Transcript PiotrSzpunar_Methods and tools of

Methods and tools of macroprudential analysis
the central bank’s perspective
Piotr Szpunar
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Agenda
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Financial stability – general remarks
Macroprudential analysis and the role of central banks
How to conduct macroprudential analysis ?
Stress-testing – types of stress tests and methods
How to use the results ?
The European context – the ESRB
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Agenda
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•
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•
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Financial stability – general remarks
Macroprudential analysis and the role of central banks
How to conduct macroprudential analysis ?
Stress-testing – types of stress tests and methods
How to use the results ?
The European context – the ESRB
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What is financial stability?
Definition used by the NBP:
• „…a situation when the system performs all its functions
in a continuous and effective way, even when unexpected
and adverse disturbances occur on a significant scale”
Financial Stability Report, page 3.
Lack of Financial Stability
Disturbance in the provision of financial intermediation services
Negative impact on the real sector
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Why should one look after financial stability?
• Financial stability is A PUBLIC GOOD
• Financial system prone to market failures
• Financial system as a transmitter of monetary policy of
the central bank
• Stable financial system as a necessary condition for
smooth functioning of the payment system
• Significant public costs of a financial crisis that results
from a severe system instability
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What do we look at?
• Financial systems
– Institutions (not only banks)
– Markets
– Infrastructure
P(X)
• Tail events
– Low probability
– High impact
X
• Ideally – forward-looking financial stability analysis:
identify today the risks that can materialize in the future
and suggest policy countermeasures when necessary
• Necessary to coordinate with macroeconomic analysis
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Financial system in the economy
Real
sector
shocks
Savings/Investment
intermediation through e.g.
investment funds; market
interest rates
Households and enterprises
Lending, deposits
insurance:
Economic function
Consumption
smoothing,
Savings/
Investment
intermediation
Domestic financial markets
Financial market
trading
Financial institutions: banks,
insurers, asset managers
Infrastructure: systems, regulations…
Foreign financial
market shocks
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A „universe” of financial stability analysis
Infrastructure
Macroeconomic
shocks
Investment
funds
Current
situation of
the banking
sector
Other
financial
institutions
Insurers
Assessment
of potential
loss & ability
to withstand
shocks
Pension
funds
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Financial Stability in transition economies
• Short history of the system in its current form
– Short time-series and breaks: difficult to build models
– Some financial products newly introduced
• Bank-dominated financial sector main focus on banks
• High share of foreign capital in the banking sector
• Important non-bank institutions:
– Insurance companies
– Pension funds and investment funds (with investment risk borne by clients)
• Important markets
– FX
– Treasury bonds
– Equity market (but directly not important for banks due to small scale of
investment in equities)
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Agenda
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Financial stability – general remarks
Macroprudential analysis and the role of central banks
How to conduct macroprudential analysis ?
Stress-testing – types of stress tests and methods
How to use the results ?
The European context – the ESRB
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Macroprudential policy
• In general terms, the ultimate goal of macroprudential policy
should be safeguarding financial stability
• At the operational level, the main objectives of macroprudential
oversight should be prevention and mitigation of systemic risk
• Prevention of risks:
– (1) analysis of the financial system
– (2) early identification of risks
– (3) remedial action
• The risk mitigation may be interpreted as making financial
system more robust and resilient.
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Who should be in charge of macroprudential
analysis?
• Macroprudential versus Microprudential approach
Mitigating systemic risks
and preventing financial crises
Micro-prudential approach
Macro-prudential approach
(individual institution’s risks)
(systemic risk)
Supervision authority
Central Bank
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Who should be in charge of macroprudential
analysis?
• Key role of central banks due to:
– Independence
– Analytical capacity for systemic risk analysis
– Data sources – not only on financial firms but also on the
real economy – providing broader view
– Monetary policy
– Market intelligence
• CB being a market participant
– Close cooperation with banks
– Bank of banks – lender of last resort
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Agenda
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•
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Financial stability – general remarks
Macroprudential analysis and the role of central banks
How to conduct macroprudential analysis ?
Stress-testing – types of stress tests and methods
How to use the results ?
The European context – the ESRB
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How to analyze financial stability?
National Bank of Poland’s approach
Slowdown in
EMU
Fall in prices
real estate
market
Large portfolio of
household credits
from the period of
lenient lending
policy
Crisis contagion
into EM
High share
of FX loans
Strict monetary
policy due to
high inflation
Higher share of
funding via
market
Credit losses
Worsening
standing of
parent entities
Higher share of
foreign and
parent
entities funding
Higher funding
costs
High divident
payments
Higher cost
and volatility
of deposits
Lower interest
income
Limited capital
resources
Capital
adequacy
Profits
Implications
For the real
economy
Lending
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Banking sector – what to look at?
Financial
market
shocks
Macroeconomic
shocks and
imbalances
Shocks
Vulnerabilities
Current
situation of
banks
Channels of impact
Assessment
of potential
loss & ability
to withstand
shocks
Banks’ income, capital,
funding
Lending and other functions
of the financial system
Real Economy
Impact on
welfare of
society
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Banking sector – what to look at?
Shocks
Vulnerabilities
Channels of impact
Banks’ income, capital,
funding
Lending and other functions
of the financial system
Real Economy
Strengths and high-risk areas in the
financial system
Examples:
- Lending policy and loan portfolio
structure
- Capital position
- Exposures to market risk
- Asset prices: real estate, shares…
- Common exposures (macro vs micro
perspective)
- Funding structure
Tools: indicators of financial system
„health”, e.g. IMF’s Financial Soundness
Indicators as a starting point (only!)
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Banking sector – what to look at?
Shocks
Vulnerabilities
Channels of impact
Banks’ income, capital,
funding
Lending and other functions
of the financial system
Real Economy
Potential shocks to financial stability
Examples:
- Macroeconomic imbalances – e.g.
inflation, current account deficit, fiscal
deficit – which may lead to weaker
future economic growth
- Indebtedness of real economy
- Materialisation of risk factors for
industries with significant bank debt
- Tensions in financial markets
- Commodity prices
Tools: macroeconomic analysis
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Banking sector – what to look at?
Shocks
Shock impact, transmission and
amplification
Vulnerabilities
Channels of impact
Banks’ income, capital,
funding
Lending and other functions
of the financial system
Real Economy
- Which institutions are influenced?
- What are the consequences of shocks?
- What mechanisms can exacerbate the
impact of shocks ? (e.g. liquidity
squeeze on money markets can also
worsen the situation of borrowers with
floating-rate debt)
- What are interlinkages with other
financial institutions?
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Banking sector – what to look at?
Shocks
Impact on banks’ financial position
Vulnerabilities
- Can institutions withstand the shocks?
- What is their capital, liquidity and
profit position after the shock?
Channels of impact
Banks’ income, capital,
funding
Tools: stress tests
Lending and other functions
of the financial system
Real Economy
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Banking sector – what to look at?
Shocks
Banks’ capacity to lend and risk
appetite
Vulnerabilities
Channels of impact
Banks’ income, capital,
funding
Lending and other functions
of the financial system
Real Economy
- Would banks change their lending
policy as a result of shocks?
- Does their capital and funding position
allow to continue to provide lending?
Tools: Most often expert assessments.
Macroeconomic models with detailed
financial sector modules are not
common yet.
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Banking sector – what to look at?
Shocks
Impact on consumption, investment,
unemployment, economic growth…
Vulnerabilities
Channels of impact
Banks’ income, capital,
funding
Tools: expert assessments in cooperation
with macroeconomic analysts; e.g.
residual adjustments in macro
forecasting models
Lending and other functions
of the financial system
Real Economy
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Indicators of financial system health
• Backward-looking - based on accounting data
• Distributions matter
– Aggregate data useful but loss of some information
– Sector-wide trends or individual bank events
– But do not replicate off-site examination
• What is behind the numbers
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Quantitative benchmarks usually not very useful
Try to understand the economic process
Look at a number of indicators simultaneously
Qualitative information also important
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Products of financial stability analysis
• Financial Stability Reports
– Main assessment of financial stability
– Published every six months
– Detailed analysis, including stress tests
– Discussed and accepted by NBP Management Board
– Main recipients
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NBP Management Board
Monetary Policy Council
FSA
Interested public
• Senior Loan Officer Survey
• Ad-hoc work
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FSR structure
• Summary assessment of risk
• Economic environment of financial institutions
– Macroeconomic trends
– Financial market developments
– Real estate market trends
• Banking sector
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Earnings
Credit risk, including analysis of borrowers’ financial position
Market risk
Liquidity risk, including box on payment system developments
Capital and stress tests
Market assessment
• Non-bank financial institutions
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Agenda
•
•
•
•
•
•
Financial stability – general remarks
Macroprudential analysis and the role of central banks
How to conduct macroprudential analysis ?
Stress-testing – types of stress tests and methods
How to use the results ?
The European context – the ESRB
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What is a stress test (in general)?
• „A rough estimate of how the value of a portfolio changes when
there are large changes to some of its risk factors”*
• Now a standard tool in risk management in financial
institutions… althought the current crisis shows that it was
probably not used enough
* source: „Financial Sector Assessment, A Handbook”, IMF &
World Bank, 2005
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What is a macro stress test?
• An attempt to (quantitatively) evaluate the resillience of a
financial system to large but plausible shocks (low probability,
high impact events)
– What types of risk have the greatest influence?
– What could be the impact of previously identified
vulnerabilities and imbalances?
– Are there common vulnerabilities across institutions that can
undermine financial stability?
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How to measure the impact?
• Usually expressed as impact on indicators of financial system
health, e.g.
– Capital adequacy
– Loan losses
– etc…
• No universal measure of financial stability developed as yet…
• … so judgment plays a great role in the interpretation of results
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Macro stress tests – some „labels”
„ad-hoc”
Shocks to FSIs are assumed by
analysts
„model-based”
„single factor”
„sensitivity”
Impact on FSIs
is based on
econometric
models
A single risk factor is
shocked – can be a macro
variable or simply an FSI
„scenario”
Possibly multiple risk factors,
comovements from macro model
or historical experience
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Macro stress tests – some „labels”
„bottom-up”
„top-down”
Calculations done
“in-house”, without
engaging financial
institutions
Calculations performed
by financial institutions,
assumptions supplied
by CB/supervisors
These are done
by the NBP
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Ad-hoc sensitivity stress tests
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Why to perform ad-hoc sensitivity simulations given
the presence of more sophisticated macro stress-tests?
1.
2.
3.
4.
Isolation of the impact of specific risk factors
Ceteris paribus kind of analysis
Prioritization of risk factors based on their isolated impact
Opportunity to take advantage of data sources not included in
macro stress-tests
Results easier to communicate
No need to specify joint distribution of risk factors which may
be very challenging
5.
6.
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Ad-hoc sensitivity stress tests
• Ad-hoc nature
– no specific macroeconomic scenario
– no assigned probability of occurrence
– scenarios chosen as (quite) extreme but plausible,
based mostly on common sense, past crises can
provide guidance
• Tracking changes in results over time is important
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Examples of ad-hoc stress-tests
1. Take a measure of risk in the financial system
2. Create a shock scenario, often on ad-hoc basis
3. Find the impact of shock on your measure of
risk
4. Try to translate the measure of risk to FSIs
(capital, earnings)
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Example – households’ income buffer
• Shock scenario
– 30% zloty depreciation
– Increase of interest rates on loans by 400 basis points
• Results – example FSR December 2010:
30% zloty depreciation
400 bp interest rates increase
Increase in the share of
households with negative income
buffer
Increase in the share of loans
extended to households with
negative income buffer
Increase in the share of
households with negative income
buffer
Increase in the share of loans
extended to households with
negative income buffer
1.2
1.5
3.2
3.7
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Example - „Stress-CAR”
• What impact can the existing portfolio of impaired loans have on
capital adequacy of banks?
• What if value of loan security held for classified loans changes?
(e.g. fire sale, overly optimistic valuation)
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Stress - CAR
3 scenarios for changes in
value of collateral
Assumption: Only collateral can be
recovered for impaired loans
Losses
Change in capital adequacy
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Stress-CAR – results
Basel II
implementation
16%
14%
12%
10%
Importance of
security for loss
reduction
3-2010
12-2009
9-2009
6-2009
3-2009
12-2008
9-2008
6-2008
3-2008
12-2007
9-2007
6-2007
3-2007
12-2006
9-2006
6-2006
3-2006
12-2005
9-2005
6-2005
8%
Capital adequacy ratio - actual data
Scenario 1 - recovery of 100% of security
Scenario 2 - 25% decline in the value of security
Scenario 3 - 50% decline in the value of security
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Stress-CAR – results
60%
50%
40%
30%
20%
Actual data
above 16%
Capital adequacy ratio
Scenario 1
Scenario 2
12% - 16%
8% - 9%
6% - 8%
4% - 6%
0% - 4%
below 0
0%
10% - 12%
10%
9% - 10%
Share in commercial bank assets .
of banks in range
• Distribution of banks’
assets by „stressed”
capital adequacy ratio
Scenario 3
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Macro stress test
Decide on the source of
shocks – ”story”
Build macroeconomic stress scenario
Calculate change in banks’ financial
result relative to baseline scenario
Calculate the changes in capital
adequacy of individual banks
Expert input
Expert analysis
Ad-hoc shocks
Macro model
Historical crisis
Econometric
models
e.g. recent
macro forecast
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Constructing a macro stress test scenario –
possible approaches
• Market forecasts
– Take the most pessimistic forecast from surveys of market participants
– Easy to communicate, but is it really extreme?
• Statistical
– Look at fancharts of GDP growth and take an extreme pessimistic path (e.g.
5% probability) or look at residuals of forecasting model and choose an
extreme shock from the distribution of residuals
– Hard to communicate
• Expert scenario
– What is pessimistic and economically consistent?
– Open to criticism of subjectivity
• Historical scenario
– What did the previous downturn look like?
– Is it relevant?
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Macro stress tests - December 2010 scenarios
• Scenarios
12-2008
3-2009
6-2009
9-2009
12-2009
3-2010
6-2010
9-2010
12-2010
3-2011
6-2011
9-2011
12-2011
3-2012
6-2012
9-2012
12-2012
GDP (y/y) %
– Baseline: October projection NBP
Shock scenarios (red lines)
– Shock I: longer period of low
on the back of October projections of GDP
economic growth in highly
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developed countries could lead to a
8
7
fall in Poland's real GDP, further
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increased by a hypothetical pro5
cyclical response of fiscal policy –
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GDP ca. 4.5 pp lower than baseline
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– Shock II: shock scenario I combined 2
with fall in foreign investor
1
confidence and additional shock for
0
the Polish economy resulting in
outflows of capital from Polish
GDP y/y
2010 2011
2012
market of government bonds – GDP
Baseline
3,5% 4,3%
4,2%
ca. 5.75 pp lower than baseline
Shock I
3,4% 2,4%
2,0%
– Horizon – end of 2012, as in NBP
Shock II
3,4% 2,1%
1,1%
macroeconomic projection
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Calculation of impact on banks
• Macro scenarios fed into panel data models to
obtain forecasts of loan losses and net interest
income for individual banks
• Costs and non-interest income assumed constant
in relation to assets
• Calculation of changes in capital adequacy
• Comparison with baseline scenario
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Building blocks
Macro scenarios
Credit risk cost forecast
Net interest income forecast
Banks’ earnings
Change in capital adequacy ratios and
estimates of recapitalisation needs
Additional
assumptions
Contagion effects
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Stress tests December 2010
Results
Actual data
2009Q4 2010Q3
Result
Impairment charges (PLN bn)
Baseline, per
year over
2010Q42012Q4
Shock
scenario 1
per year over
2010Q42012Q4
Shock
scenario 2
per year over
2010Q42012Q4
11.0
2.2
5.1
6.5
- Enterprise loans
1.2
1.2
2.5
2.9
- Household loans
8.8
1.0
2.6
3.6
Charges as % of loans
1.9%
0.4%
0.8%
1.1%
Charges as % of loans
1.2%
0.2%
0.5%
0.6%
22.0
19.9
15.9
14.8
Net earnings
9.9
14.2
8.4
5.9
Recapitalisation needs – amount of capital
injection needed to keep all banks above 8% CAR
n/a
0.1
0.25
0.5
Net interest income
45 commercial banks analysed
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Stress tests December 2010
Results
Distribution of commercial banks assets by capital adequacy ratio
99.3% 100.0%
Share in banking sector's assets
100%
98.8%
90%
94.1%
80%
70%
60%
50%
40%
Banks which need recapitalization
30%
20%
10%
0%
0.1% 0.1% 0.1% 0%
0.6% 0.6% 0.0% 0%
<0%
0%-6%
5.2%
0.5%
0.6% 0.0%
6%-8%
>8%
Capital adequacy ratio
First shock scenario- end of 2012
Baseline scenario- end of 2012
Second shock scenario - end of 2012
Actual data as at 30.09.2010
Data for 45 commercial banks was analyzed
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Agenda
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•
•
•
•
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Financial stability – general remarks
Macroprudential analysis and the role of central banks
How to conduct macroprudential analysis ?
Stress-testing – types of stress tests and methods
How to use the results ?
The European context – the ESRB
47
How to use the results of the analysis?
• Let us come back to the main objective of
macroprudential policy - prevention and mitigation of
systemic risk:
(1) analysis of the financial system 
(2) early identification of risks 
(3) remedial action
?
• Given proper identification of risks how can we
mitigate them?
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How to use the results of the analysis?
• What so far has proved inefficient in safeguarding financial
stability?
– Central banks had in many cases proper information and analysis on
potential systemic risks but also very limited set of tools for conducting
macroprudential policy
– Supervision authorities had wider set of tools but limited information on the
sources of systemic risks and focus on microprudential aspect
• A need of establishing one body provided with
responsibility/mandate for macroprudential policy and adequate
powers
• Better coordination of various policies - use of microprudential
instruments for macroprudential purposes needed
• Need for cross-border coordination
– Particularly vital for emerging economies with high share of foreign capital
in the financial sector
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How to use the results of the analysis?
• Macro objective, but both macro & (mainly) micro tools
Macroprudential objective
Macro tools
e.g.
-counter cyclical buffers
Micro tools
e.g.
-supervisory regulations
-supervisory recommendations
Moral suasion
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Agenda
•
•
•
•
•
•
Financial stability – general remarks
Macroprudential analysis and the role of central banks
How to conduct macroprudential analysis ?
Stress-testing – types of stress tests and methods
How to use the results ?
The European context – the ESRB
51
Tasks of the ESRB
• Definition and gathering of all the relevant information for the
assessment of systemic risks in the EU, including on financial
institutions, markets and infrastructures
• Identification and prioritisation of systemic risks in the EU
• Issuance of risk warnings when systemic risks are significant
• Issuance of recommendations to contain the identified risks
• Monitoring of the follow-up to warnings and recommendations
• International coordination with the IMF, FSB, and third parties
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Structure of the ESRB
SECRETARIAT
(Staffed by employees of the European Central Bank)
Analytical, statistical, administrative and logistical support to ESRB
STEERING COMMITTEE
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Prepares meetings of the General Board
Reviews documents to be discussed
Monitors progress of the ESRB’s ongoing work
ADVISORY SCIENTIFIC COMMITTEE
15 external experts (academics, representatives of
SMEs or trade-unions, providers or consumers of
financial services) with a wide range of skills and
experiences
GENERAL BOARD
Main decision-making body
Voting members include:
• President and Vice-President of the ECB
• Governors of EU national central banks
• Member of European Commission
• 3 Chairpersons of the European Supervisory Authorities
(for banking, securities & markets, insurance)
ADVISORY TECHNICAL COMMITTEE
Representatives of national central banks, national
supervisory authorities, European Supervisory Authorities
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ESRB warnings and recommendations
1)
Aimed at containing significant systemic risks, as identified by the ESRB
2)
Can be be addressed to the EU as a whole, individual countries, European
Supervisory Authorities or national supervisors (not individual financial
institutions)
3)
Recommendations include a specified timeline for policy response
4)
The addressees of recommendations should report to the ESRB their actions
or justify any inaction; the ESRB can decide that recommendations have not
been complied with or that the justification for inaction is not appropriate
5)
The ESRB can decide to publish its recommendations on a case-by-case basis,
as a tool to foster compliance
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Thank you for your attention!
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