Transcript Countercyclical capital buffer

Procyclicality and Macroprudential Policy
Jan Frait
I.
Procyclicality and Provisioning
Procyclicality
• Financial system procyclicality means the ability of the financial system to
amplify fluctuations of economic activity over the business cycle via
procyclicality in financial institutions’ lending and other activities.
• The procyclical behaviour of financial markets transmits to the real economy in
amplified form through easy funding of expenditures and investments in good
times and financial restrictions leading to declining demand in bad times.
• Procyclicality have increased over the last few years due to (i) the greater use of
leverage in the financial and real sectors, (ii) closer ties between market and
funding liquidity e.g. through increased use of collateral in secured financing, (iii)
increased contagion effects in integrated markets as well as (iv) the
(unintended) effects of some regulations, including accounting standards. (EFC
WG Report 2009)
To provision or not to provision
• Debate about the instruments that might reduce the potential procyclicality of
regulation is not a new one.
• Borio and Lowe (2001) – To provision or not provision
• paper written just prior to the setting and implementation of current regulations,
• describes a conflict between the interests of supervisors and accountants,
• financial supervisors have tended to emphasise the role that provisions can play
in ensuring that banks maintain adequate buffers against future deteriorations in
credit quality,
• accounting authorities have stressed the importance of provisions in generating
fair and objective loan valuations.
• The accountants won the battle … but after a few years we seem to be at the
start back again.
To provision or not to provision, to buffer or not to buffer
• After the crisis - to provision or not to provision, to build capital buffers or not to
build capital buffers
• bank supervisors have always been more supportive of liberal general
provisioning regimes and reserves than have accounting and securities
authorities
• this time the supervisors may use the opportunity, but it is not so easy to win a
war …
• Procyclicality may be caused by broad spectrum of factors going much beyond
accounting and capital regulation framework of financial institutions‘ regulation.
Procyclicality as a hot issue
• ECOFIN roadmap on financial supervision, stability and regulation takes the issue
of procyclicality rather seriously:
• Valuation and accounting standards: Refinement of the accounting rules in
respect of dynamic provisioning
• Pro-cyclicality:
• Follow-up to the report of the EFC-WG on Pro-cyclicality and the July Ecofin
Conclusions Possible measures to address pro-cyclicality of capital requirements
in the short term
• Identify policy tools to mitigate pro-cyclicality in the financial system and financial
regulation, including of capital requirements through counter-cyclical capital
buffers in the CRD - dynamic provisioning, proc-cyclicality of CRD.
• Similar agenda set also by Financial Stability Board.
• Projects set by BCBS and IASB to propose what is required and expected.
To provision or not to provision
• In general principle, banks should set aside provisions to cover their expected
losses while their capital should primarily be used to cover unexpected losses.
• There generally exist several provisioning systems differing in either when the
provisions are created and entered in the accounts or what event triggers
provisioning.
• Currently prevailing practice is “specific” provisioning.
• specific provisions are fixed against losses on predominantly individually
assessed loans and start at the moment an evident event occurs;
• specific provisioning is backward looking (i.e. it identifies risk ex post).
• General provisions
• are set against losses from portfolios of loans and can be forward looking (i.e.
they identify credit risk ex ante)
To provision or not to provision
• The key argument for forward-looking provisioning is the inherent tendency of
banks to relax excessively lending standards during economic upturns and tighten
them excessively during downturns
• the risks are underestimated during upturns leading to credit booms with loans
extended with prices set too low,
• subsequent downturn leads to re-pricing under the impact of higher default rate,
potentially ending in credit crunch.
• Forward-looking provisioning should therefore help to ensure correct pricing of
expected credit risk emerging at time when the credit is extended.
To provision or not to provision
• The international accounting standards currently in force (IAS 39) allow banks to
provision only for loans for which there is clear evidence of impairment (i.e.
backward-looking provisioning).
• specific provisions are created and entered in the accounts only after credit risk
comes to light (which usually occurs in times of recession),
• In the general/dynamic provisioning system provisions are also created when
credit risk comes into being (i.e. to a large degree in times of boom)
• banks provision against existing loans in each accounting period in accordance
with the assumption for expected losses:
• at times when actual losses are smaller than assumed a buffer is created which
can then be used at times when losses exceed the estimated level…
• This looks straighforward, but in practice it is not so.
LLPR in CZ
10
• Half of NPLs is not overdue ...
• Creation of LLP follows cycle, but not fully
LLP and NPL dynamics
(bil. CZK, 12M MA)
Struktura úvěrů v selhání
4
(v %)
3
Nestandardní
Pochybné
Ztrátové
Úvěry v
selhání celkem
37,8
39,1
21,0
13,4
41,2
47,5
100,0
100,0
Prodlení
nad 3M
Úvěry v
selhání celkem
38,4
38,6
100,0
100,0
2
2009
2010
1
0
Bez prodlení Prodlení do 3M
-1
8/06
2/07
8/07
2/08
8/08
2/09
8/09
2/10
8/10
m-t-m change in LLP (12M MA)
m-t-m change in NPL (12M MA)
Source: ČNB
2/11
8/11
2009
52,9
8,7
2010
51,8
9,6
Pramen: ČNB, výpočty ČNB
Provisioning in Spain
• Spain used „traditional“ provisioning up to 2000:
general provisions (GP) reflected estimate of average expected loss from total loans:
GP = g*ΔL , where L stands for total loans and g for the parameter (between 0.5%
and 1%),
while specific provisions (SP) were set in a standard way:
SP = e*ΔM, where M stands for impaired loans and e for the parameter (between
10% and 100%).
total provisions: TP = g*ΔL + e*ΔM.
• In 2000, additional compotent was added – statistical provisions:
Total provision (TP) = Specific (SP) + General (GP) + Statistical (StP)
Provisioning in Spain
• Banks sorted loans to six homogenous categories with different risk
coefficient s (defined by supervisor as average specific provision rate over
the whole cycle).
• StP = Lr – SP, where Lr is a latent risk s*L, where s stands for the
coefficient of a historical average specific provisions (between 0% and 1.5%
in the standard approach),
 SP < Lr (low impaired loans)  StP>0 (building up of the statistical
fund),
 SP > Lr (high impaired loans) StP<0 (depletion of the statistical fund),
 balance of the statistical fund: StF = StPt+StFt-1, with a limit:
0 ≤ StF ≤ 3 * Lr
Provisioning in Spain
• System had to be modified with effect from 2005 due to the IRFS –
statistical provisions were hidden in newly defined general provisons:
Total provision (TP) = Specific (SP) + General (GP)
SP: unchanged,
6
 6

GPt    i Lit     i Lit  SPt 
i 1
 i 1

GP:
• banks must make provisions against the credit growth according to parameter
 which is the average ratio of estimated credit losses (“collective assessment
for impairment” in a year neutral from a cyclical perspective) and  parameter
which is the historical ratio of average specific provision (coefficient s in
previous version),
• 1st component reflects losses in the past, 2nd reflects specific provisions in the
past relative to current ones (dynamic component),
• limits for fund set as 0,1% ≤ GF ≤ 1,5% of total loans.
Provisioning in Spain
• Developments in provisioning funds in Spain after 2000 –
developments of provisions‘ components
Total provisions
Especific provisions
General provisions
million €
60.000
50.000
40.000
30.000
20.000
10.000
0
dic-00
jun-01
dic-01
jun-02
dic-02
jun-03
dic-03
jun-04
dic-04
jun-05
dic-05
jun-06
dic-06
jun-07
dic-07
jun-08
dic-08
Source: Saurina, J. (2009): The Spanish experience of counter-cyclical regulation. Prague, October 23, 2009.
jun-09
Provisioning in Spain
• Spanish authorities considered a new system IFRS compatible (IFSB not).
• Fund was set in good times, buffer was created prior to current crisis
• NPLs 200% covered at the beginning of 2008 (EU average 60%),
• Nevertheless, at the end of 2008 only 100% covered, later on not covered …
• never sure whether the fund will suffice ... still better that nothing.
• Spanish system viewed as accounting tool – though BdE considers it as part of
toolbox for macroprudential supervision.
• BdE does not think it distorts accounting statements:
• Banks are required to disclose the amount of the dynamic provision, apart from
the specific provision.
• Thus, users of accounting statements can “undo” the impact of the dynamic
provision on the P&L.
Provisioning in Spain
• Spanish system was rather simple – a kind of pre-dynamic provisioning:
• not optimal, just one of potential solutions,
• doubts whether it really restricts excessive lending,
• can hardly be adopted in current recessionary conditions,
• unilateral attempts to do so might do more harm than gain – see Brunnermeier, M.
et al. (2009),
• proposal by Commission to use it via CRD supported neither by industry nor by
supervisors (including the CNB).
Do the Czech banks provision procyclically?
Loan loss provisions/total loans and GDP growth
(Czech Republic, 1998 - 2008)
8
7
6
5
4
3
2
1
0
-1 0
2
4
6
8
10
12
-2
-3
Source: CNB, CZSO
Note: y-axis: GDP growth in %; x-axis: ratio of provisions to loans in %
14
• There is a negative
relationship between GDP
growth and the ratio of loan
loss provisions to total loans in
the Czech Republic for the
period 1998–2008.
• Does it reflect procyclical
behaviour?
• If yes, how strong are the nonprocyclical features of banks‘
behaviour?
• For results see Frait and
Komárková (2009)
Do the Czech banks provision procyclically?
Loan Loss Provisions/Total Loans and GDP growth
(Czech Republic, 2001–2011)
8
6
4
2
0
1
1.5
2
2.5
3
-2
-4
-6
Source: CNB
Note: y-axis: GDP growth in %, x-axis: ratio of provisions to loans in %
• There is a negative
relationship between GDP
growth and the ratio of loan
loss provisions to total loans in
the Czech Republic for the
period 2001–2011.
• Does it reflect procyclical
behaviour?
• If yes, how strong are the nonprocyclical features of banks‘
behaviour?
Do the Czech banks provision procyclically?
( LLP / TA)i ,t  1   2   ln GDPt   3  UNEMPL _ gapt   4 ( EARN / TA)i ,t 
 5 ln LOANSi ,t   6  ( LOANS / TA)i ,t   7 (CAP / TA)i ,t   i ,t
Variables:
(i)
macroeconomic: the growth rate of real GDP (ΔlnGDP),
the unemployment gap (UNEMPL_gap);
(i)
bank-specific: the ratio of loan loss provisions to average total assets
(LLP/TA), loan growth (ΔlnLOANS), the ratio of total loans to TA
(LOANS/TA), pre-tax earnings (EARN), the ratio of equity capital to TA;
(ii) other: „t“ denotes time and „i“ the individual banks, TA stands for the average total
assets for the two periods (0.5(TAt+TAt-1)).
Do the Czech banks provision procyclically?
• If banks behave procyclically, the rate of economic growth will be negatively
correlated with provisioning, unemployment rate gap positively, loans growth and
the ratio of total loans to total assets positively if banks behave prudentially, pretax profit positively, capital ratio more likely negatively.
Results of panel regression for loan loss provisions
Variables
LLP/TA, lagged by 1Q
GDP growth
Unemployment gap
Pre-tax profit
Loans growth
Loans/TA
Capital/TA
No. of observations
R2 - within (among banks)
R2 - between (over time)
Coefficients
0,3390
-0,0003
0,0012
0,6565
-0,0022
0,0118
-0,2230
172
0,942
0,993
375,46
F test of equality of constants for banks (FE)
F (3,161)
2,24
Std. Deviations
0,5084
0,0020
0,0006
0,0567
0,0022
0,0048
0.0319
R2 - overall
rho
Prob > F
Prob > F
Note: The data were statistically significant at the ***1%, **5% or *10% level.
t
6,67***
-1,74**
1,84**
11,57***
-1,00
2,46***
-6,98***
0,947
0,102
0,000
0,0857
Do the Czech banks provision procyclically?
• If banks behave procyclically, the rate of economic growth will be negatively
correlated with provisioning, unemployment rate gap positively, loans growth and
the ratio of total loans to total assets positively if banks behave prudentially, pretax profit positively, capital ratio more likely negatively.
Results of panel regression for loan loss provisions
Variables
LLP/TA, lagged by 1Q
GDP growth
Unemployment gap
Pre-tax profi t
Loans growth
Loans/TA
Capital/TA
c
Coefficients
0.701764
-0.000094
0.002375
0.180381
0.000010
0.008817
-0.019226
-0.017629
No. of observations
525
R2 – within (between banks)
0.8650
R2 – between (over time)
0.9813
F(7,503)
460.49
F test of equality of constants for banks (FE)
F(14, 503)
7.22
Std. deviations
0.0242
0.0000
0.0009
0.0223
0.0001
0.0014
0.0099
0.0057
t
28.96***
-1.96**
2.69***
8.09***
0.14
6.21***
-1.94**
-3.11***
R2 - overall (celková)
rho
Prob >F
0.9604
0.6625
0.0000
Prob >F
0.0000
Note: The data were statistically significant at the ***1%, **5% or *10% level. Given the nature of the variables
under review, a fixed-effects model was used. The F-test of equality of the constants for fixed effects rejects the
hypothesis of equality at the 9% level of significance and thus partly confirms some small degree of specificity
across banks. We tested the panel data for non-stationarity using the Hadri panel unit root test.
Do the Czech banks provision procyclically?
Conclusions:
•
The negative GDP growth and positive unemployment rate gap suggest
that provisioning is significantly procyclical and lacks to a large extent
forward-looking assessment of cycle-related risk;
…however
•
The procyclicality is being partly reduced:
(i) positive and relative high coefficient of the pre-tax profit = the income
smoothing or tax optimization,
(ii) positive coefficient of loans to total assets = prudential behaviour
confirmed;
… but banks set aside fewer provisions to cover their expected losses when
their capital buffer is larger (negative capital/TA coeff.).
II.
Proposals for taming procyclicality
Existing proposals for taming procyclicality
• Through-the-cycle expected loss provisioning (TELP) – EU
Commission consultation to further changes in CRD from July 2009:
• Based on through-the-cycle expected loss – forward looking estimation of
losses that should be covered by TELP.
• TELP designed in line with Spanish approach – baseline method uses both α
and β parameters, more simple method considers parameter β only.
• Prudential measure of a „corrective kind“ which nevertheless has impact on
the accounting.
• Proposal does not address the issue of consistency between IFRS and CRD.
• TELP potentially in conflict with regulatory concept of expected loss in
Basel II.
• IRB institutions (only) apply models to set expected losses and their
coverage by provisions is tested (if provisions not sufficient, difference
deducted from regulatory capital).
Existing proposals for taming procyclicality
• Expected loss approach (IASB, June 2009)
• The expected cash flow approach - considered as a part of IASB project on
replacing IAS 39 Financial Instruments Measurement and Recognition.
• A major deviation from incurred loss approach - no trigger for an
impairment test required
• it should reflect better the economic reality of banks’ lending activities
than the incurred loss approach in that it requires an earlier recognition
of expected credit losses,
• it should help to avoid ‘incurred but not reported losses’.
• The present value of the expected future cash flows is measured using an
initial internal rate of return calculated on the basis of cash flows actually
expected at inception (taking into account expected credit losses), and not
on the basis of contractually agreed cash flows.
Existing proposals for taming procyclicality
• Expected loss approach (IASB, June 2009) cont.
• Initial internal rate of return will thus be lower than the contractual rate,
with the difference representing the risk premium charged to the borrower in
order to cover the statistically foreseeable risk of non-recovery.
• Difference between cash flows received that represent contractual interest
and interest recognised as revenues on the basis of the (lower) internal rate
of return would be recognised in the balance sheet as a credit expected loss
provision.
• Subsequent or additional impairment loss is recognised through continuous
re-estimation of credit loss expectations. Reversal of impairment loss is
recognised in profit or loss when there is a favourable change in credit loss
expectations.
• Would bring subjectivity, number of complex issues, transparency issues.
• Spanish approach and economic cycle reserve can serve as complementary
tools to it.
Existing proposals for taming procyclicality
• Economic cycle reserve (ECR) – UK Turner review
• An additional non-distributable reserve which would set aside profit in good
years to anticipate losses likely to arise in future.
• A formula driven method would simple and non-discretionary similarly to
Spanish system:
• a buffer of the order of magnitude of 2 – 3 % of RWAs at the peak of the
cycle,
• reserve could vary according to some predetermined metric such as the
growth of the balance sheet or estimates of average through-the-cycle
loan losses.
• A discretionary method would be entity-specific, tailored to the peculiarities
of each bank’s portfolios.
Existing proposals for taming procyclicality
• Economic cycle reserve (ECR) – UK Turner review cont.
• The approach has a macro-prudential defensive focus and is meant to be
accounting neutral
• it is to be shown only as a movement on the balance sheet, rather than
on the P&L (is intended to be built and drawn by appropriation of
retained earnings),
• but there are very strong arguments that it should also appear
somewhere on the P&L,
• allowing bottom line profit and earnings per share (EPS) to be
calculated both before and after its effect, and thus providing two
measures of profitability, the ‘traditional’ accounting figure and a second
figure struck after economic cycle reserving.
• Capital buffers under Basel III and CRD4 (conservation, countercyclical,
systemic risk, SIFI) – now at the most advanced stage due to its attractiveness to
the regulators and supervisors.
III.
Capital buffers
Capital buffers: nothing new
• Borio and Lowe (2001) revisited
• One possibility … is a clearer treatment of the relationship between
provisions and regulatory capital …
• to exclude general provisions from capital and to set provisions so that
they cover an estimate of the net embedded loss in a bank’s loan portfolio,
• capital could then be calibrated with respect to the variability in those
losses (their “unexpected” component). (p. 46)
• Another approach … supervisors could supplement capital requirements
with a prudential provisioning requirement …
• instead of having the annual statistical provisioning charge deducted from
a bank’s profit and loss statement, have it added to the bank’s regulatory
capital requirement for unexpected losses. (p. 48)
Capital buffers: nothing new
• Procyclicality of Basel II was widely debated prior its implementation.
• There was a clear understanding that risk-sensitive regulatory capital
requirements tend to rise more in recessions and grow less during
expansions, laying the ground for potentially pro-cyclical effects.
• The authors of the framework therefore pretended that they included some
mitigating factors to dampen the potential pro-cyclical effect of Basel II's
increased risk-sensitivity.
• Although improved risk management was one of the arguments for the
introduction of Basel II, it now appears that neither regulatory capital nor
economic capital has been set adequately to capture actual risk,
particularly the risk contained in the trading book.
Capital buffers: nothing new
• High (perceived) costs of scraping Basel II down was reflected in the
desire of regulators/supervisors to continue relying on Basel II framework
in dealing with procyclicality.
• First, they hoped, after the current crisis, micropolicies might become
easier for implementation including „theoretical“ tools within current
Basel II-Pillar 2:
• Internal Capital Adequacy Assessment Process, Supervisory Review and
Evaluation Process
• Stress testing with scenarios and methodology from supervisors
• Backward testing of PDs and LGDs, downturn LGDs, conservative
margins, tests of adequacy of provisions ...
• Second, they struggled to add some procyclicality-mitigating factors
into the concept.
CEBS proposal
• CEBS (CEBS, 2009) proposed practical tools for supervisors to assess
under Pillar 2 the capital buffers that banks have to maintain under the
Basel II/CRD framework (focusing on procyclicality of banking book of
IRB banks).
• CEBS was considering the use of mechanisms that adjust probabilities of
default (PDs) estimated by banks, in order to incorporate recessionary
conditions.
• Current PD: the long-term average of the default rates (either at the grade or
•
•
•
•
portfolio level).
Downturn PD: the highest PD over a predetermined time-span.
The scaling factor is: SF = PD_downturn / PD_current (close to 1 in a
recession and higher than 1 in expansionary phases).
The size of the buffer decreases in recession and increases in an upswing.
CEBS says proposal might easily be adapted in a Pillar 1 context, but ...
Countercyclical capital buffers
• BCBS‘s Countercyclical Capital Buffer proposal (2nd stage, issued for
comments in September 2010)
• The CCB proposal is designed to ensure that banking sector capital
requirements take account of the macro-financial environment in which banks
operate.
• The primary aim is to use a buffer of capital to achieve the macroprudential
goal of protecting the banking sector from periods of excess credit growth that
have often been associated with the build up of system-wide risk.
• Protecting the banking sector in this context is not simply ensuring that
individual banks remain solvent through a period of stress. Rather, the aim is to
ensure that the banks in aggregate has the capital on hand to maintain the flow
of credit in the economy without its solvency being questioned, when the
financial system experiences stress after a period of excess credit growth.
• This focus on excess aggregate credit growth means that jurisdictions are likely
to only need to deploy the buffer on an infrequent basis, perhaps as infrequently
as once every 10 to 20 years.
Countercyclical capital buffers
•
The starting point is Basel III new regulatory capitalization
minimums:
1. New common equity ratio (Core Tier1, CT1) of 7%, split between a 4.5%
•
minimum requirement and a conservation buffer of 2.5%.
2. A countercyclical buffer of up to 2.5% of common equity,
implemented according to national circumstance.
3. A supplementary, non-risk-based leverage ratio, to be tested at 3%.
4. Systemically important banks to carry loss-absorbing capacity “beyond
the standards announced”.
The CCB is thus presented as an add-on to the capital conservation buffer,
effectively stretching the size of the range in which restrictions on
distributions of profits are applied.
Countercyclical capital buffers
•
The starting point is Basel III new regulatory capitalization minimums
(cont.):
• Goldman Sachs view of Basel III (GS Global Investment Research):
1. CT1 ratio of 7% as the new regulatory minimum for banks of non-systemic
importance - for banks deemed to be of systemic importance, the CT1
minimum is subject to an additional surcharge and is therefore to be set at a
level above the 7% CT1 minimum.
2. A regulatory minimum is just that: a minimum. In practice, banks will aim to
exceed the minimum to be on the safe-side; and exceeded it further, before
capital return to shareholders is considered. 7% is not the “magic” number;
rather, it is a floor.
3. From an equity investor’s perspective, the relevant level of capital is not the
regulatory minimum but rather one above which all key parties—bank
managements, regulators, debt holders, “the market”—would not object to
capital being returned to shareholders. This level—the GS target
capitalization—will also differ among banks.
Countercyclical capital buffers
•
The starting point is Basel III new regulatory capitalization minimums
(cont.):
Goldman Sachs view of Basel III
Countercyclical capital buffers
• The essence of CCB:
• Calibration of CCB should be based on credit-to-GDP ratio and its deviation
•
•
•
•
from its long-term trend.
The proposal uses a broad definition of credit that will capture all sources of
debt funds for the private sector (including funds raised abroad) to calculate a
starting buffer guide. Ideally the definition of credit should include all credit
extended to households and other non-financial private entities in an economy
independent of its form and the identity of the supplier of funds. .
Conversely, the buffer would be released when, in the judgment of the
authorities, the released capital would help absorb losses in the banking system
that pose a risk to financial stability. This would help reduce the risk that
available credit is constrained by regulatory capital requirements.
Authorities in each jurisdiction will be responsible for setting the buffer add-on
applicable to credit exposures to counterparties/borrowers in its jurisdiction.
The buffer that will apply to an internationally active bank will reflect the
geographic composition of the bank’s portfolio of credit exposures.
Countercyclical capital buffers
• The essence of CCB (cont.):
• By design, the constraints imposed on banks with capital levels at the top of the
range would be minimal.
• The buffer range is divided into quartiles determining the percentage of
earnings to be conserved (calibration not finished yet).
Countercyclical capital buffers
• The essence of CCB (cont.) - the example:
• Minimum CT1 requirement for all banks is 4,5% of RWA + the capital
conservation buffer is set at 2,5% of RWA.
• Under this setting a bank with a CT1 ratio of 7,5% or higher would not be
subject to any restrictions on distributions of capital as restrictions are only
imposed in the range of 4,5% – 7%.
• If this bank becomes subject to a CCB add-on of 2%, the range in which
restrictions on distributions are imposed becomes 4,5% – 9%.
• CT1 capital ratio of 7.5% is in the third quartile of this range and so, using the
numbers in the table above, would be required to conserve 60% of earnings.
• To allow banks time to adjust to a buffer level that exceeds the fixed
capital conservation range, they would be given 12 months to get
their capital levels above the top of the extended range, before
restrictions on distributions are imposed.
Countercyclical capital buffers
41
• The CCB gives a national regulator wide discretion:
• Calibration of CCB should be based on credit-to-GDP ratio and its deviation
from its long-term trend, but this will be common reference point only.
• The calculated long-term trend of the credit/GDP ratio is a purely statistical
measure that does not capture turning points well. Authorities will form their
own judgments about the sustainable level of credit in the economy.
• Authorities in each jurisdiction will be free to emphasise any other variables
and qualitative information that make sense to them for purposes of assessing
the sustainability of credit growth and the level of system-wide risk, as well as
in taking and explaining buffer decisions.
• Particular consideration was given to the question of how to take account of
jurisdictions with financial systems at different stages of development. Each
jurisdiction will have the discretion to impose buffers above or below the guide
buffer add-on level, subject to appropriate transparency and disclosure
requirements.
Countercyclical capital buffers
42
• Credit-to-GDP is not enough:
• Maybe a useful indicator for the risk accumulation phase.
• Only gradual decline after crises.
credit_gdp_gap
GB
-16
-12
-8
-4
Median
0
25th perc.
4
8
75th perc.
12
16
-10
-10
0
-5
0
10
5
20
10
15
30
Variable around crises
1980q1
1990q1
2000q1
2010q1
Countercyclical capital buffers
• Mezní riziko vzniku krize je silně nespojité, zatímco časové řady
makroveličin ne.
43
Countercyclical capital buffers
44
• Claudio Borio (BIS) – 2010:
•
•
Most promising real-time indicators of financial distress exploit the
paradox of financial instability to their advantage
Joint positive deviations (“gaps”) of credit-to-GDP ratio and asset prices
(especially real estate) from historical norms
• Best signal of FD 2-4 years ahead (also out of sample)
• Signal of overstretched balance sheets on the back of aggressive
risk-taking (“financial imbalances”)
• They also have information about output weakness and (less
strong?) disinflation over similar horizons
• Why?
• Credit-to-GDP gap: very rough measure of economy-wide leverage
• Asset price gap: very rough measure of likelihood and size of reversal
•
US example (Graph)
Countercyclical capital buffers
45
• Claudio Borio (BIS) – 2010:
Countercyclical capital buffers
46
• Claudio Borio (BIS) – 2010:
Private credit/GDP and property price gap1
Sweden
Countercyclical capital buffers
47
• BIS – 2010:
Countercyclical capital buffer: United States
Vertical shaded areas indicate the starting years of system wide banking
crises.
The countercyclical buffer is 0 when the value of the credit/GDP gap is
below 2 and 2.5 when it is above 10 per cent; for gaps between 2 and 10
percent the buffer is calculated as 2.5/8 times the value of the credit/GDP
gap exceeding 2 per cent.
Source: BIS calculations
Countercyclical capital buffer: Spain
Works quite well – only once the stress is evident, it is necessary to release
immediately and not not wait for decline in credit-to-GDP
Release indicators
Where will this lead?
• There is a risk that combination of redrafted Basel II combined with
capital buffering, leverage limits and expected-loss-provisioning will
produce something unexpected …
• There is a visible lack of coordination of authorities in terms of
simultaneous considerations of both regulatory and accounting aspects.
• D. Tarullo (2008): „ … there is a strong possibility that the Basel II
paradigm might eventually produce the worst of both worlds—a highly
complicated and impenetrable process (except perhaps for a handful of
people in the banks and regulatory agencies) for calculating capital but
one that nonetheless fails to achieve high levels of actual risk
sensitivity”...
• Still, if the cycle is driven by overly optimistic expectations, only
combined effect of several other policies could do the job.
Money, regulation and supervisors courage
• The imbalances leading to current crisis were developing in a very
complex manner due to the combined effect of globalization, financial
market deregulation and increases in productivity that seemed to be more
than temporary.
• Such a process was reflected in a build-up of optimistic expectations
leading to „this time it will be different“.
• Monetary policy was really not much helpful, but not the major source of
asset price booms (see IMF World Economic Outlook, October 2009).
• There was no “key source“, “major policy fault“, “most important
wrongdoer“ behind the sources of crisis and a major difference in a single
policy could not prevent it.
• Or, do we really think that central bankers and supervisors were strong
enough to stop a high speed train with a massive political support?
• Or even, how strong would be the support of policy-makers in one country
who would try to cut off the music when the whole world was still dancing?
Money, regulation and supervisors courage
• The lesson for myself – if the international economy in the future starts
undergoing a dynamic drive again, accompanied by credit and asset price
booms, the authorities should apply concerted set of microprudential and
macroprudential measures to tame the immoderate optimism.
• Factors mitigating procyclicality embodied in regulation should ensure
accumulation of buffers and better supervision should prevent the bank
managers from taking excessive risks.
• Monetary policies might need to step in directly via interest-rate channel
or indirectly via macroprudential/microprudential tools changing its
transmission.
• Still, plenty of courage, luck and communication skills would be needed
to succeed.
Thank You for Your Attention
Contact:
Financial Stability Department in the CNB:
[email protected]
CNB: Financial Stability Reports, various issues available at http://www.cnb.cz/en/financial_stability/
Jan Frait
Financial Stability Dept.
Czech National Bank
Na Prikope 28
CZ-11503 Prague
Tel.: +420 224 414430
E-mail: [email protected]
References
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BANK OF ENGLAND (2009): The Role of Macroprudential Policy. Discussion Paper, November 2009.
BIKKER, J. A., METZEMAKERS, P. A. J. (2003): Bank Provisioning Behaviour and Procyclicality, DNB Staff
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BORIO C., FURFINE C. AND LOWE, P. (2001): Procyclicality of the fi nancial system and financial stability:
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Papers, No. 1, March, pp. 1–57
BORIO, C – SHIM, I. (2007): “What can (macro)-prudential policy do to support monetary policy. BIS Working
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BORIO, C. - P. LOWE, P. (2001): To provision or not to provision. BIS Quarterly Review, September 2001, pp.
36-48.
BORIO, C. - WHITE, W. (2004): Whither monetary and financial stability? The implications of evolving policy
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BORIO, C. (2009), Implementing the macro-prudential approach to financial regulation and supervision, Banque
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BORIO, C.-DREHMANN, M. (2009), Towards an operational framework for financial stability: fuzzy
measurement and its consequences. BIS Working Paper, No. 284, June 2009.
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CEBS (2009): Position paper on a countercyclical capital buffer. 17 July 2009. http://www.cebs.org/getdoc/715bc0f9-7af9-47d9-98a8-778a4d20a880/CEBS-position-paper-on-a-countercyclical-capital-b.aspx
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CLEMENT, P. (2010): The term “macroprudential”: origins and evolution. BIS Quarterly Review, March 2010, pp.
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DE LIS, F.S. - MARTINEZ PAG´ES, J. - SAURINA, J. (2003): Credit growth, problem loans and credit risk
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FRAIT, J.-KOMÁREK, L.: Monetary Policy and Asset Prices: What Role for Central Banks in New EU Member
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