A new indicator for the cost of borrowing in the euro area

Transcription

1 A new ndcator for the cost of borrowng n the euro area Karne Ferabol, anna äkknen and Josep Mara Pugvert Gutérrez Abstract In order to assess the effectveness of the monetary polcy pass-through across the euro area countres, t s necessary to use an accurate and comparable measure of the borrowng costs for frms and households n those countres. Cost-of-borrowng ndcators can be used to accurately assess borrowng costs for non-fnancal corporatons and households and to further enhance cross-country comparablty. The constructon of the new cost-of-borrowng ndcators s based on Monetary Fnancal Insttutons nterest rate statstcs, whch are consdered the most relevant source of nformaton for bank lendng rates n the euro area n partcular due to ther harmonsed collecton across countres. Four basc categores of lendng rates per country are used n the calculatons: short- and long-term lendng rates to nonfnancal corporatons and to households for house purchase, respectvely. Ths paper wll provde an assessment of the methodology employed n the calculaton of the cost of borrowng ndcators and an assessment of the results focusng on the use for polcy purposes as well as the natonal evoluton on dfferent euro area countres. Keywords: Monetary polcy, Interest ates, Cost of borrowng, non-fnancal corporatons, households JEL classfcaton: E400, E520, C90 Dvson Monetary and Fnancal Statstcs, European Central Bank, Josep_Mara.Pugvert@ecb.nt Dvson Monetary and Fnancal Statstcs, European Central Bank, Karne.Ferabol@ecb.nt Dvson Monetary and Fnancal Statstcs, European Central Bank, anna.akknen@ecb.nt. The vews expressed n ths paper are those of the authors and do not necessarly reflect those of the European Central Bank. The authors would lke to thank Patrck Sandars for ther comments and nput. IFC Bulletn No 39

2 Introducton Monetary Fnancal Insttutons nterest rates (MI) statstcs cover all nterest rates that credt nsttutons and some other MFIs resdent n the euro area apply to eurodenomnated deposts and loans vs-à-vs all households and non-fnancal corporatons of any sze that are resdent n the partcpatng EU Member States. 2 Euro area rates and volumes are calculated n terms of the so-called changng composton,.e. euro area aggregates are calculated on the bass of the countres formng part of the euro area at the tme. MI statstcs are collected, on a monthly bass, accordng to harmonsed reportng requrements as from January 2003 for the ntal 45 categores n egulaton ECB/200/8 and as from June 200 for addtonal 56 new breakdowns establshed n egulaton ECB/2009/7. Addtonally, 6 new ndcators wll also be publshed as from January 205 as establshed n egulaton ECB/203/34. The new ndcators wll further expand the data set by ncludng nterest rate reset and renegotatons. MFI nterest rate (MI) statstcs enable a more complete assessment of the mpact of monetary polcy on the euro area economy. They facltate the analyss of the transmsson mechansm of monetary polcy, n partcular of the extent and the speed of the pass-through of offcal rates and market nterest rates to lendng and depost rates faced by households and non-fnancal corporatons. In the aftermath of the fnancal crss and as country-specfc fnancng condtons have taken ncreased promnence n the analyss of euro area developments, the queston of buldng a sound and relable composte ndcator for the cost of bank borrowng has been takng nto consderaton and brought to the forefront. In ths context, ths note elaborates on the purpose of the cost of borrowng ndcator and lnks t wth the current aggregates usng MI, and presents some proposals for new ndcators based on MI statstcs. In ths respect, a new synthetc ndcator reflectng the cost of borrowng has been defned by ensurng that these ndcators comply wth the hgh output qualty prncples of ESCB statstcs n terms of: ) relevance, ) accuracy and relablty (ncludng stablty), ) consstency and comparablty, v) tmelness and v) clarty. Ths note frst descrbes the MFI nterest rate statstcs data set; secton two dscusses the conceptual ssues n respect of the cost of borrowng ndcators, secton three provdes the context n whch cost of borrowng ndcators are defned, secton four and secton fve descrbe how the cost of borrowng ndcators are beng constructed and secton sx provdes an example on how to nterpret the evoluton of the cost of borrowng ndcators to non-fnancal corporatons and households over tme. 2 The household sector also ncludes non-proft nsttutons servng households. Non-fnancal corporatons nclude all enterprses excludng nsurance companes, banks and other fnancal nsttutons. 2 IFC Bulletn No 39

3 Background data: MFI Interest rate statstcs In January 2003 the Eurosystem started complng harmonsed statstcs on eurodenomnated lendng and deposts of natonal credt nsttutons vs-à-vs households and non-fnancal corporatons. Work on the development of a steadystate approach started n summer 999 wth the am of complng a set of euro area nterest rates on retal depost and lendng busness that s harmonsed, complete, detaled, and able to cope wth fnancal nnovaton. To avod nvokng a potentally msleadng contrast between retal and wholesale nterest rates, expressons that can carry dfferent meanngs, the statstcs developed under the steady-state approach are referred to as MFI nterest rate statstcs. MFI nterest rate statstcs provde an ncreasngly mportant source of nformaton for the assessment of monetary polcy transmsson mechansm. The analyss derved from MFI nterest rate statstcs ncludes several aspects: a) studyng the pass-through process from changes n offcal rates to lendng and deposts of households (s) and non-fnancal corporatons (s); b) assessng the changes n the cost of captal nfluencng nvestment decsons; c) analysng cash-flow ncome effects resultng from changes n nterest rates, wth an mpact on dsposable ncome; d) structurng the cost of fnancng assumptons n the context of the macroeconomc projecton exercse. MI statstcs are regularly used n a varety of publcatons and notes, nter ala the ECB Monthly Bulletn, Annual eport, and Fnancal Integraton eport. Whle the currently avalable breakdowns n MI are now very detaled, and hence ncreasngly valuable, economc analyss may also requre the constructon of synthetc ndcators, whch am at usng the nformaton for other analyses as well as n the context of (regular or ad hoc) forecastng exercses. In partcular, cost of borrowng ndcators, as part of the overall cost of captal (or corporate fundng), are ntended to reflect the composte nterest rates that are most relevant n the nvestment decsons taken by non-fnancal corporatons (s), the choce between current and future consumpton made by households (s) and the cost spread between self-fnancng and use of credt by both s and s. The prces of certan fnancal servces n the euro area countres can also gve nsghts nto the state of fnancal ntegraton. For ths purpose, composte ndcators of the cost of borrowng for non-fnancal corporatons, as well as for house purchases by households, are used. Cost of borrowng context: Natonal Bank lendng rates dsperson In the perod followng the onset of the Economc and Monetary Unon (EMU), at the begnnng of 999, untl the start of the current fnancal crss, n September 2008 wth the default of Lehman Brothers, the rates charged by euro area MFIs to households, manly for new house purchases, and to non-fnancal corporatons for new loans recorded a low level of dsperson. Even though a certan degree of heterogenety n MFI nterest rates stll perssted, as a consequence of country dfferences of regulatory and fscal frameworks, dfferent degrees of competton between banks or dfferences n the economc cycle, among others factors, the level IFC Bulletn No 39 3

4 of ntegraton of the fnancal markets as measured by convergng MI could be qualfed as hghly satsfactory. Ths stuaton suddenly changed wth the erupton of the fnancal crss, whch fragmented the fnancal markets of the euro area. Ths complcated very much the assessment of the monetary polcy transmsson mechansm, snce whereas n some countres, the loose monetary polcy adopted by the ECB durng the crss reflected, more or less, the expected correspondence n the bank credt growth to nonfnancal prvate sectors, n other countres, ths varable recorded a much lower response compared to the foreseen results n perods pror to the crss. These dfferent effects dependng on the countres, can be explaned, on the one hand, because the standard pass-through models used before the crss are not sutable equpped to explan the levels of heterogenety n bank lendng rates durng the crss; and, on the other hand, because the relatve mportance of loan nstruments have changed wth the crss. egardng the standard pass-through models (.e. models where polcy nterest rates and market nterest rates are consdered the most mportant determnants of retal bank lendng rates) they have faled because they do not nclude rsk factors and soveregn debt spread among the explanatory varables. These two knds of varables have had a strong mpact on bank lendng rates n some countres. On the other hand, users requre less volatle nstruments than the broad range of MFI nterest rates nstruments categores for modellng and forecastng purposes. Wth respect to the relatve weght of the dfferent loan nstruments, the fnancal crss has, logcally, ncreased the relatve weght of short term nstruments whch n a stuaton of growng uncertanty, cover better the credt and nterest rate rsks than the long term nstruments. egardng bank loans to non-fnancal corporatons, there has been a sgnfcant ncrease n overdrafts and other short term loans n the countres more affected by the crss compared to other countres less affected. Therefore, t s necessary to use an accurate and more cross-country comparable measure of the borrowng costs for non-fnancal companes and households. The cost-of-borrowng ndcators serve both purposes: they are based on MFI nterest rates statstcs and they allow for easer and less volatle arguments n modellng and a better comparson on the credt condtons among euro area countres wth dfferent structures of borrowng to households and non-fnancal corporatons. Computng cost of borrowng ndcators In order to assess the effectveness of the pass-through across countres t s necessary to apply an accurate and consstent measure of the borrowng costs for frms and households across the euro area countres. Four basc cost of borrowng rates are consdered per each country: short and long-term lendng rates both to non-fnancal corporatons and to households for house purchase, respectvely. Long-term lendng rates to non-fnancal corporatons and short and long-term rates on loans to households for house purchase are obtaned drectly from the MFI nterest rate statstcs. In ths respect, MFI nterest rate statstcs on short-term loans 4 IFC Bulletn No 39

5 to non-fnancal corporatons, whch capture bank lendng rates on loans wth a rate fxaton perod of up to one year, only offer a partal vew of frms fnancng costs n some countres. That s because those statstcs do not nclude nterest rates on overdrafts, whch are a major source of fnance for frms n some large euro area economes (e.g. Italy and Portugal). Consequently, when takng nto account the nterest rates on overdrafts (whch are generally hgher than other short-term bank lendng rates), the estmated borrowng costs would be hgher, especally n those countres where overdrafts are an mportant source of frm s external fnance. Cost of borrowng ndcators constructon The followng secton descrbes how the dfferent cost four types of cost of borrowng ndcators are beng constructed. a) Cost of borrowng ndcator for households The cost of borrowng for households ncludes only loans for house purchase. Loans for consumpton and other purposes have been excluded as they are too volatle and less relevant for macroeconomc projectons. Short-term refers to loans wth a floatng rate or an ntal perod of nterest rate fxaton up to one year regardless of maturty. Accordngly, long-term refers to loans wth an ntal perod of nterest rate fxaton over one year. Ths ndcator s calculated as a weghted average of MFI nterest rates on shortterm and long-term loans to households for house purchase, where the new busness volumes used are smoothed wth a movng average of prevous months observatons. The precse formula s as follows: At tme t: CB t t t t where: CB s the cost of borrowng for households. (NB) are the nterest rates on new busness on loans to households for house purchase wth a floatng rate or an ntal rate fxaton up to year as defned n ECB/203/34. (NB) are the new busness volumes of loans to households for house purchase wth a floatng rate or an ntal rate fxaton up to year as defned n ECB/203/34. IFC Bulletn No 39 5

6 (NB) are the nterest rates on new busness on loans to households for house purchase wth an ntal rate fxaton over year as defned n ECB/203/34. (NB) are the volumes of new busness of loans to household for house purchase wth an ntal rate fxaton over year as defned n ECB/203/34. b) Cost of borrowng ndcator for non-fnancal corporatons The aggregated cost of borrowng ndcators for non-fnancal corporatons s calculated n broadly the same way as the one for households above,.e. as a weghted average of rates on short-term and long-term loans. As regards short-term loans to non-fnancal corporatons, the MFI nterest rates data on new busness does not nclude overdrafts, revolvng loans, convenence and extended credt. For companes n some euro area countres, these nstruments, manly overdrafts, are however a sgnfcant source of short-term fnance. Thus, snce nterest rates on overdrafts are, on average, hgher than other short-term bank lendng rates, ther excluson tends to lower average short-term rates. To mprove comparablty across countres, for cost of borrowng purposes, revolvng loans and overdrafts and extended credt card credt are ncorporated n the calculaton of short-term lendng rates as descrbed below. At tme t: CB t t where: CB s the cost of borrowng for non-fnancal corporatons. (NB) are the nterest rates on new busness of long-term loans (.e. loans wth nterest rate fxaton over one year) to non-fnancal corporatons as defned n ECB/203/34. (NB) are the volumes of new busness of long-term loans (.e. loans wth nterest rate fxaton over one year) to non-fnancal corporatons as defned n ECB/203/34. s the estmated nterest rate on new busness of short-term loans to nonfnancal corporatons adjusted to take nto account the overdrafts as defned n ECB/203/34. s the estmated volume of new busness of short-term loans to nonfnancal corporatons slghtly nflated to take nto account the overdrafts as these 6 IFC Bulletn No 39

7 are an mportant source of short-term fundng for non-fnancal corporatons. The way to do ths s to ncrease the volume of new busness short-term loans by the share of overdraft n the total amounts outstandng of short-term loans. When calculatng the total amounts outstandng of short-term loans, we consder that long-term loans wth a resdual maturty below one year and nterest reset below one year can be consdered short-term and therefore ther amounts are added to the outstandng amounts of short-term loans as defned n ECB/203/33. where: The estmated volume s calculated as follows: (NB) o ( OA) t, I< year β are the volumes of new busness of short-term loans to non-fnancal corporatons as defned n ECB/203/34. and β s the share of overdraft n the total amounts outstandng of short-term loans. (OA) o s the volume of overdrafts, revolvng loans, convenence and extended credt (outstandng amounts). (OA) are the volumes of total short-term loans to non-fnancal corporatons as defned n ECB/203/33., I year < s the estmated volume of long-term loans wth orgnal maturty over year, resdual maturty over year and wth nterest rate reset wthn a year as defned n ECB/203/34., I< year, I< year 2 0 t t wth (OA) are the volumes of total long-term loans (loans wth orgnal maturty over year) to non-fnancal corporatons as defned n ECB/203/33. <, I year( OA) s the real volume of long-term loans wth orgnal maturty over year, resdual maturty over year and wth nterest rate reset wthn a year as defned n ECB/203/33. IFC Bulletn No 39 7

8 The estmated rate, s calculated as follows: ( β ) ( ) β NB o where: (OA) o are the nterest rates on overdrafts, revolvng loans, convenence and extended credt to non-fnancal corporatons as defned n ECB/203/34. (NB) are the nterest rates on new busness of short-term loans to nonfnancal corporatons as defned n ECB/203/34. c) Cost of borrowng ndcator for short-term loans to households and nonfnancal corporatons CB, t 23 t t t... where all the components of the formula are already defned n the prevous sectons a) and b) d) Cost of borrowng ndcator for long-term loans to households and nonfnancal corporatons, CB where all the components of the formula are already defned n the prevous sectons a) and b). 8 IFC Bulletn No 39

9 Example: Cost of borrowng evoluton to non-fnancal corporatons and households n dstressed and nondstressed countres n the euro-area Chart and Chart 2 show a composte ndcator of the cost of borrowng for nonfnancal corporatons and households n dstressed and non-dstressed countres n the euro area. The two charts show that the cost of bank borrowng for nonfnancal corporatons has exhbted dfferent dynamcs across tme n response to the fnancal crss and partcularly snce the ntensfcaton of soveregn debt concerns n the euro area. Composte cost of borrowng for non-fnancal corporatons Chart In partcular, the composte ndcator for non-fnancal corporatons shows that the borrowng costs n those countres wth rsk of debt dstress,.e. Greece, Ireland, Italy, Span and Portugal and those wth no rsk of debt dstress,.e. France and Germany, have progressvely dverged snce the onset of the fnancal crss. The dsperson between these two country groups ncreased to 60 bass ponts n 202. These developments hnt at some fundamental ssues n the bankng markets: bankng markets are ncreasngly less ntegrated, as corporatons do not have equal access to fundng n all euro area countres because of natonal factors (e.g. countryspecfc macroeconomc rsks whch affect borrower rsk). In the early stages of the fnancal crss n late 2008 and n 2009, bank lendng rates to non-fnancal corporatons tracked broadly the ECB man refnancng rate n the dstressed and non-dstressed countres n the euro area. Thereafter, followng the ntensfcaton of soveregn debt tensons n 200 and n response to the ncrease n polcy nterest rates n early 20 bank nterest rates on loans to non-fnancal corporatons started to rse sooner and more rapdly n dstressed countres, especally Portugal and Greece, than n non-dstressed countres. And whle the cuts n polcy nterest rates IFC Bulletn No 39 9

10 snce md-20 translated broadly nto lower nterest rates on loans to non-fnancal corporatons n France and Germany, the pass-through has been much more sluggsh n the case of Portugal and Greece, where nterest rates reman at a hgher level than that recorded n the other large euro area economes. owever, the same fundamental ssues are not evdent n the household mortgage lendng market as presented n Chart 2. The composte ndcator of household borrowng costs for households shows almost no dvergence between dstressed and non-dstressed countres. Composte cost of borrowng for households Chart 2 In the case of loans to households for house purchase, bank lendng rates n Span and n Italy reacted partcularly strongly to the cut n polcy nterest rates recorded n late 2008 and n Ths strong reacton reflects the hgher share of mortgage loans wth a short-term nterest rate fxaton perod n these two countres compared wth other large economes n the euro area. Snce the start of the soveregn debt crss n early 200, nterest rates n these two countres ncreased more strongly than n Germany and France. Followng the polcy rate cuts snce md- 20, mortgage nterest rates have contracted across countres, as expected, and n partcular n Greece. Nevertheless, mortgage rates n Italy, Portugal and Span reman above the levels observed n 200 n spte of monetary polcy rates havng reached record low levels. 0 IFC Bulletn No 39

11 eferences egulaton (EU) No 07/203 of the ECB of September 203 concernng the balance sheet of the monetary fnancal nsttutons sector (recast) (ECB/203/33), OJ L 297, , p. egulaton (EU) No 072/203 of the ECB of September 203 concernng statstcs on nterest rates appled by monetary fnancal nsttutons (recast) (ECB/203/34), OJ L 297, , p 5. ECB. Keepng the ECB s monetary and fnancal statstcs ft for use, Monthly Bulletn, August 20. ECB. Assessng the etal Bank Interest ate Pass-Through n the Euro-area at tmes of Fnancal Fragmentaton. Monthly Bulletn Artcle, August 203. ECB. Manual on MFI nterest rate statstcs. October ECB. Fnancal Integraton n Europe. Aprl 204. IFC Bulletn No 39