Leverage and Liquidity as Supplementary Measures in ...€¦ · margin: 85%. Receivable...
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Leverage and Liquidity as Supplementary Measures in Prudential Regulation Marcos Soares da Silva Banco Central do Brasil – Departamento
Transcript of Leverage and Liquidity as Supplementary Measures in ...€¦ · margin: 85%. Receivable...
Leverage and Liquidity as SupplementaryMeasures in Prudential Regulation
Marcos Soares da SilvaBanco Central do Brasil – Departamento
The views expressed in this work are those of theauthor and do not necessary reflect those of the
Banco Central do Brasil or its members
OUTLINE
Basel III leverage and liquidity ratiosframework
Expected benefits and costs
Stylized facts and empirical evidences fromBrazil
Final remarks
BASEL III: PRUDENTIAL REGULATION
LIQUIDITY COVERAGE RATIO (LCR)
LEVERAGE RATIO (LR)
NET STABLE FUNDING RATIO (NSFR)
LEVERAGE RATIO (LR) The Basel III leverage ratio is defined as the
capital measure (the numerator) divided by the exposure measure (the denominator)
The LR’s main objective is to protect the financial system and the real economy against destabilizing deleveraging process (BCBS, 2014)
Comuniqué 20,615 (BCB), dated February 17, 2011, states that a minimum Leverage Ratiorequirement will be required, starting in January 2018
LEVERAGE RATIO (LR) EXPECTED IMPACTS
Financial institutions may react by raising their lending spreads to counterbalance the reduction in their return-on-equity (RoE)
Consequently, real economy borrowing costs may increase, turning into lower investment and equilibrium output
Higher bank risk-taking
NET STABLE FUNDING RATIO (NSFR)
The NSFR is defined as the amount of available stable funding relative to the amount of required stable funding (BCBS, 2014)
The NSFR is intended to reinforce the banking’s strength to absorb shocks, reducing risk ofspillover to the real economy
The NSFR should be applied to allinternationally active banks on a consolidatedbasis
Assets FactorCash, HQLA (level 1 and
2A), central bank reserves, loans to FI (maturity less
than 6 months)
0% - 15%
HQLA 2B, performinngloans (maturity less than 1
year), other assets(between 6m and 1yr)
50%
Performing loans above 1 year
65% / 85%
Securities ñ-HQLA, initialmargin
85%
Receivable derivatives, 20% of derivative
liabilities, fixed assets, itens deducted from
regulatory capital
100%
Capital/Liabilities FactorCapital and capital
instruments100%
Liabilities above 1 yr 100%
Retail and small business deposits
95% - 90%
Corporate deposits (< 1 yr)and other wholesale
deposits (6m-1yr)
50%
Other wholesale funding(<6m), payable derivatives, other liabilities (provisions,
tax and social liabilities)
0%
Off-balance exposures 5%
Off-balance exposures 5%
LessstableLe
ssliq
uid
and
long
erte
rm
NET STABLE FUNDING RATIO (NSFR)EXPECTED IMPACTS
The NSFR will cause short term compliancecosts
The NSFR may increase funding costs
Therefore, it might discourage banks from longterm lending
WORKING PAPERS: EVIDENCE FROM BRAZIL
The determinants of structural liquidity in Brazil: what to expect for the NSFR?New capital restriction under Basel III: determinants of leverage ratio in Brazil These studies aim to better understand how
financial institution will adjust to the new regulatory environment
Key dates on the introduction of the Basel III: NSFR and leverage ratio (LR)
Progress report on the adoption of theBasel regulatory framework by Brazil
Basel standards BCBS aggreed date of implementation Status Remarks
Liquidity standarts
Liquidity coverage ratio (LCR) Jan 2015 4 Final rule published in February 2015 and in force since 1 October 2015
LCR disclosure requirements Jan 2015 4 Final rule published in February 2015 and in force since 1 October 2015
Net stable funding ratio (NSFR) Jan 2018 1 Final rule expected to be published in December 2016
NSFR disclosure requirements Jan 2018 1 Final rule expected to be published in December 2016
Leverage ratio Jan 2018 4 Final rule published in February 2015 and in force since 1 October 2015
Leverage ratio disclosure requirements Jan 2015 4 Final rule published in February 2015 and in force since 1 October 2015
Number code: 1 = draft regulation not published; 2 = draft regulation published; 3 = final rule published (not yet implemented by banks); 4 = final rule in force (published and implemented by banks). Green = adoption completed; yellow = adoption in process; red = no adoption. Source: BCBS, 2016
WORKING PAPERS: EVIDENCE FROM BRAZIL
We analyse characteristics and drivers for 131 Brazilian financial institutions on a consolidatedbasis over the period 2008-2014
In these studies, we use a comprehensive set offinancial, accounting and supervisory data maintained by the Central Bank of Brazil, whichensures higher quality and accuracy to theinformation
NET STABLE FUNDING RATIO (NSFR)
0,90
0,95
1,00
1,05
1,10
1,15
50
55
60
65
70
75
Dec2011
Mar Jun Set Dec2012
Mar Jun Set Dec2013
Mar Jun Set Dec2014
Mar Jun Set Dec2015
Mar May
Structural Liquidity Index and share of components in thebalance sheet
Required stable funding / total assetsAvailable stable funding / total liabilitiesNSFR (left axis)
%un.
NET STABLE FUNDING RATIO (NSFR)
0
500
1.000
1.500
2.000
2.500
3.000
3.500
4.000
Dec2011
Dec2012
Dec2013
Dec2014
Dec2015
May2016
Long-term loans Short-term loans Securities and derivatives Other assets
Evolution of required stable fundingWeighted values BRL bil l ion
11%
12%
53%
23%
23%
12%
21%
23%
13%
22%
11% 10%
51% 54% 56% 54%
13%
13%
12%14%
22%
14%
11%
54%
NET STABLE FUNDING RATIO (NSFR)
0
500
1.000
1.500
2.000
2.500
3.000
3.500
4.000
4.500
Dec2011
Dec2012
Dec2013
Dec2014
Dec2015
May2016
Retail deposits < 1 year Liabilities above 1 year Capital Wholesale deposits < 1 year
Evolutionof available stable fundingWeighted values BRL bill ion
22%
21%
41%
15%
24%
21%
22%
21%
20%
22%
22%22%
41% 43% 43% 43%
15%
13%
13%
13%13%
44%
20%
22%
NET STABLE FUNDING RATIO (NSFR)
10 814
23
11
10 5710 7
13
19
16
12 52
0
10
20
30
40
50
60
70
< 0.8 0.8-0.9 0.9-1.0 1.0-1.1 1.1-1.2 1.2-1.3 ≥ 1.3
Frequency Distribution for the Structural Liquidity Index1/
Junho 2015 Maio 2016
Structural Liquidity Index
1/ The values on the top of thebars refer to the number of financial institutionswith Structural Liquidity Index belonging to the corresponding range.
% of banks' assets
LEVERAGE RATIO IN BRAZIL
2
5
11
18
95
3
10
11
17
93
0
15
30
45
60
75
0-3 3-5 5-7 7-9 >9 May 2016 Full Basel III
1/ The values on the top of the bars refer to the number of IFs with Leverage ratio belonging to that range.
%Frequency Distribution for the Leverage Ratio¹/
LEVERAGE RATIO (LR): EMPIRICAL FINDINGS
We find that the cost of adjustment of the Brazilian bank’s LR can be classified as relatively moderate
The Leverage Ratio reveals a counter-cyclical pattern. This result suggests that the adoption of an additional capital requirement not based on risk, as a supplementary prudential measure, could curb excessive credit growth during periods of growth of national income
LEVERAGE RATIO (LR): EMPIRICAL FINDINGS
There is significant evidence that profit margin is negatively correlated with LR in Brazil
With regard to financial stability, the results indicate that the variable "Probability of Default" is negatively associated with Leverage Ratio, being significant only for banks that operate with high leverage or low-level leverage
NSFR: EMPIRICAL FINDINGS
The cost of adjusting the structural liquidity indicator (NSFR) of the Brazilian banks can be classified as relatively moderate
There is evidence of a countercyclical pattern, which may help to mitigate macroeconomic shocks
Tighter monetary policy has unfavorable effects on the structural liquidity of banks
NSFR: EMPIRICAL FINDINGS
We find a negative and significant association between the NSFR and the rate of asset growth
Evidence suggests that NSFR will slightly reduce net interest margin (up to 2 percentage points)
Whether the NSFR is associated with a higher (or lower) bank failure rate is inconclusive
NSFR: EMPIRICAL FINDINGS
We find a negative and significant association between the NSFR and the rate of asset growth
Evidence suggests that NSFR will slightly reduce net interest margin (up to 2 percentage points)
Whether the NSFR is associated with a higher (or lower) bank failure rate is inconclusive
FINAL REMARKS
The introduction of the NSFR and LR requirements will ensure a greater degree of stability to the financial system. This is done by constraining the build-up of excessive leverage and limiting excesses in the usual maturity transformation process carried out by banks, especially when associated with overreliance on wholesale funding
Potential unintended consequences due to this new regulatory limits should be evaluated over the observation period left
