D EPOSIT INSURANCE AND ITS IMPLICATIONS FOR FINANCIAL CONSUMER PROTECTION F INANCIAL C ONSUMER P ROTECTION AND F INANCIAL L ITERACY Jerzy Pruski IADI President and Chair of the Executive Council President of the Management Board, Bank Guarantee Fund, Poland Sofia, 11 th June 2014
A GENDA Deposit insurance and wider perspective on consumer protection in financial markets Reasons for protecting and informing consumers and possible obstacles within these processes Global and local examples of risks associated with consumer protection The approach to consumer protection in the EU (new Deposit Guarantee Scheme Directive) IADI research programs on consumer protection and Core Principles for Effective Deposit Insurance Systems 2
P ERSPECTIVE OF DEPOSIT INSURANCE The deposit insurance fund is only Consumer protection is an attribute one of the elements of a complex of not only deposit insurers but consumer protection scheme in also of other financial safety-net financial markets players as well as policymakers Because of the complexity of financial Protection needs to be linked with markets, consumer protection and the the large variety of products available policy of informing consumers always in financial markets such as need to be considered from a broad capital investments or credit perspective The financial system should be equipped with a properly designed consumer protection scheme, comprising various entities with different responsibilities The whole mechanism contributes to the financial stability of the economy 3
O BSTACLES TO INFORMING AND PROTECTING CONSUMERS IN FINANCIAL MARKETS C ONSUMERS S ELLERS & DESIGNERS OF FINANCIAL SERVICES OF FINANCIAL PRODUCTS • Often have lack of basic market knowledge • Offer complicated products whose • Sometimes buy complicated products construction is unclear even for their designed for professionals sellers • Do not understand the risk • Do not sufficiently inform about the associated with financial products nor undertaken risk the intent behind their design • Transfer a large part of the risk to • Have a strong tendency for counterparties (consumers) confirmation bias and wishful thinking • Create uneven distribution of rights – especially dangerous in financial and obligations between markets counterparties involved in the product • See only „one side” of the market (in favour of the seller) • Are susceptible to herd instincts 4
P ROTECTION IN FINANCIAL MARKETS In recent years more consumers and retail investors have become active in financial markets and are being offered a more complex and wide-ranging set of financial services and instruments This directly translates into a greater volume and value of transactions taking place in financial markets Consumers and retail investors need to be fully protected and supplied with extensive information about products and services, investments, and especially the risk associated with their actions Why is informing and protecting consumers in financial markets crucial? Because consumers need to: • understand what they are doing • understand the potential consequences of their decisions • understand and accept the risk of an investment or financial transaction M ARKET IMPERFECTIONS IN THESE AREAS CAN HAVE SERIOUS RAMIFICATIONS IN THE FORM OF CREATION OF MARKET BUBBLES AND CAUSING DIFFERENT TYPES OF CRISES 5
C URRENCY OPTIONS AMONG P OLISH COMPANIES C URRENCY RATE PLN / EUR 2007-2009 P OLISH C OMPANIES D EPRECIATION OF PLN PURCHASING CURRENCY OPTIONS BY 53% IN 7 MONTHS A csteady trend of PLN appreciation encouraged Polish exporters to purchase currency options with banks, hedging the value of their revenues from abroad In 2008 Poland was hit by an economic crisis, which triggered the process of rapid depreciation of PLN 6
C URRENCY OPTIONS AMONG P OLISH COMPANIES M ECHANICS OF THE PROBLEM Companies that had purchased options were obliged to sell PLN to banks at a fixed price stipulated in contracts (e.g. PLN 3.5), also when the market price was PLN 4.8 This was in a large part a speculation game because the contracted amounts were much higher than the expected export revenues from particular companies L OSSES OF P OLISH COMPANIES C URRENCY OPTION N AME OF COMPANY Negative valuation of currency LOSS IN MILLIONS PLN derivatives issued by Polish Krosno 300 companies amounted to PLN 16 billion Ciech 300 Negative valuation of currency Zakłady Police 124 options amounted in total to PLN 9 billion Cersanit 53 99 public listed companies were Rudniki 13 affected by losses on options Source: KNF 7
O BSTACLES TO INFORMING AND PROTECTING CONSUMERS IN FINANCIAL MARKETS E XAMPLES OF MARKET BUBBLE CREATION L OCAL CHARACTER G LOBAL CHARACTER ( EXAMPLES FROM P OLAND ) • Popularity of derivative products (currency options) • „Dotcom” bubble • Mortgage loans in foreign currencies for households • Credit boom during times of low • Structured investment products interest rate levels as a way of ordinary saving • Mortgage-backed securities (global • Offering aggressive-strategy investment financial crisis) funds for those types of consumers that particularly need to be protected (e.g. the elderly) 8
D EVELOPMENT OF LOANS IN P OLAND L OANS BY CATEGORIES – QUARTERLY CHANGES ( IN BILLIONS PLN) 45 Source: NBP Housing loans - real Corporate loans - real 40 Expansion of Consumer loans - nominal housing loans 35 30 25 Housing loans - the main factor of loan growth 20 15 Limited 10 lending 5 0 -5 -10 II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Availability of cheap financing allowed banks to create an attractive housing loan offer, which in combination with a high demand of households for flats/houses allowed dynamic development of lending 9
E XPANSION OF FOREIGN CURRENCY HOUSING LOANS Quarterly and annual changes in housing loans (real) PLN bn 25 100% PLN-denominated Expansion of foreign currency housing loans 20 80% annual change 15 60% 10 40% Low volume of housing loans 5 20% The dynamic growth of 0 0% housing loans was -5 -20% possible mainly due to the growth in foreign -10 -40% II IV I II IV I II IV I II IV I II IV I II IV I II IV I II IV I II IV I II IV I II IV I II IV I II IV I II IV I II IV I currency loans, which III III III III III III III III III III III III III III III 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20132014 were cheaper than PLN- Quarterly changes (real) and exchange rate denominated loans PLN bn 25 4.0 because of banks’ access foreign funds foreign currency housing loans 20 3.5 to foreign funding CHF/PLN 15 3.0 10 2.5 5 2.0 0 1.5 -5 1.0 -10 0.5 -15 0.0 II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20132014 Source: NBP 10
LIABILITIES TO AN EXTERNAL FINANCIAL SECTOR Stocks (PLN bn) 1 000 900 Excess liquidity in banking sector; 800 small share of foreign funds 700 600 500 400 Growth of liabilities to 300 external financial sector 200 100 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Q1 2014 Loans for non-financial clients Liabilities to external financial sector Years 2005 - 2008 – a period of increased inflow of foreign funding 11
L OANS FOR N ON -MFI S – EURO AREA Loans for Non-MFIs (EUR trillions) 12 11 10 9 Intensive growth of bank lending to Non-MFIs in pre-crisis period 8 7 6 5 1998Feb 2003Feb 2008Feb 2013Feb 1997Sep 1998Jul 1998Dec 1999May 1999Oct 2000Mar 2000Aug 2001Jan 2001Jun 2001Nov 2002Apr 2002Sep 2003Jul 2003Dec 2004May 2004Oct 2005Mar 2005Aug 2006Jan 2006Jun 2006Nov 2007Apr 2007Sep 2008Jul 2008Dec 2009May 2009Oct 2010Mar 2010Aug 2011Jan 2011Jun 2011Nov 2012Apr 2012Sep 2013Jul 2013Dec Loans for Non-MFIs – change in volume 1200 5.0 4.5 1000 4.0 800 3.5 600 In 2005-2008 annual change in 680 3.0 400 volume between 0.6-1.1 EUR bn, 442 2.5 200 411 in comparison to 0.3-0.4 EUR bn 78 97 2.0 372 376 469 394 304 829 1 096 575 341 in 1998-2004 0 1.5 -94 -398 -200 1.0 Change in loan volume (EUR bn) -400 0.5 ECB MRO interest rate (right axis) -600 0.0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: ECB 12
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