COUNTERCYCLICAL
CAPITAL BUFFER
29 December 2015
The countercyclical buffer rate for credit exposures to the domestic private non-financial sector
is set at 0% of the total risk exposure amount, with effect from 1 January 2016.
This decision is based on the overall assessment of recent developments in a set of financial and macroeconomic
indicators, as follows1:
Chart 1 – Basel gap and additional credit-to-GDP gap3
CREDIT-TO-GDP GAP REMAINS NEGATIVE
50
The additional credit-to-GDP gap is below 0 p.p. (i.e., the
percentage points
40
credit-to-GDP ratio is below its long-term trend) and has
30
exhibited a decreasing trend since 2013. Data for the second
20
10
quarter of 2015 indicates that the additional credit-to-GDP
Upper threshold: 10 p.p.
0
gap is currently at a level of -6.66 p.p.. The Basel gap has
Lower threshold: 2 p.p.
-10
exhibited a similar trend but is currently at a level of -33.73
-20
p.p.. Both gap measures deliver a benchmark buffer rate of 0%
-30
of total risk exposure amount, according to the BCBS
Crisis periods
Basel gap
2014Q4
2012Q4
2010Q4
2008Q4
2006Q4
2004Q4
2002Q4
2000Q4
1998Q4
1996Q4
1994Q4
1992Q4
1990Q4
1988Q4
1986Q4
1984Q4
1982Q4
-40
Additional credit-to-GDP gap
methodology2.
The recent developments of the credit-to-GDP gap are
explained by both the decrease in the outstanding credit to
the domestic private non-financial sector and the increase in
Sources: BdP, INE and BdP’s calculations. Last observation: 2015Q2.
nominal GDP.
REAL BANK CREDIT GROWTH IS STILL NEGATIVE
Chart 2 – Real bank credit growth4
The year-on-year growth rate of bank credit granted to the
30
private non-financial sector has been in a descending trend
25
since the onset of the global financial crisis, entering into
per cent
20
negative territory in 2010 year end. This decrease has been
15
decelerating in the last quarters.
10
5
Notwithstanding the risks associated with the current
0
macroeconomic context, the low interest rate environment
-5
and the positive outlook for the Portuguese economy should
Crisis periods
Real bank credit, y-o-y growth rate
Real bank credit, 4 quarter m.a., y-o-y growth rate
Sources: BdP, INE and BdP’s calculations. Last observation: 2015Q3.
2014Q1
2012Q1
2010Q1
2008Q1
2006Q1
2004Q1
2002Q1
2000Q1
1998Q1
1996Q1
1994Q1
1992Q1
1990Q1
1988Q1
1986Q1
1984Q1
1982Q1
1980Q1
1978Q1
-10
have a positive impact on households’ disposable income and
firms’ profitability, reducing the debt service ratio and
potentially promoting a reversal in credit demand. However, a
potential acceleration in credit dynamics is not a reason for
concern at the current juncture, given the marked reduction
in lending business in previous years.
2
COUNTERCYCLICAL CAPITAL BUFFER
BANKS REPORT SOLID IMPROVEMENTS IN THE LOAN-TO-DEPOSIT
170
RATIO
160
In pre-crisis years, the strong bank lending growth was to a
150
large extent financed by short-term wholesale funding and led
140
to a significant increase in the loan-to-deposit ratio. During the
crisis this ratio decreased substantially reaching a level close
130
to 100% as a result of both a contraction in the lending
Loan-to-deposit ratio
2014Q4
2013Q4
2012Q4
2011Q4
2010Q4
2009Q4
2008Q4
2007Q4
2006Q4
2005Q4
improving banking system resilience to shifts in market
2004Q4
100
2003Q4
structure has changed to more stable funding sources,
2002Q4
business and an increase in deposits. Overall, banks’ funding
110
2001Q4
120
2000Q4
per cent
Chart 3 – Loan-to-deposit ratio5
sentiment.
Spreads against the Euribor rate on new loans have more
Loan-to-deposit ratio, 4 quarter m.a.
recently declined both for households and non-financial
Sources: BdP and BdP’s calculations. Last observation: 2015Q2.
corporations, but still stand at levels higher than those
observed prior to the financial crisis. In addition, banks are
allocating new funds to non-financial corporations with better
risk profile and seem to be applying lower LTV and LTI ratios
to new household loans.
10
8
6
4
2
0
-2
-4
-6
-8
-10
DEVELOPMENTS IN HOUSE PRICES REMAIN SUBDUED
One risk of the current low interest rate environment relates
to the search-for-yield behavior and price misalignments, for
instance, in the real estate market. Despite the slight increase
2015Q1
2013Q1
2011Q1
2009Q1
2007Q1
2005Q1
2003Q1
2001Q1
1999Q1
1997Q1
1995Q1
1993Q1
1991Q1
in the year-on-year growth rate of real house prices over the
1989Q1
per cent
Chart 4 – Real house price growth6
Crisis periods
Real house price index, y-o-y growth rate
Real house price index, 4 quarter m.a., y-o-y growth rate
Sources: OECD and BdP’s calculations. Last observation: 2015Q2.
second quarter of 2015, it still remains below the historical
maximums, at around 2%. Thus, there is no evidence, at the
aggregate level, suggesting an overvaluation in housing prices.
CURRENT ACCOUNT CONTINUES TO IMPROVE
The current account deficit as a percentage of GDP has
declined sharply during the recent crisis (2008Q4-2014Q4).
Chart 5 – Current account deficit as a % of
GDP7
15
Since the first quarter of 2013, Portugal has repeatedly
generated current account surpluses. Further improvements
are expected in 2015 mainly due to developments in the
balance of goods and services on account of increased
per cent
10
exports, which benefited from the recovery in relevant trading
partners in the euro area, and a favourable price effect
5
associated with the sharp fall in oil prices. The external
imbalances thus seem to continue to adjust, towards more
sustainable levels, although a long way is still ahead of us.
0
GENERAL ASSESSMENT
1996Q1
1997Q1
1998Q1
1999Q1
2000Q1
2001Q1
2002Q1
2003Q1
2004Q1
2005Q1
2006Q1
2007Q1
2008Q1
2009Q1
2010Q1
2011Q1
2012Q1
2013Q1
2014Q1
2015Q1
-5
Current account deficit (as a % of GDP)
Current account deficit (as a % of GDP) - 4 quarter m.a.
Sources: BdP, INE and BdP’s calculations. Last observation: 2015 Q2.
In line with the overall risk assessment, current credit and GDP
growth rate forecasts do not point to an increase in the
countercyclical buffer rate during 2016. The less strict bank
lending conditions, the low interest rate environment and the
positive economic prospects for Portugal might be the only
indication that the credit cycle may revert in the future.
COUNTERCYCLICAL CAPITAL BUFFER
3
NOTES
1
2
3
4
5
6
7
The assessment is based on available data up to 6 November 2015. This set of indicators covers the six categories set out in
Recommendation ESRB/2014/1.
In case the gap exceeds 2 p.p., the benchmark buffer rate will increase linearly from 0% to the upper threshold of 2.5% of the total risk
exposure amount, which is associated with a gap of 10 p.p.. See Recommendation ESRB/2014/1 Annex Part II available at
http://www.esrb.europa.eu/pub/pdf/recommendations/2014/140630_ESRB_Recommendation.en.pdf?03a7c5c908620b34673b6f290b5
4c13d.
BCBS thresholds of 2 p.p. and 10 p.p. were determined using the Basel gap. Nevertheless, they are used as an approximation to map the
additional credit-to-GDP gap into a benchmark buffer rate.
Credit to the domestic private non-financial sector, comprising all lending (loans and debt securities) extended by domestic and foreign
banks, non-banks and debt markets. The credit-to-GDP ratio is computed using a four-quarter moving sum of nominal GDP. Credit is
obtained from National Financial Accounts Statistics produced by BdP and nominal GDP from National Accounts (ESA2010, base 2011)
produced by INE.
The credit-to-GDP gap is calculated as the percentage point difference between the observed credit-to-GDP ratio and its long-term trend,
where the trend is estimated employing a one-sided HP filter with a smoothing parameter set to 400,000.
The additional credit-to-GDP gap is computed as the percentage point difference between the observed credit-to-GDP ratio augmented
with ARIMA(p,1,0) forecasts, using a maximum forecast horizon of 28 quarters, and its long-term trend, where the trend is estimated
employing a one-sided HP filter with a smoothing parameter set to 400,000.
Crisis periods as identified for the ESCB Heads of Research Group’s banking crises database.
Credit includes loans granted to the domestic private non-financial sector plus debt securities issued by the domestic private non-financial
sector. Bank credit extended by resident monetary financial institutions as available in Monetary and Financial Statistics produced by BdP.
The credit variable is adjusted for inflation using the consumer price index (2012=100) produced by INE.
Crisis periods as identified for the ESCB Heads of Research Group’s banking crises database.
Both loans and deposits are retrieved from the supervisory database and refer to values reported on a consolidated basis. Data for
2000Q4 to 2004Q4 correspond to banking system values according to local GAAP. Data for 2005Q1 to 2006Q4 correspond to values for
the 6 largest banking groups according to IFRS. Data for 2007Q1 onwards correspond to banking system values according to IFRS.
Real house price index (2010=100) produced by the OECD. The house price index is adjusted for inflation using the private consumption
deflator (2010=100) taken from the National Accounts.
Crisis periods as identified for the ESCB Heads of Research Group’s banking crises database.
Current account deficit seasonally adjusted as available in the Balance of Payments Statistics produced by BdP.
ABBREVATIONS
ARIMA
BCBS
BdP
ESA
ESCB
ESRB
GAAP
GDP
HP
IFRS
INE
LTI
LTV
m.a.
OECD
p.p.
y-o-y
Autoregressive Integrated Moving Average
Basel Committee on Banking Supervision
Banco de Portugal
European System of Accounts
European System of Central Banks
European Systemic Risk Board
Generally Accepted Accounting Principles
Gross Domestic Product
Hodrick and Prescott
International Financial Reporting Standards
Instituto Nacional de Estatística (Statistics Portugal)
loan-to-income ratio
loan-to-value ratio
moving average
Organisation for Economic Co-operation and Development
percentage points
year-on-year