A flow-of-funds perspective on non-standard monetary policy: the euro area in comparison with the US

Transcription

1 Philippine Cour-Thimann Bernhard Winkler A flow-of-funds perspective on non-standard monetary policy: the euro area in comparison with the US Monetary analysis and monetary policy frameworks Conference in Edinburgh, 10 April 2014 Views expressed are those of the presenters and not necessarily those of the ECB. We are grateful to Celestino Giron, Michele Lenza, Philippe Moutot and Philippe de Rougemont for their contributions or suggestions.

2 1 Introduction 2 The central bank balance sheet size as a tool 3 The central bank balance sheet asset composition in a flow-of-funds perspective 4 Focus: flows of funds for euro area corporates 5 Conclusion 2

3 1. Introduction The central bank measures induced large changes in their balance sheet size and composition. The central bank acted as: Lender of last resort, intermediary of last resort between private borrowers and lenders Leverager of last resort Market maker of last resort We focus on quantities and use flow-of-funds to address the question of how the Eurosystem balance sheet matters for money and credit flows in the euro area and to trace the impact of the measures: On money and credit flows and macroeconomic developments more generally, in the euro area and the US On flows of funds to non-financial corporations in the euro area 3

4 1 Introduction 2 The central bank balance sheet size as a tool 3 The central bank balance sheet asset composition in a flow-of-funds perspective 4 Focus: flows of funds for euro area corporates 5 Conclusion 4

5 Central bank balance sheet expansion 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Jan 07 Balance sheets of major Central Banks, total assets as % of GDP Eurosystem (lhs) Federal Reserve (lhs) Bank of England (lhs) Bank of Japan (lhs) Swiss National Bank (rhs) May Sep 07 Jan 08 May Sep 08 Jan 09 May Sep 09 Jan 10 May Sep 10 Jan 11 May Sep 11 Jan 12 May Sep 12 Jan 13 May Sep 13 Jan % 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Source: ECB, Federal Reserve, Bank of England, Bank of Japan. Last observations: Last points in February 2014.

6 2. Balance sheet size in a flow-of-funds perspective Question: To which extent has the central bank used the size of its balance sheet as a tool during the crisis? Next to the policy interest rate tool, central banks have put their balance sheets at use in the crisis to ensure ultimately the maintenance of price stability. But differently so: Relation to interest rate decisions: complementarity (ECB) versus substitution (FED) Quantitative versus qualitative/credit easing : size and composition (ECB and FED) Balance sheet expansion / contraction: endogenous (ECB) versus exogenous (FED) 6

7 Not ALL sectors can deleverage at the same time Leverage= Debt / Assets How to increase A D D L D A 1 A D D (decrease leverage)? A. Increase net assets (thus savings): 1 A D S Some agents have to accommodate the increasing savings A role for the government (e.g. spending, capital formation)? or the rest of the world? B. Liquidation of debt: D, A Asset price declines, self-defeating leverage loop (Adrian and Shin, 2010), disorderly deleveraging A role for the central bank? (e.g. Bindseil and Winkler, 2012) A rationale for central bank balance sheet expansion when other sectors deleverage: support asset prices and avoid disorderly deleveraging (but caution on side effects and moral hazard). 7

8 Through its balance sheet expansion, the Eurosystem leveraged up as private sectors deleveraged, but not recently Cumulated change of debt-to-assets ratio and sectoral contributions Source: ECB Euro Area Accounts. Last observations: 2013Q3. Extension from P. Cour-Thimann and B. Winkler (2012), The ECB's nonstandard monetary policy measures: the role of institutional factors and financial structure, Oxford Review of Economic Policy,Vol. 28, N. 4. Notes: A sector s contribution to euro area leverage is given by the ratio of its debt (liabilities) over total notional assets. It is expressed in percentages and in notional terms. For comparison, the dashed red line shows the marked-to market debt-to-asset ratio. The marked-to market developments are those of relevance for the discussion on the role of central banks in supporting asset price inflation. 8

9 Leveraging-up by the public sector: How does the euro area compare with the US? Consolidated sum of government and central bank liabilities (accumulated growth (solid line) and contributions to growth (bars)) Euro area US Source: Celestino Girón and Marta Rodríguez-Vives, Balance-sheet adjustment and the correction of macroeconomic imbalances, mimeo. Last observation: 2013 Q3. Notes: Cumulated growth rates of the stock of liabilities of the government and central banks since end-2006 (solid line) and their respective contributions (bars). The sum of government and central bank liabilities are consolidated (by removing government deposits at the central banks). Dotted line: share of liabilities of the total economy in % of GDP of the respective economy. 9

10 If the rationale is valid, isn t the contraction in the Eurosystem balance sheet since mid-2012 pro-cyclical? Endogenous to the 3-year LTRO repayments; but also exogenous to parameters in refinancing operations (e.g. set of eligible collateral, haircuts) Implications of the contraction for credit and price developments (e.g. Cobham and Kang, 2012 on the BoE)? BUT: The relationship between central bank money, broad money and credit developments is blurred Need for a contingent view on the central bank balance sheet size: current size masks the supportive effect from tail risk mitigating measures (commitment to FRFA for long and OMTs) The Eurosystem balance sheet is consolidated: leverage differs at the NCB level; central bank leverage buffered the internal euro area rebalancing. 10

11 The Eurosystem intermediated liquidity, providing it to stressed banking systems and absorbing it in the core Liquidity provision and absorption throughout the Eurosystem External deficit group External surplus group Source: Updated from Source: P. Cour-Thimann, Target balances and the crisis in the euro area, CESifo Forum 14, Special issue, April Last observation: End-January Notes: Liquidity provision, on the positive side = Lending to euro area credit institutions related to MPOs denominated in euro + Claims on euro area residents denominated in foreign currency + Other claims on euro area credit institutions denominated in euro + Securities + Other assets. Liquidity absorption, on the negative side = Deposits of MFIs. 11

12 1 Introduction 2 The central bank balance sheet size as a tool 3 The central bank balance sheet asset composition in a flow-offunds perspective 4 Focus: flows of funds for euro area corporates 5 Conclusion 1 2

13 3. Balance sheet asset composition in a flow-of-funds perspective Question: Which channels of transmission did the non-standard / unconventional monetary policy measures take? Before analysing flows of funds, consider first how the balance sheet composition matters for the sought economic effects: Reflecting different financing structures bank-based (euro area) or market-based (US), measures differed: collateralised lending (ECB) versus asset purchases (FED) 13

14 Financing and transmission channels in the euro area: largely bank-based Funding of the non-financial corporate sector in the euro area and the US (shares in cumulated debt transactions) Given the EMU set-up and financial structure, the implementation of monetary policy in the euro area is: 1. Decentralised 2. Through banks 3. Mainly collateralised lending with a wide range of assets eligible 4. Different to the US FED (open-market operations) Sources: Eurostat, ECB, FED. 14

15 ECB/Eurosystem (EUR billion) Rubric As reflected in the asset side of the central bank balance sheets Eurosystem (EUR billion) US Federal Reserve (USD billion) 2,800 2,600 2,400 2,200 2,000 1,800 1,600 1,400 1,200 1, Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Net foreign assets Covered Bond Purchase Programme Main refinancing operations USD repo and swaps Covered Bond Purchase Programme 2 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11 Jan 12 Jul 12 Jan 13 Jul 13 Jan 14 Domestic assets Longer term refinancing operations Marginal lending facility + Fine tuning operations Securities Markets Programme Sources: ECB, Federal Reserve. Note: Simplified balance sheets. Compared to the central banks financial statements, a number of items are consolidated. For the methodology underlying the simplified presentation, see the box entitled Simplified balance sheets: methodology in the article entitled Recent developments in the balance sheets of the Eurosystem, the Federal Reserve System and the Bank of Japan, Monthly Bulletin, ECB, October 2009.

16 A sectoral perspective on the ECB S non-standard measures Less conventional Banks NFCs Gov Lending * MRO Short term ELA LTRO Medium term ELA Long term Outright Purchases Short term Medium term Long term CBPP CBPP Trade credit insured Commercial Paper ABS bond purchase OMT SMP increasing risk increasing risk * : Forbidden by the Treaty Collateral No collateral : Among the potential measures 16

17 Flows-of-funds perspective on the transmission of non-standard measures 1. Monetary (loan-deposit) channel via bank balance sheets 2. Portfolio balance channel (via asset substitution in response to central bank asset purchases) Flow vs. stock equilibrium? 3. Role of segmented markets / preferred habitat investors 4. Flow rebalancing vs. stock deleveraging 5. Sectoral counterpart view: debt is an asset 6. Sectoral balance sheet view: debt finances assets 17

18 Money and credit growth: subdued in the euro area as their recovery was not sustained, sharper decline and rebound in the US since 2008 Euro area US Source: ECB. Last observation: 2013 Q4 (except for euro area accounts: 2013 Q3). Notes: In annual percentage changes. FoF = Flows of funds from the euro area (respectively US) accounts. Non-banks buffered the drop in bank loans to the private sector, mainly in the US.

19 What did euro area banks invest in? Net acquisitions of loans and debt securities of the non-financial sector by MFIs (4-quarter sums) Last observations: 2013 Q3. Source: ECB.

20 Who bought government bonds? Sector holdings of euro area government securities (EUR billions in 4-quarter moving sums) Source: ECB. Notes: 1) For the observation of 2013 Q4, acquisitions of non-mfi debt securities by non-residents, (2) Households, non-financial corporations, government and OFI other than investment funds. For 2013 Q4, it also includes ICPFs and investment funds. Given its residual nature, it also covers valuation differences, estimation errors and statistical discrepancies, (3) For 2013 Q4, included together with the nonfinancial sectors residually, (4) MFIs (including MMFs) other than Eurosystem, 5) 2012 Q4 include government bonds received by the Irish central bank as a result of the liquidation of Irish Resolution Corporation.

21 Sector decomposition of debt ratios Euro area (% of GDP) US (% of GDP) Last observations: 2013 Q3. Source: ECB, Eurostat, Federal Reserve. Banks: disorderly deleveraging was avoided, ECB acted on liability (not asset) side Corporates: debt ratios similar to US levels, but debt redemption continues

22 Debt-to-asset ratios for the euro area and the US (in percentages) Non-financial corporations Households Source: ECB, Eurostat, Federal Reserve. Last observations: 2013 Q3. US private sectors more sensitive to asset valuations Corporates: leverage broadly similar in US and Euro area US more pronounced household leverage cycle than in Euro area

23 1 Introduction 2 The central bank balance sheet size as a tool 3 The central bank balance sheet asset composition in a flow-of-funds perspective 4 Focus: flows of funds for euro area corporates 5 Conclusion 2 3

24 4. Focus: flows of funds for euro area corporates Acting via the funding side of banks, the ECB characterised its set of non-standard measures as enhanced credit support : supporting the transmission of the policy interest rate decisions to the real economy sectors: households and nonfinancial corporations. We focus on non-financial corporations. This aim still held during the sovereign debt crisis period, as the challenge to address evolved from tensions in the interbank market to financial market fragmentation along national borders in the euro area, also under regulatory pressure on bank balance sheets. Question: What was the extent of the enhanced credit support to corporates? 24

25 A counterfactual analysis shows that non-standard measures supported bank loans to the private sector, especially corporates Difference between policy and no-policy scenarios for loans to private sector (differences in logarithms) Source: D. Giannone, M. Lenza, H. Pill and L.Reichlin (2012), The ECB and the interbank market, CEPR Discussion Papers 8844 (Figure 6), also published in Economic Policy. Notes: In the model the impact of non-standard measures (in the three years following the Lehman collapse) is solely through the channel of their effects on money market spreads. The figure reports the differences in the logarithms of (i) short-term loans to NFCs (blue solid line), (ii) long-term loans to NFCs (blue solid line with circles), (iii) short-term loans to Households (red dashed line) and (iv) long-term loans to Households (red dashed line with circles) in the policy and in the no-policy scenarios. Positive figures indicate a positive effect of the non-standard measures. 25

26 As a result, short-term bank loans to corporates were in line with past regularities, but not the longer-term loans Short-term bank loans to corporates (loans to NFCs with a maturity below 1 year, annual percentage changes, seasonally adjusted) Longer-term bank loans to corporates (loans to NFCs with a maturity above 1 year, annual percentage changes, seasonally adjusted) Source: D. Giannone, M. Lenza and L.Reichlin (2013), Money, credit, monetary policy and the business cycle: what changed during the crisis?, mimeo, updated from CEPR Discussion Papers Last observations: June Notes: Actual annual growth rates (solid line) and distribution of the conditional forecasts (coloured fan). Note: short-term bank loans were also supported by a substitution away from longer-term bank loans. 26

27 Financing of euro area corporates: the broader picture Addressing impairments in transmission and avoiding the materialisation of tail risks supported the euro area as a whole, and through the banking sector the corporates but to a limited extent. The counterfactual analysis suggests that the non-standard measures were insufficient to support bank loans to corporates. Since financing of the euro area economy is mostly bank-based, especially for SMEs whose role is crucial for employment and production, this weighs on the economic recovery. From this, one could conclude: need for the ECB to support liquidity to banks and support SME financing, especially given regulatory pressure on banks and AQR. BUT monetary policy cannot and should not (fully) restore pre-crisis levels of credit flows to corporates. Other factors play a role in their weakness (illustrated below): Necessary corporate balance sheet rebalancing in stressed-countries Possible substitution among corporate financing sources 27

28 Regional perspective on sectoral imbalances Continued surpluses in the non-stressed euro area countries, closing deficits in the stressed countries, given rebalancing for corporates Net lending/net borrowing (four-quarter sums; percentage of GDP) External surplus countries External deficit countries Source: Eurostat and ECB. Last observations: 2013 Q2. Notes: The net lending/net borrowing have been adjusted to exclude acquisitions less disposals of non-financial non-produced assets (to avoid the distortions caused by the large proceeds from the sale of UMTS mobile phone licences in 2000). Financial corporations include the central banks. External surplus countries: had an external surplus during (Germany, Belgium, The Netherlands, Luxembourg, Finland, Austria). External deficit countries: all others. 28

29 Financing became less bank-based as (large) corporates turned to more market-based funding (at prices also supported by the ECB measures) Corporate funding: MFI loans borrowing, debt securities and quoted shares net issuance (4-quarter flows in billion euro) Source: ECB. Last observations: 2013Q3. 29

30 and other buffers such as inter-company loans (not visible from consolidated corporate sector data), which could also benefit SMEs Corporate non-consolidated debt (13,5 trn euro) by instrument/counterpart Trade credits and loans granted by NFCs (4-quarter flows in billion euro; growth rate YoY) Sources: Eurostat, ECB (Internal estimates for trade credit). Latest observation: 2013Q3 30

31 1 Introduction 2 The central bank balance sheet size as a tool 3 The central bank balance sheet asset composition in a flow-of-funds perspective 4 Focus: flows of funds for euro area corporates 5 Conclusion 3 1

32 5. Conclusion Rubric 1 st Question: To which extent has the central bank used the size of its balance sheet as a tool to maintain price stability? The balance sheet size is indicative of the central bank impact on inflation to a much lesser extent for the Eurosystem than for the Fed, given the complementarity with interest rate decisions and measures that address tail risks to price stability without immediate reflection in the balance sheet. 2 nd Question: Which channels of transmission did the non-standard monetary policy measures take? In difference to the Fed, the ECB acted through collateralised lending. Disorderly deleveraging was avoided, but banks invested central bank money largely in government bonds, little to lend to corporates. 3 rd Question: What was the enhanced credit support to corporates? A counterfactual analysis shows an effective, but limited enhanced credit support to corporates, but balance sheet adjustments are necessary in some countries and corporates could in part turn to other funding sources, which the ECB measures actually also supported. 32

33 Background 33

34 Useful references Rubric ECB Working Paper No (April 2013) by Cour-Thimann and Winkler on ECB non-standard measures (OxREP 2012) October 2011 ECB Monthly Bulletin article on flow-of-funds perspective on the financial crisis 2012 & 2013 ECB Financial Integration Reports: Special Features on sectoral balances, December 2013 MB Box 4 ECB Working Paper No (2011) by Riccardo Bonci on transmission of monetary policy via FoF Chapter 7 on cross-checking and the flow-of-funds, in Papademos and Stark (eds.): Enhancing Monetary Analysis, ECB October 2010 Cour-Thimann, P. (2014), Monetary policy and redistribution: information from central bank balance sheets in the euro area and the US, Review of Economics, forthcoming. Cour-Thimann, P. (2013), Target balances and the crisis in the euro area, CESifo Forum 14, Special Issue, April. Winkler, van Ried and Bull (eds): A flow-of-funds Perspective on the Financial Crisis, Vol. I and II, Palgrave Macmillan,

35 Money, Credit and Sectoral Balance Sheets Rubric Foreword Peter Praet Money, Credit and the Flow of Funds in Monetary Policy; Bernhard Winkler, Ad van Riet and Peter Bull PART I: MONEY, CREDIT AND LIQUIDITY IN THE FLOW OF FUNDS 2. The Quantity Theory of Money and the Flow of Funds; Carmelo Salleo 3. The Quantity Theory of Credit and Some of its Policy Implications; Richard Werner 4. Euro Area Money Demand and International Portfolio Allocation; Roberto A. De Santis, Carlo A. Favero and Barbara Roffia 5. Global Liquidity and Credit Booms; Claudio Borio, Robert McCauley and Patrick McGuire 6. Dual Liquidity Crises; Ulrich Bindseil and Adalbert Winkler 7. Determinants and Consequences of Credit Tightening; Riccardo De Bonis, Luigi Infante and Francesco Paternò PART II: SECTORAL ANALYSIS OF THE FLOW OF FUNDS 8. Financial Intermediary Balance Sheet Management; Tobias Adrian and Hyun Song Shin 9. Bank Leverage and the Credit Cycle in the Euro Area; Celestino Gíron and Silvia Mongelluzzo 10. Households' Financial Portfolio Choices; S. Avouyi Dovi, Vladimir Borgy, Christian Pfister, Michael Scharnagl and Frank Sédillot 11. Household Balance Sheets and Debt; Jacob Isaksen, Paul Lassenius Kramp, Louise Funch Sørensen and Søren Vester Sørensen 12. Analysing Recent Developments in the Financing of Euro Area Non-Financial Corporations; Laurent Maurin 13. Monetary Policy and the Flow of Funds in the Euro Area; Riccardo Bonci

36 Macroeconomic Imbalances and Risks to Financial Stability Rubric Foreword; Vítor Constâncio Introduction and Overview; Bernhard Winkler, Ad van Riet and Peter Bull PART I: FLOW OF FUNDS AND MACROFINANCIAL ANALYSIS 2. Tobin LIVES; John Duca and John Muellbauer 3. Balance sheets in The Great Moderation; Richard Barwell and Oliver Burrows 4. Japan's Flow of Funds Accounts; Shuji Kobayakawa and Ryoichi Okuma 5. Financial Accounts - the Case of Slovenia; Janez Fabijan PART II: FLOW OF FUNDS AND MACROECONOMIC IMBALANCES IN EUROPE 6. The Financial Crisis in the Light of Euro Area Accounts; Philippe de Rougemont and Bernhard Winkler 7. The Surveillance of Macroeconomic Imbalances in the EU; Carlos Cuerpo and Alexandr Hobza 8. Debt, Assets and Imbalances in the Euro Area; Christophe Van Nieuwenhuyz PART III: FLOW OF FUNDS AND FINANCIAL STABILITY 9. Systemic Risk Contingent Claims Analysis; Nuno Silva, Nuno Ribeiro and António Antunes 10. Financial Accounts and Financial Stability in Lithuania; Virgilijus Rutkauskas 11. Financial Linkages of the Financial Sector in Austria; Michael Andreasch