International Monetary Fund - Sveriges...
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Macroprudential Policy - The View from the IMF Erlend Nier International Monetary Fund 1
Transcript of International Monetary Fund - Sveriges...
Macroprudential Policy - The View
from the IMF
Erlend Nier International Monetary Fund
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Plan of the presentation 2
1. Definition and rationale
2. Challenges to the effective pursuit of macroprudential policy
3. The need for strong institutional foundations
4. Operational considerations
Definition and rationale 3
Macroprudential policy is defined as the use of primarily prudential tools to limit systemic risk (IMF, 2011).
the risk of disruptions to the provision of financial services that is caused by an impairment of all or parts of the financial system, and can cause serious negative consequences for the real economy (IMF, FSB and BIS, 2009).
By mitigating systemic risks, macroprudential policy aims ultimately to reduce the frequency and severity of financial crises.
Definition and rationale 4
The case for macroprudential policy intervention stems from three sets of systemic externalities (IMF, 2013). These are: (i) the tendency of the financial system to amplify adverse
aggregate shocks, e.g., adverse effects on output from a credit crunch;
(ii) macro-financial feedback mechanisms that can increase exposure to adverse aggregate shocks, e.g., the build-up of leverage and erosion of lending standards in response to increases in asset prices;
(iii) linkages within the financial system that increase the vulnerability of the system to idiosyncratic or aggregate shocks, and can render individual institutions “too important to fail”.
Challenges 5
First challenge: Macroprudential policy is subject to biases that favor inaction or insufficiently forceful and timely action (Inaction Bias) (IMF 2011, Nier 2011)
Flows from the nature of the policy problem: macroprudential policy manages a tail risk The benefits of action accrue in the future and are difficult to
measure
The costs of actions are more visible and felt immediately, by financial firms and borrowers.
Biases are compounded when macroprudential policy is subject to lobbying by the financial industry
political pressures
Challenges 6
Second challenge: The financial system evolves dynamically; the level, source, and distribution of systemic risk are subject to
change.
The financial system will evolve to seek profitable opportunities. Can evolve in response to financial innovations (technological innovations)
regulatory constraints (leakage problem)
distortions caused by other policies (e.g., fiscal distortions that favor debt)
Dynamic evolution can open up “policy gaps” and requires the coordination across policy fields. Need for coordination can reinforce inaction bias.
Institutional foundations 7
Strong institutional arrangements are essential for macroprudential policy to be effective. These arrangements should assure (IMF 2011, 2013): Willingness to act:
clear assignment of the mandate to someone (a body or committee),
strong role for the central bank
objectives and accountability mechanisms established in law
Ability to act:
sufficient powers
information collection, calibration and designation
Mechanisms to ensure cooperation in risk assessment and mitigation
(e.g., financial stability objectives for microprudential agencies and securities regulators)
Institutional foundations
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Effective macroprudential policy requires powers (IMF 2011, 2013). When the financial sector evolves dynamically, powers are needed to obtain information; wield policy tools; expand the range of action
beyond established prudential tools,
beyond the existing regulatory perimeter.
Useful to combine: hard powers over specific macroprudential tools,
powers to recommend, coupled with comply or explain,
soft powers, e.g. to initiate legislative changes and to influence other policy settings.
But soft powers alone are unlikely to be sufficient.
Institutional foundations 9
A well-designed communication strategy can help address biases in favor of inaction.
Important communications tools are a policy strategy,
regular assessments of risk and effectiveness of measures taken,
records of the meetings of macroprudential policymakers.
Communication can establish and maintain a commitment to take action
create a political constituency for macroprudential action
create a narrative that prepares for additional action
Operational considerations Rules versus discretion
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A policy strategy based on “rules” can help overcome political economy challenges, and create predictability and political acceptance. However, A static policy setting may need to be calibrated very tightly,
creating efficiency costs for borrowers and encouraging leakages.
The policymaker needs to retain discretion to respond flexibly to changing financial conditions.
Macroprudential policy requires judgment based on all information.
including market intelligence and soft information.
Macroprudential policy is therefore best supported by “guided discretion,” based on indicators, but complemented by judgment.
Operational considerations Activating macroprudential policies
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Policy need to be based on analysis of vulnerabilities Time dimension:
Broad-based vulnerabilities from an excessive growth in total credit Vulnerabilities from exposures to the household and corporate sector Vulnerabilities for the financial system from maturity and FX mismatches.
Structural dimension: vulnerabilities from interlinkages within the financial system
HouseholdsFinancial Sector
Government
Corporations
Rest of the World
Time dimension Structural dimension
Note: Arrows denote size of exposures . Note: Large Domestic Bank (LDB), Small Domestic Bank (SDB), Mutual Fund (MF), Insurance Company (IC), Global Bank (GB).
Operational Advice Mapping assessment to choice of policy tools
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The analysis needs map an analysis of vulnerabilities into potential policy responses.
Risks from broad-based credit booms can be addressed by broad-based (capital) tools (e.g., CCB).
Household sector vulnerabilities can be addressed by sectoral tools (e.g., risk weights, LTV and DSTI).
Corporate sector vulnerabilities can be addressed by sectoral tools (e.g., risk weights).
Funding (maturity mismatch) and FX risks in the financial sector can be addressed by liquidity tools (e.g. stable funding ratios, liquid asset ratios).
Structural risks from interconnectedness in the financial sector can be addressed by structural tools (e.g., capital surcharges)
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Operational considerations Indicators for activation can differ across tools
Broad-based (Capital) Tools
Sectoral Tools (Households,
Housing sector)
Sectoral Tools (Corporate)
Liquidity Tools
Core indicators
•Credit/GDP gap
• Increase in the share of mortgage loans to total credit • Mortgage loan growth • House price/income and rent
• Increase in the share of corporate loans to total credit • Corporate loan growth
• Increase in loan-to-deposit ratio • Increase in non-core-to-core funding ratio
Additional indicators
… … … …
Example: Indicators for Activation of CCB
Core and Additional Indicators
Core indicators
• Credit-to-GDP gap
Additional indicators
• Credit growth (m-o-m and y-o-y change)
• Debt levels and debt service ratios of households and corporates
• Asset price growth, house prices-to-income and rent
• Leverage on individual loans or at the asset level (e.g. loan-to-
value (LTV) - on average and the distribution across new loans
• Decomposition between core and non-core liabilities and the
wholesale funding ratio
• Current account deficits
Operational considerations Using multiple indicators for activation
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Evaluation of core indicators should be com-plemented by additional indicators to support a judgment on the need for policy action. When multiple indicators are flashing “red”, there is a strong case
for activating measures, even if this decision should be based on judgment.
When some indicators are flashing “red,” and others “green,” consideration can also be given to alternative policy actions.
E.g., when house prices rise, but mortgage lending is subdued, this can point to supply constraints and the need for structural measures
When most indicators are yellow, this points to a gradual approach to the activation of measures, e.g., initial non-binding guidance or partial tightening of tools.
Where information to construct indicators is missing (“no light”), the emphasis is on the collection of the relevant data.
Operational considerations Implementing and tightening
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The implementation of tools should aim to ensure the effective and efficient use of macroprudential policy.
The aim is for benefits to be realized in a manner that considers adjustment costs to the financial industry; the potential for leakages (circumvention); efficiency costs for borrowers from a reduction in the provision of financial
services; potential costs to output growth;
Well-tailored design and a gradual approach to the tightening of tools can help achieve benefits while avoiding costs.
Use of multiple tools can increase effectiveness. The marginal benefit of tightening any one tool will eventually decrease due to
increased distortions and incentives for circumvention. The use of complementary tools can mitigate such effects costs, increasing the
desired impact of macroprudential action.
Operational considerations Relaxing macroprudential tools
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A relaxation of time-varying tools can be justified when the financial cycle turns. To help avoid a vicious feedback between deteriorating economic and
financial conditions that depresses economic activity especially when macroprudential constraints are binding on the supply of
credit.
A relaxation needs to respect prudential minima that can ensure an appropriate degree of resilience against future shocks.
Business cycle
Financial cycle
Not a time for relaxation
Time for relaxation
Time
Cycle
Operational considerations Relaxing macroprudential tools
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Indicators that can guide a decision to relax macroprudential constraints can differ from those used for activation. They also differ across tools. Broad-based and sector-specific capital tools:
Early signs of an incipient credit crunch: slowing credit growth, market indicators, incipient increases in NPLs.
Tools specific to the residential property market (such as LTV and DSTI): Early signs of a vicious cycle between falling house prices, falling credit and
rising defaults: falling prices, sharply slowing credit, and deteriorating borrower balance
sheets
Liquidity tools: Early signs of liquidity stress within the system that may lead to fire-sales:
increases in the price of wholesale funding, increased access to central bank lending facilities
Gauging the time for relaxation requires judgment.
Operational considerations Country-characteristics
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Country-characteristics can shape the approach to macroprudential policy:
1. Availability of data and strength of supervisory capacity
2. A country’s economic structure, such as its degree of diversification
3. Need for financial deepening and level of debt to GDP
4. The degree of capital account openness
5. A country’s financial structure (size, inter-connectedness, concentration)
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Thank you
References 21
IMF, FSB and BIS, 2009, “Guidance to Assess the Systemic Importance of Financial Institutions, Markets and Instruments: Initial Considerations”
IMF, 2011, “Macroprudential Policy: An Organizing Framework”
Nier, Erlend, 2011, “Macroprudential Policy - taxonomy and challenges”
IMF, 2013, “Key Aspects of Macroprudential Policy”
Household Indebtedness and the Canadian
Macroprudential Responses
IMF- Riksbank Conference on Macroprudential Policy---Implementation and Interaction
with other Policies, Riksbank, Stockholm, 13-14 November 2014
Cesaire Meh
Deputy Chief, Financial Stability Department
Bank of Canada This presentation is not to be re-distributed and the views expressed in it are those of the author and not of the Bank of Canada
Outline
Housing and household imbalances
Public policy responses
Effectiveness of policies
Conclusion
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Housing and Household Imbalances
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To offset the weak global demand during the crisis, the Bank of
Canada lowered the bank rate to ZLB
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2007 2008 2009 2010 2011 2012 2013 2014
0
1
2
3
4
5
6
7
%
Discount 5-year fixed mortgage rate 10-year government bond yield BOC target overnight rate
Last observation: September 2014 Source: Bank of Canada and ING Direct
Low rates stimulate domestic demand and lead to higher
household debt and house prices
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70
90
110
130
150
170
190
%
Canada United States United Kingdom Australia Sweden
Household debt-to-income ratio
Last observation: 2014Q1
For international comparability, data for Canada are for households plus non-profit institutions serving households (NPISH).
Sources: Statistics Canada, Haver Analytics, U.K. Office for National Statistics and U.S. Federal Reserve
200
0
200
1
200
2
200
3
200
4
200
5
200
6
200
7
200
8
200
9
201
0
201
1
201
2
201
3
201
4
90
110
130
150
170
190
210
230
250
270
290
Canada United States United Kingdom Australia Sweden
House price indexes (2000Q1 = 100)
Last observation: Canada and United States, 2014Q2; other countries, 2014Q1 Sources: Teranet-National Bank, Case-Shiller and Federal Reserve Bank of Dallas
Supply of multiple-unit dwellings under construction
continues to rise
6
1982 1986 1990 1994 1998 2002 2006 2010 2014
-300
-200
-100
0
100
200
300
Single and semi-detached Multiples (row houses, condominiums and other)
Supply of multiple-unit dwellings under construction
Deviation from historical average, per 100,000 people (aged 25+ years), major metropolitan areas
Last observation: June 2014 Sources: Canada Mortgage and Housing Corporation, Statistics Canada and Bank of Canada calculations
Public Policy Responses
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Challenges and considerations when taking policy actions
to address these imbalances
Low rates lead to financial but not enough economic risk taking
rotate growth from credit financed household spending to
exports and investment
Balance financial and macroeconomic stability objectives
correct imbalances but keep inflation expectations anchored
and growth momentum alive
Set macroprudential policy to be consistent with long-run goal
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Actions taken by authorities:
Tightened rules for government-backed mortgage insurance
Tightened supervisory guidelines for mortgage and mortgage
insurance underwriting
Communication of risk: Minister of Finance and Bank of Canada
Strengthened oversight of public and private mortgage insurers
Bank of Canada pointed to household imbalances in its interest rate
decisions, consistent with its flexible inflation targeting framework
Risk management approach
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Successive rule tightening over 4 years: 2008-2012
Maximum amortization
period
40 years 25 years
LTV limit for new
mortgages
100% 95%
LTV limit for mortgage
refinancing
95% 80%
LTV limit for investment
properties
95% 80%
Debt-service criteria Total debt-service ratio
(TDS) capped at 45%
Gross-debt-service ratio
(GDS) capped at 39%
and TDS ratio at 44%
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Effectiveness of Policy Responses
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Reduced amortization periods on new mortgages
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2010 2011 2012 2013 2014
0
10
20
30
40
50
60
70
80
90
100%
>35 to 40 years >30 to 35 years >25 to 30 years 25 years or less
Insured mortgage originations by amortization period, as a share of total Extended amortizations start to disappear after July 9, 2012 rule change
Last observation: 2014Q1 Note: New originations include purchases from 3rd parties, switches from other FIs, refis, and pre-approvals.
Source: Regulatory filings of Canadian banks
Raised credit scores and mortgage quality
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2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
0
10
20
30
40
50
60
70
80
90
%
No credit score Under 600 600-659 660-699 700 and over
Distribution of credit scores at origination (CMHC high-ratio mortgages)
Last observation: 2012 Sources: CMHC Annual Report 2012 and Canadian Housing Observer 2012
Mortgage rule changes contributed to trend decline of
household credit growth
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2007 2008 2009 2010 2011 2012 2013 2014
0
2
4
6
8
10
12
14
16
%
Total household credit Residential mortgage credit Consumer credit
Annualized 3-month growth rates
Last observation: September 2014
Note: Shaded area represents periods of changes o government-backed mortgage insurance
Source: Bank of Canada
Housing activity appears to respond to mortgage rule
changes over short horizons, but less evident in prices
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300
350
400
450
500
550
600
Thousands of units, SAAR
National Existing Home Sales
Last observation: September 2014
Sources: Canadian Real Estate Association (CREA), Bank of Canada calculations and
Teranet-National Bank
85
105
125
145
165
185
June 2005=100
Canada Toronto Vancouver
Montréal Calgary
Teranet-National Bank Major City
Last observation: July 2014
Source: Teranet-National Bank
Conclusion
Timely changes to insured mortgage rules
have contributed to credit growth moderation
imbalances expected to unwind gradually to achieve a “soft landing”
Challenges involve balancing financial stability and fragile economic
recovery
Ongoing concerns:
Pockets of vulnerability in segments of housing market
Public Canadian authorities continue to remain vigilant and monitor the
imbalances 16
Sveriges Riksbank & IMF conference on macroprudential policy, 13-14 November 2014
Macro-prudential policy: When and how to take action? The Banque de
France’s approach
Anne Le Lorier
Premier Sous-Gouverneur
Banque de France
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Sveriges Riksbank & IMF conference on macroprudential policy, 13-14 November 2014
Outline
1. A tentative guide for conducting macro-prudential policy
2. Case study : risks related to the French real estate sector
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Sveriges Riksbank & IMF conference on macroprudential policy, 13-14 November 2014
1. A tentative guide for conducting macroprudential policy
a) Identifying and measuring risks to financial stability
b) Choosing the appropriate instrument
c) Setting up triggers for the activation of instruments
d) Taking account of specificities and interactions
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Sveriges Riksbank & IMF conference on macroprudential policy, 13-14 November 2014
1.a) Identifying and measuring risks to financial stability
• The 2007-09 financial crisis showed the need to consider financial risk not only at the individual level, but at the level of the entire financial system
• The lack of stability in the financial system may severely affect the functioning of the economy.
• In practice, need to monitor a large number of indicators of different nature: macroeconomic aggregates, credit risk variables, financial soundness ratios, measures of concentration risks and models of contagion
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Sveriges Riksbank & IMF conference on macroprudential policy, 13-14 November 2014
1.b) Choosing the appropriate instrument
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Objective Instruments
Mitigate and prevent excessive credit growth and leverage
Countercyclical capital buffer [CCB], sectoral capital requirements, leverage ratio, Loan-to-value cap, debt-to-income cap
Mitigate and prevent excessive maturity mismatch and market illiquidity
Liquidity Coverage ratio [LCR], Net stable funding ratio [NSFR]
Limit bilateral exposure concentration Large exposure restrictions, CCP clearing requirement
Limit the systemic impact of misaligned incentives with a view to reducing moral hazard
Systemically Important Financial Institutions capital surcharges
Strengthen the resilience of financial infrastructures
Margin & haircut requirements on CCP clearing, systemic risk buffer
Sveriges Riksbank & IMF conference on macroprudential policy, 13-14 November 2014
1.c) Setting up triggers for the activation of instruments
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• Need to quantify systemic risk thresholds triggering instrument activation/calibration
• Overcoming the “inaction bias” may require binding indicators and thresholds.
• But there is a danger to miss the build-up of risk if pre-defined indicators and thresholds fail to capture actual risks.
• A certain amount of discretion is needed.
Sveriges Riksbank & IMF conference on macroprudential policy, 13-14 November 2014
• Complementarity and substitutability between macro-prudential instruments
• Importance to coordinate macro-prudential policy and other economic
policies (monetary policy, fiscal policy, micro-prudential supervision)
• Cross-country dimension
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1.d) Taking account of interactions
Sveriges Riksbank & IMF conference on macroprudential policy, 13-14 November 2014
2. A case study: addressing risks related to the French real estate sector
a) Real estate prices developments have been particularly pronounced, hence a risk of re-pricing
b) There is no need to tighten lending-related prudential requirements at the current juncture
c) French banks have safeguards against a downturn in real estate markets
d) Data gaps remain in the area of commercial property and must be addressed
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Sveriges Riksbank & IMF conference on macroprudential policy, 13-14 November 2014
2.a) Real estate prices developments have been particularly pronounced, hence a risk of re-pricing
Residential real estate prices Commercial real estate prices
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100
120
140
160
180
200
220
240
260
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
FranceParis Region (Île-de-France)France excl. Paris Region
Residential Real Estate Prices
Index100=2000Q1
Source: INSEE, IPD, ECB
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Sveriges Riksbank & IMF conference on macroprudential policy, 13-14 November 2014
2.b) There is no need to tighten lending-related prudential requirements at the current juncture
• Downward trend in the credit-to-GDP gap indicator for France over the recent months
• At the current level of the indicator, no CCB would be recommended.
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2 pp
4 pp
6 pp
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70%
80%
90%
100%
110%
120%
130%
140%
150%
160%
170%
1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011
Cred
it to G
DP
gap C
red
it t
o G
DP
rat
io
Credit to GDP gap Credit to GDP ratio Trend of the credit to GDP ratio
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Source: BIS
Sveriges Riksbank & IMF conference on macroprudential policy, 13-14 November 2014
2.c) French banks have safeguards against a downturn in real estate markets
Source: ACPR
Total gross exposures on the commercial property sector
129,1 137,1
182,3 187,4
182,0 182,8
+6,13%
+33,03%
+2,76% -2,89% +0,46%
2008 2009 2010 2011 2012 2013
5,78% 7,17%
9,25% 8,55% 8,00% 8,27%
36,2%
31,0% 32,1% 32,8%
36,8% 37,0%
2008 2009 2010 2011 2012 2013
Non-performing loan ratio Coverage ratios
Non-performing loans and coverage ratios
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Sveriges Riksbank & IMF conference on macroprudential policy, 13-14 November 2014
2.d) Data gaps remain in the area of commercial property and must be addressed
• Our knowledge of these markets is limited
• Available price indices are produced by a single data provider, with a coverage of around 40% of the market
• Several avenues for improving the situation
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Sveriges Riksbank & IMF conference on macroprudential policy, 13-14 November 2014
Concluding remarks
• When and how to take action? Further work is still needed…
• Operationalising macro-prudential policy will remain an important challenge.
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