II Meeting on Financial Stability Bogotá, Colombia (October 25, 2012) Macroprudential Policy in Korea - An Introduction to BOK Framework - Hyeonjin Cha Bank of Korea DISCLAIMER: This presentation represents the views of the author and not necessarily those of the BOK or BOK policy. The views expressed herein should be attributed to the author and not to the BOK, its management or its Monetary Policy Committee.
Outline I. Potential Systemic Risks Unique to Korea II. Macroprudential Measures Deployed Main reasons we advanced these measures Impacts of these measures III. Recent Developments SAMP (Systemic Risk Assessment Model for Macroprudential Policy)
I. Potential Systemic Risks Unique to Korea 1 Capital Flow Volatility 2 Household Debt Both factors affect systemic risk in terms of procyclicality. Korean economy exposed more to systemic risk in the time-varying dimension, than in the cross-sectional dimension. (B. Aydin, M. Kim and H. Moon: Financial Linkages across Korean Banks IMF,WP/11/201, 2011) 1/10
In particular, strong procyclicality of capital flows amplifying business cycle fluctuation is a systemic risk factor common to emerging Asian countries Capital Inflows to Asia & GDP Growth Capital Inflows to Korea & GDP Growth 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 (%) (%) Capital inflows/gdp(lhs) GDP growth (RHS) 01 02 03 04 05 06 07 08 09 10 11 Source: BOK staff calculation 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0-5.0 4.0 3.0 2.0 1.0 0.0-1.0-2.0-3.0-4.0-5.0-6.0 GDP Growth (RHS) Net Capital Flow/GDP (LHS) 00 01 02 03 04 05 06 07 08 09 10 11 10.0 5.0 0.0-5.0-10.0-15.0-20.0 Emerging Asian Economies may have high reliance for credit supply on capital inflows in the form of external liabilities, rather than on funding by domestic bank deposits. 2/10
1 High Capital Flow Volatility 250 200 150 100 (billion dollars) Capital Flows 221.9 Short-term debt Bond Equity 101.6 140 120 100 80 A Financial Market Volatilities (std. dev*) Won/Dollar FX rate (LHS) KOSPI (LHS) Treasury Bond Yield (3Y, RHS) C B 0.35 0.30 0.25 0.20 50 60 0.15 0-50 -100 97.11~98.3 98.4~08.8 08.9~08.12 09.1~11.6 11.7~11.12-21.4-12.6-69.6 A B (Asian Crisis) Source: BOK staff calculation C (EU Debt Crisis) (Lehman Crisis) 40 20 0 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 * 3-month moving averages 3/10 0.10 0.05 0.00
2 Rapid Increase in Household Debt High Level Household leverage at historic peak Floating Rates Almost 90% of mortgage loans Household Debt-to-Disposable Income Mortgage Loans, by Interest Rate Type 1) 155% Fixed Rate 10.1% 129% Floating Rate 89.9% 2005 2006 2007 2008 2009 2010 Source : Bank of Korea Sources : Bank of Korea, 9 major domestic banks Note: 1) As of end-2011 4/10
II. Macroprudential Measures Deployed 1 Responses to Capital Flow Volatility Capital Inflows Capital Outflows International Cooperation Aimed at stabilizing short-term capital flows and establishing backstop (safeguard) against sudden capital outflows 5/10
1) Main reasons we advanced these measures In open emerging markets, non-core liabilities take form of short-term FX liabilities, increasing vulnerability to outbreak of crisis High capital flow volatility also causes interest and FX rate deviation from economic fundamentals, thereby weakening monetary policy transmission channel Non-core Liabilities of Korean Banks Net FX Liabilities Foreign Portfolio Investment and Term Spread 600 500 400 300 200 100 (trillion won) FX borrowing Debt Securities Others A: Lehman Crisis B: EU Debt Crisis A B 250 200 150 100 50 (billion dollars) short-term liabiliies long-term liabiliies A B 12.0 7.0 2.0-3.0 (billion dollars) A Bond Investment Equity Investment Term Spread B (%p) 3.0 2.0 1.0 0.0-1.0 0 0 05 06 07 08 09 10 11 05 06 07 08 09 10 11 Source: Shin & Shin (2010), updated by BOK staff -8.0-2.0 08.1 08.7 09.1 09.7 10.1 10.7 11.1 11.7 12.1 6/10
2) Impacts of these measures (in response to capital inflows) Effective so far Short-term External Debt Decreased Arbitrage Incentive Reduced Terms of Foreigners Bond Investment Lengthened 200 150 100 50 0-50 -100-150 -200 Changes in External Debt, before and after ceilings (billion dollars) 67.1 60.4 short-term external debt long-term external debt Before Ceiling (Apr. 09~Dec. 10) 171.8-156.6 After Ceiling (Jan. 11~Nov.11) 1.5 1.0 0.5 (%) Foreign Bank Branches Arbitrage Incentive Arbitrage incentives Levy rate(short-term) Moving Avg. of net arbitrage incentive Arbitrage incentive before levy Arbitrage incentive after levy Foreigners Bond Investment, before and after (billion dollars) taxation 9 7 5 3 1 short-term bond investment long-term bond investment Implementation (Jan. 11) -1 Announcement (Oct. 10) 0.0-3 Jan-11 Apr-11 Jul-11 Oct-11 09.1Q 3Q 10.1Q 3Q 11.1Q 3Q Source: Bank of Korea 7/10
2 Responses to Household Debt Caveat: more work needed to establish how much of changes in house price and loan growth attributable to macroprudential policy tightening Housing indicators (Seoul area) before and after loan regulation tightening 1) Mortgage loans 2) House prices 3) Housing transactions 4) 1) Comparison between six-month periods before and after strengthening of loan regulations 2) In trillions of won 3) Apartment basis 4) In units of 10,000 * Source: Bank of Korea 8/10
Impacts of DTI / LTV ceilings: effective? BOOM Effective in limiting excessive credit provision by banks during economic upturns BUST May be less effective in improving liquidity conditions or supply of credit? Despite eased LTV/DTI limits, banks likely to focus on cash hoarding rather than lending 6,000 5,000 4,000 3,000 (billion won ) Tightening of LTV (Oct. 03) Mortgage Loan Fluctuations 1) Introduction of DTI (Aug. 05) Tightening of DTI (Feb. 07) Loosening of DTI (Nov. 08) Tightening of DTI (Sep. 09) Loosening of DTI (Aug. 10) 2,000 1,000 0 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Source: Bank of Korea 9/10
III. Recent Developments 1 BOK Act of 2011 : new mandate 2 Global BOK : flagship in central banking Systemic Risk Assessment Model for Macroprudential Policy Multi-purpose model: system risk assessment, stress test, etc. (first full-fledged model in Asia) consists with 6 module: macroeconomic risks, bank losses, bankruptcy, contagion, multi-period development, 5/10 systemic risk evaluation. Room for improvement : workshop in 2013 10/10