The sector has so far shown itself resilient to the financial consequences of the severe shock represented by the Covid-19 pandemic. But equally, the supply of insurance seems in the round to meet demand from the economy. Moreover, we do not think about capital requirements in isolation, but as part of a three pillar regulatory regime (comprising capital, risk management, and disclosure). Today I want to talk a little about how we think about capital adequacy within that broader framework, and specifically the interplay with strength of market discipline, the ladder of intervention, and the way that firms structure themselves. In the light of those factors, how do we judge when the level of capital is ‘just right’? The three pillar regulatory regime Last year I talked about what the insurance sector does for the wider economy[3], which itself defines our mission in insurance supervision: the protection of policyholders and the stability of the supply of financial services to the wider economy. Broadly speaking, those services are the pooling of risk, provision of secure retirement income, and long term investment. The safety and soundness of individual firms is a primary objective, but is not really an end in itself, it is a means to fulfilling our mission.
At the same time, solid domestic savings rates rationalize the needs of the economy for external funding, which means reduced exposure to sudden changes in the capital flows dynamics, i.e. reduced sensitivity to shocks from the external sector. The latest economic crisis clearly illustrates the risks of excessive indebtedness and excessive dependence on external financing, which further emphasizes the importance of domestic savings, which has proven to be a more stable source of funding. Having in mind all the benefits of saving, it is my pleasure to conclude that Macedonian citizens are cultivating a savings culture in the banking sector. In the last 10 years, total deposits have grown at a rate of around 8%, on average, on an annual basis, which contributed to an increase in savings1 by about 10 p.p. at the level of 55% of GDP in 2017. The fact that the deposit growth was registered in conditions of the global crisis and more economic and political shocks proves the high confidence of the citizens in the banking sector, which remained stable, sound, highly capitalized and liquid throughout the entire period, showing high capability for successful handling of shocks. Higher growth in the denar deposits and the acceleration of growth of the long-term savings is especially positive, which strengthens the banks' capacity for long-term placements and the support for investment projects. The deposit growth provided a solid basis for increase in the lending activity and deepening of financial intermediation2 by around 8 p.p.