G28 - Financial Institutions and Services: Government Policy and RegulationReturn

The size of the shadow banking sector (SBS) has more than doubled in the Czech Republic over the last decade. This places a potential burden on policy makers. On the one hand, the SBS complements regular banking by expanding access to credit and investments, enabling better risk sharing and maturity transformation, and sup-porting market liquidity. On the other hand, SBS activities can put the stability of the financial system at risk and amplify its procyclicality by exacerbating the build-up of leverage and asset price bubbles. We implement a FAVAR model of the Czech economy to determine the impact of macroeconomic factors on the SBS. We find that the SBS: (i) is sensitive to changes in market interest rates and term spread; (ii) exhibits great procyclicality; (iii) can act as a complement to regular banking and satisfy some additional demand for credit. We also define some potential risks of continued growth of the SBS, linked to our empirical evidence.

The article discusses which policies and to what extent should be financed from the EU budget and/or from the national budgets of the EU member states to satisfy the rationale and efficiency point of view. To answer these questions we discuss the existing approaches and apply the most relevant ones (in particular the theory of fiscal federalism and public sector economics) to examine the current structure of the EU budget expenditures. We conclude that there are few EU policies that would be more efficient if they were more fiscally centralized and there is a policy that should be brought down to national (regional) level.

This study examines the role of firm-specific, macroeconomic, banking and financial environment factors in determining whether they were able to access external finance during the global financial crisis. Heckman's selection approach is used to model the demand and supply of credit in the euro area during and after the financial crisis period. We conclude that since 2011, when the rejection probabilities for external credit applications peaked, the chances of obtaining credit have improved. However, young and small firms are still more likely to have their credit applications rejected. A decrease in government support such as guarantees increases the probability of rejec-tion, as does a reduction in firms' own capital and a worsening credit history. Among the bank-specific factors, an increase in banks' equity capitalization reduces the rejection probability, while an increase in the cost of borrowed funds and a decrease in the competition levels raise the rejection probability. The legal structure to deal with insolvency disputes and the development of the credit information market have a significant bearing on credit availability, as we find that an increase in the time to resolve insolvencies and a reduction in adverse selection problems by credit information sharing increase the credit rejection probabilities.

The contribution deals with the risk regulation in the framework of Solvency II, which is the new regulatory system in insurance valid in majority of the EU countries since 2016. It concentrates on the underwriting risk (in particular, on the reserve risk) and on the counterparty default risk (i.e. mainly on the reinsurers' default risk), since such risks are crucial for insurance activities. Various actuarial approaches to the underwriting risk applied by subjects respected by insurance regulators and supervisors are surveyed. Moreover, one of them suggests by means of a real data example a simplified approach to the reserve risk, which may be appreciated in practice just for its simplicity. As to the counterparty default risk, the paper presents a method that can be suitable when the reinsurers form a small group of heterogeneous subjects imperilled by a common shock as a financial crisis or a natural catastrophe; this methodological approach is also demonstrated by a numerical example.

The aim of this paper is to evaluate the way in which capital influences profitability of banks and exposure to risk in seven European countries: Austria, Bulgaria, Greece, Italy, Romania, the Netherlands and Hungary. Based on previous studies, we developed a model of simultaneous equations to analyse the relation between capital, risk and performance. The model includes 68 banks and covers the period between 2006 and 2011. In addition, estimations have been made for the three capital ratios (own capital ratio, tier 1 ratio and capital adequacy ratio) for each country included in this study. The obtained results have revealed the existence of a negative relationship between capital and taken risks and a positive relationship between capital and profitability, as well as between risk and profitability.

The global banking system proved significantly vulnerable to systemic risk during the 2007-2009 financial crisis. In this paper, we construct an agent-based network model of systemic risk to a banking system, and use it for stress-testing of several different regulatory measures. First, our simulations confirm that sufficient capital buffers in individual banks are crucial for protecting the stability of the whole system. Second, we show that the regulatory measures installed as preventive measures to ensure that the banks possess sufficient capital buffers have almost no positive effects on stability when the system is collapsing. Finally, we highlight various data deficiencies which prevent the researchers and regulators from fully understanding the complete range of systemic risk and make it difficult to devise effective and targeted regulatory measures at this time.

This research investigates the emergence of stock market in the Czech Republic. We use Czech mass privatization as an experiment that allows us to analyze under what conditions a viable stock market arises. On the Prague Stock Exchange (PSE), unlike its counterparts in Poland or Hungary, exceptionally large amounts of shares were delisted e.g. excluded from public trading soon after trading at this market began in 1993. We estimate the determinants of shares delisting analyzing the period 1993-2004. Using firm-level data on listed and delisted companies we show that it was possible to prevent massive delisting if certain pre-privatization and privatization characteristics of the companies had been taken into account when deciding which companies to place on the stock exchange for public trading following the mass privatization. This result has important implications for establishing stock markets in emerging economies.

This paper presents the construction of a new indicator (named the JT index) evaluating the economy's financial stability, which is based on a financial scoring model estimated on Czech corporate accounting data. Seven financial indicators capable of explaining business failure at a 1-year prediction horizon are identified. Using the model estimated in this way, an aggregate indicator of the creditworthiness of the Czech corporate sector (the JT index) is then constructed and its evolution over time is shown. This indicator aids the estimation of the risks of this sector going forward and broadens the existing analytical set-up used by the Czech National Bank for its financial stability analyses. The results suggest that the creditworthiness of the Czech corporate sector steadily improved between 2004 and 2006. However, the JT index for 2007 and 2008 deteriorated what could be explained through global market turbulences while the further decrease in 2009 rather by the global recession. The used methodology for the construction of the JT index might be suitable for decision makers when evaluating the economy's financial stability. Although our research is done as a case study on the Czech Republic, its basic idea might be easily applied to other countries as well.

The results of stress tests of the Czech banking sector based on credit risk and credit growth models, applied to the household and corporate sector are presented in the paper. The use of these newly developed models enables the stress tests to be linked to the CNB's official quarterly macroeconomic forecast. In addition, the article updates the stress scenarios, including simple sensitivity analyses of credit risk for individual sectors. Based on the analysis, an answer is sought to the question of whether the observed credit growth to corporate sector and households poses any threat to the stability of the banking sector. The analyses conclude that the banking sector as a whole seems to be resilient to the macroeconomic shocks under consideration.

The article examines the impact of the budget deficit upon the term structure of Czech interest rates. An important feature of the model is that it enables us to directly test the predictions of the three alternative paradigms, the Keynesian, neoclassical and the Ricardian, concerning the long-term and short-term impact of deficit on interest rates. The result of the study, obtained by the IV method suggests that the budget deficit is negatively related to the interest rate level in the short-run. Therefore, the long-run Ricardian proposition cannot be rejected in favour of any alternative hypothesis.

This theoretical paper maps the transition experience of the financial sector using evidence from the Czech money market. Especially, the respect is paid to the structure of interest rates during the period from 1993 to 2001. The main components of the money market that mostly determine the term structure are the interbank deposit market and the market for short-term securities. The study abstains from interbank market survey and provides a detailed description of the default-free short-term securities market and its impact on past interest rate movements.

Banks played a central and, at times, controversial, role in the post-1989 transformation of the Czech economy. This article is trying to assess that role by setting it in a historical and comparative context. Economic historians have specified two broad models of banking behaviour, although the differences can be exaggerated. Transition economies show some common characteristics, but past history gave Czech banks a particularly important role and policy makers pursued a conception under which they would finance rapid economic transformation, partly following a model from the past. With varying degrees of willingness, established banks took on this role, undermining their own financial solidity. As the Czech road ran into difficulties, so a different conception of banks' development was adopted, closer to policies more familiar across Central and Eastern Europe.