Macroprudential policy and instruments:
Setting counter-cyclical capital buffers in
converging economies
Jan Frait
Executive Director
Financial Stability Department
Ministry of Finance Seminar
Smilovice, 6 December 2011
Outline
1. Macroprudential policy
2. Countercyclical capital buffers in Basel III and the
standpoint of the Czech National Bank in the EU
discussions in this area
3. The CNB analysis focusing on the problems (concerns)
when using the suggested credit-to-GDP gap guide for
converging economies
4. Possible alternatives for converging economies based on
economic fundamentals: the CNB work in progress
2
I.
Macroprudential Policy Framework
3
What is a macroprudential policy framework?
• Following the global financial crisis, on the EU level as well as on the
national levels the ways how to establish the additional pillar for financial
stability – macroprudential policy framework – is being discussed.
• Until the crisis, the concept of macroprudential policy was discussed
primarily within the central banking community under the leadership of
the Bank for International Settlements (BIS henceforth).
• After the crisis, the term “macroprudential” has become a buzzword
(Clement, 2010) and the establishment of effective macroprudential
policy framework has become one of the prime objectives of the G20,
EU, IMF and other structures.
• In the EU, such a desire has already been reflected in the decision to
create the European Systemic Risk Board as the EU-wide authority of
macroprudential supervision and by number of iniciatives focusing on
defining the EU-wide framework for macroprudential regulation.
4
What is a macroprudential policy framework?
• The term “macroprudential” is now too embracive and it is often
used outside of the scope of its original meaning.
• The CNB looks at the concept of macroprudential policies from
relatively narrow perspective of the original BIS approach (e.g.
Borio, 2003, Borio and White, 2004).
• The objective of a macroprudential approach in the BIS tradition
falls within the macroeconomic concept and implicitly involves
monetary and fiscal policies (Borio and Shim, 2007, and White,
2009).
• In the BIS tradition, the phenomenon of financial market
procyclicality (mainly the procyclical behaviour of credit provision)
stands centrally (Borio and Lowe, 2001, or Borio, Furnine and
Lowe, 2001).
5
What is a macroprudential policy framework?
• The other stream is modelling of systemic risk associated with
individual institutions. By comparison with canonical models of
systemic risk like Diamond and Dybvig (1983) emphasining
interlinkages and common exposures among institutions, in the BIS
logic, systemic risk arises primarily through common exposures to
macroeconomic risk factors across institutions.
• The cross-section dimension of systemic risk (common exposures
among institutions, network risks, infrastructure risks, contagion ...) has
been intensively studied by the IMF (see special chapters on systemic
risks in the last few Global Financial Stability Reports).
6
The CNB’s historical interpretation of financial stability
Sound financial system
Yes: resilience
No
Financial
stability
Yes
Financial
volatility
Shocks
• The CNB’s approach to financial
stability has historically been strongly
macroprudential and close to the
relatively narrow BIS interpretation
focusing primarily on risks associated
with the financial cycle.
• Its objective is to ensure that the
financial system does not become so
vulnerable that unexpected shocks
ultimately cause financial instability in
the form of a crisis.
No: vulnerability
Financial
vulnerability
Financial
instability
(crisis)
7
Financial stability vs. macroprudential policy – the CNB view
• The CNB considers macroprudential policy to be an element of
financial stability policy (Frait and Komárková, 2011).
• The main distinguishing feature of macroprudential policy is that unlike
traditional microprudential regulation and supervision (focused on the
resilience of individual financial institutions to mostly exogenous
events):
• it focuses on the stability of the system as a whole;
• it primarily monitors endogenous processes in which financial
institutions that may seem individually sound can get into a
situation of systemic instability through common behaviour and
mutual interaction,
• the objective of financial stability analysts is therefore avoid the risk
of the fallacy of composition – wrong assumption that the state of
the whole is the sum of the state of seemingly independent parts.
8
Macroprudential policy and systemic risk - objectives
• The macroprudential policy objective is to prevent systemic risk from
forming and spreading in the financial system.
• Systemic risk has two different dimensions:
• The time dimension reflects the build-up of systemic risk over time due to
the pro-cyclical behaviour of financial institutions contributing to the
formation of unbalanced financial trends.
• The second dimension is cross-sectional and reflects the existence of
common exposures and interconnectedness in the financial system.
• The two dimensions of systemic risk cannot be strictly separated, as
they largely evolve jointly over the financial cycle.
• The experience commands that the time dimension of systemic risk
has to be regarded as more important.
• Cross-sector dimension cannot be ignored especially due to the risk of
contagion from domestic as well as foreign environment.
9
Conseptual approach of the CNB‘s macroprudential policy
• The key concept describing the time dimension of systemic risk over financial
cycle is leverage (the indebtedness of economic agents, stocks of loans, the
ease of obtaining of external financing, the size of interest rate margins and
credit spreads, etc..).
• The leverage can be approximated by credit-to-GDP ratio:
• increases until the financial cycle turns over, sometimes the turn is
disorderly and presents itself as the eruption of financial crisis.
• then starts to decline, although in the early phase of the crisis remains high
(given falling nominal GDP it can even rise in the initial post-crisis years).
• The deleveraging phase can therefore last several years, and in the event of
a deep crisis the leverage ratio can, after a time, fall below its long-term
normal value.
• Consequently, the leverage ratio adjusts to economic conditions after a
considerable lag, so stock measures have only a limited information value as a
guide for the macroprudential policy response during the financial cycle.
• For this reason, forward-looking variables are needed that can be used to
identify situations where the tolerable limit for systemic risk has been exceeded.
10
Leverage over credit cycle – a slow motion process
• Conduct of macroprudential policy changes throughout financial cycle.
leverage
Good times (systemic risk
accumulation):
leverage phase with
excess optimism
turning point (start
of crisis)
Bad times (systemic risk
materialization):
deleveraging phase with
excess pessimism
time
Normal level
of leverage
Signal for macroprudential tools
activation: forward-looking or
leading indicators (credit-to-GDP
gap, real estate prices gap …)
Discontinuity in marginal risk of
financial instability: e.g.financial
markets indicators (credit
spreads, CDS spreads) or
market liquidity indicators
Signal for termination of
supportive policies:
contemporaneous indicators
(default rates, provision rates,
NPL rates, lending conditions)
and financial markets indicators
11
Credit cycle and systemic risk – two phases
• In a credit cycle, systemic risk evolves differently in two phases:
accumulation (build-up) and materialization (manifestation).
• Note the financial stability paradox: a system is most vulnerable when
it looks most robust.
Build-up of systemic risk
period of financial
exuberance
Materialisation of systemic risk
period of financial
distress
period of low
current risk
time
period of high
current risk
time
normal conditions
marginal risk of
financial instability
degree to which risks
materialise as defaults, NPLs
and credit losses
12
Macroprudential policy and systemic risk - definition
• Macroprudential policy can be defined as the application of a
set of instruments that have the potential to
• increase preventively the resilience of the system, in the
accumulation phase, against the risks of emergence of financial
instability in the future by
• creating capital and liquidity buffers,
• limiting procyclicality in the behaviour of the financial system
• containing risks that individual financial institutions may create for
the system as a whole.
• mitigate the impacts, in the materialization phase, of previously
accumulated risks if prevention fails.
13
Macroprudential policy and systemic risk - tools
• True (genuine) macroprudential tools are those which can be applied in
the form of rules and can therefore take the form of built-in stabilisers.
• They should automatically limit the procyclicality of the financial
system or the risky behaviour of individual institutions.
• They should be explicitly focusing on the financial system as a
whole and endogenous processes within it.
• In addition to true macroprudential tools, various microprudential
regulatory and supervisory tools can be used for macroprudential
purposes.
• If these tools are applied not to individual institutions, but across
the board to all institutions in the system, they can be regarded as
macroprudential instruments.
• Measures of this type, along with monetary policy tools, fiscal policy
tools and tax measures, have been applied in many countries in the
past in an effort to slow excess credit growth.
14
II.
Countercyclical capital buffers – concept
15
Countercyclical capital buffer in Basel III (1)
• countercyclical capital buffer (CCB henceforth) is genuine
macroprudential tool
• „optimists“ believe that the CCB could be used for taming a
credit boom
• help the authorities to lean against the build-up phase of the
cycle by raising the cost of credit, and therefore slowing down
its provision, when they conclude that the stock of credit has
grown to excessive levels relative to the benchmarks of the
past experience
• this potential moderating effect on the build-up phase of
the credit cycle should be viewed as a positive side
benefit, rather than the primary aim of the CCB regime
16
Countercyclical capital buffer in Basel III (2)
• „pessimists“ presume that the quantitative impact of the CCB
during the credit boom will be rather weak
• it should primarily protect the banking sector and general
economy from the after-effects of excess aggregate credit
growth that have often been associated with the build up of
system-wide risk
• What kind of after-effects? …to maintain the flow of credit in
the economy when the broader financial system experiences
distress after a credit boom (smooth landing)
17
The role of a macroprudential authority regarding CCB
• to monitor credit and its dynamics (and potentially other
indicators) and make assessments of whether system-wide
risks are being built up
• based on this assessment, to decide whether the CCB
requirement should be imposed (set above the zero value)
• to apply judgment to determine whether the CCB should
increase or decrease over time (within the range of zero to
2.5% of risk weighted assets, in very strong credit booms
even above 2.5%)
• to be prepared to remove the requirement on a timely basis if
the system-wide risk crystallizes
18
The view of the Czech National Bank
• when Basel III was discussed, CNB in general
• supported the CCB as a useful macroprudential tool as well as
harmonized methodology for setting it across countries
• which would – however – allow sufficient flexibility for national
policymakers (reflecting different level of financial intermediation
in converging economies and other specificities of individual
countries)
• supported the Basel III approach to determine the bank-specific
capital buffer (linked to the credit dynamics in the country where
the loans were granted)
* EC: Consultation Document – Countercyclical Capital Buffer. 25 October 2010.
19
Implementation of the buffer in CRD IV/CRR
• within consultations of the European commission* (October –
November 2010) – especially in the area of application of
capital buffer for cross-border banks - the CNB
• supported the Basel III-compatible approach to determine
the bank-specific capital buffer (i.e. linked to the credit
dynamics in the country where the loan was granted),
• rejected the alternatives approaches suggested by the
Commission (determining the buffer according to the
jurisdiction of the parent bank or according to the
jurisdiction from which the credit is ultimately granted).
* EC: Consultation Document - Countercyclical Capital Buffer. 25 October 2010.
20
June 2011 discussion within the ESRB: countercyclical buffer in
CRD IV/CRR
• CNB supported the June 2011 letter by ESRB to European
Commission suggesting that in the area of buffers the CRD IV
text should
• allow national policymakers to set buffers in excess of
2.5% without reference to exceptional circumstances
• permit the setting of buffers in excess of 2.5% for third
country exposures
• allow for national policymakers to voluntary reciprocate
when buffers are set in excess of 2.5%
• strengthen the role of ESRB in monitoring and peerreviewing the buffer setting
• July 2011 publication of the CRD IV/CRR draft to a large
extent reflected these suggestions
21
September 2011 discussion within the ESRB: the countercyclical
buffer in CRD IV (1)
• however, the July 2011 CRD IV/CRR text does not grant full
flexibility to national policymakers
• A „dual“ regime has been suggested
• standard countercyclical capital buffer regime (decision on
the buffer rate made quarterly, the indicators used to
determine the rate approved by the ESRB, full reciprocity
with voluntary reciprocity if buffer rate above 2.5%)
• an additional (structural) buffer regime (reviewed only
annually, any indicator/variable could be used by national
authorities – not only those approved by ESRB, variables
may include also non-cyclical/structural variables, no
international reciprocity)
22
September 2011 discussion within the ESRB: the countercyclical
buffer in CRD IV (2)
• CNB supports the CRD IV amendment proposals approved by
General Board of ESRB in September 2011 to remove the
dual regime of the buffer, as
• cyclical instrument is not appropriate to tackle structural
(non-cyclical) systemic risk
• characterized by important rigidities (prohibition of
reciprocation, only annual review)
• there would be problems with communication of the two
types of buffers
• reflected in amendment of Art 126 CRD - modify 126 (3)
and to repeal 126 (4)
23
September 2011 discussion within the ESRB: maximum versus
minimum harmonization
• in general, the CNB supports the possibility of national
policymakers to tighten capital requirements in Pillar 1 (i.e. the
CNB supports harmonization of minimum standards and not
maximum harmonization) due to macroprudential reasons
• in the September 2011 GB ESRB meeting, the CNB
supported
• strengthening of the delegated authority of the
Commission (no time limit for tightening periods; broader
scope of measures) and underlining the role of ESRB…
reflected in proposal for a re-cast of Article 443 CRR and
the related Recital
• and – more importantly - providing Member States with the
same authority to address systemic risks… reflected in
proposal for a new Article 443-bis CRR
24
III.
CCB – calibration
25
The common reference guide: credit-to-GDP gap
• the common reference guide* for setting the CCB is based on
the aggregate private sector credit-to-GDP gap
• a gap between currently observed value and the calculated longterm trend of private sector credit to GDP
Countercyclical capital buffer
(% of RWA as a function of credit-to-GDP gap in pps)
4
3.5
3
2.5
2
1.5
1
0.5
0
-4
-2
0
2
4
6
8
10
12
Credit-to-GDP gap (in %)
14
-1.4
-1.3
-1.2
-1.1
-1
-0.9
-0.8
-0.7
-0.6
-0.5
-0.4
-0.3
-0.2
-0.1
0
0.1
0.2
• for calculation of the long-term
trend, the Basel committee
suggests using the HodrickPrescott filter with a high
smoothing parameter
• buffer set as a function of the
credit-to-GDP gap
* BCBS: Guidance for national authorities operating the countercyclical capital buffer. BIS, December 2010, pp. 4 and 8.
26
CNB work on countercyclical capital buffers
• the CNB is focusing on the issue of how to calibrate the CCB
in converging economies
• Financial Stability Report 2010/2011* responds to question
“how the CCB would have been set if the regime had been
existing before crisis?“ through the analysis of ten CEE
countries in the period of strong credit growth 2003-2007
• conclusion: basic methodology recommended by Basel
Committee for setting the CCB rate (credit-to-GDP gap
calculated according to the purely statistical method of
Hodrick-Prescott filter) is not appropriate for converging
economies like the Czech Republic
• it is surely not appropriate for advanced countries previously
experiencing lasting credit boom either!
* Geršl, Adam – Seidler, Jakub: Excessive credit growth as an indicator of financial (in)stability and its use in macroprudential
policy. Thematic article, FSR 2010/2011, CNB.
27
CEE converging countries and calculation of credit-to-GDP gap
1. short time-series (Basel recommends 20 years of quarterly data)
2. fast credit growth is incorporated in the trend (convergence in
credit to GDP - initial low level of financial intermediation and
catching up process)
Development of credit to GDP ratio in CEE countries
(%)
Development of credit to GDP ratio in CEE countries
(%)
140
140
120
120
100
100
80
80
60
60
40
40
20
20
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Hungary
Poland
Romania
Slovenia
Euro area
Source: IMF IFS, CNB calculations
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Bulgaria
Estonia
Latvia
Source: IMF IFS, CNB calculations
Lithuania
Euro area
28
CEE countries and buffer calculation – what makes things complex
3. banking sector restructuring (bad assets in the 1990s – especially
CZ and SK, bank privatizations)
4. changes in the composition of credit to the private sector
(increasing share of loans to households)
5. end-point bias of HP filter as an obstacle to practical conduct of
macroprudential policy
Development of credit to GDP ratio in CEE countries
(%)
Stock of bank credit to the real sector in the Czech Republic
(in CZK bil)
80
2000
70
1800
1600
60
1400
50
1200
40
1000
30
800
600
20
400
10
200
0
1998Q1 1999Q3 2001Q1 2002Q3 2004Q1 2005Q3 2007Q1 2008Q3
Czech Republic
Source: IMF IFS, authors' calculations
Slovak Republic
0
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
Non-financial corporations
Source: Czech National Bank
Households
29
Deleveraging and buffer calculation
Credit and its quality in the Czech Republic
(1993–2010, in %)
35
Sectoral structure of credit in the Czech Republic
(1993–2011, in %)
70
30
100
65
80
25
60
20
55
15
10
50
5
60
40
45
0
40
20
-5
-10
35
-15
30
I/93
I/96
I/99
Credit growth
I/02
%NPL
I/05
I/08
Credit-to-GDP (rhs)
Source: CNB
Note: Credit growth is year-over-year increase in total bank credit,
% NPL is the share of nonperforming loans on total bank credit.
Data from the beginning of 1990s are based on authors' estimates.
0
01/93
01/96
01/99
01/02
Non-financial corporates
Tradesmen
Government
01/05
01/08
01/11
Households
Other financials
Source: CNB
30
Application of the guide to the Czech Republic
• using HP filter with recommended lambda would indicate excess credit
growth (even since 2003 if estimated „continuously“)
• holds even if other reasonable denominators are used (assets)
Bank credit to the real sector in relative terms
(%)
Credit gaps in the Czech Republic with alternative denominators
(%)
70
20
60
15
50
10
40
5
30
0
20
-5
10
-10
0
1996
1998
2000
Source: CNB, CZSO
2002
2004
2006
2008
Credit-to-GDP
Credit-to-financial-assets
Credit-to-assets
2010
-15
03/98
03/00
03/02
03/04
03/06
03/08
Credit-to-GDP gap
Credit-to-GDP gap (actual period estimation)
Credit-to-financial-assets gap
Credit-to-assets gap
Source: CNB, authors' calculations
03/10
31
Application of the guide to the Czech Republic
• when estimated in credit growth phase only (2004-2008), HP filter captures
only short-term deviations
Credit-to-GDP and its trend (HP filter on data starting in 2004)
(%)
60
55
50
45
40
35
30
06/04
06/05
06/06
06/07
Estimated HP trend
06/08
06/09
Credit-to-GDP
Source: IMF IFS, CNB calculations
32
Historical comparison does not reveal excessive credit in
the Czech Republic (1)
Czech Republic has lower level of credit to GDP than selected core EU countries when at
similar level of economic development (in the 1980s)
other features of credit growth in the Czech Republic also do not indicate the build up of
system-wide risk (no FX loans to households; no external funding; high deposit-to-loan
ratio; low LTV ratios)
• contrasts with e.g. Latvia that had comparatively much higher stock of credit in 2008,
several „dangerous“ features of credit boom and lower level of GDP per capita
•
•
Credit to GDP for similar level of economic development
(GDP per capita in 2005 USD = 17 ths USD; in %)
Credit to GDP for similar level of economic development
(GDP per capita in 2005 USD = 14 ths USD; in %)
100
100
90
90
80
80
70
70
60
60
50
50
40
40
30
30
20
20
10
10
0
0
CZ
(2009)
IT
(1986)
NL
(1984)
AT
(1984)
Source: IMF IFS, CNB calculations
FR
(1985)
ES
(1990)
DE
(1983)
Latvia
(2008)
IT (1984)
ES (1988)
Source: IMF IFS, CNB calculations
AT (1985)
DE (1985)
33
Historical comparison does not reveal excessive credit in
the Czech Republic (2)
• ....
Credit-to-GDP ratios for a similar level of economic development
(in %; GDP per capita, in PPP constant 2005 international $;
approximately 22, 500 for the Czech Rep as of 2010)
100
90
80
70
60
50
40
30
20
10
0
Czech Republic Italy Netherlands Austria
(2010)
(1988)
(1984)
(1985)
France
(1987)
Spain
(1997)
Germany
(1985)
Source: IMF IFS, WB WDI, authors' calculations
34
IV.
CCB – the way forward
35
The discretion of policymakers is anchored in Basel III
• credit-to-GDP ratio should serve only as a guide*
• rather than relying mechanistically on the credit/GDP guide,
authorities are expected to apply judgment in the setting of the
buffer in their jurisdiction after using the best information
available to gauge the build-up of system-wide risk
• in addition, the calculated long-term trend of the credit/GDP ratio
is a purely statistical measure that does not capture turning points
well*
• therefore, authorities should form their own judgments about
the sustainable level of credit in the economy; they should use
the calculated long-term trend simply as a starting point in
their analysis
* BCBS: Guidance for national authorities operating the countercyclical capital buffer. BIS, December 2010, pp. 4 and 8.
36
The alternative to HP filter: fundamental „out-of-sample“ method leads
to different credit-to-GDP gaps and different potential buffers
•
•
•
a way how to form judgment about the sustainable level of credit in the economy:
• regressing the credit to GDP on a range of economic fundamentals (GDP per capita;
households consumption; inflation,FX loans to households; external funding;
deposit-to-loan ratio; LTV ratios etc.), using data for developed countries
• applying the estimated elasticities „out of sample“, i.e. on CEE countries to calculate
„equilibrium credit“
in contrast to HP filter, the fundamental out-of-sample method takes into account the
economic fundamentals influencing the level of credit in the economy
the HP filter would not define some countries as in a situation of excess credit growth
while fundamental method would (figures below in the table are calculated for 3Q 2008,
i.e. just before the CEE countries were hit by the global financial crisis)
Countercyclical capital buffer
(% of RWA)
Out-of-sample
HP filter
Out-of-sample
10.8
2.5
2.5
-15.0
2.4
0.0
27.9
1.0
2.5
-8.3
1.5
0.0
19.6
0.0
2.5
-10.7
0.0
0.0
-23.3
0.3
0.0
-27.3
1.3
0.0
-22.8
1.3
0.0
5.5
1.1
1.1
Credit-to-GDP gap (%)
HP filter
BG
11.4
CZ
9.5
EE
5.3
LT
6.9
LV
1.0
HU
-1.4
PL
3.0
RO
6.1
SK
6.1
SI
5.4
Source: authors' calculations
37
Results of the „out-of-sample“ method in comparison to HP filter
Estonia
Czech Republic
Latvia
50%
20%
40%
15%
40%
30%
10%
30%
20%
5%
20%
10%
10%
0%
0%
-5%
-10%
0%
-10%
-20%
-10%
-15%
-30%
-20%
-20%
-40%
-25%
2000q1 2002q1 2004q1 2006q1 2008q1
HPgap
OUTgap
-30%
2000q1 2001q4 2003q3 2005q2 2007q1 2008q4
HPgap
OUTgap
-50%
2000q1 2001q4 2003q3 2005q2 2007q1 2008q4
HPgap
OUTgap
38
Results of the „out-of-sample“ method in comparison to HP
filter
Slovenia
Slovakia
Poland
20%
20%
15%
15%
15%
10%
10%
10%
5%
5%
5%
0%
0%
0%
-5%
-5%
-5%
-10%
-10%
-10%
-15%
-15%
-15%
-20%
-20%
-20%
-25%
-25%
-25%
-30%
-30%
-30%
2000q1 2002q1 2004q1 2006q1 2008q1 2010q1
2000q1 2002q1 2004q1 2006q1 2008q1
HPgap
OUTgap
HPgap
OUTgap
-35%
2000q1 2001q4 2003q3 2005q2 2007q1 2008q4
HPgap
OUTgap
39
Results: comparison of HP and out-of-sample methods
Hungary
Bulgaria
15%
20%
10%
10%
5%
0%
0%
-5%
-10%
-10%
-20%
-15%
-20%
-30%
-25%
-40%
-30%
-50%
2000q1 2001q4 2003q3 2005q2 2007q1 2008q4
HPgap
-35%
2000q1 2001q4 2003q3 2005q2 2007q1 2008q4
HPgap
OUTgap
OUTgap
Lithuania
Romania
20%
10%
10%
0%
0%
-10%
-10%
-20%
-20%
-30%
-30%
-40%
-40%
-50%
-50%
2000q1 2001q4 2003q3 2005q2 2007q1 2008q4
HPgap
OUTgap
-60%
2000q1 2002q1 2004q1 2006q1 2008q1 2010q1
HPgap
OUTgap
40
Countries above equilibrium credit
• it seems that for CEE countries, the out-of-sample method better predicts the
problem countries
• empirical evidence shows that the four countries identified as being above
equilibrium credit (LV, BG, EE, SI) and the two close to the border (HU and LT)
did not show particularly high Tier 1 capital ratios before crisis in 2008 (except
Bulgaria) and some of them experienced relatively high drop in RoE of banks
Credit-to-GDP gap via out-of-sample and Tier 1 ratio in 2008
(gap in pps; Tier 1 capital ratio in 2008)
Credit-to-GDP gap via out-of-sample and change in RoE
(gap in pps; change in RoE of banking sector in pps)
10
CZ
13
0
RO
12
-40.0
BG
CZ
-20.0
RO
0.0
HU
PL
-10
SI
20.0
40.0
BG
11
SK
SK
PL
-20
LV
10
LT
HU
-30
EE
SI
9
-40
LV
8
-50
LT
7
6
-40.0
-20.0
0.0
Source: IMF, authors' calculations
20.0
40.0
-60
-70
Source: IMF, authors' calculations
EE
41
Further developments
• to be fair, the out-of-sample method also has a number of drawbacks
• fundamental variables selection (housing prices seem to be a
relevant variable, but can themselves suffer from bubbles)
• selection of advanced (sample) countries
• different fundamentals in advanced (sample) countries versus
CEE countries at the current stage of development
• estimation method suffers by losing country-specific constant
• the methodology is being developed further and made more robust
to be more appropriate for practical implementation
• other methods and indicators are being tested as to their signaling
properties for a built-up of systemic risk in converging economies
• the indicators for deciding on policy reversals are needed too
42
Policy approach – consistency vs. discretion
• The key issue is setting the long-term equilibrium trend(s)
more optimistic
equilibrium trajectory
Credit-to-GDP
clearly above
more indicators and
judgment required
?
less optimistic
equilibrium trajectory
clearly below
time
43
Countercyclical capital buffers – the example of policy
• Credit-to-GDP cannot be a sole driver of countercyclical capital buffers
setting – it is a lagging slow-motion variable staying above the historical
norms during the initial stages of crisis.
• The indicators of credit cycle dynamics and other are therefore needed to
guide the shifts in setting (credit growth, lending conditions, spreads etc.)
Credit-to-GDP over financial cycle
period of financial
exuberance
Credit dynamics (e.g. y-o-y growth)
period of financial
exuberance
period of financial
distress
period of financial
distress
CCB set to zero
again
time
long-term „normal“
level of credit-to
GDP
time
CCB set at
maximum 2,5 %
turning point (start of
crisis): credit-to-GDP
still very high, but policy
has to change sharply
CCB set to zero
turning point (start of
crisis): credit growth
falls, lending conditions
tighten
44
Conclusions
• flexibility embedded in the Basel III countercyclical capital
buffer regime is a desirable element
• should be kept to a large extent in the EU regulation (CRD
IV/CRR), the ESRB should keep the coordination and ex post
monitoring role
• CEE converging countries are exactly the ones where
detrending by HP filter can not work well in calibrating the
buffer
• macroprudential research in CEE countries has to identify set
of fundamental factors that could provide solid guidance for
setting this instrument and using it in efficient way
45
Thank you for the attention
www.cnb.cz
Jan Frait
Head of Financial Stability Department
Jan.Frait@cnb.cz
Contact to the Financial Stability Department:
E-mail: financial.stability@cnb.cz
http://www.cnb.cz/en/financni_stability/
References
•
•
•
•
•
•
•
•
•
•
•
BANK OF ENGLAND (2009): The Role of Macroprudential Policy. Discussion Paper, November 2009.
BORIO C., FURFINE C. AND LOWE, P. (2001): Procyclicality of the financial system and financial stability:
issues and policy options”, in “Marrying the macro- and microprudential dimensions of financial stability”, BIS
Papers, No. 1, March, pp. 1–57
BORIO, C – SHIM, I. (2007): “What can (macro)-prudential policy do to support monetary policy. BIS Working
Papers, no 242, December.
BORIO, C. - P. LOWE, P. (2001): To provision or not to provision. BIS Quarterly Review, September 2001, pp.
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BORIO, C. - WHITE, W. (2004): Whither monetary and financial stability? The implications of evolving policy
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de France Financial Stability Review, No. 13 — The Future of Financial Regulation, September 2009.
BORIO, C.-DREHMANN, M. (2009), Towards an operational framework for financial stability: fuzzy
measurement and its consequences. BIS Working Paper, No. 284, June 2009.
CLEMENT, P. (2010): The term “macroprudential”: origins and evolution. BIS Quarterly Review, March 2010,
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DIAMOND, D - DYBVIG, P. (1983): Bank runs, deposit insurance and liquidity”, Journal of Political Economy,
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WHITE, W. (2006): Procyclicality in the financial system: do we need a new macrofinancial stabilisation
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References
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•
•
FRAIT, J., KOMÁRKOVÁ, Z. (2009): Instruments for curbing fluctuations in lending over the business cycle.
Financial Stability Report 2008/2009, Czech National Bank, pp. 72-81.
Frait, J., Komárek, Komárková, Z. (2011): Monetary Policy in a Small Economy after the Tsunami: A New
Consensus on the Horizon? Czech Journal of Economics and Finance 61, No. 1, pp. 5-33.
Frait, J., Komárková, Z. (2011): Financial stability, systemic risk and macroprudential policy. Financial Stability
Report 2010/2011, Czech National Bank, pp. 96-111; ISBN 978-80-87225-34-9
Frait, Jan; Gersl, Adam; Seidler, Jakub; Credit growth and financial stability in the Czech Republic. World Bank
Policy Research Working Paper; no. WPS 5771 2011/08/01 August 2011
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