Macroprudential and Monetary Policy Dilemmas in a Small Open Economy

Transcription

1 Macroprudential and Monetary Policy Dilemmas in a Small Open Economy Júlia Király and Attila Csajbók Lecture in the National Bank of Serbia MNB Belgrade May 31, 212

2 Jan-8 Apr-8 Jul-8 Oct-8 Jan-9 Apr-9 Jul-9 Oct-9 Jan-1 Apr-1 Jul-1 Oct-1 Jan-11 Apr-11 Jul-11 Oct-11 Motivation: Why Hungarian monetary policy had to be procyclical during the crisis? 4 percent percent GDP-growth (seasonally adjusted data, yearly changes) Base rate (right-hand scale) 2

3 Overview The monetary policy framework in Hungary Macroprudential policy FX-lending: magnitude and key drivers Monetary policy in the presence of FX-lending Implications for institution design 3

4 The monetary policy framework IT since 21 (with wide ER bands until 28, free float afterwards) Open economy: Exports+Imports~2% of GDP (Poland: 2-3%) Trade oriented towards EU: 75%, of which 55% Eurozone Exchange rate channel strong Financial intermediation: deepening, but still lower than in Eurozone + a large part FX-denominated Interest rate channel weaker : Strong reliance on the ER channel 4

5 Jan/93 Jul/93 Jan/94 Jul/94 Jan/95 Jul/95 Jan/96 Jul/96 Jan/97 Jul/97 Jan/98 Jul/98 Jan/99 Jul/99 Jan/ Jul/ Jan/1 Jul/1 Jan/2 Jul/2 Jan/3 Jul/3 Jan/4 Jul/4 Jan/5 Jul/5 Jan/6 Jul/6 Jan/7 Jul/7 Jan/8 Jul/8 Jan/9 Jul/9 Jan/1 Jul/1 Jan/11 IT was successful in bringing down inflation Average inflation before IT: Average inflation after introducing IT: 5.4 % 5 5

6 but not in stabilizing inflation around the MNB s target(s) % % Consumer price index Year-end targets Medium term inflation

7 HUF/EUR Exchange rate band inconsistent with IT

8 Jan-8 Mar-8 Jun-8 Sep-8 Dec-8 Mar-9 Jun-9 Sep-9 Dec-9 Mar-1 Jun-1 Sep-1 Dec-1 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Volatile risk premium: 5-year CDS-spread 8 basispoints

9 Volatile CDS spread due to high vulnerability Gross public debt/gdp(%) HU 5 PL 4 CZ 3 SK SL 2 LV LT BL, RO 1 Net external ET debt/gdp(%)

10 Volatile risk premium + fear of floating? 14 Jan 28=1 percent HUF/EUR exchange rate (Jan 28=1) MNB base rate (right-hand scale) 1

11 Overview The monetary policy framework in Hungary Macroprudential policy framework FX-lending: magnitude and key drivers Monetary policy in the presence of FX-lending Implications for institution design 11

12 Types of policies aiming at financial stability Crisis management Crisis containment: handling an acute liquidity crisis, preventing creditors/depositors run LOLR (central bank) Enhancing deposit insurance (fiscal authority) Crisis resolution: overcoming a solvency crisis Portfolio cleaning, recapitalisation, closing (fiscal authority) Crisis prevention (prudential policies) Microprudential: aimed individual institutions (supervisory authority) Macroprudential: aiming financial stability (post-crisis an increasing role for central banks) (cross border effects) 12

13 Macroprudential institutional framework in Hungary Pre-crisis Tri-partite system (Financial Stability Committee): Hungarian Financial Stability Authority (HFSA): microprudential supervision Central bank: macroprudential monitoring but no policy tools Ministry of Finance: regulatory power No clear mandate for macroprudential regulation and supervision No proper alignment of responsibilities and tools Example: MNB sent regular warnings (both to the FSC and publicly) about the risks of FX lending, but this was not followed by policy action by MinFin or HFSA 13

14 Overview The monetary policy framework in Hungary Macroprudential policy FX-lending: magnitude and key drivers Monetary policy in the presence of FX-lending Implications for institution design 14

15 Bruttó államadósság (a GDP arányában) Household savings proved to be low with compared with the high government debt G o v e r n m e n t d e b t / G D P LV LT RO BG HU PL EE PT MT SK CZ SI GR UK IT FR ES CY BE DE IE AT FI SE DK NL y =,476x + 19,759 R² =, Egy főre jutó GDP (EU átlaga=1; 21) Per capita GDP LV NO SK FI HR CZ LT BG PL RO GR HU IE EE ES DK SI LU AT SE PT FR DE CY NL IT UK BE y =,3235x + 26,48 R² =, Household net wealth / GDP A háztartások nettó pénzügyi vagyona (a GDP arányában; 29) Source: Eurostat

16 FX lending reasons and consequences HOUSEHOLDS Classical dollarization Short planning horizon - optimism Gambling motive BANKS Liquidity awash Cheap funding and cheap swaps lack of long term local funds Risk based competition ( Ninjaloans All in all: lack of effective macroprudential regulation 1 % 12 9 Currency board Estonia Latvia Lithuania Bulgaria Romania Poland Hungary Czech Republic Slovakia Ratio of FX loans (25) Ratio of FX loans (28) Interest rate differential Cím: Minta Cím - Előadó: Minta Előadó 16

17 22.I. II. III. IV. 23.I. II. III. IV. 24.I. II. III. IV. 25.I. II. III. IV. 26.I. II. III. IV. 27.I. II. III. IV. 28.I. II. III. IV. 29.I. Net external debt a kind of private credit boom 7 % % Banking sector General government Corporate sector Net external debt (the 12-percent debt service to the GDP rate was not too high, relatively (1995: 33%))

18 2Q1 21Q1 22Q1 23Q1 24Q1 25Q1 26Q1 27Q1 28Q1 29Q1 21Q1 211Q1 Stylised facts on (unhedged) FX lending in proportion to GDP (%) HUF loans CHF-based loans EUR-based loans Other FX-based loans 18

19 FX lending and the background 'Fiscal alcoholism' HIGH PUBLIC DEBT High rate of inflation Global financial system foreign owned banking sector Boom in residential lending High HUF interest rates FX lendinglending 15% loan to deposit ratio (L/D) HIGH EXTERNAL DEBT

20 Why widespread FX lending is a systemic risk? Part 1: Solvency Banks do not have an open FX position (microprudentially may look OK), but households exchange rate risk can easily transform into credit risk of banks higher credit risk of the financial system gets reflected in sovereign spreads (contingent claim on the state) increases funding cost for banks due to (1) their sovereign exposure or (2) internal pricing of funds in cross-border banks (Note that this happens regardless of their individual portfolio quality! systemic contagion ) reinforces solvency risk (vicious circle) 2

21 The downside of borrowing in a safe haven currency 18 Jan 28= HUF/CHF exchange rate (Jan 28=1) HUF/EUR exchange rate (Jan 28=1) 21

22 28Q1 Q2 Q4 29Q1 Q2 Q4 21Q1 Q2 Q4 211Q1 Q2 Q4 Non-performing loan ratios (NPLs) on mortgages 16 percent percent Mortgage loans - FX Mortgage loans - HUF 22

23 Why widespread FX lending is a systemic risk? Why widespread FX lending is a systemic risk? Part 2: Liquidity Long-term mortgage credits were financed mainly by short-term foreign funding (L/D problem, maturity mismatch) or domestic deposits + FX swaps A freeze of the FX swap market can cause serious liquidity problems Just like a sudden depreciation, as FX swap contracts involve daily margin call requirements The central bank s LoLR capacity in FX is limited (by reserve size) International cooperation of central banks (swap lines) may help However, this help is by no means automatic or immediate 23

24 Dánia Letto. Svédo. Észto. Íro. Litvánia Olaszo. Finno. Magyaro. Portugália Szlovénia Franciao. Hollandia Spanyolo. Ausztria Románia Ciprus Németo. Bulgária Lengyelo. Görögo. Belgium Szlovákia Málta Cseho. Luxemburg % High loan/deposit ratio = high external funding ratio Málta Lettország Ciprus Írország Litvánia Luxemburg Románia Magyarország Belgium Hollandia Észtország Portugália Görögország Bulgária Finnország Dánia Szlovákia Franciaország Svédország Lengyelország Ausztria Csehország Németország Spanyolország Szlovénia Olaszország %

25 Jan-7 Apr-7 Jul-7 Oct-7 Jan-8 Apr-8 Jul-8 Oct-8 Jan-9 Apr-9 Jul-9 Oct-9 Jan-1 Apr-1 Jul-1 Oct-1 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 The other source of funding FX lending: domestic deposits + swaps billion EUR Net FX swap stock of the banking system 25

26 Jan-8 Mar-8 May-8 Jul-8 Sep-8 Nov-8 Jan-9 Mar-9 May-9 Jul-9 Sep-9 Nov-9 Jan-1 Mar-1 May-1 Jul-1 Sep-1 Nov-1 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 Recurrent turbulences in FX swap markets basis points month FX-swap implied yield spreads 26

27 Oct-8 Nov-8 Dec-8 Jan-9 Feb-9 Mar-9 Apr-9 May-9 Jun-9 Jul-9 Aug-9 Sep-9 Oct-9 Nov-9 Dec-9 Jan-1 Feb-1 Mar-1 Apr-1 May-1 Jun-1 Jul-1 Aug-1 Sep-1 Oct-1 Nov-1 Dec-1 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 and the use of MNB FX liquidity providing instruments 22 million EUR million EUR One-day FX swap facility 6-month FX-swap facility 3-month FX-swap facility 27

28 FX lemding: lessons from the crisis learnt EBCI, ESRB etc. (too late nothing to do with the accumulated stock): Country specific approach is requested Home and host country policies should be coordinated Long term local currency capital markets should be developed Level playing field should be taken into consideration Bans on fx lending may become counterproductive Adequate liquidity buffers should be provided Hungary MNB initiated responsible lending regulation (LTV caps, lower for FX) in 29, became effective at the beginning of 21 New government imposed an outright ban on FX mortgages in August 21 These measures were absolutely necessary to increase systemic resilience but the timing of their application (at the beginning of recovery) was procyclical Stock problem is not yet solved (recent government measures proved to be counterproductive) 28

29 Jan-7 Apr-7 Jul-7 Oct-7 Jan-8 Apr-8 Jul-8 Oct-8 Jan-9 Apr-9 Jul-9 Oct-9 Jan-1 Apr-1 Jul-1 Oct-1 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 FX loans virtually disappeared from new lending, New mortgage lending of Hungarian banks 2 HUF bn % HUF FX Proportion of HUF denominated contracts (right-hand scale) 29

30 212Q1 Q2 Q4 213Q1 Q2 Q4 214Q1 Q2 Q4 215Q1 Q2 Q4 216Q1 Q2 Q4 but the stock is here to stay for a while billion Ft Household FX loan stock - projection 3

31 Overview The monetary policy framework in Hungary Macroprudential policy FX-lending: magnitude and key drivers Monetary policy in the presence of FX-lending Implications for institution design 31

32 Main lesson 1: the constraints on monetary policy Widespread unhedged FX lending constitues a systemic risk thus imposing a serious financial stability constraint on a monetary policy that normally operates through the ER channel, as a depreciation increases both solvency and liquidity risk in the banking sector In a dowturn, the room for monetary easing may become very limited 32

33 Integrating macroprudential policy in the central bank operational framework Macro stability goal Price stability goal Financial stability goal Monetary policy tools Macroprudential tools : primary use of tool : secondary use of tool OR unintended consequence 33

34 Financial stability/monetary policy interaction in the MNB s practice Interaction between monetary and macroprudential policy mechanisms are complex, currently far from well-understood Because of the FX debt constraint, interaction is very important and explicit in the Hungarian case In day-to-day policymaking, need for a modus operandi : this involves some shortcuts Monetary policy decision-making formally takes into account financial stability constraints Perceived financial stability risk appears in the monetary policy reaction function of the MPM - model Interest rate reaction to risk premium shocks depends on whether the economy is perceived to be in normal mode (low δ) or crisis mode (high δ) A systemic stress indicator (among other info) is used to decide which regime we are in 34

35 Systemic financial stress indicator 1,,9,8,7,6,5,4,3,2,1, Systemic stress indicator Critical threshold 35

36 Interaction of monetary and macroprudential policymaking in the MNB Beside contemporaneous indicator, need for more strategic assessment (how far currently we are from the stability constraint?) One analytical tool for this is the credit risk stress test (normally includes a substantial ER shock), sometimes in reverse stress test form ( death zone estimations ) Regular financial stability chapter in the material for monthly rate-setting meetings + analysis of effects of macroprudential measures, if necessary Macroprudential policy takes into account monetary policy in some respects: e.g. in stress testing: the design of stress scenario, typical mon. pol. reaction to GDP or risk premium shock 36

37 Overview The monetary policy framework in Hungary Macroprudential policy FX-lending: magnitude and key drivers Monetary policy in the presence of FX-lending Implications for institution design 37

38 Main lesson 2: institution design Failure of the tri-partite system in Hungary to stop the dynamic increase of unhedged FX lending Microprudential regulation in itself is insufficient Macroprudential responsibility should be explicitly stated It should be clearly allocated among the stakeholders (central bank, FSA, MinFin) In any institutional setting, the central bank has to play a key role in macroprudential policymaking Macroprudential tools have to be allocated where the responsibility lies Cross-border macroprudential coordination is important (multilateral: ESRB, bilateral: home-host) 38

39 Recent developments in the institutional framework Recent change of Central Bank Act: delegates explicit macroprudential responsibility and regulatory tools to the MNB in the areas of: Countercyclical buffer SIFI capital regulation Curbing excessive lending Containing systemic liquidity risk 39

40 Lessons from the crisis: macroprudential policy is required Achieving price stability is necessary but not enough to achieve economic stability: financial stability should be considered by central banks Financial sector is not frictionless: procyclical behavior with nonlinearities (credit crunch, sudden stop, overheating, fx lending ) Better understanding of contagion Inflation target is rather short run macroprudential target is for medium/long term Macroprudential and monetary policy may have conflicts by construction A good institutional framework is of great value