What data are needed for financial stability analysis and
implementing macroprudential policy?
Is there a need for reprioritisation of FSIs?
IMF-FSB User Conference
Bernd Braasch
Financial Stability Department
Deutsche Bundesbank
The views expressed in this presentation are those of the author and should not be
attributed to the Deutsche Bundesbank.
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Overview
I.
Data for financial stability analysis
 What are the main future challenges for financial stability analysis?
 To what extent has the financial crisis revealed new fields for financial
analysis …
 … underlined identified priorities?
II. Financial Soundness Indicators
 Objectives
 Did FSI fail to indicate the crisis and why?
 Reprioritisation of FSIs
III. One of the main objectives of the conference  Prioritised list of main
issues for financial analysis and associated data needs
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I.
Data for financial stability analysis
3
Important to distinguish fields with information from
data gaps – also to isolate priorities
Challenges
Data
needs
Financial
stability
analysis
I. Case by case
(for example
special reports)
Capital flows of
EMEs
Institutional
Investors
II. Regular data
Capital flows of
non-bank fin. inst.
Balance sheet
approaches
Financial
innovations
Systemic risk
(for example)
III.
Data and
analytical
tools
(for example)
Centralised
securities
database
Risk map (Issing
Report)
Globalised
securities
database
Monitoring/
early warning
system
Financial
soundness
indicators
Global capital
flows
Financial
innovations
Measuring
systemic risk etc.
International
comparability
Reprioritisation
Market indicators
Surveillance
…
Risk map (Issing
Report)
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“…, in order to achieve improvements in the financial architecture that
substantially strengthen financial stability, an in-depth analysis of the
underlying reasons for the crises is essential.”
(Axel Weber, Dinner speech at the joint Bundesbank-CEPR-CFS conference: “Risk transfer: challenges for financial institutions
and markets”, Frankfurt am Main, 11 December 2008, BIS Review, 158, 2008, page 1 ff)
• Bundesbank will further deepen financial stability analysis …
• … in its newly created financial stability department
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Objectives of this conference – very
ambitious
Financial stability
analysis
Priorities
Related
data needs
Available data
• Market indicators
• Official data
Remaining data
gaps
Main issues
1. Cross-border
linkages
2.
3 …..
6
Different initiatives to take stock of
information and data gaps
• Inter alia
Conference on implementing G8 Action Plan: Financial Globalisation,
Vulnerabilities and Data Needs (Frankfurt, January 2008)
Co-hosted by the Bundesbank and the German Federal Ministry of
Finance
Results have contributed to the Future Work Programme for
broadening the database
And in particular for the reconvened Working Group in Securities
Databases
http://www.bundesbank.de/presse/presse_aktuell.en.php
Roundtable meetings, working groups (MCM) to enhance collaboration in
financial stability analysis
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Financial stability analysis – objectives and
tentative priorities against the backdrop of
the financial crisis
1. Analyse implications of changing global financial transmission mechanism
2. Institutionalisation of saving
3. Cross-border financial linkages of banking systems
4. Contributions to better understanding of changing interdependence
between financial and real spheres
5. Deepening analysis of systemic risk approaches, as an element of early
warning systems
6. Developing operational financial stability framework
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Financial stability analysis – objectives and
tentative priorities against the backdrop of
the financial crisis
6. Financial stability implications of financial innovations (new instruments;
securitisation etc.)
7. Measurement of financial stability
8. Results of financial stability analysis contribute to furthering the
development of macroeconomic models
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Cross border linkages
Recommendations of the „Issing Committee“
•
Interconnectedness and shadow banking system, comprising off-balance sheet
entities and risk transfer instruments (CDOs; CDS)
 Risk map
❙ Global database of the global financial interconnectedness is needed
❙ … and of major risk drivers
❙ IMF and Inter-Agency Task Force should develop a proposal for „global risk map“
 Global credit register
❙ Work efficiently on national level
❙ Gobal credit register could enhance risk management (firm and systemic level)
 Global securities register
❙ Would add the international capital market dimensions
❙ Proposal: Working Group on Securities Databases
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Cross border linkages
Recommendations of the „Issing Committee“
Hedge Funds
• Data to enhance direct regulation
 Structural data (including identifier; domicile; ownership structure;
investment objectives)
 Including balance sheet information on a quarterly base
• Data to enhance indirect regulation
 Systemic oversight risk directed at major banks which provide funds
 Monitoring counterparty risk management by prime brokers (including
leverage ratios)
Procyclicality
 Build up of systemic exposures
 Macrosystemic indicators and microsystemic indicators
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What are best practices in monitoring systemic
risks arising from hedge funds and other large
unregulated non-bank financial institutions?
• Main focus: Better oversight of potential systemic risks.
• Public databases do not provide adequate data on HF; reports by primary
dealer about their exposures useful but not sufficient to get an appropriate
insight.
• Information should be regular and timely (preferably monthly, at least
quarterly).
• Main items on asset side broken down by asset classes: Equity, bonds,
commodities. Liabilities side: Investment by investors and debt (including
collateralized debt).
• Also, use of derivates (according to risk categories) and short sales.
• Information requirements should encompass single hedge funds as well as
Fund of HF. Global approach.
• For discussion: Additional indicators for HF liquidity risk? Market risk?
(E. Brandt)
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Global financial factors of growing
importance for national financial markets –
Some empirical evidence
Global capital flows reflect growing importance of financial market channel:
•
•
Quantum leap in quantity and quality
Significant changes in the structure and composition of capital flows
Spreads gaining in importance as a leading indicator of real economic growth
Spreads in EMEs are more and more driven by global financial factors, and less by
national fundamentals; global liquidity and risk appetite
Empirical evidence:
• Around 50 % of the variance of the spread level in EMEs is determined by few global
factors, in particular risk appetite and global market liquidity - Martín González Rozada and
Eduardo Levy Yeyati, Global Factors and Emerging Market Spreads, Inter-American Development Bank, Research Department,
Working Paper No. 552
•
“… that a single common factor is able to explain a large part of the co-variation in
emerging market economies’ (EMEs) spreads observed in the last 4 years” - Alessio
Carlione, Paolo Piselli, and Giorgio Trebeshi, Emerging markets’ spreads and global financial conditions. In: Journal of
International Financial Markets, Institutions & Money, 19 (2009)
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Global financial factors of growing
importance for national financial markets –
Some empirical evidence
• Widening of the spread levels in current turmoil in EMEs mainly caused by
lower risk appetite, less by fundamentals
• “… the search for yield has meant that investors have differentiated less in
recent years between EMEs of different credit quality. In other words the
dispersion of sovereign bond spreads across EMEs has fallen by much
more than that of sovereign credit rating.” Guillermo Felices et al., BoE, Quarterly
Bulletin, 2008/Q1
• Three to four global factors can explain 80% to 90% of all rating changes in
EMEs. What does it mean for costs of refinancing; country specific
developments sufficiently considered? - Andrew Powell and Juan Francisco Martinez, On
Emerging Economy Sovereign Spreads and Ratings. IADB Research Department Working Paper, No. 629,
January 2008
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Growing importance of global financial
factors – further noteworthy implications
• Dynamically changing interdependence between financial and real spheres
• Rebalancing effects and portfolio strategies of global players of increasing
importance for global financial and real cycles
• Little differentiation between asset classes and country risks
• One of the main explanations of why even countries with
 a stable macroeconomic framework
 stronger regulation and
 an efficient market infrastructure
• … have been severely affected by this financial crisis
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Changing interdependencies between
financial and real sphere of the economy
Global
financial
factors
National financial
system
Growing importance of
financial indicators
as predictor of national
business cycles
National
determinants
200 bp increase
in spread levels
in EMEs
dampens world
economic growth
by around 0,9 %
compared with
baseline
scenario in the
following year
National business
cycle
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Better understanding of key drivers of
financial globalisation is of key importance
– for early warning systems and monitoring
Globally acting institutional investors
• Better data coverage of institutional investors’ behaviour, strategies and
global capital flows, generated by international rebalancing of portfolios
 Without a deeper knowledge of the behaviour of globally acting investors no
substantial progress in understanding
❙ changing market dynamics
❙ response patterns of financial markets,
❙ contagion and spillover effects
 is possible
• Moreover, better data on portfolio strategies are key to enhancing progress
 in early warning systems
 in monitoring implications of financial globalisation
 in financial soundness
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Better understanding of key drivers of
financial globalisation is of key importance
– for early warning systems and monitoring
Globally operating banks
 Management of internationally allocated credit portfolios and liquidity
management
 Financial stability properties of different banking structures
 “Portfolio” of mainly globally acting and financial market oriented big banks
 “Mixed portfolio” of large globally acting banks, savings banks and
cooperative banks
 Empirical study on Bank ownership and financial stability in Germany
Thorsten Beck, Heiko Hesse, Thomas Kick and Nataly von Westerhagen, Bank ownership and stability:
Evidence from Germany, March 2009
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Shift of risks to sectors where data
coverage is weak or information nonexistent
Central
banks
Banking
sector
Non-bank
financial
inst.
Firms
Households
Central
banks
Banking
sector
Non-bank
financial
inst.
Firms
Households
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• Financial risks have been shifted to households and firms where data
availability is weak or data non-existent, such as emerging market
economies
• Financial activities expanded in fields where information and data are weak
or non existent (IMF)
 Off-balance sheet entities: shift of risks to off-balance sheet positions; lower
risk weight; undervaluation of risks
 New financial instruments; structured products
 Derivatives markets
 Non-bank financial institutions
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II.
Financial Soundness Indicators
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Reprioritisation of financial soundness
indicators
Rationale must answer the following important questions:
i.
What are the main objectives of FSIs? – Different concepts (FSI; MPI;
GFSR)
ii. Did FSIs fail to indicate the financial crisis and why?
iii. What necessary information is not captured by traditional FSIs?
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FSIs - Different objectives
Necessity and direction of reprioritisation depends on the main objectives of
the FSIs
• Financial stability of banks and (national) banking systems
• Enhancing international comparability of financial data
• Part of early warning systems with regard to risk exposures and financial
tensions
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FSIs – Limitations
• Backward looking indicators
• Are on average not “sensitive” enough to major shifts in market
developments
• Financial innovations and globalisation of finance influence banks’ risk
exposure … higher sensitivity to shifts in market developments which are
insufficiently captured by FSIs
• Comparatively low frequency of data
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• Set of core indicators with only one indicator which reflects market risks:
exposure to currency risks
• Recent empirical studies show that FSIs significantly fluctuate with the
business cycle
 Impairs international comparability
 Influence of boom and bust cycles?
• Changing financial environment – changing interdependencies of credit
and market risks which are not captured by FSIs?
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• In particular CAR failed to distinguish between US banks that needed
government intervention and banks not needing intervention, leverage
ratios more informative (GFSR)
Reprioritisation: In a broader context, not a first priority for closing data gaps
• First question: appropriate criteria or methods to single out relevant FSIs
• Open for discussion
 Leverage ratios
 Off-balance sheet positions
 Better regional data coverage
 Better coverage of global risks to balance sheet positions
 Liquidity positions
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FSIs as part of early warning systems
Two elements:
 Early warning of financial tension (intermediaries)
 Early warning system with regard to contagion and spillover (financial system)
•
In both cases, FSIs have little power to predict systemic risks
•
FSIs fruitful in countries with less developed markets
•
FSIs fail to reflect the complexity of modern financial systems and could lead to
erranous conclusions without extensive background analyses (Deutsche Bundesbank, Financial
Stability Review, Financial Soundness Indicators: a contribution to improving the worldwide availability of data for financial stability
analysis. November 2006, p 103 - 122
•
“Comparative advantages” of market indicator-based approaches for detecting
systemic risks?
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Measurement of financial stability
• Macro stress tests failed to anticipate the financial turmoil as a potential
relevant outcome. “The tests indicated that the capital buffers in the
system were perfectly adequate, and yet they came under considerable
strain once the turmoil erupted.” Borio and Drehmann, Towards an operational framework for financial
stability: “fuzzy” measurement and its consequences. BIS Working Papers, No. 284, June 2009
• “The very fact that unusually large shocks are needed to produce any
action suggests that the current generation of macro stress tests is
missing essential elements of financial instability.” (Borio and Drehmann, 2009, p. 22)
• Should more emphasis be put on early warning systems and systemic risk
approaches?
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Systemic risks
• Effective measurement of systemic risks of key importance in a more
globally interconnected world
• Approaches for evaluating risks of individual financial institutions
• Contagion and spillover, regime shifts from high volatility to systemic risk
• Approaches to measure financial soundness based on market information
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Systemic risks
•
Two key questions:
 Simultaneous defaults of large systemically relevant financial institutions
 Measurement of the vulnerability of financial systems
•
Market-based indicators: forward-looking, daily availability
 CDS and equity prices
 Probability of default of individual banks and asset-return correlation
 For example: new indicator: price of insurance against large losses in the banking
sector in the coming 12 months (Xin Huang et. al.; A framework for assessing the systemic risk of major financial
institutions, BIS Working Papers, No. 281, April 2009)
 Credit risk and tail risk models: option implied probability of default (iPoD); forwardlooking, provide early warning systems of distress. “When complemented with other
market and non-market information, option-iPoD and option-leverage might become a
useful tool for the daily surveillance of financial and non-FIs.” GFSR, April 2009
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Reliability of market indicators
• But, here is a big “if”:
• “If, as some analytical approaches suggest, excessive risk-taking is the
source of financial instability, then estimates of risk derived from market
prices would tend to be unusually low as vulnerabilities build up and
would tend to behave more like contemporaneous indicators of financial
distress.” Borio and Drehmann, 2009, p. 14
• Even more important, measures of systemic risks and early warning
systems have to generate outcomes ─
 which give reliable guidance? For globally coordinated measures – will there
be agreement on one model of early warning systems?
 Are these approaches sufficiently forward-looking to enable policy action?
 How do we assure that identified risks are translated into action?
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