Q&A with Dimitar Bogov, governor of the National Bank of the Republic of Macedonia
In an interview with Euromoney, Bogov discusses credit growth, bank regulation, foreign dominance of the country’s lenders, and the Vienna initiatives.
How would you characterize the National Bank of the Republic of Macedonia’s (NBRM) overall approach to bank regulation? How has it evolved over the past five years? What are the key challenges facing the NBRM in relation to bank regulation?
The NBRM keeps pace with the international standards in banking regulation. Having in mind the recommendations of the Basel Committee on Banking Supervision pertaining to the harmonization of the implementation of Basel standards with the characteristics and the capacity of the banking system, the NBRM opted for gradual transition to the Basel II standards. Their introduction started in 2007; currently the regulation encompasses all three pillars of Basel II, except advanced approaches from the first pillar which are medium-term priority for the NBRM.
Preparations regarding Basel III adoption are on track. Some of the banks increased their capital levels, and we do not expect difficulties in achieving strengthened capital standards. The main challenge is to comply with the liquidity standards, regarding the treatment of the domestic CB and T-bills and the possible effects on the fiscal and monetary policy effectiveness and implementation.
In what respects has the NBRM’s regulatory stance been influenced by the dominance of foreign-owned lenders in the Macedonian banking system? How has it been affected by the problems suffered in their home market by the parent banks of several leading Macedonian lenders? How has the NBRM’s response compared with that of regulators elsewhere in SEE/CEE?
Like in the most CEE countries, Macedonian banks are dominantly foreign owned. The benefits from the foreign presence in the region, and in Macedonia as well, are quite evident. It has contributed to better capacity of the banking sector for absorption of local shocks, enabled import of the know-how from the more developed financial markets, increased the competition among institutions, and provided wider spectrum of financial and banking services for the public.
Overall, the foreign presence contributed to the stability and safety of the banking systems in the region.
But recently the Macedonian banking sector felt the other side of the medal of the foreign presence on the market. Concerns with respect to eurozone banks’ deleveraging, due to additional capital requirements, have materialized. Even though the banking sector is in overall sound shape, the deleveraging by the eurozone parent banks have affected the credit developments, creating even bigger concerns due to the current asset-quality review and stress test of the eurozone banks.
A set of monetary and macro-prudential measures were undertaken in the last several years. Immediately, as the first signals of the crisis had appeared, we tightened some of the prudential requirements, regarding limits of exposure to banks, liquidity requirements, etc.
The new decision on credit risk management (effective from December 1, 2013), introduced several reliefs in the credit risk regulation, like materiality threshold for determining the non-performing status, inclusion of defined collateral in DCF and NPV calculation, reduction of the thresholds of impairment/special reserve percentages.
The possible release of impairments, i.e. higher profit for banks at the end of the year due to these changes, could be used only to cover losses from previous years or to increase the banks’ reserves or retained earnings (tier 1 capital).
Striving to support the banks’ credit activity and consequently the economic growth without compromising the objectives of maintaining price stability, the stability of the exchange rate, and the financial stability of the country, NBRM introduced diverse policies to tackle credit-market bottlenecks.
Besides the interest rate cuts that have brought the policy rate to its historical low of 3.25%, over the past two years we have introduced several changes in the reserve requirements instrument.
Furthermore, we have eased liquidity requirements for banks and have fundamentally redesigned monetary policy operational framework with the goal of further strengthening monetary policy effectiveness, easing credit conditions and supporting the development of domestic money market.
In addition, the NBRM has undertook non-standard measures in the reserve requirements instrument targeted towards the corporate sector as to facilitate the credit terms for the net-exporters and domestic electricity producers.
How effective have the Vienna initiatives been in addressing conflicts between home and host regulators? Does the NBRM support multilateral efforts to limit deleveraging in the Balkan region?
Republic of Macedonia was not included in the Vienna Initiative framework (1.0 and 2.0). During the first wave of the global financial crisis in 2008/2009, the domestic banks were not significantly influenced by the deleveraging of their parent banks and were able to sustain their stability. As a result, it was not essential to include the Republic of Macedonia in the Vienna Initiative 1.0 framework
However, the experience of the participating countries and their supervisory bodies suggests that the Vienna initiatives have helped in avoiding potential banking systemic crisis in the CESEE countries, by appropriately addressing the deleveraging processes in these countries and enhancing the coordination between all relevant public and private stakeholders.
Having in mind the systemic importance of the foreign banks’ subsidiaries in our country, their operation is imminent for the stability of our banking system.
In addition, the possible divestment of some of the parent banks might seriously endanger the stability of the Macedonian financial system, which underlines the importance of adequate cooperation with the home supervisors.
Therefore, NBRM has been requested and approved inclusion in the Vienna Initiative 2.0 framework. Additionally, as an effort to enhance the multilateral cooperation, NBRM participates in the Bank of Albania’s initiative for the region’s joint participation within Vienna Initiative 2.0.
What is the outlook for the Macedonian banking sector in terms of credit expansion, profitability and asset quality? What are the key challenges facing lenders in Macedonia? How important is boosting bank lending for economic growth and what can the NBRM do to promote this?
The main pillars of the stability of the Macedonian banking sector are the high and stable liquidity and solvency. The stability of the banking system was maintained even in the most severe period of the EMU sovereign debt crisis.
In the peak of the uncertainty about the future of the euro currency, the de-euroization in the country accelerated. The banking system remained unaffected of the adverse movements on the international financial market due to its non-dependence on foreign sources of financing.
Macedonian banks have never suffered from parent-funding deleveraging, because traditionally the main source of financing is domestic deposits. Macedonian subsidiaries of EU parent banks are one of the best-performing banks within their groups, as well as in the banking system of the Republic of Macedonia, according to its risk management and corporate government system. They operate and can operate on a stand-alone basis, and do not depend on liquidity and capital support from the parent bank.
Despite the vast number of measures, the soundness of the banking system and the abundance of liquidity, banks still remain reluctant to lend. Apparently, there are factors which preclude a more rapid credit growth.
Vigilant risk-pricing by banks, amidst the global uncertainty, the rise in the NPLs over the crisis period, the ongoing process of balance-sheet consolidation and deleveraging by European parent banks, do act as a constraint. Hence, improvement in these factors deems as necessary precondition for stronger credit growth.
Given the overall good health of the domestic banking system, the current improvement of economic prospects and confidence, one can expect for credit growth to rebound again.
Modest credit growth is especially evident with the corporate sector, that is, in the same time, a leader in the NPLs growth. Even though the NPL growth rate is still double digit (it is 11.1% in October 2013), its pace is strongly decelerating. This was especially evident in the second half of 2013 that could be explained by the positive developments in the domestic economy, especially the stronger growth of economic activity in the first and second quarters of this year.
Expectations for keeping the economy in the zone of solid growth provide the basis for the expectation that further acceleration of the growth of NPLs in the corporate sector is significantly exhausted, considering also the support by the banks to some corporate clients, in order to alleviate their credit burden in accordance with their temporary financial difficulties.
Compared with some countries in our neighborhood and beyond, the share of net-NPLs in the total own funds of the banking system of the Republic of Macedonia is significantly lower, due to the conservative approach of the banks in credit-risk measurement and the full coverage of NPLs with impairment.
Credit-risk losses affected profitability of the banking system, but it is profitable and its operational efficiency is improving. Macedonian banks apply a more prudent approach, being more conservative in lending and achieving higher yields with greater propensity for low-risk placement of the collected funds from the public in liquid instruments with lower yields.
While it is widely recognized that credit growth tends to be highly synchronized with real GDP cycle, multiple crisis episodes offer anecdotal evidence that, after broad financial or economic distress, this link might be weakened. Or more precisely, there is a large probability credit growth to be a lagging indicator of economic recovery.
The latest eurozone figures on economic and credit growth might be a good example of a “creditless recovery”. Scrutinizing the Macedonian credit market in the last couple of years, the downward path of the credit growth is noticeable.
On the other hand, the post-crisis growth has been rather solid, with the GDP exceeding the pre-crisis level. This seemingly broken credit-growth link is explained by factors intrinsic for the Macedonian economy.
First, there are new large foreign entrants which contribute to a large extent to the growth of the economy. As their operations are, in general, not being financed by domestic banks, their performance does not impact much on the credit market. In addition, the fiscal impact on activity is rather strong, but it is also not directly related to bank credit. Hence we do see currently a type of a “decoupling”.
But, of course, the outlook for the rest of the economy, which is exposed to domestic banks, to a large extent is conditioned on the credit availability. Hence, credit sluggishness in this segment might be a potential contributor to economic headwinds in the near to medium term. Even more, as amidst the shallow financial system, the alternatives to the banking financing are rather scarce.
Does the NBRM expect and/or support further consolidation in the Macedonian banking sector?
Currently there are no official announcements for further consolidations in the banking sector. In the last two years, NBRM publicly stresses the need of consolidation in the Macedonian banking sector and encourages banks to take that path. An increased presence of stronger and larger market players are welcomed by the NBRM, as they should contribute to a further increase in competitiveness of the sector and appropriate reduction in the prices of banks’ products.