Outsourcing – a Tool for Increasing the Competitivness of Czech banks Doc. František Pavelka, CSc Sumy, 26. may 2011, Ukraine

Structure of the speech 1. Analysis of the competitiveness of Czech banks 2. Outsourcing – a tool for enhancing the competitiveness of Czech banks 3. Principles of the outsourcing regulation 4. Experiences of the outsourcing usage in Czech Banking System

1. Analysis of the competitiveness of Czech banks Two periods of the Czech bank system development: Last decade of the XX th century - a period of formation and consolidation of the Czech banking system. First decade of the XXI st century - a phase of the formation of the classical, functional banking and financial market.

Birth of the two degree bank system Quick development One Central bank 7 state owned banks as maximum at 1995/ Czech private banks as maximum at foreigner banks as maximum at Czech credit unions as maximum at 1999

Consequences of the quick development 5 state owned banks – Consolidation program, preparation for privatization – costs of the rescue 350 billions of Crowns Czech private banks – massive bankruptcies and revoking of licenses (29 in total), Stabilization program, costs about 30 billions Czech credit unions - total collapse, tod a y only 14 unions

Consequences for bank´s competitiveness Competitiveness of the Czech banks both state owned and private owned is close to zero. Czech banking market began to take on foreign banks' capital 1995 Czech capital 77,2%, foreigner 22,8% 1998 Czech capital 61,3%, foreigner 38,7% 2001 Czech capital 30,0%, foreigner 70,0%

Birth of the classical bank and financial market Red lines: Massive entry of the foreigner capital Stabilization of the Czech bank system Entry of the country on EU Consolidation of the financial market regulation

Stabilization of the Czech bank system (number of banks) YearCzechForeignTotal

Massive entry of the foreigner capital YearShare of the Czech capital Share of the foreign capital ,2 %22,8% ,5 %54,1 % ,2 %85,8 % ,7 %80,3 %

Consolidation of the financial market regulation PeriodeCharacteristics Standardization of the regulation Harmonization of the regulation, entry in EU Integration of the financial market regulation Basel II implementation

Two different tendencies The condition for bank's competitiveness ameliorate! Internal interbank competition is growing International interbank competition near to zero

Fatal question on bank's competitiveness How big can be the interest of the foreign capital on the growth of the competitiveness of the Czech economy?

Index of the support of the competitiveness

2. Outsourcing – a tool for enhancing the competitiveness of Czech banks „Outsourcing is defined as a regulated entity’s use of a third party (either an affiliated entity within a corporate group or an entity that is external to the corporate group) to perform activities on a continuing basis that would normally be undertaken by the regulated entity, now or in the future“ (Joint Forum, march 2005 at the Bank Committee for Banking Supervision at BIS ).

OUTSOURCING Level of the outsourcing Tactical outsourcing Strategic outsourcing Transformatory outsourcing

PYRAMID SAVINGS SCHEMES TAC TICAL STRATEGIC TRANFOR MATORY

Onsourcing Transformatory outsourcing changes on ONSOURCING

Onsourcing internal sourcing: ONSOURCING As a form of mutuel transfer of services ADVENTAGE: Diminution of the risk Multiplication of the economies of scale Economies of the unification Effektivness of the cross selling Possibility to avoid regulation rules

Onsourcing type of ČSOB group ČSOB bank ČMSS savings ČSOB Leas ČSOB Insurance ČSOB Investment fund HYPO mortgages

Onsourcing type Wüstenrot Mortgage bank Live insurance Non Live insurance Building Saving society

3. Principles of the outsourcing regulation „Outsourcing has the potential to transfer risk, management and compliance to third parties who may not be regulated, and who may operate offshore. In these situations, how can financial service businesses remain confident that they remain in charge of their own business and in control of their business risks?“ (Outsourcing in Financial Services, Joint Forum, 2005

Main risk of outsourcing Operational risks, or risks of a third party (external service provider failure) reputation risks (loss of reputation due to the service provider failure) legal risks (adherence to legal regulations – compliance, law enforceability, observing contracts, withdrawal from contract) concentration risks (hereby is understood the excessive concentration of the whole branch – e.g. banking – on outsourcing of one similar task, important for banks – e.g. IT providers)

The main theme of the regulation protection of the consumers‘ interests namely protection of the personal dates business dates information under the banking secrecy

4. Experiences of the outsourcing usage in Czech Banking System Main stream – onsourcing Supportive stream – classical (tactical) outsourcing

Main streams Integration and unification of methodology, IT systems, accounting, reporting and so on Concentration of the realisation of the non banking activities to the one specialised member of the bank group Cross-selling Franchising Decentralization of the Distribution of the product and services

Supporting stream Pyramid of the outsourced activities Transportazio n Facilities management Marketing Call centres Manufacturing Human ressources Finance Distribution and logistik Administration IT

Costs of outsourcing (regulated) end of 2010, million of Czech crowns banks costs on outsourcing % from administration costs big banks ,61% medium banks52712,36% small banks352,25% buildings savings societies 926,09% total ,02%

Herfindahl index of market competition yearassetsdeposit s 20070,1000, ,1010, ,1030,118

Hirfendahl-Hirschman Index yearHHI 20070, , , Author´s calculation, total assets

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