Domestic and External Sectoral Portfolios: Network Structure and Balance-Sheet Effects

Transcription

1 Domestic and External Sectoral Portfolios: Network Structure and Balance-Sheet Effects Jonas Heipertz (PSE), Romain Rancière (USC, NBER), Natacha Valla (PSE, EIB) International Financial Integration in a Changing Policy Context? The end of an Era? European Commission, Brussels March 1, 2018

2 Introduction: Motivation Since the crisis, large adjustments in countries aggregate International Investment Positions. Understanding the macroeconomic implications of such aggregate dynamics for risk-sharing, propagation, financial fragility requires disaggregation. By Instrument equity vs debt instruments, currency denomination assets and liabilities, By Sector Financial Sectors Real Sectors Due to data limitations until recently, the role of sectoral portfolios for the aggregate dynamics have been understudied. How do sectoral portfolios shape aggregate dynamics? How do shocks to sectoral portfolios propagate?

3 Introduction: Key Questions What sectoral patterns are underlying the rapid deterioration of the net external portfolio position of France between 2008 and 2014 from a creditor position of 4.7 percent of GDP to a debtor position of percent of GDP? How do shocks that originated in domestic sectors or the rest of the world propagate through the network structure formed by intersectoral asset and liability position (balance-sheet contagion)?

4 Introduction: What we do This paper uses a unique comprehensive dataset on French portfolio assets and liabilities to 1. Generate French Sectoral Portfolio Facts on 1.1 The dynamics of domestic and external portfolios of French sectors. 1.2 and their network structure. 2. Estimate a reduced-form model of balance-sheet contagion through intersectoral security linkages. 3. Perform comparative statics of shock on domestic sectors or the rest of the world.

5 The Paper in the Literature Eisenberg and Noe (2001): Propagation of shocks to outside assets and liability through banks balance-sheets. Castrén and Kavonius (2009): Shock transmission through flow-of-funds based on accounting rule. No direct measure of bilateral exposure. Galstyan et al. (2016): International sectoral portfolio with CPIS data.

6 Preview: Stylized Facts The change in the net external portfolio position of France was driven by: a banking sector retranchment on the asset side, and foreign expansion on the liability side. an increase in foreign liablities of the public and the corporate sector. but was mitigated by the expansion of the domestic and foreign asset portfolio of the insurance sector. Banking, corporate sector, and public sector increase foreign debt liabilities three to four times more vis-à-vis Non-Eurozone countries than vis-à-vis Eurozone countries.

7 Preview: Balance-Sheet Effects The financial sectors of the economy (banking, insurance, mutual funds) are strongly affected by balance-sheet contagion, while the returns on real sectors liabilities (public and corporate sector) do not significantly depend on portfolio holdings. Through balance-sheet contagion the financial sectors are Strongly exposed to foreign sector shocks Increasingly exposed to public sector shocks

8 Plan 1. The Data 2. Stylized Facts 2.1 Sectoral Portfolios 2.2 Network Structure 3. Balance-Sheet Effects Models 3.1 The Model & Comparative Statics 3.2 Estimation 4. Results: Shock Propagation

9 1. The Data

10 Protide (Banque de France) Database on portfolio security holdings collected by the Banque de France from direct and custodian reportings Exhaustive for domestic and foreign portfolio holdings by French residents Include Foreign Holdings of French Securities. Frequency is quarterly, from to today (but we stop in ) High level of granularity Security-by-security database, with information about the characteristics of each security (including instrument type, nationality of the issuer) Balance-sheet agregation at the sector-level Full range of cross-holding: across sectors, between sector / rest of the word, between domestic / foreign sectors (for EA countries only) Compared to: CPIS: Sectoral information on holder positions only, not issuers, for a small sample of countries, in recent years. Only external portfolios. Flow-of-funds: No breakdown between domestic and foreign portfolios at the sector level.

11 2. French Sectoral Portfolio Facts

12 Aggregate French Net IIP Figure: Net international invesment position of France

13 Sectoral Portfolios (I): Contribution to Aggregate Change Debt Equity Total Sector A L Net A L Net Net Banking sector 7.8% +6.5% 14.3% % Mutual funds +1% +2.2% 1.2% % 2.4% 3.6% Insurance sector +4.9% % +1.4% 1% +2.4% +7.3% Corporate sector % 6.5% % 1.6%.8.1% Household sector % % +2.4% Public sector 0 +26% 26% % Total 1.8% +41.2% 43% 3.8% +3% +0.8% 42.2% Table: Contributions to Change of the Aggregate External Portfolio Position (in % of GDP, 1% set to zero)

14 Sectoral Portfolios (II): Domestic vs. External Sector A L Net A L Net Panel A: Domestic Banking sector 38.8% 56.1% -17.3% 43.2% 49.2% -5.9 % Mutual funds 24.3 % 39.4 % % 24.4 % 42.2 % % Insurance sector 44.9% 2.6% 42.3% 58.1% 0.73% 57.4% Panel B: External Banking sector 41.1 % 25.5 % 15.6 % 31.9% 31.4% 0.5% Mutual funds 26.8 % 5.0% 21.8% 28.4% 9.6% 18.8% Insurance sector 26.8 % 1.9 % 24.9 % 33.1 % 0.6% 32.5 % Panel C: Consolidated Banking sector 79.96% 81.61% -1.64% 75.1% 80.5% -5.4% Mutual funds 51.1% 44.4% 6.7% 52.8% 51.8 % 1.0% Insurance sector 71.77% 4.50% 67.27% 91.2% 1.3% 89.9% Table: Domestic and External Sectoral Portfolios (in % of GDP)

15 Network Structure (I): Domestic Figure: Domestic Sectoral Network

16 Network Structure (II): Domestic Figure: Domestic Sectoral Network

17 Network Structure (III): International Figure: International Sectoral Network

18 Network Structure (IV): International Figure: International Sectoral Network

19 3. Balance-Sheet Effects Model

20 Reduced-Form Contagion Model Key Assumption: The return on portfolio liabilities of sector j is a function of the return on sector j s portfolio assets. Intuition: In response to shocks, sectors rebalance their portfolios and all returns need to adjust to restore market equilibrium. This model aims to capture how returns on liabilites move in general equilibrium as a response to shock on assets. J γ j,t = β j,0 + β j,1 ω j,j,tγ j,t + ωj,tx x t + ɛ j,t, for j = 1,..., J j =1 where E [ɛ j,t ] = 0 for j = 1,..., J Cov [ɛ j,t, ɛ j,t] = Σ ɛ = diag [σ 1, σ 2,..., σ J ] with γ j,t the return on instruments emitted by sector j, x i,t the return on foreign assets, ω j,j,t and ω x j,i,t portfolio-shares of sector j liabilities and outside assets, ɛ j,t a sector j specific shock, and β j,1 is the balance-sheet contagion coefficient of sector j.

21 Equilibrium Returns and Comparative Statics Writing all J equations in matrix notation, we obtain equilibrium returns as a function of exogeneous variables γ t = [I β 1 ω t ] 1 (β 0 + β 1 ω x t + ɛ t ) and through total differentiation the effects of 1. a change in the return of the outside asset, dx t dγ t dx t 2. and a change in shocks, dɛ t : = [I β 1 ω t ] 1 ˆβ1 ω x t dγ t dɛ t = [I βω t ] 1 Indeed, the effects crucially depend on the matrix [I β 1 ω t ] 1 (i.e. the Leontief inverse), which measures the time-varying strengh of shock propagation through the network.

22 Shock Propagation: From Partial- to General Equilibrium To see this more clearly, we can develop the Leontief inverse as an infinite sum[i β 1 ω t ] 1 = I + β 1 ω t + (β 1 ω t ) 2 + (β 1 ω t ) and write the effect of a shock on returns after N propagations as: dγ N t dɛ t = N (β 1 ω t ) n where N = 0 is the partial equilibrium effect and N gives the general equilibrium effect. n=0

23 Identification To identify the model, we need at least as many moment conditions as parameters. There are a total of J 3 parameters J balance-sheet contagion coefficients: β 1,1,..., β J,1 J shock variances: σ 1, σ 2,..., σ J and J constants: β 1,0,..., β J,0 We have the following J + J(J + 1)/2 moment conditions: J First-Order Moment Conditions: E [(I β 1 ω t ) γ t β 1 ω x t x t ] β 0 = 0 J(J + 1)/2 Second-Order Moment Conditions: E [ ((I β 1 ω t ) γ t β 1 ω x t x t β 0 ) ((I β 1 ω t ) γ t β 1 ω x t x t β 0 ) ] Σ ɛ = 0 Such that with J = 5, we have 5 overidentifying restrictions.

24 Estimates Only financial sectors exhibit significant balance-sheet contagion. ˆβ 0 ˆβ1 ˆσ ɛ Banking sector 0.003** 3.195*** 0.008*** (.00) (.96) (.00) Insurance sector *** 0.026* (.01) (.94) (.00) Mutual funds *** 0.007*** (.00) (.06) (.00) Corporate sector (.02) (139.71) (.07) Public sector 0.006* *** (.00) (.32) (.00) Significance: *** at 1%; ** at 5%; * at 10% Table: Two-Step GMM Estimates of Model parameters

25 4. Some Shock Propagation Results

26 Shock Propagation: Two Settings 1. Variation over time of the total effect of one pecentage point shocks on returns over time. 2. Partial- and General Equilibrium return adjustments for a negative one percentage point shock on GIPS asset returns: vs

27 Total Effect vs (I) (a) Banking shock (b) Mutual fund shock (c) Insurance shock (d) Foreign shock

28 Total Effect vs (II) (e) Public shock (f) Corporate shock

29 Total Effect Time Series (I): Banking

30 Total Effect Time Series (II): Insurance

31 Total Effect Time Series (III): Mutual Funds

32 PE to GE: Negative GIPS Shock - Returns Partial effect and shock propagation much stronger in than after the Greek Debt Crisis. Banking Insurance Mutual Funds Figure: Partial to General Equilibrium Return Adjustment (black=2010.1, blue=2012.1)

33 PE to GE: Negative GIPS Shock - Portfolio Weights Share of GIPS assets in sectoral portfolios of Banks and Insurances halfed from from 2010 to Figure: Share of GIPS Assets in Sectoral Portfolios

34 Conclusion 1. We have shown how sectoral portfolios explain the sharp deterioration of the Net External Portfolio Position of France from 2008 to The balance-sheet contagion model proposes a flexible way how to quantify balance-sheet contagion at the sector-level. 3. Next step: Microfoundation of the balance-sheet contagion model based on asset demand and supply.

35 5. Back-Up

36 Breakdown of Total Sectoral Portfolios

37 Extra: Breakdown of External Sectoral Portfolios