The new liquidity measurement model developed by the Júlia Király Deputy Governor 29 November 212
Content Liquidity and measurement prior to the crisis New measures and new data collection during the crisis New liquidity rules and new database for the future 2
Jan-4 Apr Jul Oct Jan-5 Apr Jul Oct Jan-6 Apr Jul Oct Jan-7 Apr Jul Oct Jan-8 Apr Jul Oct Jan-9 Apr Jul Oct Jan-1 Apr Jul Oct Jan-11 Apr Jul Oct Jan-12 Apr Jul Funding liquidity: L/D ratio, a special leverage 25 HUF Bn per cent 18 2 16 15 14 1 12 5 1 8-5 6-1 4-15 2-2 Loan Deposit Loan-to-Deposit ratio (right-hand scale) Source: MNB. 3
Jan-4 Jun-4 Nov-4 Apr-5 Oct-5 Mar-6 Aug-6 Jan-7 Jul-7 Dec-7 May-8 Oct-8 Apr-9 Sep-9 Feb-1 Jul-1 Jan-11 Jun-11 Nov-11 Apr-12 Oct-12 Funding liquidity: fx mismatch 18 EUR million EUR million 18 15 15 12 12 9 9 6 6 3 3-3 -3 Total open FX position On-balance sheet FX position Non-residents' net FX swaps On-balance FX position adjusted with non-residents' net FX swaps Source: MNB. 4
Liquidity monitoring tools prior to the crisis D1: Daily operative report on the changes of FX position of credit institution Daily FX balance-sheet of banks, specialised credit institutions and EEA branches in Hungary It contains all spot, forward, futures, options, FX swap and CCIRS transactions Data come from both banks accounting and risk management system L9: Daily Balance-sheet report It shows major balance-sheet items by denomination Data come from banks accounting system Banks obligation to submit data is based on designation Last data collection was in 26, after that no bank was designated F1: Monthly report of the Supervisory Balance-sheet It shows major liquid assets, but only on a monthly basis Data come from banks accounting system There were structural liquidity surplus in the Hungarian banking system before the financial crisis There was no liquidity regulation 5
Content Liquidity and measurement prior to the crisis New measures and new data collection during the crisis New liquidity rules and new database for the future 6
Liquidity crisis: 28 October Increasing global risk aversion Increasing tough terms of getting FX liquidity of domestic banking sector Introduction of FX swap tenders: Tight liquidity in FX swap O/N, 3-month, 6-month, in EUR market and CHF since 28 Excess demand for HUF liquidity Selling government securities of nonresident participants Broadening the scope of Tight eligible liquidity collaterals, in interbank HUF market introducing 2-week and 6-month covered loans and decreasing reserve ratio Purchases Tight on liquidity the secondary in government securities market based government on agreement security with banks and institutional market investors Illiquidity of government securitites market Tight LoLR liquidity tools are of also individual available banks 7
Data collection was complemented with new requirements in October 28 D1: Daily operative report on the changes of FX position of credit institution Daily FX balance-sheet of banks, specialised credit institutions and EEA branches in Hungary It contains all spot, forward, futures, options, FX swap and CCIRS transactions Data come from both banks accounting and risk management system L9: Daily Balance-sheet AL1: Daily Balance-sheet report This It shows is a major revision balance-sheet of the old report items L9 by denomination Slight Data come modifications from banks were accounting developed system together with the HFSA At Banks the beginning obligation of to the submit crisis, data majority is based of on the designation financial institutions was designated Last data collection to submit was data, in 26, later it after was that restricted no bank to was major designated banks F1: Monthly report of the AL2: Daily cash-flow report Supervisory Balance-sheet Developed together with the HFSA Based It shows on major banks liquid 3-day assets, treasury but position only on a monthly basis Data come from banks risk accounting management system database It contains on-and off-balance sheet transactions Both AL1 and AL2 reports were ordered by the HFSA, but banks provided these data to the MNB on a gentlemen agreement basis until January 21. From that time MNB ordered both reports on its own right. 8
3-Jan 31-Jan 1-Feb 2-Feb 3-Feb 4-Feb 5-Feb 6-Feb 7-Feb 8-Feb 9-Feb 1-Feb 11-Feb 12-Feb 13-Feb 14-Feb 15-Feb 16-Feb 17-Feb 18-Feb 19-Feb 2-Feb 21-Feb 22-Feb 23-Feb 24-Feb 25-Feb 26-Feb 27-Feb 28-Feb Monitoring tools were developed based on these new daily data 3-day liquidity buffer of major banks Liquidity position 4 3 5 HUF Bn HUF Bn 4 3 5 3 3 2 5 2 5 2 2 Maturing onbalance sheet liabilities 1 5 1 5-5 1 5 1 5-5 -1-1 FX swap exposure Cumulated gap Liquidity buffer (+/-) Liquidity buffer - previous week Available liquidity reserves Note: data are also available for individual banks. Source: MNB. 9
Monitoring tools were developed based on these new daily data Maturing on-balance sheet liabilities in the banking sector Liquidity position 9 8 HUF Bn HUF Bn 9 8 7 7 6 6 Maturing onbalance sheet liabilities 5 4 3 5 4 3 2 2 1 1 FX swap exposure -7 days 8-14 days 15-3 days 31-9 days 91-365 days 1-2 years Note: data are also available for individual banks. Source: MNB. 1
Jan-4 May-4 Sep-4 Jan-5 May-5 Sep-5 Jan-6 May-6 Sep-6 Jan-7 May-7 Sep-7 Jan-8 May-8 Sep-8 Jan-9 May-9 Sep-9 Jan-1 May-1 Sep-1 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Monitoring tools were developed based on these new daily data FX swap exposure of the banking sector Liquidity position Maturing onbalance sheet liabilities 5 HUF Bn HUF Bn 4 5 4 3 5 3 2 5 2 1 5 1 5-5 -1-1 5 5 4 5 4 3 5 3 2 5 2 1 5 1 5-5 -1-1 5 FX swap exposure Net FX swaps FX swaps maturing in 3 days Note: data are also available for individual banks. Source: MNB. 11
Content Liquidity and measurement prior to the crisis New measures and new data collection during the crisis New liquidity rules and new database for the future 12
Liquidity rules of banks short-term liquidity position Liquidity position: the 3-day forward-looking cumulated gap + liquidity reserve available in 3 days Cumulated gap: treasury financing surplus (or deficit, if negative) calculated on the basis of the static maturity structure of cash-flow Available liquidity reserve: FX nostro account + disposable MNB-eligible securities + (settlement account current balance average settlement account holding requirement during maintenance period) Minimum regulatory level of the liquidity surplus from January 212 Balance-sheet Coverage Ratio: 1 percent of balance sheet total or Deposit Coverage Ratio: 2 percent of total corporate and household deposits 13
Jan-9 Feb-9 Mar-9 Apr-9 May-9 Jun-9 Jul-9 Aug-9 Sep-9 Oct-9 Nov-9 Dec-9 Jan-1 Feb-1 Mar-1 Apr-1 May-1 Jun-1 Jul-1 Aug-1 Sep-1 Oct-1 Nov-1 Dec-1 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Liquidity surplus as a percentage of balance-sheet total 3 per cent per cent 3 25 25 2 2 15 15 1 1 5 5-5 -5-1 -1-15 -15 Total liquidity surplus HUF liquidity surplus FX liquidity surplus Regulatory limit Source: MNB. 14
Liquidity rules: FX Funding Adequacy Ratio (FFAR) FFAR: the ratio of the sum of stable FX funds and long-term net FX swaps to the weighted sum of FX assets to be financed. GOAL: to simultaneously reduce maturity mismatch in both on and off balance sheet FX position Stable FX Funding Long term net FX swaps / = 65% Effective FX assets to be funded from 1 July 212 15
Major part of the adjustment via long-term FX swaps Decomposition of the change in the FFAR of the banking sector (exchange rate adjusted, change calculated since end-march) 16 percentage point percentage point 16 14 14 12 12 1 1 8 8 6 6 4 4 2 2 April May June July August September Increase of on-balance sheet FX liabilities Increase of FX swaps maturing over 1 year Decrease of FX assets Source: MNB. 16
Monitoring of newly introduced liquidity rules amounted to modify an existing report and to introduce a new one D1: Daily operative report on the changes of FX position of credit institution Daily FX balance-sheet of banks, specialised credit institutions and EEA branches in Hungary of the same type It contains all spot, forward, futures, options, FX swap and CCIRS transactions Data come from both banks accounting and risk management system AL1: Daily Balance-sheet This is a revision of the old report L9 Slight modifications were developed together with the HFSA At the beginning of the crisis, majority of the financial institutions was designated to submit data, later it was restricted to major banks AL2: Daily cash-flow report Slightly modified: it contains both Balance-sheet Coverage Ratio and Deposit Coverage Ratio Monitoring of short-term liquidity rules is based on AL2 From January 212 AL5: F1: Monthly report Report of on the FX Supervisory Funding Adequacy Balance-sheet Ratio Based on banks accounting and risk management system It shows major liquid assets, but only on a monthly basis Developed together with the HFSA Data come from banks accounting system Both regulatory authority ordered banks to submit the report Monitoring of long-term liquidity rule (FFAR) is based on AL5 From March 212 17
What risks are not addressed by the newly introduced rules? Short-term liquidity indicators FFAR Sufficient liquidity buffer under normal market environment Reducing maturity mismatch in the FX position None of them handles: RISKS STEMMING FROM THE HIGH FX SWAP EXPOSURE 18
What are the risks of the high volume of FX swaps and how can we monitor the build-up of these risks? Risks Monitoring of risks FX funding through FX swaps has usually shorter maturity than direct FX funding -> higher roll-over risk Based on D1 we can calculate the duration of FX swaps Roll over and margin call need of Hungarian banks can put pressure on swap spreads FX swap spreads are available from market sources (e.g. Bloomberg) Margin call requirements of swap contracts could cause FX liquidity shock to banks in case of a strong HUF depreciation As regards the extent of margin requirements we only have had estimations until now 19
New database for the future D1: Daily operative report on the changes of FX position of credit institution Balance of margin accounts has to be reported Those derivatives to which margin requirement belongs have to be flagged From January 213 AL1: Daily Balance-sheet This is a revision of the old report L9 Slight modifications were developed together with the HFSA At the beginning of the crisis, majority of the financial institutions was designated to submit data, later it was restricted to major banks AL2: Daily cash-flow report AL5: Monthly Report on the FX Funding Adequacy Ratio Slightly modified: it contains both Balance-sheet Coverage Ratio and Deposit Coverage Ratio Based on banks accounting and risk management system Developed together with the HFSA Both regulatory authority ordered banks to submit the report Monitoring of short-term liquidity rules is based on AL2 From January 212 Monitoring of long-term liquidity rule (FFAR) is based on AL5 From March 212 F1: Monthly report of the Supervisory Balance-sheet It shows major liquid assets, but only on a monthly basis Data come from banks accounting system 2