The role of banks in the economy

Transcription

1 Introduction Banks are financial intermediaries Banking regulation: why and how? Conclusion The role of banks in the economy Semaine de la finance quantitative École Nationale des Ponts et Chaussées Département Ingénieurie Mathématique et Informatique (IMI) Master II The role of banks in the economy 1/31

2 Introduction Banks are financial intermediaries Banking regulation: why and how? Conclusion 1 Introduction 2 Banks are financial intermediaries which fill the gap between supply and demand on money market and the risk market 3 Banking regulation: As concentration points of risks, banks are increasingly more regulated 4 Conclusion: what future for banks and regulation? The role of banks in the economy 2/31

3 Introduction Banks are financial intermediaries Banking regulation: why and how? Conclusion Some puzzling figures Some puzzling figures The role of banks in the economy 3/31

4 Introduction Banks are financial intermediaries Banking regulation: why and how? Conclusion Brief history of the financing of the economy through time Brief history of the financing of the economy through time The role of banks in the economy 4/31

5 1 Introduction Some puzzling figures Brief history of the financing of the economy through time 2 Banks are financial intermediaries which fill the gap between supply and demand on money market and the risk market Supply and demand on the money market and the role of banks Supply and demand of risks and the role of banks 3 Banking regulation: As concentration points of risks, banks are increasingly more regulated Why regulating banks? Focus on the prudential regulation and its impact on the structure of the economy 4 Conclusion: what future for banks and regulation? What future for banks? What future for regulation? References The role of banks in the economy 5/31

6 Supply and demand on the money market and the role of banks Supply and demand on the money market Non Financial Agents Households Firms Public Adm Supply Time mismatch Risk Mismatch Banks & Markets Demand The role of banks in the economy 6/31

7 Supply and demand on the money market and the role of banks Who finances the economy? (in TUSD) Corporate bonds 86 TUSD Equity 69 TUSD Loans 76 TUSD Public debt securities 58 TUSD Source: Aspects of Global Asset Allocation, IMF and personal cross-checkings The role of banks in the economy 7/31

8 Supply and demand on the money market and the role of banks Who borrows? (in TUSD) Banks 130 TUSD Mutual funds and Insurrance companies 58 TUSD Private Wealth 37 TUSD Pension funds 34 TUSD Foreign Exchange Reserve 117 TUSD Sovereign Wealth Funds 73 TUSD Hedge Funds 28 TUSD Private Equity Funds 22 TUSD Source: The Random Walk, Mapping the world financial markets, 2014, DB research The role of banks in the economy 8/31

9 Supply and demand on the money market and the role of banks The two financing of the economy Markets and intermediation Financial Agents Non Financial Agents Other financial intermediaries Non Financial Agents Financial Markets Desintermediation Banks Intermediation Lends Borrows The role of banks in the economy 9/31

10 Supply and demand on the money market and the role of banks An heterogenous structure of financing of the economy through the world The difference between the US and the EU 100% 90% Banking loans Private debt securities (securitization) Quoted shares 16% 22% 33% 80% 70% 17% 17% 60% 50% 40% 40% 30% 61% 67% 20% 27% 10% 0% Economy based on intermediation Disintermediated economy Total financing / GPD France 153 % Euro Zone 158 % United States 241 % The role of banks in the economy 10/31

11 Introduction Banks are financial intermediaries Banking regulation: why and how? Conclusion Supply and demand on the money market and the role of banks An heterogenous structure of financing of the economy through the world Why is it different in the US? The role of banks in the economy 11/31

12 Supply and demand on the money market and the role of banks The benefit of banking intermediation An expertise in maturity transformation Households Firms Public Adm Banks Insur Cie Other FI 100% 50% 0% -50% -100% -150% The role of banks in the economy 12/31

13 Supply and demand of risks and the role of banks Introduction to bank businesses and customers Households Corporate Firms Public Administration Large Corporate Firms Financial Institutions Sovereigns Households Wealthy households Universal Bank Domestic Retail Banking International Retail Banking Investment Banking Specialized Banking services Proprietary Trading The role of banks in the economy 13/31

14 Supply and demand of risks and the role of banks Example of contracts designed by banks Economic purpose of banks products Financing the economy Transfering the risks Loans Bonds Equity ABS Derivatives The role of banks in the economy 14/31

15 Introduction Banks are financial intermediaries Banking regulation: why and how? Conclusion Supply and demand of risks and the role of banks Other advantages of banks Information theory (wider scope of vision); Economy of scale; Diversification of risks; Proximity with more non-financial agents (small firms, households, etc) The role of banks in the economy 15/31

16 1 Introduction Some puzzling figures Brief history of the financing of the economy through time 2 Banks are financial intermediaries which fill the gap between supply and demand on money market and the risk market Supply and demand on the money market and the role of banks Supply and demand of risks and the role of banks 3 Banking regulation: As concentration points of risks, banks are increasingly more regulated Why regulating banks? Focus on the prudential regulation and its impact on the structure of the economy 4 Conclusion: what future for banks and regulation? What future for banks? What future for regulation? References The role of banks in the economy 16/31

17 Introduction Banks are financial intermediaries Banking regulation: why and how? Conclusion Why regulating banks? The risky business of banks Banks concentrate risks Credit Risk Market Risk Operational Risk Structural Risks The role of banks in the economy 17/31

18 Why regulating banks? The risky business of banks Banks balance sheet and the necessity for capital Loss distribution Assets Loans and other Financial Assets Liabilities Debts Capital Provisions The role of banks in the economy 18/31

19 Why regulating banks? Why a macroprudential regulation? Banks positive and negative externalities Banks are at the center of our economies - Finance the economy; - Provide way to transfer risks; - At the basis of money creation Banks face numerous and complex risks - Credit Risk (~80 %*); - Market Risk (~10 %*); - Liquidity Risk; - Operational Risk (~10 %*) * Computed as a percentage of Risk Weighted Assets (RWA, see Lecture 5) It is thus a highly regulated sector Banks must set capital apart to face an likely rise of these risks Incentives to reduce balance sheet size Moving toward an originate to distribute model? (vs originate to hold) The role of banks in the economy 19/31

20 Why regulating banks? Why regulation must be macroprudential? The historical concentration of banks failures Source: Federal Deposit Insurance Corporation (FDIC) The role of banks in the economy 20/31

21 Why regulating banks? Why regulation must be macroprudential? The pro-cyclical behaviour of the banking sector 220% 4 200% 2 180% 0 160% % % % Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q The role of banks in the economy 21/31

22 Introduction Banks are financial intermediaries Banking regulation: why and how? Conclusion Why regulating banks? Why regulation must be macroprudential? Because they are too big to fail? The role of banks in the economy 22/31

23 Focus on the prudential regulation and its impact on the structure of the economy The prudential regulation Brief history of banking regulation history Basel Accords Basel I 1988 Basel II 2004 Basel III 2010 Cook ratio Credit Risk Simple weights for assets Market Risk by 1995 Operational Risk Stress Tests Internal models 3 pillars Liquidity Risk Contracyclical buffer Macroprudential approach SIFI The role of banks in the economy 23/31

24 Introduction Banks are financial intermediaries Banking regulation: why and how? Conclusion Focus on the prudential regulation and its impact on the structure of the economy The prudential regulation Purpose of banking regulations Limit the number of banking failures Reduce the cost of banking failures Better governance The role of banks in the economy 24/31

25 Focus on the prudential regulation and its impact on the structure of the economy The consequences and limits of regulation A negative short term impact 0 IIF assessment of regulatory changes on banks Change in Real GDP Level % point, difference between real GDP paths in "regulatory reform" scenario versus "base" scenario Countries included in the simulation: US, Eurozone countries, Japan, UK, Switzerland Source : IIF (septembre 2011) The role of banks in the economy 25/31

26 Introduction Banks are financial intermediaries Banking regulation: why and how? Conclusion Focus on the prudential regulation and its impact on the structure of the economy The consequences and limits of regulation A new structure of the financing and its drawbacks The role of banks in the economy 26/31

27 Introduction Banks are financial intermediaries Banking regulation: why and how? Conclusion Focus on the prudential regulation and its impact on the structure of the economy The consequences and limits of regulation What are the benefits? The role of banks in the economy 27/31

28 Focus on the prudential regulation and its impact on the structure of the economy Are our economies getting disintermediated? It still depends on the studied countries The role of banks in the economy 28/31

29 1 Introduction Some puzzling figures Brief history of the financing of the economy through time 2 Banks are financial intermediaries which fill the gap between supply and demand on money market and the risk market Supply and demand on the money market and the role of banks Supply and demand of risks and the role of banks 3 Banking regulation: As concentration points of risks, banks are increasingly more regulated Why regulating banks? Focus on the prudential regulation and its impact on the structure of the economy 4 Conclusion: what future for banks and regulation? What future for banks? What future for regulation? References The role of banks in the economy 29/31

30 Introduction Banks are financial intermediaries Banking regulation: why and how? Conclusion What future for banks? Challenges faced by banks Challenges they are facing and the ones to come Fintechs Low rates Regulation The role of banks in the economy 30/31

31 Introduction Banks are financial intermediaries Banking regulation: why and how? Conclusion What future for regulation? Challenges faced by the regulation Challenges they are facing and the ones to come Securitization Shadow banking Tax havens The role of banks in the economy 31/31

32 References Bank of International Settlements (2016) Seminannual otc derivatives statistics Link Basel Committe (2000) Principles for the Management of Credit Risk Final Document BIS Link Brunel, V and Roger, B (2015) Le Risque de Credit, Des modeles au pilotage de la banque Economica Link Fergusson, N (2008) The Ascent of Money: A Financial History of the World Penguin Books Link Scialom, L (2013) Economie bancaire Link The role of banks in the economy 31/31