Macro-prudential Framework AO iAn Overvie세션1_사회).pdf · International forums like G20 as part of its financial regulatory agenda has asked FSB, BIS and also IMF to focus on

Macro-prudential Framework A O iAn Overview

FINANCIAL & PRIVATE SECTOR DEVELOPMENTEUROPE AND CENTRAL ASIA

• Lalit Raina, Sector Managera t a a, Secto a age• January, 2012

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Financial & Private Sector DevelopmentThe World Bank

Table of Contents

• Why a Macro-prudential Framework

• What is a Macro-prudential Framework

• Systemic Risk Monitoring Framework

M P d ti l I t t• Macro Prudential Instruments

• Implementation and CoordinationImplementation and Coordination

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The World Bank Financial & Private Sector Development

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Why Macroprudential Framework

Recent Crisis experience has taught that a systemic crisis can still h d k h f lhappen due to excessive systemic risks even when specific institutional risks may be within the micro‐prudential parameters.

Thus focusing on stability of individual institutions is not enough. To sustain financial stability, a macro‐prudential regulation and supervision

h i th i t l t d i tit ti lapproach is the appropriate regulatory and institutional response, especially for SIFIS.

International forums like G20 as part of its financial regulatory agenda has asked FSB, BIS and also IMF to focus on developing Macro‐Prudential policy frameworksPrudential policy frameworks.

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The World Bank Financial & Private Sector Development3

Why Macroprudential Framework

In the US, 2010 Dodd‐Frank Act created a new “Financial Stability h l’ ( ) h d b d l d h d lOversight Council’ (FSOC) chaired by Treasury and includes, the Federal

Reserve, SEC, FDIC, and the new BCFP. The FSOC can designate SIFIS.

UK has set up a FPC (Financial Policy Committee) in July 2010 chaired by the Bank of England for macro‐prudential policy. This will have some

l ith th MPCoverlap with the MPC.

EU has set up a European Systemic Risk Board (ESRB) in Jan 2011, and p p y ( )includes the ECB, Member Central banks, the three EU supervisors EC and ECFIN

Mexico has (FSC‐MOF led) & Malaysia (FSEC—Cen Bank)

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Recent international developments on macroprudential frameworksmacroprudential frameworks

In October 2011, the Financial Stability Board (FSB), together with the International Monetary Fund (IMF) and Bank for International SettlementsInternational Monetary Fund (IMF) and Bank for International Settlements (BIS), produced a progress report to the G20 on macro‐prudential tools and frameworks.

While work in this area is still developing, important steps have been taken on new policy instruments, consolidating understanding of the effectiveness of instruments, and in designing governance frameworks to support macro‐prudential policies.

Considerable progress has been made in the past year in developing new macro‐prudential tools:

• Basel III introduces a countercyclical capital buffer whose purpose is to support the stability of the financial system.

• Another notable achievement has been the agreement over the FSB’s framework to

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tackle risks posed by systemically important banks

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Table of Contents




• Macro Prudential Instruments

• Implementation and Coordination

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What is a Macroprudential Framework

1 Decision on Creation of a Financial Stability Institutional Mandate1. Decision on Creation of a Financial Stability Institutional Mandateand assign responsibility for macro‐prudential Policy Framework

2. Establishment of a Systemic Risk Monitoring Framework

Key elements

3. Development of a Macro‐prudential regulatory Frameworkincluding policies, tools and operating guidelines

Key elements

4. Implementation and Coordination

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Decision on Creation of a FSC

A political decision is necessary for the creation of an FSC, also whether it will be a research and advisory body or an action entity; ESRB advisory body FPC and FSOCresearch and advisory body or an action entity; ESRB advisory body, FPC and FSOC action oriented.

Following the political decision a Presidential Decree or Legislative action may beFollowing the political decision, a Presidential Decree or Legislative action may be required to create the FSC.

These will need to be followed by operating /decision protocols depending upon theThese will need to be followed by operating /decision protocols depending upon the scope of the mandate

Boundaries including relationships with Micro‐prudential supervisors, accountability, g p p p , y,follow up issues.

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Table of Contents

• Why a Macro-prudential Framework• Why a Macro-prudential Framework

• What is a Macro-prudential FrameworkWhat is a Macro prudential Framework

• Systemic Risk Monitoring Frameworky g



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Systemic Risk Monitoring Framework

The SRMF is the starting point for identifying the risk factors, monitoring h d k k f h fthem and make a risk assessment for the purpose of triggering actions. It should include:

An analytical toolkit to identify and monitor systemic risks; key parameters and factors; quantitative and qualitative;

Processes to locate and collect the necessary data;

Analysis of the risk data in terms of scale, trends, probability, timing, system resilience,

Based on the analysis, develop a risk assessment matrix in terms of priority and magnitude, tailored to the specific country

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Systemic risk FactorsThe macro‐financial risk factors and toolkit will essentially consist of two types:

1. Macroeconomic factors Identifying macro imbalances

Monetary, fiscal and business cycle indicators:y, y

1. GDP Growth Rate

2 I fl ti2. Inflation

3. Interest rate

4 Real Exchange rate4. Real Exchange rate

5. Current Account deficits

6 Large short term capital flows6. Large short term capital flows

7. Asset ( real Asset or securities markets) Price overheating

8. Debt to GDP Ratios ( especially external debt to GDP)11


8. Debt to GDP Ratios ( especially external debt to GDP)

Systemic risk Factors2. Financial Sector Factors (Equilibrium or severe imbalance)

1. High Credit to GDP growthh l ( ) h l l f2. High system leverage ( LTD ratio)‐ wholesale funding

3. High Fx liabilities to total liabilities4. High Interbank dependence or external dependence –contagion risks;5. High Fx loans to total loans, especially to non Fx generating borrowers6. High Household and/or corporate leverage (debt/equity ratios)7. High Household/corporate debt service requirements7. High Household/corporate debt service requirements8. High loan to value ratios9. Rising sector concentration;10 Increasing NPLs;10.Increasing NPLs;11.Declining ROA or ROEs in the banking sector;

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Systemic risk Factors

There have several efforts made to combine these systemic risk factors k d f d b bl blinto some kind of an index to be able to comparable over time. Some

examples are:

• Composite Indicator of Systemic Stress ( ECB)

• Global Financial Stress Index ( BOA Merril Lynch)

• Fitch Macro Prudential Indicator (MPI)

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1. Rapid Credit Growth: Abundant liquidity led to credit boom, which busted in an environment of decreased market confidence and high risk aversion. g

Credit Growth (2005-2011)

80

100

GeorgiaKazakhstan

60Ukraine

Serbia

Latvia

Lithuania Romania

20

40

%

Bulgaria

EstoniaRussian Fed.

0

‐20

Dec‐05

Dec‐06

Dec‐07

Dec‐08

Dec‐09

Dec‐10

Oct‐11

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Source: IMF‐IFS

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Credit Growth

Credit Growth in Rest of Emerging Countries (2006-2011)

40

45

Indonesia

25

30

35

China

Indonesia

%

15

20

25

Korea

India

%

5

10Singapore

Malaysia

Thailand

0

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Source: IMF‐IFS

Credit Growth Western Europe

Credit Growth in Western Europe (2006-2011)

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Source: IMF‐IFS

2. High leverage‐‐High Loan/Deposit ratios. Rapid credit growth was funded mainly from external borrowings. Dependence on foreign financing remains hi h fl t d i ll d ti i LTD ti

350

high, reflected in small reductions in LTD ratios.

Loans/Deposits (%), 2005-2011

250

300

Latvia

200

%

UkraineEstonia

100

150Georgia

Serbia

Lithuania

KazakhstanRussian Fed. Romania

50Bulgaria Serbia

02005 2006 2007 2008 2009 2010 Oct‐11

• In some countries, such as Ukraine, LTD ratios have increased due to significant deposit withdrawals.• Banks face a significant challenge to rebalance their funding models to rely less on external financing and more

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• Banks face a significant challenge to rebalance their funding models, to rely less on external financing and more on the deposit base.

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Comparable Loan to Deposit Ratio in Asia (%)

300

China

Loans/Deposits (%), 2005-2011

200

250

K%

150

Korea

Thailand

50

100Singapore

Malaysia

Indonesia India

Thailand

0

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Comparable Loan to Deposit Ratio in Western Europe (%)

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3. High Proportion of External Liabilities. Reliance on foreign financing remains high, although external financing has slightly decreased in some countries, on t f ti d i k i d i l d i t b k ’top of continued risk aversion and economic slowdown in parent banks’ countries.

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4. Dramatic decline in Net Capital Inflows. They dropped dramatically and are unlikely to resume in the near future, as high risks discourage investments and

t i t t i th i l t IFI d th ditsome countries start repaying their loans to IFIs and other creditors.

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Net Capital Inflows in Asia (2007‐2011)

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Net Capital Inflows

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5. Excessive Lending in Forex. High currency‐induced credit risk from high fxlending continues, with high vulnerabilities for unhedged borrowers.g , g g

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6. Accelerated Deleveraging

30Capital/Assets (%), 2006 - 2010

20

25 Serbia

Georgia

10

15%Kazakhstan Russia

UkraineBulgariaRomania

HungaryEstonia

0

5 LatviaLithuania

Hungary

‐10

‐5

‐15

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Capital to asset ratio

Capital/Assets (%), 2006 - 2010

10

12

SingaporeIndonesia

Malaysia

p ( ),

6

8

MalaysiaThailand

Korea

India%

4

6China

0

2

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Capital to asset ratio

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11. External Debt to GDP still rising. Macroeconomic vulnerabilities persist in many countries. As sovereign fears undermine refinancing and economic growth declines external debt exposures will remain highdeclines, external debt exposures will remain high.

External Debt/ GDP (%), 2007 ‐ 2009

160

180

200

Latvia

EstoniaBulgaria

Hungary

Slovenia100

120

140

KazakhstanCroatia

Lithuania

Ukraine60

80

100

Russia

R i0

20

40

Romania02007 2008 Q3 2009

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Table of Contents






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Macroprudential ToolsThi ti f th b k t f l t t l d th t ld bThis sections focus on the basket of regulatory tools and measures that could be considered as macro‐prudential regulatory responses to systemic risks. They primarily will consist of three sets of tools:

Interest rate policyincrease interest rates to reduce inflation and consumption;

management of foreign reserves exchange

Capital soft or hard

Exchange rate policy management of foreign reserves, exchange rates adjustments to push for exports;

reduce interest rates to discourage hot 1.Macroeconomic

Policy Tools

Capital soft or hard Controls money, institute taxes to discourage short

term flows; repatriation controls;

i t i i fi l t i t d t lFiscal deficits Deal primarily with monetary and exchange rate Mandatory reserve

maintaining fiscal restraints and control on public expenditures

gpolicies and fiscal policies

requirements

Debt to GDP

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Macroprudential Tools (cont.)

Capital buffersCountercyclical capital buffers over and above regulatoryminimums built during good times; builds resilience, curbs

Dynamic provisioning

credit expansion

Build provisions during a credit boom against expectedlosses in future down cycles, historical loss data used-Spanish Approach differs from capital buffers which take

2.Countercyclical Loan to Value Ratios

y p g Spanish Approach, - differs from capital buffers which takecare of unexpected losses;

Limits the loan amount to a fraction of the collateralizedmarket value,--discourages asset price bubbles; can alsob d t ifi b i t di tTools

Debt to Income RatiosT l t d

be used on a sector specific basis to discourage sectorconcentrations;

While usually a micro-prudential measure it is used broadlyto reduce household leverage and enhance systemic

Tools to reduce excessive financial sector risks,‐‐countercyclical in

Loan to Deposit Ratios

creditworthiness

This can be used to limit excessive credit growth as well asthe liability structure by limiting dependence on wholesalefunds;y

nature.

Leverage ratios

funds;

Total assets (risk weighted) selected divided by capital (tierone) Minimum 3% being talked about

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Macroprudential Tools—SIFI MeasuresCapital Surcharge

Contingent Capital

•Capital over and above normal regulatory limits because oftheir size and the potential systemic impact in case of failure

•CoCos- hybrid capital that can be converted to higher

Higher Risk Weights

Contingent Capital quality capital

•For specific exposures, e.g. fx lending, real estate, consumerfinance loans,--deviation from Basel committee rules

Li it t di id d di t ib ti d i i d

3 SIFI Measures

Dividend distribution

Liquidity Surcharge

•Limits to dividend distribution during upswings anddownswings

3. SIFI Measures

D l ith i

Maturity mismatches

Large exposures

•Limits to maturity mismatches

•Limits to large exposures

Deal with excessiverisk mitigation inSystemicallyImportant Financial

Net FX exposures

Macro stress testing

•Limits to net FX exposures

pInstitutions. Recovery and Resolution

plans ( Living Wills)

Executive compensation •Restrictions on executive compensation

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Executive compensation Restrictions on executive compensation

Table of Contents• Why a Macro-prudential Framework





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Implementation and Coordination

Composition of a macro‐

• Usually it is done through a coordinating council or committee. Central Banks have a crucial role, in an IMF survey, nearly 90

t f th t i fi d th C t l B k th lprudential authority

percent of the countries confirmed the Central Bank as the clear financial stability role. In addition prudential agencies are included;

• Besides the mandate the authority needs powers to collect

Mandate and powers

• Besides the mandate, the authority needs powers to collect supervisory information; to be able to include systemic institutions, including non‐banks or central counterparties; and to undertake “dynamic rule making” and calibrating it to level of

Accountability

undertake dynamic rule making and calibrating it to level of systemic risk.

• Since it is not a specific mandate like “inflation targeting” but a b d d ti l d t t bilit i diffi ltAccountability

and communication

broader macro‐prudential mandate, accountability is more difficult, but transparency and clear communication to public of risk warnings, assessments, and policy recommendations is essential for accountability;

Domestic and international policy

for accountability;

• Domestic co‐ordination with micro‐prudential, monetary and fiscal authorities is essential. International financial connectedness

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policy coordination needs international coordination.

Documents

Macro-prudential Framework AO iAn Overvie세션1_사회).pdf · International forums like G20 as part of its financial regulatory agenda has asked FSB, BIS and also IMF to focus on