Macroprudential policy instruments

Transcription

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2 Macroprudential policy instruments Somnath Chatterjee Bank of England November 2013 Bank of England 2013

3 Disclaimer The views expressed in this presentation are those of the presenter and not necessarily those of the Bank of England or members of either the Monetary Policy Committee or the Financial Policy Committee 3

4 Outline Introduction Which tools are available for the FPC s use? Which indicators will the FPC routinely look at? What is the expected impact on financial stability and growth? Open issues 4

5 Which macroprudential tools? FPC will have immediate powers over: countercyclical capital buffer (CCB); and sectoral capital requirements (SCRs) Future candidates? leverage ratio (in 2018, subject to review in 2017); liquidity tool; margining requirements; loan-to-value (LTV)/loan-to-income (LTI) restrictions; (credit limits); etc. Policy Statement: The FPCs Powers to Supplement Capital Requirements (2013) 5

6 How much of banks funding must be sourced from capital According to Basel III standards, banks must fund risk-weighted assets with at least a certain amount of capital, known as minimum requirements of capital. In addition to the minimum requirements, banks will be required to have a number of capital buffers. These are meant to ensure that banks can absorb losses in times of stress without necessarily being deemed in breach of their minimum capital requirements. The CCB tool would allow the FPC to change capital requirements above normal microprudential standards. 6

7 Total assets, risk-weighted assets and capital requirements 7

8 Countercyclical capital buffer (CCB) Additional temporary capital buffer applied at an aggregate level FPC sets CCB rate for UK lending Other countries set national CCB rate for overseas lending 8

9 Policy process timeline Risk assessment process FPC decisions Coordination process Implementation Impact 9

10 Core indicators to guide decision-making Core indicators serve two purposes: internally: starting point for analysis and consistency in decisionmaking; and externally: transparency, accountability, predictability They are not meant as a substitute for judgement Which indicators? complements to the credit-gdp gap; simple, high-level, understandable; and categorisation: bank balance sheet stretch, borrower stretch, terms and conditions in financial markets 10

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12 Leverage and risk-based capital ratios 12

13 Market-based banking system indicators 13

14 Credit 14

15 Market expectations of stock market volatility - VIX Sources: Bloomberg and Bank calculations. (a) One-month moving average. The VIX is a measure of market expectations of 30-day volatility as conveyed by S&P 500 stock index options prices. 15

16 Conditions and terms in markets (2) 16

17 What do they tell us in the current conjuncture? (1) Weak credit......and elevated spreads on new lending Credit-to-GDP gap (percentage points) Credit growth (per cent on a year earlier) Per cent / percentage points Blended UK mortgage spread Blended UK corporate lending spread Basis points Sources: Bank of England, ONS and Bank calculations Source: Bank of England, Council of Mortgage Lenders (CML), British Bankers Association, Bank of America Merrill Lynch, de Montfort University, Bloomberg and Bank calculations

18 What do they tell us in the current conjuncture? (2) But weak profitability......and low investor confidence Return on assets before tax Per cent H Sources: Published accounts and Bank calculations. Senior CDS premia(b) Subordinated debt spread(c) Basis points 1, Sources: Markit Group Limited, UBS Delta, Thomson Reuters Datastream, published accounts and Bank calculations. 18

19 Sectoral credit growth Sources: ONS, Bank of England, published accounts and Bank calculations. (a) Twelve-month nominal growth rate of credit. Household series includes all liabilities of the household and not-for-profit sector. Commercial real estate series includes UK-resident banks' and building societies' claims on the sector (including lending for development of buildings). Intra-financial series, derived from published accounts, includes lending to other banks and other financial corporations. The series is not adjusted for mergers / acquisitions. This contributes to large growth rates in some periods e.g (Midland/HSBC) and 2007 (RBS/ABN Amro) as they can result in step changes in the size and interconnectedness of the major UK bank peer group. 19

20 Sensitivity of funding costs to leverage 20

21 Net Stable Funding Ratio NSFR Structural funding ratio, ensure banks fund illiquid assets with stable sources of funding. Aim to agree by end 2014, implement Designed with a much broader coverage than the LCR, capturing all balance sheet assets and liabilities. Uses a 1 year time horizon to distinguish between liquid and less liquid assets and stable and less stable liabilities. 21

22 Basic NSFR Design Available Stable Funding Stable liabilities are given high ASF factors. These include: All liabilities with maturity >1 year Retail deposits Wholesale non-financial deposits Required Stable Funding Liquid assets are given low RSF factors. These include: Cash and HQLA Short dated bank loans Longer dated loans face higher RSF factors, which essentially means they should be funded by stable deposits or long term funding. 22

23 Empirical evidence on NSFR design 2010 version of NSFR at end 2006 for 112 banks, in ascending order, with banks that subsequently failed denoted in red surviving failed 180% 160% 140% 120% 100% 80% 60% 40% 20% % 23

24 Empirical evidence on NSFR design Deposit/Total Asset ratio at end 2006 for 112 banks, in ascending order, with banks that subsequently failed denoted in red 24

25 Policy process timeline Risk assessment process FPC decisions Coordination process Implementation Impact 25

26 Credit conditions and aggregate demand Credit boom in Ireland and Spain concentrated in real estate construction sectors UK s credit boom drove up property prices and lending within the financial sector stimulus to growth smaller? How much of a macro-prudential tightening is real vs nominal => scope for monetary policy 26

27 Practical implementation: policy process timeline 6-12 months X months 12 months? Risk assessment process FPC decisions Coordination process Implementation Impact Lags in data availability Conflicting indicators, consensual decision-making, lobbying, decisions may be unpopular, costbenefit analyses CRDIV/CRR CCB: Firms have 12 months SCR: as soon as is reasonably practicable, requirement to consult Economic/ behavioural lags 27

28 Open issues How to balance resilience v credit supply? How activist should policy be? Coordination in relation to: microprudential regime monetary policy Making mistakes without losing credibility 28