Transcript Countercyclical capital buffers

Setting counter-cyclical capital buffers in
converging economies
Jan Frait
I.
Countercyclical capital buffers – concept
2
Countercyclical capital buffer in Basel III (1)
• countercyclical capital buffer (CCB henceforth) is genuine
macroprudential tool
• „optimists“ believe that the CCB could be used for taming a
credit boom
• help the authorities to lean against the build-up phase of the
cycle by raising the cost of credit, and therefore slowing down
its provision, when they conclude that the stock of credit has
grown to excessive levels relative to the benchmarks of the
past experience
• this potential moderating effect on the build-up phase of
the credit cycle should be viewed as a positive side
benefit, rather than the primary aim of the CCB regime
3
Countercyclical capital buffer in Basel III (2)
• „pessimists“ presume that the quantitative impact of the CCB
during the credit boom will be rather weak
• it should primarily protect the banking sector and general
economy from the after-effects of excess aggregate credit
growth that have often been associated with the build up of
system-wide risk
• what kind of after-effects? …to maintain the flow of credit in
the economy when the broader financial system experiences
distress after a credit boom (smooth landing)
4
The role of a macroprudential authority regarding CCB
• to monitor credit and its dynamics (and potentially other
indicators) and make assessments of whether system-wide
risks are being built up
• based on this assessment, to decide whether the CCB
requirement should be imposed (set above the zero value)
• to apply judgment to determine whether the CCB should
increase or decrease over time (within the range of zero to
2.5% of risk weighted assets, in very strong credit booms
even above 2.5%)
• to be prepared to remove the requirement on a timely basis if
the system-wide risk crystallizes
5
The view of the Czech National Bank
• when Basel III was discussed, CNB in general
• supported the CCB as a useful macroprudential tool as well as
harmonized methodology for setting it across countries
• which would – however – allow sufficient flexibility for national
policymakers (reflecting different level of financial intermediation
in converging economies and other specificities of individual
countries)
• supported the Basel III approach to determine the bank-specific
capital buffer (linked to the credit dynamics in the country where
the loans were granted)
* EC: Consultation Document – Countercyclical Capital Buffer. 25 October 2010.
6
Implementation of the buffer in CRD IV/CRR
• within consultations of the European Commission* (October –
November 2010) – especially in the area of application of
capital buffer for cross-border banks - the CNB
• rejected the alternatives approaches suggested by the
Commission (determining the buffer according to the
jurisdiction of the parent bank or according to the jurisdiction
from which the credit is ultimately granted).
* EC: Consultation Document - Countercyclical Capital Buffer. 25 October 2010.
7
II.
CCB – calibration
8
The common reference guide: credit-to-GDP gap
• the common reference guide* for setting the CCB is based on
the aggregate private sector credit-to-GDP gap
• a gap between currently observed value and the calculated longterm trend of private sector credit to GDP
Countercyclical capital buffer
(% of RWA as a function of credit-to-GDP gap in pps)
4
3.5
3
2.5
2
1.5
1
0.5
0
-4
-2
0
2
4
6
8
10
12
Credit-to-GDP gap (in %)
14
-1.4
-1.3
-1.2
-1.1
-1
-0.9
-0.8
-0.7
-0.6
-0.5
-0.4
-0.3
-0.2
-0.1
0
0.1
0.2
• for calculation of the long-term
trend, the Basel committee
suggests using the HodrickPrescott filter with a high
smoothing parameter
• buffer set as a function of the
credit-to-GDP gap
* BCBS: Guidance for national authorities operating the countercyclical capital buffer. BIS, December 2010, pp. 4 and 8.
9
CNB work on countercyclical capital buffers
• the CNB is focusing on the issue of how to calibrate the CCB
in converging economies
• Financial Stability Report 2010/2011* responds to question
“how the CCB would have been set if the regime had been
existing before crisis?“ through the analysis of ten CEE
countries in the period of strong credit growth 2003-2007
• conclusion: basic methodology recommended by Basel
Committee for setting the CCB rate (credit-to-GDP gap
calculated according to the purely statistical method of
Hodrick-Prescott filter) is not appropriate for converging
economies like the Czech Republic
• it is surely not appropriate for advanced countries previously
experiencing lasting credit boom either!
* Geršl, Adam – Seidler, Jakub: Excessive credit growth as an indicator of financial (in)stability and its use in macroprudential
policy. Thematic article, FSR 2010/2011, CNB.
10
CEE converging countries and calculation of credit-to-GDP gap
1. short time-series (Basel recommends 20 years of quarterly data)
2. fast credit growth is incorporated in the trend (convergence in
credit to GDP - initial low level of financial intermediation and
catching up process)
Development of credit to GDP ratio in CEE countries
(%)
Development of credit to GDP ratio in CEE countries
(%)
140
140
120
120
100
100
80
80
60
60
40
40
20
20
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Hungary
Poland
Romania
Slovenia
Euro area
Source: IMF IFS, CNB calculations
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Bulgaria
Estonia
Latvia
Source: IMF IFS, CNB calculations
Lithuania
Euro area
11
CEE countries and buffer calculation – what makes things complex
3. banking sector restructuring (bad assets in the 1990s – especially
CZ and SK, bank privatizations)
4. changes in the composition of credit to the private sector
(increasing share of loans to households)
5. end-point bias of HP filter as an obstacle to practical conduct of
macroprudential policy
Development of credit to GDP ratio in CEE countries
(%)
Stock of bank credit to the real sector in the Czech Republic
(in CZK bil)
80
2000
70
1800
1600
60
1400
50
1200
40
1000
30
800
600
20
400
10
200
0
1998Q1 1999Q3 2001Q1 2002Q3 2004Q1 2005Q3 2007Q1 2008Q3
Czech Republic
Source: IMF IFS, authors' calculations
Slovak Republic
0
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
Non-financial corporations
Source: Czech National Bank
Households
12
Deleveraging and buffer calculation after a boom
• Růst úvěrů do privátního sektoru v eurozóně i po 2008 vs. s výrazné
poklesy ve Velké Británii nebo USA.
Úvěry privátnímu sektoru v eurozóně, USA a V. Británii
(leden 2002 = 100)
210
190
170
150
130
110
90
I.02
I.04
I.06
EA
I.08
UK
I.10
USA
Pramen: ECB
Pozn.: pro EA a UK použita shodná metodika ECB
13
Application of the guide to the Czech Republic
• using HP filter with recommended lambda would indicate excess credit
growth (even since 2003 if estimated „continuously“)
• holds even if other reasonable denominators are used (assets)
Bank credit to the real sector in relative terms
(%)
Credit gaps in the Czech Republic with alternative denominators
(%)
70
20
60
15
50
10
40
5
30
0
20
-5
10
-10
0
1996
1998
2000
Source: CNB, CZSO
2002
2004
2006
2008
Credit-to-GDP
Credit-to-financial-assets
Credit-to-assets
2010
-15
03/98
03/00
03/02
03/04
03/06
03/08
Credit-to-GDP gap
Credit-to-GDP gap (actual period estimation)
Credit-to-financial-assets gap
Credit-to-assets gap
Source: CNB, authors' calculations
03/10
14
Application of the guide to the Czech Republic
• when estimated in credit growth phase only (2004-2008), HP filter captures
only short-term deviations
Credit-to-GDP and its trend (HP filter on data starting in 2004)
(%)
60
55
50
45
40
35
30
06/04
06/05
06/06
06/07
Estimated HP trend
06/08
06/09
Credit-to-GDP
Source: IMF IFS, CNB calculations
15
Historical comparison does not reveal excessive credit in
the Czech Republic (1)
Czech Republic has lower level of credit to GDP than selected core EU countries when at
similar level of economic development (in the 1980s)
other features of credit growth in the Czech Republic also do not indicate the build up of
system-wide risk (no FX loans to households; no external funding; high deposit-to-loan
ratio; low LTV ratios)
• contrasts with e.g. Latvia that had comparatively much higher stock of credit in 2008,
several „dangerous“ features of credit boom and lower level of GDP per capita
•
•
Credit to GDP for similar level of economic development
(GDP per capita in 2005 USD = 17 ths USD; in %)
Credit to GDP for similar level of economic development
(GDP per capita in 2005 USD = 14 ths USD; in %)
100
100
90
90
80
80
70
70
60
60
50
50
40
40
30
30
20
20
10
10
0
0
CZ
(2009)
IT
(1986)
NL
(1984)
AT
(1984)
Source: IMF IFS, CNB calculations
FR
(1985)
ES
(1990)
DE
(1983)
Latvia
(2008)
IT (1984)
ES (1988)
Source: IMF IFS, CNB calculations
AT (1985)
DE (1985)
16
Historical comparison does not reveal excessive credit in
the Czech Republic (2)
• ....
Credit-to-GDP ratios for a similar level of economic development
(in %; GDP per capita, in PPP constant 2005 international $;
approximately 22, 500 for the Czech Rep as of 2010)
100
90
80
70
60
50
40
30
20
10
0
Czech Republic Italy Netherlands Austria
(2010)
(1988)
(1984)
(1985)
France
(1987)
Spain
(1997)
Germany
(1985)
Source: IMF IFS, WB WDI, authors' calculations
17
III.
CCB – the way forward
18
The discretion of policymakers is anchored in Basel III
• credit-to-GDP ratio should serve only as a guide*
• rather than relying mechanistically on the credit/GDP guide,
authorities are expected to apply judgment in the setting of the
buffer in their jurisdiction after using the best information
available to gauge the build-up of system-wide risk
• in addition, the calculated long-term trend of the credit/GDP ratio
is a purely statistical measure that does not capture turning points
well*
• therefore, authorities should form their own judgments about
the sustainable level of credit in the economy; they should use
the calculated long-term trend simply as a starting point in
their analysis
* BCBS: Guidance for national authorities operating the countercyclical capital buffer. BIS, December 2010, pp. 4 and 8.
19
The alternative to HP filter: fundamental „out-of-sample“ method leads
to different credit-to-GDP gaps and different potential buffers
•
•
•
a way how to form judgment about the sustainable level of credit in the economy:
• regressing the credit to GDP on a range of economic fundamentals (GDP per capita;
households consumption; inflation,FX loans to households; external funding;
deposit-to-loan ratio; LTV ratios etc.), using data for developed countries
• applying the estimated elasticities „out of sample“, i.e. on CEE countries to calculate
„equilibrium credit“
in contrast to HP filter, the fundamental out-of-sample method takes into account the
economic fundamentals influencing the level of credit in the economy
the HP filter would not define some countries as in a situation of excess credit growth
while fundamental method would (figures below in the table are calculated for 3Q 2008,
i.e. just before the CEE countries were hit by the global financial crisis)
Countercyclical capital buffer
(% of RWA)
Out-of-sample
HP filter
Out-of-sample
10.8
2.5
2.5
-15.0
2.4
0.0
27.9
1.0
2.5
-8.3
1.5
0.0
19.6
0.0
2.5
-10.7
0.0
0.0
-23.3
0.3
0.0
-27.3
1.3
0.0
-22.8
1.3
0.0
5.5
1.1
1.1
Credit-to-GDP gap (%)
HP filter
BG
11.4
CZ
9.5
EE
5.3
LT
6.9
LV
1.0
HU
-1.4
PL
3.0
RO
6.1
SK
6.1
SI
5.4
Source: authors' calculations
20
Results of the „out-of-sample“ method in comparison to HP filter
Estonia
Czech Republic
Latvia
50%
20%
40%
15%
40%
30%
10%
30%
20%
5%
20%
10%
10%
0%
0%
-5%
-10%
0%
-10%
-20%
-10%
-15%
-30%
-20%
-20%
-40%
-25%
2000q1 2002q1 2004q1 2006q1 2008q1
HPgap
OUTgap
-30%
2000q1 2001q4 2003q3 2005q2 2007q1 2008q4
HPgap
OUTgap
-50%
2000q1 2001q4 2003q3 2005q2 2007q1 2008q4
HPgap
OUTgap
21
Results of the „out-of-sample“ method in comparison to HP
filter
Slovenia
Slovakia
Poland
20%
20%
15%
15%
15%
10%
10%
10%
5%
5%
5%
0%
0%
0%
-5%
-5%
-5%
-10%
-10%
-10%
-15%
-15%
-15%
-20%
-20%
-20%
-25%
-25%
-25%
-30%
-30%
-30%
2000q1 2002q1 2004q1 2006q1 2008q1 2010q1
2000q1 2002q1 2004q1 2006q1 2008q1
HPgap
OUTgap
HPgap
OUTgap
-35%
2000q1 2001q4 2003q3 2005q2 2007q1 2008q4
HPgap
OUTgap
22
Results: comparison of HP and out-of-sample methods
Hungary
Bulgaria
15%
20%
10%
10%
5%
0%
0%
-5%
-10%
-10%
-20%
-15%
-20%
-30%
-25%
-40%
-30%
-50%
2000q1 2001q4 2003q3 2005q2 2007q1 2008q4
HPgap
-35%
2000q1 2001q4 2003q3 2005q2 2007q1 2008q4
HPgap
OUTgap
OUTgap
Lithuania
Romania
20%
10%
10%
0%
0%
-10%
-10%
-20%
-20%
-30%
-30%
-40%
-40%
-50%
-50%
2000q1 2001q4 2003q3 2005q2 2007q1 2008q4
HPgap
OUTgap
-60%
2000q1 2002q1 2004q1 2006q1 2008q1 2010q1
HPgap
OUTgap
23
Countries above equilibrium credit
• it seems that for CEE countries, the out-of-sample method better predicts the
problem countries
• empirical evidence shows that the four countries identified as being above
equilibrium credit (LV, BG, EE, SI) and the two close to the border (HU and LT)
did not show particularly high Tier 1 capital ratios before crisis in 2008 (except
Bulgaria) and some of them experienced relatively high drop in RoE of banks
Credit-to-GDP gap via out-of-sample and Tier 1 ratio in 2008
(gap in pps; Tier 1 capital ratio in 2008)
Credit-to-GDP gap via out-of-sample and change in RoE
(gap in pps; change in RoE of banking sector in pps)
10
CZ
13
0
RO
12
-40.0
BG
CZ
-20.0
RO
0.0
HU
PL
-10
SI
20.0
40.0
BG
11
SK
SK
PL
-20
LV
10
LT
HU
-30
EE
SI
9
-40
LV
8
-50
LT
7
6
-40.0
-20.0
0.0
Source: IMF, authors' calculations
20.0
40.0
-60
-70
Source: IMF, authors' calculations
EE
24
Further developments
• to be fair, the out-of-sample method also has a number of drawbacks
• fundamental variables selection (housing prices seem to be a
relevant variable, but can themselves suffer from bubbles)
• selection of advanced (sample) countries
• different fundamentals in advanced (sample) countries versus
CEE countries at the current stage of development
• estimation method suffers by losing country-specific constant
• the methodology is being developed further and made more robust
to be more appropriate for practical implementation
• other methods and indicators are being tested as to their signaling
properties for a built-up of systemic risk in converging economies
• the indicators for deciding on policy reversals are needed too
25
Policy approach – consistency vs. discretion
• The key issue is setting the long-term equilibrium trend(s)
more optimistic
equilibrium trajectory
Credit-to-GDP
clearly above
more indicators and
judgment required
?
less optimistic
equilibrium trajectory
clearly below
time
26
Countercyclical capital buffers – the example of policy
• Credit-to-GDP cannot be a sole driver of countercyclical capital buffers
setting – it is a lagging slow-motion variable staying above the historical
norms during the initial stages of crisis.
• The indicators of credit cycle dynamics and other are therefore needed to
guide the shifts in setting (credit growth, lending conditions, spreads etc.)
Credit-to-GDP over financial cycle
period of financial
exuberance
Credit dynamics (e.g. y-o-y growth)
period of financial
exuberance
period of financial
distress
period of financial
distress
CCB set to zero
again
time
long-term „normal“
level of credit-to
GDP
time
CCB set at
maximum 2,5 %
turning point (start of
crisis): credit-to-GDP
still very high, but policy
has to change sharply
CCB set to zero
turning point (start of
crisis): credit growth
falls, lending conditions
tighten
27
Conclusions
• flexibility embedded in the Basel III countercyclical capital
buffer regime is a desirable element
• should be kept to a large extent in the EU regulation (CRD
IV/CRR), the ESRB should keep the coordination and ex post
monitoring role
• CEE converging countries are exactly the ones where
detrending by HP filter can not work well in calibrating the
buffer
• macroprudential research in CEE countries has to identify set
of fundamental factors that could provide solid guidance for
setting this instrument and using it in efficient way
28
Thank you for the attention
www.cnb.cz
Jan Frait
Head of Financial Stability Department
[email protected]
Contact to the Financial Stability Department:
E-mail: [email protected]
http://www.cnb.cz/en/financni_stability/
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•
•
•
•
•
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•
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