New setup of Financial Stability framework: Internal conflicts and cooperation. Central bank of Armenia Andranik Grigoryan

Transcription

1 New setup of Financial Stability framework: Internal conflicts and cooperation Central bank of Armenia Andranik Grigoryan

2 Different policy levers Price stability the primary and sometimes sole mandate of monetary policy. Financial stability a realm of prudential regulation and supervision (often managed by agencies separate from the central bank).

3 Benign neglect approach Most of the central banks took a benign neglect approach where the Monetary policy reacts to movements in asset prices and credit aggregates only to the extent they affect inflation The role of monetary policy to respond to the macroeconomic consequences of financial instability, if and when it is materialized.

4 As a result Recognition of the need to mitigate crisis risk proactively, rather than only relying on cleaning up after a crisis. Evidence that the Price stability is no longer sufficient to ensure macroeconomic stability. Shift of emphasis on containing systemic risk by complementing traditional microprudential policies aimed at individual institutions with macroprudential policy frameworks.

5 Armenian financial system cleaning of Banking system, Banking supervision and regulation development, Monetary policy challenges to tackle with high inflation development of banking system and financial infrastructure, Banking Supervision is in line with Basel, Monetary policy moving to inflation targeting Financial system and macro economy suffering from Global financial crisis, Supervisory and macro prudential tools to maintain financial system stability, Inflation expectations are mainly anchored

6 Armenian banking system intermediation 80% 70% 60% 50% 40% 30% 20% 10% 0% 74.5% 45.3% 35.0% Loans to GDP Deposits to GDP Assets to GDP

7 Macroeconomic performance Trillions AMD % 15% 10% 5% 0% 5% 10% 15% 20% Nominal GDP (left axis) CPI (Dec o Dec, %) (right axis) Real GDP growth (right axis)

8 Financial Intermediation Thousands US dollar % 140% 120% 100% 80% % 40% 20% 0% 0 20% GDP per capita 2015 (left axis) annual growth in credit to GDP ratio (right axis) PP Credit to GDP 2014 (right axis)

9 CBA actions during 2009 economic crisis Formation of Financial stability committee, frequent meetings of the committee FX interventions intended to smooth short time and sharp fluctuations of FX rate Continuous decrease of repo rate during the year, after shock Increase of repo supply and extension of longer term repo by the CBA Interventions in T bills secondary market (the CBA increased its T bills portfolio to indirectly support market liquidity) Intensified and targeted supervision of financial institutions

10 CBA actions during 2009 economic crisis (2) All measures were targeted to ease credit crunch and increase banking liquidity, assure Financial stability Inflation was anchored for that period of time

11 4,000 3,500 3,000 2,500 2,000 1,500 1, Non performing loans vs. total loans 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% Billions AMD Jan 2008 Apr 2008 Jul 2008 Oct 2008 Jan 2009 Apr 2009 Jul 2009 Oct 2009 Jan 2010 Apr 2010 Jul 2010 Oct 2010 Jan 2011 Apr 2011 Jul 2011 Oct 2011 Jan 2012 Apr 2012 Jul 2012 Oct 2012 Jan 2013 Apr 2013 Jul 2013 Oct 2013 Jan 2014 Apr 2014 Jul 2014 Oct 2014 Jan 2015 Apr 2015 Jul 2015 Oct 2015 Jan 2016 Total Assets (left axis) Total Loans (left axis) NPL % (right axis)

12 Leaning against the wind The 2009 crisis proved that benign neglect approach is not the best in coping with growing risks and threats in the economy. The CBA s actions on financial stability front proved to be successful at that time, supporting the monetary policy and price stability goal. This was the approach where policy stance is chosen to be tighter than the one justified by the stabilization of inflation (traditional central bank goal) to limit the buildup of financial risks Proponents of LAW argue the policy rate may not be the best tool to deal with financial risks, especially when compared to micro and macro prudential tools. And this was true for Armenia.

13 CBA actions during market crisis Increase of Lombard repo rate by 1275bp, more than X2 Increase of policy rate by 200bp Increase of reserve requirement for FX liabilities X2 FX interventions intended to smooth short time and sharp fluctuations of FX rate Verbal interventions Lift of risk weights for FX loans, decrease of risk weights for AMD mortgage loans Decrease of reserve requirement for long term liabilities Inflation was lower of the upper boundary of monetary policy target

14 CBA actions during market crisis Stabilization of FX market, improve short term liquidity, improve liquidity gap by prolongation of the tenor of liabilities Changes of risk weights aimed to restrain FX loans and stimulate origination of AMD loans

15 Policy rate (Refinancing Rate) 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 15

16 Main tasks of CBA after 2015 Price stability Financial stability according to the latest amendments of Constitution in 2015

17 Price stability Starting from 2006 the CBA moved to inflation targeting strategy. Decision making process in the CBA CBA board On a monthly basis it makes decisions on policy interest rate based on the information provided by the Forecasting Group. MP committee Committee makes its sessions on a weekly basis and discusses the main developments related to the banking sector, fiscal policy and inflation. Forecasting group Meetings are scheduled on a monthly and quarterly basis. During of meetings the main developments, forecasts for upcoming 12 month period and suggestions on the change of the policy rate are discussed.

18 Financial Stability Starting from 2015 Financial Stability maintenance is one of the primary goals of the CBA Decision making process in the CBA CBA board Makes decisions on financial stability policy including macroprudential and crisis management policy. FS committee Committee conducts its sessions on a quarterly basis and discusses the main developments of external sector, macroeconomy and financial system. It also discusses the assessments of the financial system stability and resilience (including the results of stress tests, satellite models) and makes suggestions on FS policy implementation.

19 CBA as mega regulator Since 2015 risk based supervision principles are in place (partially, in testing period). CBA Financial supervision department is in charge of on site and off site supervision of institutions under CBA regulation. Decision making process in the CBA Since 2006 the Central Bank was given authority to regulate and supervise activities of all participants of the financial sector: Banks Credit organizations Lombards Insurance companies, Insurance brokers and Insurance agents Investment companies, Investment and Pension Fund managers, Loan Portfolio Securitization Fund, other security market participants Currency dealers and Exchange agencies Payment Organizations Licensing committee It discusses the issues related to procedures of prior approval of getting/terminating the license, registration, licensing of all financial participants, assessment of the professional adequacy and qualification of managers and other responsible employees. It also discusses the violations made by the parcipants and the feasibility of implementing appropriate sanctions.

20 CBA mandates and tasks contributing to financial stability maintenance Oversight of payment system Financial stability monitoring, stress tasting and crisis management Financial system supervision on site, off site Emergency Liquidity Assistance Financial stability Monetary policy tools Cooperation with international organizations responsible for Financial stability and financial institutions supervision Improving of financial literacy

21 The structure of financial stability maintenance Identification and analysis of potential risks and their impact Monitoring and analysis Macroeconomic Financial Financial Financial environment markets institutions infrastructure Using projections of MP DSGE model Evaluation of risks and ranges of their fluctuation Policy implementation Inside the interval of Financial stability Assessment Near the boundaries of Financial stability interval, the probability of violations Outside the interval of Financial stability Preventive Corrective Recovery actions actions actions Quarterly FS committee meetings after MP forecasting team Financial stability

22 References 1. IMF Working Paper A Financial Stability and Interest Rate Policy: A Quantitative Assessment of Costs and Benefits Andrea Pescatori and Stefan Laseen IMF staff report Monetary policy and financial stability August Internal working paper Financial stability framework, Central bank of Armenia, Financial Stability report, 2010, Central bank of Armenia 5. Financial Stability report, 2015, Central bank of Armenia

23 Thank you!