Jiří Rusnok: Basel Consultative Group Meeting - welcome speech
Welcome speech by Mr Jiří Rusnok, Governor of the Czech National Bank, at the Basel
Consultative Group Meeting, Topic "Regulatory Treatment of Sovereign Exposures - Survey of
Recommendations", Czech National Bank and Bank for International Settlements, Prague, 4
October 2016.
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Dear Basel Consultative Group members,
Dear experts from all around the world,
Dear ladies and gentlemen,
Let me warmly welcome you to the Czech National Bank (CNB). We are proud to host the expert
meeting on the Basel regulatory reform and its design, using the perspective of emerging
markets and developing countries.
In the wake of the recent global financial crisis, the Basel Committee on Banking Supervision
(BCBS) is making reform steps towards more healthy, stable, and resilient banks and financial
systems. The latest Basel reform includes more and better bank capital, leverage and liquidity
requirements, as well as macro-prudential measures, ranging from G-SIB surcharges to
countercyclical capital buffers. The reform effort is successfully underway and new standards
are gradually being implemented worldwide, covering advanced as well as emerging markets
and developing countries.
When designing further details of the regulatory reform, we have to pay special attention to
differences in financial systems among countries and regions. Namely, financial systems in
emerging markets and developing countries are often shallower and less liquid than in advanced
economies. Therefore, emerging market countries can hardly take over all regulatory measures
without modifications. On the contrary, they need to contribute to the design of the measures to
make them robust and effective across countries. Similar holds for regulatory objectives, as what
is considered a priority for regulators in advanced countries, like the G20 countries, might not be
considered as urgent in emerging market countries.
In this regard, I welcome and strongly support the effort of the Basel Consultative Group (BSG)
as a forum for deepening the engagement of the BCBS with non-member authorities,
international institutions, and regional groups of banking supervisors on the regulatory reform and
banking supervisory issues. I see cooperation between the BCBS and the BCG as a key
component helping to design robust regulation and supervision, taking into account financial
sector aspects in both advanced and emerging markets and developing countries. As a member
of the BCG, the CNB has actively participated in the work of the group. We contributed to the
work agenda evaluating major intended and unintended consequences of Basel III
implementation for emerging and smaller economies in the past. We also hosted a workshop on
this topic in 2013.
As I see your workshop agenda, I appreciate that you are going to discuss the timely issue of
sovereign exposures in emerging markets. The reasons for the high share of government bonds
in commercial bank assets in emerging markets are clear and straightforward. Financial markets
in these countries are still under development and shallow, which is limiting their ability to
diversify assets. Banks can also choose to be exposed to sovereign debt in some countries as
the alternative (private lending) is riskier given existing legal and institutional imperfections.
Finally, the current regulatory setup gives preferential treatment to sovereign exposures, as
banks' exposures to domestic government in domestic currency are subject to low or even zero
risk weights.
While banks' sovereign exposures in advanced countries are considered to hover at reasonable
levels, exposures in many emerging market countries are significant. The current level or its
buildup is becoming a relevant concern to emerging market countries, mainly owing to credit and
concentration risks. As the sovereign debt crisis in Europe showed recently, the zero risk weight
commonly applied to sovereign exposures in domestic currency might not be fully consistent
with empirical observations of the risks of sovereign debt defaults. Hence, the default risks of
sovereign issuers need to be reflected accurately in risk weights to ensure that banks have
appropriate ex-ante incentives to take on such exposures. Besides credit risks, excessive
sovereign exposure concentration reinforces the link between sovereign and banking sector
stress. In fact, the close relationship between sovereigns and banks is seen as one of the major
reasons for the severity of the Eurozone crisis. Therefore, breaking the sovereign-bank nexus is
needed in order to strengthen macroeconomic stability.
Nevertheless, our prudential treatment of sovereign exposures needs to strike a balance. It has
to bear in mind the specific role sovereign debt plays in financial markets. Government securities
are used by central banks as collateral in managing market liquidity and implementing monetary
policy through money market operations. Furthermore, given their low risks, they are used by
banks and pension funds as investment instruments. These aspects need to be borne in mind
when designing prudential treatment of banks' sovereign exposures. This is particularly true of
emerging and developing countries, as their financial markets are shallow and low-risk
equivalents to government securities and central bank papers are hard to find.
As I have already mentioned at the beginning of my speech, the CNB hosted the BCG workshop
on the impacts of Basel III implementation on emerging markets and smaller economies three
years ago. The workshop was efficient and successful, resulting in a memo highlighting the
effects of the reforms on these economies for the BCBS and supervisors. I am happy that we
are meeting here again to discuss regulation of sovereign exposures and other topical issues
related to Basel III regulatory reform. I hope that this workshop will reach similar success.
Ladies and gentlemen, thank you and I wish you success in your work.