Macro-prudential policy in the New Zealand context

Transcription

1 Macro-prudential policy in the New Zealand context MONETARY POLICY WORKSHOP ON STRENGTHENING MACRO-PRUDENTIAL FRAMEWORKS TOKYO, JAPAN MARCH Chris Hunt Reserve Bank of New Zealand

2 Outline 1. Broader economic and institutional context 2. Objectives of macro-prudential policy 3. Expanding the macro-prudential toolkit 4. The core funding ratio as a macro-prudential instrument 5. Where to from here

3 The New Zealand context Small, open economy - Impact of high exchange rate on the tradables sector a key concern - Housing market a key driver of the business cycle Bank dominated financial system - Highly concentrated, foreign owned Net debtor economy - Banks conduit for foreign borrowing - Reliance on short-term wholesale funding

4 Institutional context RBNZ full service central bank - Enabling legislation: promote soundness (and efficiency) of the financial system Explicit macro-financial/prudential focus and analysis has evolved over time - Macro-financial Stability team established in 2 - Macro-financial Committee established during GFC Supporting monetary policy? the ER dilemma - 26: investigated use of supplementary stabilisation instruments ( tweaky tools )

5 Objectives of macro-prudential policy Ultimate objective: address systemic (nondiversifiable) risk within the financial system - Cross-sectional dimension - Time-varying dimension Proximate objectives - Building institutional resilience through buffers, firewalls etc - Reducing the amplitude of the financial cycle (more ambitious?)

6 Developing the macro-prudential toolkit at the RBNZ Broad assessment of various tools - Mainly focused on addressing time-varying systemic risk Basel III counter-cyclical capital buffer (CCB) Adjustments in the core funding ratio LVR restrictions Overlays to sectoral risk weights - Note: no current case for deployment of any new tools Cross-sectional systemic risk: development of Open Bank Resolution (OBR) policy Development of early warning indicator framework to detect emerging financial vulnerabilities and imbalances Consideration of legal powers and governance issues

7 Building liquidity buffers the core funding ratio (CFR) RBNZ s prudential liquidity policy came into effect April 21 - Micro-prudential policy aimed at reducing vulnerability of banks to funding/liquidity shocks - NZ version of Basel III LCR and NSFR CFR: locally incorporated banks required to have a minimum level of stable or core funding - Essentially retail funding & wholesale funding greater than 1 year to maturity CFR initially set at 65%. Raised to 7% mid Regulatory forbearance: November 211 decision to delay increase to 75% by six months

8 Material improvement in banking system funding liquidity buffers % of loans & advances Regulatory minimum Retail funding Short-term wholesale funding % of loans & advances CFR 1 Long-term wholesale funding

9 Macro-prudential extension of CFR Fixed CFR likely have some stabilisation properties - To fund increased lending in a boom banks have to use more expensive funding sources increases cost of funding for any given policy interest rate potentially reducing credit growth - Hard to rapidly increase long-term wholesale funding sand in the wheels effect - But behaviour of credit spreads over cycle could mitigate any countercyclical effect Discretionary/rule-based adjustments to the CFR - Analogous to operation of counter-cyclical buffer - Increased resilience as funding buffers built up, then released over cycle - Any effect on amplitude of credit cycle depends partly on credit spreads Transition arrangements and forbearance mimic discretionary adjustment

10 Making a case for macroprudential intervention Identifying vulnerabilities: Macro-prudential indicator report Some questions to consider decision tree : 1. Are debt levels (becoming) excessive or asset prices overvalued? 2. Would macro-prudential overlay be consistent with monetary policy? 3. What is the nature of the imbalance? Sectoral specific risks versus generalised risks. 4. Choice of instrument.

11 Where to from here? Refining process to identify vulnerabilities Clarifying legal powers and governance structures - e.g. use of macro-prudential tools for non-bank deposit-takers (NBDTs) Public consultation (for CCB) Design and calibration of tools Ongoing research and model development

12 Extra slides

13 Net external liabilities % of GDP Other sectors Monetary authority 1 General government Bank % of GDP 1 8 Equity NIIP

14 Counter-cyclical capital buffer (CCB) Consultation document on core micro-prudential elements of Basel III released November 212 Remaining aspects, including CCB, up for further public consultation in April. NZ likely adopt Basel III CCB proposal in its generic form - Likely use very infrequently Issues for implementation - Coverage (banks +/- non-bank deposit takers?) - Buffer maximum (greater than 2.5%?) - Length of notice period (12 months too long?) - Governance arrangements - Rule-based versus discretion - Indicators for application versus release of CCB

15 The credit gap and calibration of the CCB ppts 15 Real time credit-to-gdp gap for New Zealand ppts 15 1 countercyclical capital buffer = buffer maximum 1 5 countercyclical capital buffer between and buffer maximum - e.g 2.5% RWA Specific lower and upper thresholds based on BCBS analysis of historical banking crises Dec-92 Dec-94 Dec-96 Dec-98 Dec- Dec-2 Dec-4 Dec-6 Dec-8 Dec-1-15

16 Majority of lending intermediated through banks percentage points Non-bank lending institutions Banks Aggregate credit growth (RHS) apc

17 Credit growth by sector apc Agriculture Household -1 Business apc

18 Banking system profitability improving % of assets 4 Net interest income Operating expenses Abnormal and extraordinary items Profit after tax Other operating income Tax Impaired asset expense % of assets

19 Composition of bank funding, excluding equity (as at Sept 211) 1% 6% 14% 58% 7% 5% Domestic deposits Domestic ST market funding Offshore LT market funding Offshore deposits Offshore ST market funding Domestic LT market funding

20 Bank funding costs Basis points 6 5 Indicative cost of borrowing in US market Retail funding spread Basis points