MACRO-PRUDENTIAL POLICIES WITHIN A MULTI-COUNTRY
MONETARY UNION
Fernando Restoy
Deputy Governor, Banco de España
CONFERENCE ON FINANCIAL STABILITY AND MACRO-PRUDENTIAL POLICY
Session 1: Policy framework for financial stability
Banco de Portugal
Lisbon, 10 February 2015
INTRODUCTION
The beauty of macro-prudential (macro–pru) policies
Squaring the number of policy objectives with the policy
instruments available.
Especially relevant in a multi-country monetary union.
But caution. Two main messages of this presentation:
Be clear on macro-pru objectives. Pru should probably
predominate.
Do not overplay the separation principle: policy
coordination is a must.
2
ON OBJECTIVES (1)
The macro dimension vs. the pru dimension
Macro-pru is conceived as actions aimed at addressing
risks stemming from macro-financial developments by
employing (mostly although not exclusively) prudential
tools.
Ambiguity as to the objective:
MACRO OBJECTIVE:
Mitigating macro-financial imbalances
and/or
PRU OBJECTIVE:
Strengthening banks’ ability to cope
with macro-financial risks
3
ON OBJECTIVES (2)
The challenges of the macro objective
Macro objective is much more challenging:
• Limited ability to affect banks’ strategies (e.g. credit
standards)
• Even if individual banks’ strategies could be affected,
less constrained banks and non-banks could take over
[see Basten and Koch (2014) and Jiménez et al (2013)]
Better aim at making banks more resilient to macrofinancial shocks.
4
ON POLICY COORDINATION (1)
Conflicts of interest have had substantial influence on the
design of policy frameworks
Monetary policy (MP) vs. micro-prudential policies
Micro-prudential vs. macro-prudential
Micro and macro-prudential vs. resolution
In Europe, wide array of financial authorities: ECB – MP, ECB –
BS, ESRB, EBA, SRB,… plus a constellation of national agencies.
Conflicts of interests exist BUT are they always so relevant?
Wise to ignore financial stability for pure MP decisions?
Wise to deal separately with instruments (micro-pru, macropru, resolution, …) that do actually share an ultimate financial
stability objective?
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ON POLICY COORDINATION (2)
Moreover, are synergies properly taken into account?
Macro view relevant for identifying and addressing risks at firm-level.
Supervisory analysis key to assessing aggregate financial risks and
adequate macro actions.
Micro-pru and resolution policies clearly complementary.
System’s liquidity management cannot be dissociated from pru
analysis.
And little evidence that conflicts of interest were the problem
Excessively narrow policy focus arguably much more relevant:
• MP did not care sufficiently about financial imbalances
• Micro-pru policies lacked sufficient macro perspective
• Central Banks’ liquidity management, at times, insufficiently
coordinated with pru policies
6
ON POLICY COORDINATION (3)
Therefore, to fully exploit new macro-pru tools, need to
frame them within a comprehensive and a consistent
policy set-up
The role of Central Banks is key to ensuring the
desired comprehensiveness and consistency: take
the separation principle as given, but apply it
pragmatically
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AN ILLUSTRATION: EXPERIENCE IN SPAIN WITH
DYNAMIC PROVISIONS (1)
The facts: huge lending expansion … and lending bust
1999Q1=100
1.000
Credit to construction and real
estate sectors
Credit to the non-financial private
sector
Nominal GDP
700
House prices
400
100
1999QI
2001QI
2003QI
2005QI
Source: INE, BE and own calculations
2007QI
2009QI
2011QI
2013QI
8
AN ILLUSTRATION: EXPERIENCE IN SPAIN WITH
DYNAMIC PROVISIONS (2)
The causes: inadequate policy mix
Excessively lax monetary policy
Insufficient fiscal adjustment
interest rate
% GDP
10
6
8
3
6
0
4
-3
2
-6
Taylor rule average SPAIN
0
-2
Taylor rule average EMU
-4
ECB official rate
1999
2001
2003
2005
-9
Public balance
Structural primary
public balance
-12
2007
2009
2011
Source: ECB, Eurostat and Estrada and Saurina (mimeo)
2013
1999 2001 2003 2005 2007 2009 2011 2013
Source: AMECO
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AN ILLUSTRATION: EXPERIENCE IN SPAIN WITH
DYNAMIC PROVISIONS (3)
The role of dynamic provisions:
-Help smooth the provisioning effort (albeit moderately)
-But little impact on credit developments (at least during
the expansion)
million €
140.000
120.000
million €
2.000.000
1.800.000
Total provisions
1.600.000
100.000
1.400.000
80.000
1.200.000
1.000.000
60.000
800.000
40.000
600.000
400.000
20.000
0
200.000
Specific provisions
General Provisions
Credit to the nonfinancial private
sector (right)
0
Source: BE
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AN ILLUSTRATION: EXPERIENCE IN SPAIN WITH
DYNAMIC PROVISIONS (4)
The limits of macro-pru:
working with averages while aggregate developments embed a
relevant dispersion of risk management policies across banks
%
35
NPL ratio in the non-financial private sector by credit institution
30
25
20
Average: 14%
15
10
Average: 4.9%
5
Average: 0.6%
0
December 2006
December 2009
December 2013
Source: BE and own calculations
Need to work hand-in-hand with micro-supervision
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AN ILLUSTRATION: EXPERIENCE IN SPAIN WITH
DYNAMIC PROVISIONS (5)
As a conclusion, countercyclical provisions:
Useful device that together with stringent micro-policies
increased resilience of the Spanish financial sector.
Unable however to moderate huge credit expansion…
…as other policies were significantly pushing in the opposite
direction (no policy coordination).
With the benefit of hindsight: an even more proactive macro
and micro-prudential action would have been helpful.
Macro-pru not a substitute of adequate policy coordination.
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THANK YOU FOR YOUR ATTENTION