Moscow, 20.11.2008 National Foreign Exchange Association, Russia

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Impact of World Financial Crisis on Interbank Markets (international and Russia view)

Dmitry Piskulov, Ph.D. (Econ.)

Chairman of the Committee for

Professionalism, Ethics and Education,

Senior Adviser, ICAP

Moscow, 20.11.2008 National Foreign Exchange Association, Russia

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Interbank operations on global markets

• 2 segments of interbank cash market: – FX markets (spot + FX swaps) – cash MM instruments (interbank deposits, CDs, CPs)

• FX market: Daily volume: ~3 trln. US$ (April 2007)

• Cash MM:– Unsecured MM deposits (declining since 2007)– Secured lending (Repo against general collateral) –

show an increase

Moscow, 20.11.2008 National Foreign Exchange Association, Russia

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Main problems of global interbank

• Worsening creditworthiness of banks (declining credit ratings) and bankruptcies

• Crisis of confidence: started 2007– Almost all interbank credit lines were closed in

London, NY, Tokyo etc. (after Lehman was allowed to collapse, September 2008)

– cash money stopped to be placed between banks – moved to the Central bank deposits

– Money authorities (Central banks) in many countries had to guarantee commercial banks

Moscow, 20.11.2008 National Foreign Exchange Association, Russia

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Results of confidence crisis• Lack of liquidity: interbank turnovers dropped, Now only short-date maturities:

- O/N, T/N: 99.9%

- longer than O/N: 0.1%• Central banks became large lenders to commercial banks (Repo, lending against collateral, buy-outs)• LIBOR malfunction: it moved from being representative of US$ interest rate to a reference rate open for different interpretations. Problem is huge volumes ($350 trln). of financial products fix-off LIBOR)

Moscow, 20.11.2008 National Foreign Exchange Association, Russia

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NYFR versus LIBOR • ICAP NYFR (New York Funding Rate) – alternative to

BBA LIBOR, launched on 11June 2008• calculated by ICAP on same methodology (16 US based

banks ).• NYFR released daily at 9:30 a.m. NY time  NYFR LIBOR          1-mth  3-mth     1-mth  3-mth  

AUG AVE.  2.48 2.82    2.47 2.81     SEPT 16    2.85   2.97    2.75  2.88     SEPT 30    4.36   4.39    3.93  4.05OCT  8     4.83 4.90   4.29  4.52   NOV 14     1.48   2.32    1.48   2.24    NOV 17      1.46   2.34    1.47   2.24    NOV 18     1.48   2.34    1.45   2.22  

Moscow, 20.11.2008 National Foreign Exchange Association, Russia

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• Global assets funded in 2000-2008 in 2 ccy:

• USD• JPY

• Central banks, Sovereign Wealth Funds formed liquidity pools in USD, JPY, less EUR

• USD, JPY funding were swapped into national currencies for investments

• When USD market became short supply – all other markets suffered as investors were forced to sell local assets they could not fund

Low liquidity in national currencies

Moscow, 20.11.2008 National Foreign Exchange Association, Russia

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Prospects of global interbank

• Volumes dropped in some instruments (maximum in unsecured loans)

• Slow restoration of credit lines (takes months)

• Need changes of regulatory model – less self-regulation, more state regulation

• Increased role of

money brokers

Moscow, 20.11.2008 National Foreign Exchange Association, Russia

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Problems of Russian money market

• 3-tier banking system: low flows between segments

• Concentration of cash resources within largest (government owned banks) – led recently to the

• Distorted model of money supply (from the Central bank)

• Distorted interest rates structure (interbank rates MosPrime lower than official CBR rates)

Moscow, 20.11.2008 National Foreign Exchange Association, Russia

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Crisis impact on Russian interbank

• No funding from abroad• Interbank credit lines closed: funding from CBR• Increased RUB interest rates for 2-3 tier banks• No RUB FX forward rates (or distorted)• Dark pools of liquidity (very segmented)• Increased role of state banks in transfer of funds

to other banks• Less unsecured credits, unability of FX swap

(forward market) to generate liquidity• MosPrime rate accuracy

Moscow, 20.11.2008 National Foreign Exchange Association, Russia

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MosPrime Rate of NFEA• MosPrime rate: short-term MM RUB reference rate• Jan 08: inclusion into ISDA 2006 Definitions• Aug 08: increase in # of panel banks (from 8 to 10)

Use of MosPrime %%

Analysis and statistics purposes 83.3

Fixing base for interest rates of lending/funding products 66.7

Settlements of Interest rate derivatives 61.1

Accounting and internal benchmarking 16.6

Tenor of MosPrime mostly used (82%) 3 мth

Moscow, 20.11.2008 National Foreign Exchange Association, Russia

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Tasks of banking community• Re-establish credit lines (will take 1-2 years) – needs

support from government• New methodology of credit ratings

– use domestic Rating Agencies– Accounting issues (IAS vs RAS) – huge impact of balance

sheets and capital

• Initiatives of self-organization of banks (for instance create liquidity pools secured by gurantee funds)

• Keep MosPrime accuracy and discipline, introduce new procedure of inclusion/exclusion

• New Master Agreement (developed by NFEA, ARB, NAUFOR)

• Changes in taxation regime

Moscow, 20.11.2008 National Foreign Exchange Association, Russia

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Legal framework

Bilateral legal interbank agreements used for

derivatives trading (percentage of respondents):

ISDA Agreement 2002 78%

In-Housemade agreements 69%

Elaborated by legal firms 15%

NFEA agreement 8%

GMRA 8%

Moscow, 20.11.2008 National Foreign Exchange Association, Russia

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Cooperation with monetary authorities

To establish joint Money Market Working Group (CBR-NFEA) with representatives of CBR + banking professionals

• To discuss parameters of monetary policy (exchange rate, interest rate targets)

Moscow, 20.11.2008 National Foreign Exchange Association, Russia

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Contact Details

13 Bolshoy Kislovskiy Per., Moscow, 125009, Russia, Tel.+7 (495) 705-9693, Fax: +7(495) 705-9675.www.nva.ru, www.nfea.ru

@ The Copyright National Foreign Exchange Association, 2008. All rights reserved. Any reproduction is only permitted with prior consent of NFEA.