dimitar bogov : impact of international regulatory cooperation on the republic of macedonia opening speech by mr dimitar bogov, governor of the national bank of the republic of macedonia, at the 36th meeting of the european banking federation, skopje, 7 june 2013. * * * distinguished participants to the 36th european banking federation associates ’ meeting, dear guests, ladies and gentlemen, let me wish you a very warm welcome at today ’ s meeting. the topic i want to dedicate my welcoming speech on is international regulatory cooperation. the banking system in the republic of macedonia is predominantly foreign - owned and consists mostly of either subsidiaries of foreign banks or of banks owned by foreign portfolio investors. foreign ownership has assisted banks in their efforts to follow sound market practice, develop and maintain high credit standards and receive encouragement and advice from their larger and longer established parent institutions. the global financial crisis and eurozone debt crisis have not fundamentally changed this relationship. nevertheless, these exceptional crises do constitute a real challenge for international and global banking. the vienna initiative, the framework to safeguard the financial stability of emerging europe, has been valuable in raising awareness that the deleveraging process in developed europe should not unduly restrict operations of bank subsidiaries in emerging europe. in this context, it is important to note that even before the crises stroke, deposits raised in the macedonian banking system by the predominantly foreign - owned domestic banks were lent by those same banks to borrowers in the republic of macedonia. as a rule, foreign funding, excluding equity and reserves, did not exceed 10 % of all sources of financing of the banking sector. there has always been a difference amongst individual banks, a reflection of the different strategies for funding and acquiring sources, yet the overall importance of foreign funding is not in its percentage, but in its long - term nature. this is the premise on which the good business relations between parent banks and subsidiaries is based. when the crises stroke the relative importance of domestic deposits in financing the claims on macedonian borrowers actually increased. in the republic of macedonia the ratio of loans to domestic gdp is still 47 – 50 %, while the ratio of deposits to domestic gdp is around 55 %. these ratios in the developed world tend to be above 100 %, which shows the potential for growth. similarly, the ratio of household debt, including mortgages, to household disposable income, is around 25 %, substantially lower than most countries at a similar level of development, also offering opportunities for the banking sector. regulatory capital

collapse of an economic bubble. 3 in the period preceding the recent crisis, especially around the mid2000s, the united states and some european economies experienced a large - scale credit bubble. it was the bursting of that credit bubble that triggered the financial crisis, which was further aggravated by the failure of lehman brothers in the autumn of 2008. during the bubble period, risk - taking was excessive. looking at the behavior of financial institutions, for example, this involved the accumulation of excessive leverage and maturity mismatches between assets and liabilities. typically, excessive leverage is taken to refer to an increase in debt beyond a point where there is an appropriate balance between capital and debt. more generally, however, excessive leverage can be taken to mean excessive risk - taking, including off - balance transactions, relative to the capital base. at a time of financial crisis, excessive leverage will show itself in capital shortages and solvency problems suffered by financial institutions. on the other hand, the term “ maturity mismatch ” refers to the financing of long - term assets using short - term debt, and in the run - up to the recent financial crisis, there was a considerable increase in such mismatches. a typical example of this is structured investment vehicles ( sivs ). these sivs invested in medium - to long - term securitized products related to subprime mortgages and raised funds by issuing short - term asset - backed commercial papers with those securitized products as underlying assets. however, once some kind of a shock occurs, funding becomes difficult, and such liquidity risks materialize not only in terms of the domestic currency but also in terms of foreign currencies. in the recent global financial crisis, apart from the united states, u. s. dollar liquidity risk was particularly serious for european financial institutions and, as you will know, japanese financial institutions, too, faced shortages of u. s. dollar funds from the autumn of 2008 through the beginning of 2009. once there is a liquidity shortage, financial institutions are forced to sell their assets, resulting in a fall in asset prices, and, for financial institutions as a whole, further intensifies liquidity shortages. thus, during the financial crisis, the the extent of the financial crisis, however, has differed across regions, and financial systems in asia, including japan ’ s, have proved to be relatively robust. for details, see shirakawa, m., “ reforming the framework of financial regulation and supervision :