscal policy mix geared towards lowering the excessively high tax rates, further rationalising public expenditure and enhancing the Public Investment Programme. Ideally, this change should be combined with more realistic primary surplus targets, considering that, with public debt close to 170% of GDP, one additional percentage point increase in GDP contributes 1.7 times more towards reducing the public debt ratio than does one percentage point of primary surplus. 

Fourth, greater focus on attracting foreign direct investment of high value added, which would accelerate technology integration, strengthen Greece’s export performance, utilise inactive human resources, thereby increasing total factor productivity. This presupposes a continuation of privatisations, along with an encouragement of public-private partnerships and a removal of disincentives to investors. 

Fifth, strengthening the “knowledge triangle” (education, research, innovation). As shown by the latest global trends, in modern efforts to reconcile the functioning of a market economy, i.e. capitalism, with democracy, investing in knowledge and the access opportunities to knowledge for all are a crucial catalyst both for economic growth and for social justice. The Greek education system, despite producing a pool of highly-qualified individuals, fails to equip them with the skills required in today’s digital world. The new technologies can generate employment opportunities, provided that labour can rapidly adjust to a human-centred working environment, in which knowledge, skills, personal initiative, mobility, flexibility and cooperation will play a key role. Investing in human capital and fostering entrepreneurship are strategies crucial to the successful adjustment of the labour market. All levels of the education system must therefore be redesigned in order to cultivate the skills required by the modern labour market. Closer links between education and the production process will contribute towards this goal. 
                                                                          *** 
2019 will be a challenging year, as domestic and external risks remain. Therefore, there is no room for complacency. Greece’s successful course in new, post-crisis, European normality calls for strict commitment to uphold the very important achievements made so far, conduct a prudent economic policy aimed at eliminating the remaining imbalances and pursue reforms. The ultimate objective is to complete the Greek economy’s safe transition to a sustainable growth model based on extroversion, entrepreneurship, investment, knowledge and social cohesion, with social sensitivity and respect for the natural environment. The benefits to be reaped are substantial: a rapid decrease in the unemployment rate, a reversal of the brain drain, higher total productivity, higher wages and incomes.