The financial crisis in the light of the Euro Area Accounts: A flow-of-funds perspective

Transcription

1 The financial crisis in the light of the Euro Area Accounts: A flow-of-funds perspective Bernhard Winkler* European Central Bank Universitá di Trento 24 May 212 * Based on joined work with Ph. de Rougemont and C. Giron, views expressed should not be attributed to the ECB

2 Content I. Introduction II. Sectoral (im-)balances III. Leverage dynamics IV. Financial (dis-)intermediation 2

3 Introduction Re-discovering real-financial interlinkages after the financial crisis Role of financial imbalances & credit cycles in asset markets (BIS) Role of financial intermediation and financial innovation (securitisation, SPVs, liquidity in repo markets, brokers and dealers, underpricing of risk) (H.S. Shin) Real-financial feedback loops, role of credit conditions for consumption & boom-bust in mortgage markets (J. Muellbauer) off the radar screen in standard (neo-wicksellian & representative agent) DSGE/RBC macro and textbook inflation targeting 3

4 Introduction FoF / sectoral accounts provide 1. Integrated real and financial developments by institutional sector 2. Financial flow and balance sheets (leverage indicators) 3. Financial structure and intermediation patterns platform for new economic thinking & revisiting older traditions (Keynes & Hayek & Fisher, Friedman & Tobin, Minsky & Kindleberger, Modigliani ) policy relevance of quantities (as opposed to price variables): non-standard policy measures (size and composition of central bank balance sheet), including QE (portfolio balance channels) 4

5 FoF & the ECB s monetary policy strategy Primary objective of price stability Macroeconomic Projections Governing Council takes monetary policy decisions based on a unified overall assessment of the risks to price stability Economic analysis Analysis of economic dynamics and shocks Crosschecking FoF Monetary analysis Analysis of monetary trends FoF FoF Full set of information 5

6 Main uses of FoF a) Flow of funds matrix as natural extension of money demand Monetarist tradition on money, wealth and asset markets (Brunner/Meltzer): MV=PT role of real vs. financial transactions? Tobin (1969) portfolio balance approach, Ramb & Scharnagl (211) Financial Ideal Demand Systems (Deaton/Muellbauer, Blake) Asset demand in portfolio balance model: Demand by instrument r C+D r B r Eq r Ins Y W t-1 S Currency & Deposits a 1 b 1 c 1 d 1 e 1 f 1 g 1 Debt securities a 2 b 2 c 2 d 2 e 2 f 2 g 2 Shares and equity a 3 b 3 c 3 d 3 e 3 f 3 g 3 Insurance reserves a 4 b 4 c 4 d 4 e 4 f 4 g 4 Financial wealth 1 1 6

7 Main uses of FoF b) The flow of funds and real-financial transmission VAR: Bonci (as CEE 1996) monetary policy impact on FoF variables FAVAR: Hofmann (as Bernanke et al 25), BVAR, factor models revisit Brainard & Tobin (1968), Backus & Purvis (198)? Impact of MP shock on firms (Bonci 211): 4 Total financial liabilities 2 Total financial assets

8 Main uses of FoF c) The flow of funds projections and cross-checking Part of macro-projections since 23: models & accounting identities Enhanced in 28: expand on balance sheets / financial sector Use for monetary-financial scenarios around baseline Sectoral net lending / net borrowing in baseline Nonfinancial corporations Households Financial corporations Government T otal

9 Main uses of FoF d) The flow of funds and macro-financial risk analysis Flow of funds map fin. structure, leverage and intermediation chains (Adrian/Shin; Geanokoplos, ) Approaches with endogenous financial instability (Minsky, Austrians) Network of interlinked balance sheets for macro-prudential analysis Cross-sectoral gross balance sheet exposures (Castren 29) HH ROW OFI NFC MFI GOVT INS 9

10 Feedback loops and sectoral interactions during the crisis Global Economy Households Governments Policy interventions Non-Financial Firms Increased uncertainty & precautionary savings Reduced housing & financial wealth International confidence spillovers Increased funding costs & borrowing constraints Higher mortgage default Risk Premia Fiscal imbalances and sovereign risk Financial Sector Asset Prices & Net Worth Increased uncertainty Higher funding costs & borrowing constraints Lower profits & reduced or delayed investment International confidence & trade spillovers Increased corporate bankruptcy 1

11 Content I. Introduction II. Sectoral (im-)balances III. Leverage dynamics IV. Financial (dis-)intermediation 11

12 The financial crisis in the light of the Euro Area Accounts: sectoral (im-)balances Net lending/ net borrowing (financial surpluses and deficits): a sectoral and regional view See: 1. The financial crisis in the light of the euro area accounts: a flow-offunds perspective ECB Monthly Bulletin, October A sectoral account perspective of imbalances in the euro area Box 3 of the ECB Monthly Bulletin, February

13 Financial surpluses/deficit in the euro area : the traditional sectoral view Euro area net lending / net borrowing by sector 6 (EUR billions; four-quarter moving sum) h o u s e h o ld s f in a n c ia l c o r p o r a t io n s e u r o a r e a n o n - f in a n c ia l c o r p o r a t io n s go v e r n m e n t Sources: Eurostat, ECB. Latest observation: 211Q3. Net lending adjusted for transactions in nonproduced assets 13

14 Euro area income, savings, and capital formation by sectors (annual percentage change; percentage change contribution) Euro area savings Euro area gross disposable income contribution by sectors Government Financial corporations Non-financial corporations Households Euro area capital formation Sources: Eurostat, ECB. Latest observation: 211Q4.

15 Low but increasing household saving ratio and stabilisation in NFC net borrowing Household income, consumption and saving ratio (annual percentage changes for income and consumption; seasonally adjusted saving ratio as percentage of income) 17 Saving rate (SA)(lhs) Household income (rhs) Consumption (rhs) Sources: Eurostat, ECB. Latest observation: 211Q NFCs capital investment, savings and net borrowing (quarterly flow in billion euro seasonally adjusted by DGS) Nonfinancial investments Of which fixed capital formation Retained earnings and net capital transfers Net borrowing(+)/net lending(-)

16 NFC financing, by use of funds and by source of funds 8 7 NFCs financing* by use of funds (4-quarter flows in billion euro) Liquid assets Quoted equities purchas ed Net bo rrowing(+)/net lending(-) NFCs financing* by source of funds (4-quarter flows in billion euro) Other liabilities minus other assets Unquoted equity issued minus purchased Debt securities issued Quoted equities issued Loans (net of loans granted) Sources: Eurostat, ECB. Latest observation: 211Q2. * For expositional reasons, financing comprises in this presentation some transactions in assets that are netted here with liabilities (loans, unquoted shares, receivables, insurance technical reserves, and derivatives)

17 Holding gains and losses of household and financial corporations Financial corporations other economic flows on assets (in billion euro quarterly flow) Change in household net worth (four-quarter moving average; % gross disposable income) 8 6 Other flows in nonfinancial assets*** Other flows in financial assets and liabilities** Change in net worth due to net saving* Change in net worth Mutual funds shares Unquoted shares Debt securities Other Loans Quoted shares Sources: Eurostat, ECB. Latest observation: 211Q4. Sources: Eurostat, ECB. Latest observation: 211Q4. Note: data on nonfinancial assets are estimates by the ECB * comprises: net saving, net capital transfers received, and the discrepancy between the nonfinancial and the financial accounts ** mainly holding gains and losses on shares and other equity *** mainly holding gains and losses on real estate and land

18 Stabilisation (after a pronounced improvement) in government accounts Government expenditure, revenue, and deficit (billion euro per quarter; seasonally adjusted by DGS) Revenue 13 Expenditure 12 Surplus/deficit (rh) Sources: Eurostat, ECB. Latest observation: 211Q4.

19 Sectoral net lending/net borrowing by country grouping (deficit and surplus countries) Surplus countries Deficit countries (% of GDP, four-quarter moving sum) (% of GDP, four-quarter moving sum) 1 8 government financial corporations non-financial corporations households total economy government financial corporations non-financial corporations households total economy Sources: Eurostat, ECB. Latest observation: 211Q3. Surplus countries (current account): Belgium, Germany, Luxembourg, the Netherlands, Austria and Finland 19

20 Origin of the regional differentials in net lending and in saving In saving and investment ratios In sectoral saving ratios (% of GDP, four-quarter moving sum) (% of GDP, four-quarter moving sum) 8 6 contribution of the saving ratio differential (external surplus group minus external deficit group) contribution of the investment ratio differential (external surplus group minus external deficit group) net lending/net borrowing - external surplus group net lending/net borrowing - external deficit group S (s) -S (d) NFC s aving differential (co ntributio ns ) ho us eho lds s aving differential (co ntributio ns ) financial co rpo ratio ns s aving differential (co ntributio ns ) go vernment s aving differential (co ntributio ns ) to tal s aving - external deficit gro up total s aving - external s urplus gro up I (s) -I (d) Sources: Eurostat, ECB. Latest observation: 211Q2. Surplus countries (current account): Belgium, Germany, Luxembourg, the Netherlands, Austria and Finland

21 Corporates wage bill and profit measure in surplus and deficits countries GOS to VA of NFCs Deficit and surplus countries (national accounts) Wages of NFC in surplus and in deficit countries (national accounts) (4-quarter moving average) (trillion euro) external deficit group external surplus group exterrnal deficit group external surplus group Sources: Eurostat, ECB. Latest observation: 211Q3. Surplus countries (current account): Belgium, Germany, Luxembourg, the Netherlands, Austria and Finland 21

22 Regional leverage Debt ratio of the private non-financial sectors (percentage of gross disposable income or GDP) 12 NFCs in external deficit group NFCs in external surplus group households in external deficit group households in external surplus group Source: ECB, Eurostat. Latest observation: 211Q

23 Content I. Introduction II. Non-financial sector behaviour III. Leverage dynamics IV. Financial (dis-)intermediation 23

24 Leverage dynamics: debt and assets Some considerations on debt: (i) Debt is an asset Debts of a sector must be analysed by reference to assets of other sectors (ii) Debt is to finance assets Debt incurrence behaviour cannot be analysed separately from asset accumulation behaviour Debt, as opposed to equity, refers to commitments of future fixed payments 24

25 Point of methodology 1: Measures of indebtedness and leverage Leverage: debt to asset ratio value of debt compared to value of assets at market prices As opposed to debt to income ratio Related concepts: Capital ratio: (assets-debt)/assets Leverage multiplier: assets/(assets-debt) Debt to capital ratio: debt/(assets-debt) Equity ratio: equity/assets. Tobin s Q Two caveats: Consolidated basis or non-consolidated basis? To capture active additions/subtractions to the balance-sheet, one can look at debt to asset ratios calculated with notional stocks 25

26 Point of methodology 2: Notional leverage ratio and active leverage behavior Active leverage behaviour is measured by the change in notional stock of debt to asset ratio Example: debt to asset ratio, financial institutions.1.8 Year on year change of logarithms, contributions Changes in asset prices Changes in debt prices Active leverage (changes in the notional ratio) debt to financial assets (headline ratio).1.8 Notional stocks are transactions cumulated on outstanding amounts since Thereby price effects are excluded (besides price changes affecting the transactions themselves) Sources: Eurostat, ECB Latest observation: 211Q2. 26

27 Similar levels of debt in the euro area and the US, but different sector composition Euro area (% of GDP) US (% of GDP) NFCs Households Governmnet Financial institutions (rhs) NFCs Households Governmnet Financial institutions (rhs) Sources: EAA (ECB and Eurostat) and US FoF (US Federal Reserve) Notes: Debt defined as loans (other than intercompany loans), securities other than shares or financial derivatives, money market fund shares and deposits Latest observation: 211Q3 27

28 Debt-to-assets: NFC leverage similar in the two areas but higher leverage for US Households NFCs (% of assets) Households (% of assets) EA US EA US Sources: EAA (ECB and Eurostat) and US FoF (US Federal Reserve) Notes: Debt defined as liabilities excluding equity, intercompany loans and other accounts payable Latest observation: 211Q3 28

29 Deleveraging by NFCs NFCs leverage (% of GDP and assets) Changes in NFC debt-to-assets (% of assets; y-o-y changes and contributions to changes) Debt to GDP Debt-to-assets (rhs) Active leverage Non-financial asset price changes Total change in debt-to-assets Equity price changes Other changes Sources: EAA (Eurostat, ECB) and national sector accounts Notes: Debt defined as all liabilities other than equity. Active leverage refers to changes in the leverage ratio due to transactions (see box 2 of the October 211 article The financial crisis in the light of the Euro Area Accounts: a flow-of-funds perspective ). Contributions to y-o-y changes are linearly approximated Latest observation: 211Q3 29

30 Limited active deleveraging by households Households leverage (% of GDI and assets) Debt to GDI Debt-to-assets Changes in households Debt-toassets (% of assets; y-o-y changes and contributions) Active leverage Housing prices and other changes Equity price changes Total change in debt-to-assets Sources: EAA (Eurostat, ECB) and national sector accounts Notes: Debt defined as all liabilities. Contributions to y-o-y changes are linearly approximated Latest observation: 211Q3 3

31 Deleveraging the household sector - How? 16 Household debt to disposable income (in %) Italy euro area Spain U.S. Household leverage = Debt 16 Gross Disp. Income Source: ECB, Federal Reserve Economic Data Reduction possibilities: 1. forced deleveraging via bankruptcy (depends on legal environment) 2. forced deleveraging by banks (credit crunch) 3. structural deleveraging (through higher income resulting from structural reforms, repayment of debt, lower consumption, etc.) 31

32 Leverage cycle: a cross sector view Leverage and change in notional leverage. Contributions by sector (% of assets; year-on-year changes in the euro area notional leverage ratio, year-on-year changes in contributions to the ratio by sector; percentages) NFCs Government Total change Financial Institutions Households Leverage ratio Leverage= Debt / Assets How to increase A D D Source: ECB, Eurostat. Latest observation: 211Q3 Notes: The leverage ratio is calculated as notional debt liabilities divided by total notional assets. The contributions by sector are calculated as the ratios of each sector debt to total assets of the euro area L = A. Increase net assets (thus savings): D A = 1 A D D + 1 (decrease leverage)?: ( A D) S A.1 Some agents have to accommodate the increasing savings: government? Rest of the world? A.2 Capital formation B. Liquidation of debt: D, A B.1 Asset price decreases, self-defeating leverage loop (Adrian, Shin, 21), disorderly deleveraging B.2 Consolidation/nonconsolidated 32

33 Is banks capital position so deteriorated? Capital ratios of MFIs, according to the EAA (% of assets) Notional net asset ratio Equity ratio Net asset ratio Sources: EAA (Eurostat, ECB). Last observation: 211Q3 Notes: The net assets ratio is calculated as the ratio of financial assets minus liabilities other than shares and other equity (excluding investment fund shares, but including money market fund shares) to financial assets; all balance-sheet items valued at market value The notional net asset ratio is calculated as the net asset ratio, but on the basis of notional balance-sheet items (accumulation of transactions on the stock at 1999Q1). The equity ratio is calculated as the ratio of shares and other equity (excluding investment fund shares, but including money market fund shares) equity to financial assets; all balance-sheet items valued at market value 33

34 Content I. Introduction II. Sectoral (im-)balances III. Leverage dynamics IV. Financial (dis-)intermediation 34

35 The risk associated with high dependence on bank lending in stock can be mitigated by disintermediation Relative share of banking in NFC consolidated debt in the euro area and in the US MFI Loans borrowing, debt securities and quoted shares net issuance (4-quarter flows in billion euro) 1 8 N o n b an k 7 6 Debt securities issued Quoted equities issued MFI loans to NFC 5 6 N o n b an k 4 4 B an k B an k -1 E A US Sources: Eurostat, ECB (Latest observation: 211Q2), FED. 35

36 US NFCs financing in loans and debt securities US NFC debt financing (% 1 of GDP - SA) U S N F C d e b t f in a n c in g ( % o f G D P - q u a r t e r ly ) D e b t s e c u r it ie s L o a n D e b t s e c m in u s L o a n Sources: Federal Reserve, ECB. Latest observation: 211Q2. 36

37 Role of intrasector lending (trade credits and loans granted) as buffer Corporate debt (13 trillion euro) by main instrument/counterpart Trade credits and loans granted by NFCs (4-quarter flows in billion euro; growth rate YoY) Trade credit Loans by RoW MFI loans Loans by corp Debt securities Other financing Other loans Other FI loans Trade credit receivable (lh) Trade credit payable (lh) Loans granted by NFCs (lh) Annual growth rate in value added Sources: Eurostat, ECB (Internal estimates for trade credit). Latest observation: 211Q4. 37

38 Cash-rich corporates, in the US, the UK and the euro area Chart A: Stock of non-financial corporate liquid assets in the US, UK and euro area % of GDP % of GDP 4 quarter moving sum Chart B: Net change in non-financial corporate liquid assets in the US, UK and euro area Euro area US UK Euro area US UK (RHS) Q Q Q3 199 Q Q Q Q Q Q Q Q 3 2 Q4 22 Q 1 23 Q2 24 Q 3 25 Q4 27 Q 1 28 Q2 29 Q 3 21 Q Q Q Q Q Q Q Q Q Q Q Q 3 2 Q 4 22 Q Q 2 24 Q Q 4 27 Q Q 2 29 Q Q 4-1. Sources: ECB-Eurostat EAA, Federal Reserve, ONS Last observation 211Q4 (Q3 for the euro area) Sources: ECB-Eurostat EAA, Federal Reserve, ONS Last observation 211Q4 (Q3 for the euro area) Liquid assets comprise currency and deposits, debt securities held and mutual funds

39 Disintermediation: General Government Government additions to financial assets (4-quarter flows; in % of GDP) Government net incurrence in liabilities (4-quarter flows; in % of GDP) 5 4 Other accounts Equities Loans Debt s ecurities Depos its Other acco unts Deposits Loans Debt s ecurities Sources: Eurostat, ECB. Latest observation: 211Q1. Sources: Eurostat, ECB. Latest observation: 21Q4. 39

40 Eurosystem balance sheet expansion (excess liquidity) 4

41 Comparison Eurosystem vs. the Fed The US Fed. Res. Sys. multiplied its balance sheet by 3.2 since January 27 The Eurosystem multiplied its balance sheet by 2.8 since January 27 (with a large expansion after the 3-year LTROs) If the Eurosystem multiplied its balance sheet by 3.2 since January 27 its assets would be 15.5% higher (by EUR 384 billion) 41

42 Feedbacks between market, banks, sovereigns and funding of real economy Sovereigns Capital markets Rating Agencies Regulator s Pressure on the cost of funding and equity Banks reduce sovereign debt holdings Increased costs for both sovereigns and banks Banks Higher cost of funding and equity Default rates rise Production falls Spending falls Corporates Households Limited credit availability Higher funding costs Jobs fall Confidence falls

43 Ways out of excessive debt Type Theory History* Belt-tightening needed but potentially painful most common Growing out of debt least painful rare, coinciding with oil or war boom Widespread defaults risk of collapse of confidence and credibility costs often after currency crisis High-inflation macroeconomic cost weak institutions, emerging economies * See for example evidence in McKinsey Global Institute report Debt and deleveraging: The global credit bubble and its economic consequences, January 21 43

44 Ways out of excessive debt: role of monetary policy Belt-tightening deleveraging too restrictive Massive default, deflation? too supportive Debt inflation Grow out of debt 44

45 Thank you! Time for questions and discussion 45