Macro-prudential Policy Strategy July 2016 Fátima Silva
Outline 1. Macro-prudential Policy Strategy 2. Macro-prudential Toolkit: Policy Actions in 2015/2016 2.1. Countercyclical Capital Buffer 2.2. O-SIIs - Identification and Buffer Calibration 2.3. Sectoral Requirements 2
Overview The financial crisis Risks arising from externalities and interconnectedness in the financial system Supervisory model focused on the solvency of individual institutions was ill-suited to detect systemic risks Reforms in regulation and supervision Development of an institutional and operational framework for macroprudential policy implementation Basel III and the EU regulatory framework define conditions for the implementation of a number of instruments for macro-prudential policy ESRB recommendations and analyses to guide macro-prudential policy implementation National context In Portugal, Banco de Portugal is the macro-prudential authority (2013) Banco de Portugal is responsible for defining a strategy and the appropriate instruments to prevent systemic risk 3
1. Macro-prudential Policy Strategy 4
Macro-prudential Policy Strategy Macro-prudential Policy Ultimate objective: to contribute to the safeguarding of financial stability, by strengthening the resilience of the financial sector and preventing systemic risk, BUT. 5
Macro-prudential Policy Strategy Wide scope of its final objective Vulnerabilities could be built up in the financial system, in part or as a whole, or even outside Nature of risks to be mitigated 6 Need for intermediate objectives
Macro-prudential Policy Strategy Banco de Portugal approved the strategy to guide the implementation of macroprudential policy, which encompasses four pillars: 1 Selection of intermediate objectives and instruments 2 Risk assessment; Activation of policy instruments; Assessment and evaluation of policy impact 3 Institutional Framework and Coordination Mechanisms 4 Communication of risk assessments and policy actions The document describing the strategy for macro-prudential policy is available on Banco de Portugal s website. 7
Macro-prudential Policy Strategy Intermediate Objectives To mitigate and prevent excessive credit growth and leverage To mitigate and prevent excessive maturity mismatch and market illiquidity To limit direct and indirect exposure concentrations To limit incentives for excessive risk-taking by systemically important institutions Enhancing the resilience of financial institutions in order to promote financial stability 8
Macro-prudential Policy Strategy Intermediate objective Relevance Policy instrument Mitigate and prevent excessive credit growth and leverage Periods of excessive credit growth and indebtedness levels of all sectors of the Portuguese economy Countercyclical capital buffer (CCB); Sectoral capital requirements; Limits on the LTV, LTI and DSTI ratios Mitigate and prevent excessive maturity mismatch and market illiquidity Limit direct and indirect exposure concentrations Sovereign debt crisis and related financial market fragmentation are examples of triggers of liquidity stress periods High concentration of the financial system on real estate and sovereign exposures Loan to deposit ratio Systemic risk buffer (SRB); Large exposure restrictions Limit incentives for excessive risk-taking by systemically important institutions High financial system concentration and interconnectedness Capital buffer for systemically important institutions (O-SIIs) 9
Macro-prudential Policy Strategy Assessment of risks By intermediate objectives Several indicators covering all sectors of the financial system Prospects Based on Funding and Capital Plans Forecasts Policy measures Monitoring Capital-based Asset-based Other measures 10
2. Macro-prudential Toolkit: Policy Actions 11
Macro-prudential Toolkit: Policy Actions in 2015 In 2015 and in the first half of 2016 Banco de Portugal decided to CCB In December 2015 set the countercyclical buffer rate at 0% of the total risk exposure amount, with effect from 1 January 2016 and to prevail in the first quarter of the year. In March and June 2016 decided to main the countercyclical capital buffer OSII Impose capital buffers to credit institutions identified as O-SIIs. This measure applies from 1 January 2018 onwards. with a phase-in process (50% and 100% of the O-SII buffer in 01/01/2018 and 01/01/2019 respectively). 12
2.1. Countercyclical Capital Buffer 13
Countercyclical Capital Buffer Assessment for quarterly CCB rate setting is based on: Quantitative indicators Complemented by Expert judgement Measures of credit cycle Basel gap Additional credit-to-gdp gap (ratio augmented with forecasts) Other indicators published in BdP webpage y-o-y rate of house price index y-o-y rate of bank credit to the private non-financial sector 1y difference of bank credit as a percentage of 5y m.a. of GDP Current account deficit as a percentage of GDP Loan-to-deposit ratio y-o-y rate of the debt-service-to income Bank spreads on new lending to non-financial corporations Outputs: - Background document with assessment - Underlying data Both published quarterly in BdP webpage Complemented by other indicators/analyses in the internal monitoring framework 14
1981 Q4 1983 Q2 1984 Q4 1986 Q2 1987 Q4 1989 Q2 1990 Q4 1992 Q2 1993 Q4 1995 Q2 1996 Q4 1998 Q2 1999 Q4 2001 Q2 2002 Q4 2004 Q2 2005 Q4 2007 Q2 2008 Q4 2010 Q2 2011 Q4 2013 Q2 2014 Q4 per cent 1982 Q4 1984 Q2 1985 Q4 1987 Q2 1988 Q4 1990 Q2 1991 Q4 1993 Q2 1994 Q4 1996 Q2 1997 Q4 1999 Q2 2000 Q4 2002 Q2 2003 Q4 2005 Q2 2006 Q4 2008 Q2 2009 Q4 2011 Q2 2012 Q4 2014 Q2 percentage points Countercyclical Capital Buffer 50 40 30 20 10 0-10 -20-30 -40 Basel gap and additional credit-to-gdp gap Upper threshold: 10 p.p. Lower threshold: 2 p.p. Current setting (2016 Q2) Both measures of the credit-to-gdp gap decreased further in the third quarter of 2015, thus remaining in negative territory. Basel gap for 2015 Q2 is at -36.57 p.p. and the additional credit-to-gdp gap at -7.94 p.p.. Both gap measures lead to a benchmark buffer rate of 0% of the total risk exposure amount. Ratio between the one year difference in bank credit and the five year moving average of GDP 100 80 60 40 20-20 -40-60 15 0 Crisis periods Basel gap Additional credit-to-gdp gap Crisis periods (1y diff bank credit/5y m.a. GDP) (1y diff bank credit)/(5y m.a. GDP), 4 quarter m.a. Another early indicator of credit imbalances is the ratio between the one year absolute difference in bank credit and the five year moving average of GDP. This indicator has been in negative territory since 2010, reflecting the observed contraction in bank credit. In the third quarter of 2015, real bank credit growth was still negative, standing at -7.10 per cent, representing an increase of 0.18 p.p. when compared to the previous quarter. It is expected that bank credit continues to recover over the upcoming quarters due to developments in both supply of and demand for credit..
2.2. O-SIIs - Identification and Buffer Calibration 16
O-SIIs O-SII Identification Methodology [EBA/GL/2014/10] Common to all Member States Mandatory Framework Complemented by Member States specific Supervisory Judgment Criteria Indicators (% banking system) % Size - Total assets 25% i) Use of optional indicators Importance (including substitutability/ financial system infrastructure) Complexity /cross-border activity Interconnected ness - Value of domestic payments transactions - Private sector deposits from depositors in the EU - Private sector loans to recipients in the EU - Value of OTC derivatives (notional) - Cross-jurisdictional liabilities - Cross-jurisdictional claims - Intra-financial system liabilities - Intra-financial system assets - Debt securities outstanding 25% 25% 25% If Score < 350 b.p. ii) iii) Use of qualitative information Possibility to raise/decrease the threshold of 350 b.p. by 75 b.p. If Score 350 b.p. O-SIIs automatically identified + O-SIIs identified by supervisory judgment Identified O-SIIs 17
O-SIIs O-SIIs identification process (2015) Results Overview 6 banking groups automatically identified as O-SIIs (scores well above 350 basis points). Supervisory judgement: inclusion of an optional indicator - Geographical breakdown of bank s activity - to represent the financial services provided by financial institutions in Azores and Madeira. This led to the identification of 1 additional banking group. In June 2015, 7 banking groups were identified as systemically important in the Portuguese banking system: CGD, BCP, NB, BPI, BST, BANIF and CEMG. In the aftermath of the resolution measure applied to Banif, Banco de Portugal decided to exclude Banif from the set of O-SIIs. 18
O-SIIs O-SIIs Identification Scores Distribution (as of June 2015) 19
O-SIIs O-SIIs calibration methodology Banco de Portugal applied the Bucketing or Clustering approach. This approach relies on the allocation of O- SIIs to pre-defined buckets or clusters according to the scores drawn from the identification process. Taking into account the scores obtained in the June 2015 identification process, 5 buckets were defined. Given the scores underlying each PT O-SII, bucket 5 corresponds to an empty bucket, in the sense that no PT O-SII will be allocated to it. By considering an empty bucket, the national authority signalizes the market and the O-SIIs that the latter could be asked to comply with a higher rate in the future if they become more systemically relevant. 20 Clusters and Buffer Rates Buckets Scores O-SII Buffers 5 2800 2.00% 4 2100-2799 1.00% 3 1400-2099 0.75% 2 700-1399 0.50% 1 350-699 0.25%
2.3. Sectoral Requirements 21
Sectoral Requirements Data collection with reference date of December 2015 Main indicators: At the time of acquisition House purchasing price at the time of acquisition House valuation at the time of acquisition Borrower s income at the time of acquisition First monthly installment At the reference date Latest house price evaluation Current borrower s income Last monthly installment 22
Sectoral Requirements Assessment of risks in the real estate sector Monitoring the risks underlying the real estate prices Monitoring the risk of the financial sector s exposure to the real estate Main indicators: Real estate price developments Real estate credit developments Construction activity Investment in the real estate sector Main indicators: LTV, LTI, DSTI, by credit contract Non-performing loans Credit conditions: spreads, maturity 23