European Commission Directorate-General for Financial Stability, Financial Services and Capital Markets Union Coping with the international financial crisis at the national level in a European context Impact and financial sector policy responses in 2008 – 2015 This document has been prepared by the Directorate-General for Financial Stability, Financial Services and Capital Markets Union (DG FISMA). This document is a European Commission staff working document for information purposes. It does not represent an official position of the Commission on this issue, nor does it anticipate such a position. Neither the European Commission nor any person acting on its behalf may be held responsible for the use which may be made of the information contained in this publication, or for any errors which, despite careful preparation and checking, may appear. ABBREVIATIONS Countries and regions EU: European Union EA: Euro area CEE: Central and Eastern Europe MS: Member State BE: Belgium BG: Bulgaria CZ: Czech Republic DK: Denmark DE: Germany EE: Estonia IE: Ireland EL: Greece ES: Spain FR: France HR: Croatia IT: Italy CY: Cyprus LV: Latvia LT: Lithuania LU: Luxembourg HU: Hungary MT: Malta NL: The Netherlands AT: Austria PL: Poland PT: Portugal RO: Romania SI: Slovenia SK: Slovakia FI: Finland SE Sweden UK: United Kingdom JP: Japan US: United States of America Institutions EBA: European Banking Authority EBRD: European Bank for Reconstruction and Development EC: European Commission ECB: European Central Bank Fed: Federal Reserve, US IMF: International Monetary Fund OECD: Organisation for Economic Cooperation and Development v Graphs/Tables/Units bn: Billion bp. /bps: Basis point / points lhs: Left hand scale mn: Million pp. / pps.: Percentage point / points pt. / pts.: Point / points Q: Quarter q-o-q%: Quarter-on-quarter percentage change rhs: Right hand scale tn: Trillion y-o-y%: Year-on-year percentage change Currencies EUR: Euro ECU: European currency unit FX: Foreign Currency BGN: Bulgarian lev CNY: Chinese yuan, renminbi CZK: Czech koruna DKK: Danish krone GBP: Pound sterling HUF: Hungarian forint HRK: Croatian kuna ISK: Icelandic krona MKD: Macedonian denar NOK: Norwegian krone PLN: Polish zloty RON: New Romanian leu RSD: Serbian dinar SEK: Swedish krona CHF: Swiss franc JPY: Japanese yen RMB: Renmimbi TRY: Turkish lira USD: US dollar Other abbreviations AGS: Annual Growth Survey AMC: Asset management company AMR: Alert Mechanism Report APS: Asset protection scheme AQR: Asset quality review BAMC: Bank Asset Management Company (the Slovenian "bad bank") vi BoP: Balance of payments BSSF: Bank Solvency Support Facility (Portugal) CDS: Credit default swap CGD: Caixa Geral de Depósitos (the largest bank in Portugal) CET1: Common equity tier 1 capital CLP: Credit loss projection CMU: Capital Markets Union CoCos: Contingent convertibles CRD: Capital Requirements Directive CRR: Capital Requirements Regulation CSR(s): Country-specific recommendation(s) CT1: Core tier 1 capital DTA: Deferred tax asset DUTB: Družba za Upravljanje Terjatev Bank, or Bank Asset Management Company (BAMC) in English (the Slovenian "bad bank") EAD: Exposure at default EL: Expected Loss IAS: International accounting standards IDR: In-depth review IFRS: International financial reporting standards INSOL International: International Association of Restructuring, Insolvency and Bankruptcy Professionals KfW: Kreditanstalt für Wiederaufbau (the German development bank) LGD: Loss given default MIP: Macroeconomic imbalance procedure MOU: Memorandum of Understanding NAMA: National Asset Management Agency (the Irish "bad bank") NFC: Non-financial corporation NKBM: Nova Kreditna Banka Maribor (the second largest bank in Slovenia). NLB: Nova Ljubljanska Banka (the largest bank in Slovenia). NPE: Non-performing exposure NPL: Non-performing loan NPV: Net present value NRP: National reform programme PCAR: Prudential Capital Assessment Review (Ireland) PD: Probability of default RBS: Royal Bank of Scotland RPI: Royal Park Investments (a Belgian "bad bank") RWA: Risk-weighted assets SAREB: Sociedad de Gestión de Activos Procedentes de la Reestructuración Bancaria, or the Management Company for Assets Arising from the Banking Sector Reorganisation in English (the Spanish "bad bank") SCP: Stability and convergence programme SIFI: Systemically important financial institution SME: Small and medium-sized enterprise SSM: Single Supervisory Mechanism UKAR: United Kingdom Asset Resolution (the English "bad bank"). vii ACKNOWLEDGEMENTS This report was prepared in the Directorate-General for Financial Stability, Financial Services and Capital Markets Union (DG FISMA) under the direction of Oliver Guersent (Director-General), Sean Berrigan (Deputy Director-General) and Mario Nava (Director, Financial system surveillance and crisis management). The production of the document was coordinated by Filip Keereman and Rainer Wichern (respectively, Head of Unit and Deputy Head of Unit, National financial systems). Contributors were Laszlo Butt (sections II.2.2.2.3, II.3.4.2, box III.1.1), Tanguy de Launois (section II.3.5, chapter II.4), Hana Genorio (sections II.1.4, II.5.3-4), Nikolay Gertchev (sections I.2.1, II.1.1-3, II.3.4, box II.1.1), Nicolas Jegou (section II.2.3.1-2, box III.1.2), Loukas Kaskarelis (section II.3.1-2, chapter III.3), Filip Keereman (boxes I.2.1, II.1.2, II.2.1, II.3.1, III.3.1, sections II.3.1-2, II.6.1.1), Daniel Koerhuis (section II.6.2.1), Daniel Kosicki (sections I.2.2, II.2.1-2, II.6.1.3-5), Mihai Macovei (sections II.3.3, III.1.1-2, chapter III.3), Michal Strojwas (chapters II.7, III.2, box II.7.1), Agapi Thomopoulou (chapter II.4), Corina Weidinger Sosdean (sections II.3.4.2, II.5.1-2, II.6.1.2, II.6.2.2), Rainer Wichern (section II.2.3.3), Markus Wintersteller (sections I.1.1, II.3.5, III.1.3-5). Rajko Vodovnik was responsible for statistical support and layout and Martine Maebe provided secretarial assistance. The report benefited from discussions and an exchange of views during a presentation of a preliminary version in two internal DG FISMA seminars. In particular, observations of Peter Grasmann and Nigel Nagarajan on a close-to-final version are gratefully acknowledged. Several colleagues from other parts of the European Commission provided comments and suggestions that helped to improve the text. We are grateful to Francisco Barros Castro, Kathrin Blanck-Putz, Antonios Bouchagiar, Dimitra Bourna, Koen Dierckx, Delia Alexandra Dogaru, Miroslav Florian, Leo Flynn, Valeska Gronert, Heiko Hesse, Anton Jevcak, Stefan Kuhnert, David Lopes, Carlos Maravall Rodriguez, Magdalena Morgese Borys, Irena Peresa, Presiyan Petkov, Marc Puig, Jonas Sebhatu, Giedrius Sidlauskas, Karl-Philipp Wojcik. Comments would be gratefully received and should be sent, by mail or e-mail, to: Directorate-General for Financial Stability, Financial Services and Capital Markets Union (DG FISMA) Unit E2: National financial systems European Commission B-1049 Brussels Belgium E-mail: [email protected] or [email protected] viii CONTENTS Executive summary 1 Part I: National financial sectors in a European context 3 1. Introduction and overview 4 1.1. The national financial systems at the onset of the crisis 4 1.2. Main findings 7 2. The financial sector in the evolving country surveillance in the EU 18 2.1. The Financial sector in the economic adjustment programmes 18 2.2. The financial sector in the enhanced economic surveillance in the European Union 25 Part II: Response to the crisis 31 1. Addressing the liquidity needs 32 1.1. The national central banks as lenders of last resort 32 1.2. The evolving lending rules of the Eurosystem 34 1.3. Medium-term structural solutions to liquidity issues 37 1.4. The special case of Cyprus and Greece: the imposition of administrative measures 38 2. Restoring capital buffers 42 2.1. Crisis impact on bank solvency 42 2.2. Stress tests 43 2.3. Capital raising 53 3. Bank restructuring and consolidation 58 3.1. Restructuring and liquidation in perspective 58 3.2. Downsizing, home bias and consolidation 63 3.3. The post-crisis reform of Spanish and German savings banks 65 3.4. The cooperative banking model under pressure 67 3.5. The place of public banks in some Member States 71 4. Dealing with impaired assets 73 4.1. Impaired assets stay on the banks' balance sheet ("internal workout") 73 4.2. Bad assets are transferred to a separate structure 76 4.3. Conclusion 84 5. Improving regulation and supervision 85 5.1. Enhancement of supervisory capacity 85 5.2. Strenghening of prudential and regulatory framework 86 5.3. Targets for non performing loans 89 5.4. Legislation on sales of non-performing loans 91 6. Avoiding contagion 92 6.1. The Vienna Initiative 92 6.2. Dealing with the Greek-Cypriot link 98 7. Tackling private indebtedness 101 7.1. A closer look at private sector debt 101 7.2. Specific characteristics of credit expansion in Central and Eastern Europe 104 7.3. Deleveraging: policy options 106 ix Part III: Impact on macro financial stability 115 1. Stabilisation of the banking and government sector 116 1.1. A significant recovery of bank prudential indicators 116 1.2. Markets validate the stabilisation of banks, but weak spots remain 123 1.3. Stabilisation of government interest rates with reappearance of the risk premium 126 1.4. Different paths were taken for different sets of countries in stabilizing government yields 126 1.5. The bank sovereign nexus 129 2. The flow of credit to the economy 132 2.1. Lending conditions in a fragmented market 132 2.2. Looking for external financing 134 2.3. Policy actions to diversify financing options for small and medium sized enterprises 136 2.4. Concluding remarks: lending growth remains subdued and alternatives are slow to pick up 137 3. Trade-offs between stabilisation and growth 139 3.1. A stable banking sector fosters long-term sustainable growth 139 3.2.