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Macroprudential Policy
Macroprudential Policy
Macroprudential Policy
Macroprudential Policy
Macroprudential Policy
Macroprudential Policy
Macroprudential Policy
Macroprudential Policy
Macroprudential Policy
Macroprudential Policy
Macroprudential Policy
Macroprudential Policy
Macroprudential Policy
Macroprudential Policy
Macroprudential Policy
Macroprudential Policy
Macroprudential Policy
Macroprudential Policy
Macroprudential Policy
Macroprudential Policy
Macroprudential Policy
Macroprudential Policy
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Macroprudential Policy

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Presentation by Santiago Fernández de Lis

Presentation by Santiago Fernández de Lis

Published in: Economy & Finance, Business
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  • 1. Macroprudential policySantiago Fernández de LisChief Economist, Financial Systems and RegulationITAM Summer Camp24th August 2012
  • 2. BBVA’s Views on Macroprudential aspects 24th August 2012Basic concepts Page2
  • 3. BBVA’s Views on Macroprudential aspects 24th August 2012Section 1Basic conceptsThree different but closely related concepts Macroprudential Systemic risk Financial stability Policy• Risk of disruption to • Introduces systemic • One objective of macro financial services dimension in policies caused by an prudential policies • Complementary to price impairment of all or • Key complement to stability parts of the financial microprudential • Implicit or explicit in system. central banks’ mandates• Not only SIFIs Page3
  • 4. BBVA’s Views on Macroprudential aspects 24th August 2012Section 1Basic concepts PRE-CRISIS: Separate goals NOW: holistic view MONETARY MICROPRUDENTIA MICROPRUDENTIA L MONETARY POLICY POLICY L POLICY POLICY Price stability FIs soundness Price stability FIs soundness MACROPRUDENTIAL Financial stability POLICY Financial stability • The Macroprudential conceptual framework is not complete yet • .. but significant progress towards a better formalization Page4
  • 5. BBVA’s Views on Macroprudential aspects 24th August 2012MonetaryPolicy & AssetBubbles Page5
  • 6. BBVA’s Views on Macroprudential aspects 24th August 2012Section 2Monetary Policy & Asset bubblesShould monetary policy deal with asset bubbles? No consensus • Pre- crisis: no active role. “Mop up after” strategy (Greenspan) • Last decade: intense debate with pros and cons for a more active role of central banks Arguments in favour Arguments against• Mandate: CBs tend to have also a • False-positives: asset bubbles cannot financial stability mandate be clearly identified ex-ante• Preserve macro stability: asset price • Effectiveness: one objective (inflation) bubbles threat macroeconomic stability is more effective• Symmetry: If CB must act when bubble • Adequacy: CB does not have adequate bursts, then also a role when it is building instruments to deal with asset bubbles. up Excessively low interest rates played a major role in the origins of the crisis Page6
  • 7. BBVA’s Views on Macroprudential aspects 24th August 2012Section 2Monetary Policy & Asset bubbles Asset price bubbles can be very disruptive, especially if Central Bank response is asymmetric: can saw the seeds of future bubbles Monetary policy must deal appropriately with asset bubbles, in coordination with macroprudential policy But using the same instrument (interest rate) to address two different objectives (price stability and financial stability) is a source of conflict Limits of monetary policy to deal with bubbles enhance the preventive role of macroprudential policy Page7
  • 8. BBVA’s Views on Macroprudential aspects 24th August 2012TheMacroprudential toolkit Page8
  • 9. BBVA’s Views on Macroprudential aspects 24th August 2012Section 3The Macroprudential toolkitA wide variety of macroprudential tools have already been used. Not clear-cutdefinition of macroprudential domain Time dimension Cross-sectional dimension (procyclicality) (systemic risk) • Countercyclical buffer • SIFI capital add-on Capital • Dynamic provisions • Levy on non core funding • Limits to profits distribution • Limits to credit growth • Limits on concentration of • Dynamic caps on LTV or DTI counterparty risk Credit • Dynamic haircuts/margin req. • Dynamic leverage ratio • Reserve requirements • Caps on FX lending • Minimum margins • Limits on net open FX Liquidity • Liquidity ratios mismatches • Taxes (FTT) • Limits on maturity mismatches • SIFI resolution requirements Structural • Disclosure requirements Page9
  • 10. BBVA’s Views on Macroprudential aspects 24th August 2012Section 3The Macroprudential toolkitPractical experience in the use of these tools is tentative: 3 illustrative examples Recent Description/Aim Effectiveness examples Colombia Dynamic Provisioning based on expected Peru MIXED provisioning losses Spain Limits to foreign Limit credit risk related to FX Eastern POOR currency lending exposure Europe LTV/DTI restrictions Limit leverage/excess indebtedness Asian EMEs HIGH Page 10
  • 11. BBVA’s Views on Macroprudential aspects 24th August 2012Some countryexperiences Page11
  • 12. BBVA’s Views on Macroprudential aspects 24th August 2012Section 4Dynamic provisioning: rationaleNormal provisioning Dynamic provisioning NORMAL PROVISIONING credit DYNAMIC PROVISIONING credit NPL Provisions NPL Provisions Page12
  • 13. BBVA’s Views on Macroprudential aspects 24th August 2012Section 4Dynamic provisioning: Latam andSpain Spain Peru Colombia June 2007 (commercial) Introduced July 2000 November 2008 June 2008 (consumption) Based on Rule: Credit (stock and growth) Rule: GDP Rule based in 4 indicators Discreet/continuous Continuous Discreet (on/off) Continuous System vs. institutions Institution- specific System-based Institutions specific Potential GDP (5%) implicit Implicit threshold in the minimum threshold. Thresholds Fund limits: 10%-125% provisioning coefficients Change in GDP growth also set by the authorities plays a role Yes, “pro-cyclical” The use of provisions in Yes, generic provisions can Symmetry provisions can increase or the downturn is subject to increase or decrease decrease considerable constraints General. Can smooth profits in General. Can smooth profits Use: individual or general Individual the downturn in the downturn Depends on specific Depends on specific Depends on riskiness of Amount provisions, credit level, credit (individual) provisions and portfolio growth and riskiness of portfolio riskiness of portfolio Tax deductibility Yes (1% limit) No Yes Source: Fernández de Lis and García Herrero (forthcoming in Economía) Page13
  • 14. BBVA’s Views on Macroprudential aspects 24th August 2012Section 4Dynamic provisioning: Spain Boom phase Crisis Provisioning to credit and GDP Years Average Years Average (As % of credit, left scale, and % GDP credit credit growth, right scale) growth growth Expected 4 13% 4 6% Observed 8 16% 4+ 1% Adoption of Dynamic 2004 Reform 2010 reform7,0% Provision 7% • Key problem: calibration of the cycle s 6%6,0% 5% • Useful as a buffer, less so as a dampener 4%5,0% 3% • Did not discouraged credit growth in the boom4,0% 2% 1% • Criticism by accounting standard-setters3,0% 0% Specific to credit2,0% Generic to credit -1% • Reform in 2004 implied lower accumulation Total provision to credit -2% GDP yoy (RHS)1,0% -3% • Crisis period: smoothed its impact in the early -4% stages0,0% -5% 1999 DIC 2000 MAR 2000 JUN 2000 DIC 2001 MAR 2001 JUN 2001 DIC 2002 MAR 2002 JUN 2002 DIC 2003 MAR 2003 JUN 2003 DIC 2004 MAR 2004 JUN 2004 DIC 2005 MAR 2005 JUN 2005 DIC 2006 MAR 2006 JUN 2006 DIC 2007 MAR 2007 JUN 2007 DIC 2008 MAR 2008 JUN 2008 DIC 2009 MAR 2009 JUN 2009 DIC 2010 MAR 2010 JUN 2010 DIC 2011 MAR 2011 JUN 1999 SEP 2000 SEP 2001 SEP 2002 SEP 2003 SEP 2004 SEP 2005 SEP 2006 SEP 2007 SEP 2008 SEP 2009 SEP 2010 SEP • … but allowed for profits distribution in the downturn: did dynamic provisions delayed the adoption of solutions for ailing banks? • Recently: highly pro-cyclical increase due to market pressure. Asymmetric market discipline Page 14
  • 15. BBVA’s Views on Macroprudential aspects 24th August 2012Section 4Limits to FX lending: CEE Vast increase in credit growth: • Massive foreign lending through banking system Boom in overall economy: • Housing bubble • Mostly channeled to the real estate sector. • Equity markets bubble • Increasing external indebtedness • Centralized foreign banks played a key role • When available (non EMU), monetary and exchange rate policies used. • Macroprudential tools used too mostly targeting foreign lending Page15
  • 16. BBVA’s Views on Macroprudential aspects 24th August 2012Section 4Limits to FX lending: CEE countriesIn general, policy reaction was mild and came too late (in the bust) • Authorities complacent Policy reaction • Late adoption • Only a few regulators reacted in time • Higher capital requirements for FX loans: Romania 2004 & 2010, Hungary 2008, Poland 2008 & 2012, Latvia 2009, Albania 2008 Design • Higher LTV for FX mortgage loans (Hungary 2010) or DTI (Romania 2008, Hungary 2010, Poland 2010 and 2012) • Outright ban on new FX loans: Hungary 2010 Results • Poor except for Poland, Serbia, Albania Page16
  • 17. BBVA’s Views on Macroprudential aspects 24th August 2012Section 4LTV and DTI ceilings in Asian EMEs Type of macroprudential instrument Used in Countercyclical capital buffers (linked to credit growth) China Countercyclical provisioning China, India Loan-to-value (LTV) ratios China, Hong Kong SAR, Korea, Singapore Direct controls on lending to specific sectors Korea, Malaysia, Philippines, Singapore Capital surcharges for SIBs China, India, Philippines, Singapore Liquidity requirements / funding India, Korea, Philippines, Singapore Limits on currency mismatches India, Malaysia, Philippines Loan-to-deposit requirements China, Korea Source: Caruana 2010 (speech) Page 17
  • 18. BBVA’s Views on Macroprudential aspects 24th August 2012Section 4LTV and DTI ceilings in Asian EMEs Policy reaction timely and adequate, with better results • In general tImely Policy reaction • Dynamic fine tuning (eg LTV limits were tightened successively). • Mostly used in conjunction with other measures (monetary policy, capital controls, …) • LTV limits for mortgages: China, Hong Kong, Korea, Singapore, • LTV and DTI caps are changed in line with the cycle. Discretion. • In HK and Korea adjusted to loan size, value and location of Design property • Direct controls on lending to specific sectors: Korea, Malaysia, Philippines, Singapore • Taxes in real estate transactions: China, Hong Kong, Singapore, Korea • Helpful to address exuberance in real estate markets but other Results policies also contributed • Hong Kong : LTV policy effective in reducing systemic risk • Evidence in favor of Korean geographical LTVs is positive Page18
  • 19. BBVA’s Views on Macroprudential aspects 24th August 2012Lesson fromthe crisis Page19
  • 20. BBVA’s Views on Macroprudential aspects 24th August 2012Section 5Main lessons from the crisisA good design of the macroprudential policy is key for success ELEMENTS FOR SUCCESS Good Good • New macroprudential supervisors: EU, Architecture governance US, UK, Mexico, Chile, Uruguay, • Different architectures and powers but same goal (mitigate systemic risk) • Central bank tends to have a pivotal role Good Effective tools (EU, UK, US) monitoring • Global consistency/coordination must be ensured Compatible with Global prudential consistency Page20
  • 21. BBVA’s Views on Macroprudential aspects 24th August 2012Section 5Main conclusions: a modest Decalogue 1. Macroprudential policies imply an explicit mandate for financial stability 2. The boundaries between macroprudential and macroeconomic policies are sometimes blurred. 3. Important to reduce the burden of financial stability objectives on monetary policies 4. Evidence about effectiveness of macroprudential tools is mixed. Timeliness in adoption of policies is key 5. Monitoring and transparency are key aspects … 6. … but policies that rely on [asymmetric] market discipline are less reliable… 7. …whereas most effective policies are relatively intrusive. Towards an Asian model? 8. Rules-based policies preferable to discretion 9. … but depend on “ex ante” calibration of the cycle, which is challenging 10. International coordination important to ensure consistency Page 21
  • 22. BBVA’s Views on Macroprudential aspects 24th August 2012Thank you!sfernandezdelis@bbva.com Page22

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