Guiding Principles for Bank Resolution

Document Sample
Guiding Principles for Bank Resolution Powered By Docstoc
					Spaghetti Westerns and Shakespeare:
     Outlook and Opportunities for
        Ontario Credit Unions

                  Central 1
           2009 Spring Conference

                          A. Michael Andrews
                          mike@amandrews.ca


         A. MICHAEL ANDREWS AND ASSOCIATES LIMITED
         Specialists in Financial Sector Policy, Strategy, Regulation and Supervision
     Outlook and Opportunities
The economic forecast and financial
 system risks pose significant challenges
The impact will not be uniform across
 the financial sector, or across the credit
 union system
Opportunities exist, even though “true
 it is, we have seen better days”

                             William Shakespeare
                     As You Like It, Act 1 Scene 7

                                                 2
      Financial System Outlook and Risks
 Five main risks to
   the financial sector
1. Funding and liquidity
2. Capital adequacy
3. Household balance
   sheets
4. Global economic
   downturn
5. Global imbalances
   and currency
   volatility                         3
      Financial System Outlook and Risks
 Five main risks to
   the financial sector
1. Funding and liquidity
2. Capital adequacy
3. Household balance
   sheets
4. Global economic
   downturn
5. Global imbalances
   and currency
   volatility                         4
        The (Relatively) Good
Funding and liquidly   Global imbalances
                         and currency
Household balance       volatility
 sheets




                                     5
      Funding and Liquidity
Events since mid-2007 have overturned many
 assumptions about liquidity management
Triggered a rediscovery of the joys of retail
 funding and boring retail banking
  Wholesale financing dried up
  Increased competition for deposits
  Falling rates are compressing margins
Most credit unions continue to rely on
 traditional deposit mobilization—a strength
 relative to many financial institutions
                                          6
           Loan to Deposit Ratios
System averages, end-2007
110
100
 90
 80
 70
 60
                                  ce
                 B




                                             L
                        N




                                                           I
                                       B




                                                               S
                                                   SK
      C

          B




                                                         PE
                A




                                            N




                                                               N
                       O




                                       M
  B

          N




                               an
                            lli
                           A
                        L'




Source: Calculated from Credit Union Central of Canada data.
                                                                   7
        Ontario CU-CP Net Liquidity
     Cash+investments-borrowing (percent of assets)
15
14
13
12
11
10
      Q4-06 Q1-07 Q2-07 Q3-07 Q4-07 Q1-08 Q2-08 Q3-08

 Source: Calculated from DICO data.


                                                 8
             Household Balance Sheets
Household debt
(percent of personal disposable income)
180

160
                                United States
140

120
                                                      Canada
100

80
      1990        1994           1998          2002            2006
Source: Bank of Canada Financial Stability Review, Dec 2008.          9
             Household Balance Sheets
Indebtedness Indicators
       Debt-to-income ratio (left scale)     Debt-service ratio (right scale)

140                                                                       14

120                                                                       12

100                                                                       10

80                                                                        8

60                                                                        6
      1990         1994           1998      2002           2006

Source: Bank of Canada Financial Stability Review, Dec 2008.
                                                                     10
  Global Imbalances and Volatility
Credit unions have less direct exposure
 than many other financial institutions
  Few trading assets
  Little currency exposure
  Little direct country-risk exposure
Indirect risks from the impact on
 investor and consumer sentiment



                                           11
The Bad




           Capital
            Adequacy



                12
     Capital Adequacy
So far so good, but it will get worse
 before it gets better
Trend in delinquency and non-
 performing loan coverage is a concern
Credit unions are limited in their ability
 to deal with losses—can’t go to the
 market with a new issue, so retained
 earnings is the only real buffer


                                              13
               Ontario CU and CP Asset Quality
 Delinquent loans 30-90 days             Delinquent loans > 90 days

               300       Total loan loss allowance
               250
               200
  $ millions




               150
               100
                50
                 0
                     Q4- Q1- Q2- Q3- Q4- Q1- Q2- Q3-
                     06 07   07 07   07 08 08    08

Source: Calculated from DICO data.
                                                               14
       Capital Levels and Asset Quality
          Regulatory capital/total assets (left scale)
          Loan allowance/>90 day delinquent (right scale)

7.4                                                      130
7.3                                                      120
7.2                                                      110
7.1                                                      100
7.0                                                      90
6.9                                                      80
      Q4-06 Q1-07 Q2-07 Q3-07 Q4-07 Q1-08 Q2-08 Q3-08


Source: Calculated from DICO data.
                                                        15
       And the Ugly
Global Economic
 Downturn




                      16
             Global Economic Downturn
    Global decline in demand is hitting Ontario
     manufacturing, but
    The loss of manufacturing jobs is part of a
     long term trend that began before the
     cyclical downturn started
            Manufacturing Jobs in Ontario (000s)
1200
  800
  400
     0
         98 99 00 01 02 03 04               05 06   07 08
Source: Statistics Canada Table 282-0088.             17
Strength In Hard-Hit Regions




                           18
                                      Strength In Hard-Hit Regions


                                               Population                 Credit Union Assets

                               45
percent of provincial totals




                               40
                               35
                               30
                               25
                               20
                               15
                               10
                                5
                                0
                                    Northern    S outhwestern   Central      GTA         Eastern

                                                                                             19
        Strength in Hard Hit Regions
CU-CP market share in Ontario is about 5
 percent overall, but only 2 percent in GTA
35 percent of the population of Northern
 Ontario are CU-CP members
         Population      Bank Branches         CU-CP Locations
 80
 60
 40
 20
  0
                   GTA                         Outside GTA

      Sources: DICO, CPA, Statistics Canada.                     20
    Strength in Hard-Hit Sectors
Despite ongoing consolidation, still
 some closed-bond industrial-based
 credit unions
Many of the largest community credit
 unions have strong roots in the auto
 and steel sectors
Plunging commodity prices are another
 blow to Northern Ontario, already
 reeling from a long decline in the
 forestry sector

                                         21
   Opportunities in Challenging Times

“Ill blows the wind that profits nobody”
                               William Shakespeare
             Henry the Sixth, Part III, Act 2 Scene 5


Credit unions able to withstand the
 tempest can build on their strengths
Supporting local businesses
Strengthening ties to the community
Increasing market share
                                                   22
       Prospering in Tough Times
The population of Sault Ste. Marie declined
 by 5.6 percent from 1996 to 2001
Thousands of jobs were lost in a small
 community
  Unemployment peaked at over 12
    percent, more than twice the provincial
    average
Community First (formerly ASCU) grew by
 more than one-third, significantly increasing
 its market share as the banks cut back
                                           23
      Prospering in Tough Times
“People know that we are not going to
 pull out or cut back because of the
 latest doom and gloom report in the
 newspaper. These business owners
 know they can count on us, and have
 become our best salespeople.”
                                     Aldo Greco, quoted in
                        A. Michael Andrews and Associates,
                        Strengthening Ontario Communities:
    The Contribution of Credit Unions and Caisses Populaires
              http://www.ontariocreditunions.com/andrews/
                                                     24
          5% Market Share—25% SME
Business Credit Outstanding
Authorizations under $1 million, end 2006
 $15 billion
                                                     CU-CP 25%


                                                                 Central

                                                                 Eastern
Banks 75%
                                                                 GTA
                                                                 Northern
                                                                 South-
                                                                 western

Source: Statistics Canada Table 176-0045 and DICO.                 25
         5% Market Share—16% Ag
Agricultural Credit Outstanding, end 2006

   $4.8 billion
                                                 CU-CP 16%

                                                             GTA
                                                             Northern
                                                             Eastern
                                                             Central
     Banks                                                    South
      84%                                                    western
                                                              12.5 %




Source: Statistics Canada Table 176-0045 and DICO.              26
  Good Jobs in Smaller Communities
Credit unions and caisses populaires
 employ over 7,000 people in Ontario
Two-thirds of all financial sector jobs
 are in the GTA, but 80 percent of credit
 union and caisse populaire jobs are
 outside the GTA
Credit unions bring head office jobs to
 smaller communities
Average credit union wages are above
 the provincial average
                                        27
     Community Support
Many credit unions dedicate two, three
 or even five percent of pre-tax profits to
 community initiatives, compared to the
 one percent average among larger
 financial institutions
Especially important as other
 businesses and individuals cut back
Opportunity for credit unions to
 differentiate themselves and capitalize
 on community support
                                          28
     In the Midst of the Tempest
What’s done can’t be undone
                            William Shakespeare
                          Macbeth, Act 5 Scene 1


 Just as the rising tide of fifteen years of
  unprecedented growth lifted all boats,
  the swirling eddies of the global
  economic downturn will test the
  soundness of all hulls and crew

                                              29
   Drawing On Inherent Strength
Our remedies oft in ourselves do lie
                                 William Shakespeare
             All’s Well That Ends Well, Act 1 Scene 1


 Credit unions that built a strong buffer
  of excess capital during the good times
  are well placed to weather the storm
 Credit unions have a remarkable
  opportunity to differentiate themselves
  from the competition
                                                   30
      Seizing the Opportunity
Requires a sound prudential base—capital
 and liquidity
  Too late now to wish we had done things
   differently in the good times
Building market share and brand awareness
  Supporting businesses when the banks
   are cutting back
  Avoiding layoffs and cutbacks in
   community support
  Getting the story out about credit unions
   supporting their community             31
     Looking Ahead
They say, best men are moulded out of
faults, and, for the most, become much
more the better for being a little bad.
                             William Shakespeare
               Measure for Measure, Act V Scene 1

 So lets hope that your credit union, and
  the system as a whole, proves to be only
  a little bad, and emerges much stronger
  from the tempest

                                               32