Banking Systems of SEEEs : Crisis Effects, outlook and risks Radovan Jelašić, Governor - National Bank of Serbia Greece, 16 th October 2009

Effects of the financial crisis were reflected in all major economic indicators (1/2) * Financial loans are shown in net amount and include net foreign borrowing by banks and enterprises. RSD In EUR mn +26% +512bps

Effects of the financial crisis were reflected in all major economic indicators (2/2) In EUR bn In thous. * *Including registered farmers

“You only find out who is swimming naked when the tide goes out” NBS was quite restrictive until the beginning of the crisis* because of:  High capital adequacy ratio: 23.3%;  Substantial holdings of National Bank of Serbia repos by commercial banks: EUR 3.2bn, representing 13% of total assets of the banking sector;  High reserve requirements: 40% on new FX savings, 45% on foreign borrowing;  Low level of household indebtedness**: EUR 608 per citizen, EUR 1,680 per employed person***)  75% of banks owned by strategic owners from the EU;  Low country rating S&P, Fitch : BB- /negative outlook;  Floating exchange rate and 70% of all loans FX denominated;  Haunting past: lost savings, pyramid banks, hyperinflation. *Figures of the banking sector as of Sept 30 th 2008 **Loans and leasing contracts ***Including registered farmers

Stable banking sector saved the Serbian taxpayer  Improving international environment and several measures implemented by government and NBS halted further deterioration of GDP: Government provided loan subsidies while the Central bank substantially relaxed its restrictive regulations (e.g.): Since 1 October 2008, banks are exempt from reserves requirements on foreign borrowing, subordinated loans and financial leasing abroad Deposit insurance scheme was increased to EUR 50,000 from EUR 3,000; Tax on interest revenue for FX saving was abolished for 2009;  Banks regained liquidity and are again borrowing money from abroad. None- performing loans are bottoming out, exchange rate got stabilized without NBS being active on the FX market. Based on the “Vienna agreement”, foreign banks decided not to lower the country exposure till the end of 2010!

Bank stress tests have been carried out as part of the Vienna Initiative  Vienna Initiative (FSSP – Financial Sector Support Program) was launched in March 2009 – the number of participating banks has in the meantime risen from 10 to 27;  Carry out stress tests of the banking sector as a whole until end-2009 – so far, diagnostic analyses of 16 biggest banks (83% of balance sheet total) have been conducted;  Provide dinar (short-term liquidity loans) and FX liquidity (EUR/RSD swap transactions between the NBS and banks) - COMPLETED;  Relax the arrears criteria in case of rescheduling the repayment terms for loans granted before April COMPLETED.  Maintain the level of exposure to Serbia (direct channel: cross-border borrowing + indirect channel: investments through subsidiaries) and maintain the level of regulatory indicators above the prescribed minimum (capital adequacy, liquidity ratio…);  Define methodology and participate in stress tests coordinated with the IMF;  Consider pre-emptive capital increase if stress tests prove it necessary. Banks’ commitmentsNBS’s commitments

Model and assumptions  Моdel – regression using output gap, depreciation and changes in interest rates as independent variables and their impact on the worsening of credit portfolio and losses from rising NPLs over 2 years (2009 and 2010);  The NBS uses a standardized “bottom-up” IMF testing of credit risk (which has the strongest impact);  Assumptions of the downside scenario have been used.  Elasticity demonstrating the intensity of impact of macroeconomic scenario on the rise in NPLs (based on the IMF panel regression implemented in around 50 countries) Assumption Expected Changes in GDP Output gap Depreciation Changes in interest rates / ? Output gap 0.7 Depreciation 0.3 Changes in interest rates 0.4

Composite results of bank stress testing (83% of balance sheet total – 16 banks) are positive!  In the downside scenario, the volume of NPLs would rise by 13.9%;  Even if the downside scenario materialized, the composite regulatory indicator (capital adequacy) would remain high above the regulatory minimum (12%).  Banks in Serbia do not need pre-emptive capital increase;  The strongest impact on the rise in NPLs comes from declining economic activity reflected in declining GDP and output gap. Starting basis after diagnostic analyses (RSD bn) Capital adequacy 19.01% 2009 Estimated annual loss from the rise in NPLs Capital adequacy 18.04% 2010 Estimated annual loss from the rise in NPLs Capital adequacy 16.42%

Conclusion  Materialization of a downside scenario would lead to а) a 13.9% increase in NPLs (from 8.1% to 22%), i.e. 175% nominal increase relative to the March 2009 level and b) a drop in capital adequacy from 19.0% to 16.4% at end-2010;  In the year to August, NPLs rose by 25% (from 8.1% to 10.1%), with a trend of stagnation - minimum chances of materialization of the downside scenario until end-2010!  Results of the stress tests have shown that even in a downside scenario, the banking sector (with its current level of capital and reserves) is capable to absorb all potential losses, and level of 37% above the capital adequacy regulatory minimum!

Even today there are several key lessons regarding the effects of the crisis  Bank shareholders are playing a key role in case of crisis a) strategic owners deserved the confidence; b) in Serbia, private owners (non-state) caused some concern;  Countercyclical fiscal policy should be practiced also during good times i.e., government should use the periods of economic prosperity and boom for building up savings or at the very least, it should try not to increase public debt;  Legislation should allow fast and efficient handling of crises;  Credit growth in good times should be more aggressively curbed;  Both capital adequacy ratio and liquidity ratio of banks should be higher in emerging countries;  Central bank should maintain an adequate (higher) level of FX reserves as a lender of last resort not only in local currency but FX as well;

Outlook for the banks in SEE will be determined by several factors ! 1.Growth model: Domestic demand or more export driven growth model ? 2.Macroeconomic policies : To which extent will adjustment take place in fiscal or monetary policy ? 3.International capital market conditions : Will money be available at the price and in the amount as previously? 4.Conditions in the country of the banks’ headquarters : Will the origin of the bank be an asset or a liability? 5.Speed of adjustment : How fast will particular bank adjust to a new reality?

Serbia and the region