Briefing on the Bank of England Stress Test:Common & Bespoke Scenarios
Dr. PETR ZEMCIK, DIRECTOR
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Introduction1
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About Moody’s Analytics
Moody's Analytics operates independently of the credit ratings activities of Moody's Investors Service. We do not comment on credit ratings or potential rating changes, and no opinion or analysis you hear during this presentation can be assumed to reflect those of the ratings agency.
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Economic & Consumer Credit Analytics – Our Services
Forecasts with Alternative Scenarios
Risk Management, Strategic Planning, Business and Investment Decisions
Macro, Financial Data and Economic Research
Regulatory Stress Test Advisory Services
Consumer Credit Analytics
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Today’s Speaker
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Dr. Petr Zemcik, Director Chief European EconomistDr. Zemcik supervises a group of economists responsible for analysis, modeling,
and forecasting for Europe. He holds a PhD and MA in Economics from the University of Pittsburgh and MSc in Econometrics and Operations Research from the University of Economics in Prague.
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» Introduction» Regulatory Scenarios Framework» Interest Rates Paths» Foreign Exchange Rates: Fundamentals & No Arbitrage» Fed Taper 2014: FX & Yield Shock» Output Projections: U.K. and Other Countries and Regions» Extension to Other Variables» Financial Models And Credit Risk» Concluding Remarks
Agenda
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Regulatory Scenario Framework2
99
» January 10 – Firms submit high-level risks to PRA*» January 31 – PRA provides comments on risks explored by firms*» February 24 – Firms submit worked-up scenario.*» March 12 – banks submit detailed portfolio data up to yr-end 2013.» March 31 – PRA baseline and stress scenarios published.» April 4 – official submission of bespoke scenarios.*» April 4 – MA completes forecasts for PRA baseline and stress Scenarios.» April 9 – MA completes narratives for PRA baseline and stress Scenarios.» April 30 – PRA board approves risks.*» Q2 – banks analyse impact of scenarios.» June 30 – results approved by each bank’s Board submitted to the PRA.» Q2/Q3 – The BoE runs regulatory models and compares results with
banks’ analysis. The BoE also conducts system-wide & feedback analysis.» Q4 – FPC/PRA Board decisions and disclosure.
* Dates related to bespoke scenario development.
Expected PRA 2014 Stress Test Timeline
1010
Regulatory and MA Stress ScenariosPRA Anchor Scenario 2013H2- Dual banking and sovereign debt crisis. - High/low interest path
FED CCAR 2013 ScenariosAdverse Scenario- High interest rates, low inflation- Motivated by the Great Recession, FED TaperSeverely Adverse Scenario- Euro zone crisis, global recession
MA Stress ScenariosEuro Zone Crisis (“S4”)- Dual banking and sovereign debt crisis, Grexit. Oil Price Shock (“S6”)- Stagflation, high interest rates
1111
» PRA 2013H2– Provided series: 14 U.K., 14 U.S., 2 Euro Zone– MA: 19 countries, 2 regional aggregates – Euro Zone and Asian-Pacific
» CCAR 2013– Provided series: 16 U.S., 3 EUZN, 3 DA, 3 U.K.– MA: 36 countries, 9 regional aggregates– Delivery in business days: U.S. 3 days, countries 4 days, regional aggregates 5 days –
World, North America, South America, Developed Asia, Developing Asia, Europe, Euro Zone, Middle East and Africa, Oceania
– 30 US CCAR banks.
» MA Models/Capacity– U.S. model 1600+ variables– 55 country models, 60+ variables each– Financial market and credit risk models– Numerous satellite support models
PRA/BoE & CCAR/Fed Scenarios in Numbers
1212
Moody’s Analytics Country Model Design
Exchange rates
Investment
Wages and salaries
Population
Prices
GDP
Monetary policy rate
Imports
Government
Exports
Global GDP
Unemployment rate
Consumption
Labor force
Employment
Potential GDP
Other deflators
Import prices
10-yr yield
Global prices
13
Interest Rates Paths3
1414
Variable Description Coef.1
Real 10-yr yields(fwrgt10yq.igbr-@pcy(fwcpiq.igbr)); R2=0.63, 1995Q4-2013q3
C constant 0.72*
@movav(@pcy(fwgdplq_igbr(-1)),3)Nominal GDP (Bill. GBP, SAAR) - 0.09
fwrmpolq.igbr-@pcy(fwcpiq.igbr) BoE discount rate (NSA), real 0.84***
@movav((fwggbblq_igbr/fwgdplq_igbr),4)Budget balance ratio to nominal GDP(SA)
- 81.37***
Monetary policy rate (dlog(fwrmpolq.igbr)); R2=0.54, 1998Q2-2013q3
C constant - 0.09***
d(fwlbrq.igbr-fnairu.igbr) Unemployment gap (SA) - 0.39***
dlog(@movav(fwcpiq_igbr(),1))Consumer price index(2005=100, SA) 9.42***
Fundamentals Drive Interest Rates in Long-Run
1 With“***” the variable is significant at 1%, with ”**” at 5% and with “*” at 10%
1515
0
1
2
3
4
5
6
7
8
9
Actual 10-yr bond yieldFitted 10-yr bond yieldActual policy rateFitted policy rate
Policy Rates and Yields Fitted vs. ActualU.K. rates, %
Source: Moody’s Analytics
1616
0
1
2
3
4
5
6U.K. U.S. Euro zone
Assumptions for the PRA Policy RatesPRA policy rates, %
Sources: ECB, BoE, Fed, Moody’s Analytics
1717
1
2
3
4
5
6
7U.K. U.S. Euro zone Germany Italy
Yields in the Low Path Anchor ScenarioPRA 10-yr government bond yields, %
Sources: ECB, BoE, Fed, IMF, Bank of Italy, Moody’s Analytics
1818
0
1
2
3
4
5
6
7
810-yr govt. bond yield 3-mo libor
NFC loan rate BoE policy rate
NFC Loan Rate DeterminationPRA, U.K. rates, %
Sources: BoE, BBA, ONS, Moody’s Analytics
19
Exchange Rates:Fundamentals & No Arbitrage4
2020
1.4
1.6
1.8
2.0
Good Fit for GBP/USD Exchange Rate$ per £, log(fwtfxiusaq.igbr); R2=0.42, 1998Q1-2012Q3
Source: Moody’s Analytics
Variable Description Coef.1
C constant - 0.74***
log(fwcpiq.iusa/fwcpiq.igbr) U.S.- U.K. inflation gap 1.99***
log(fwrmpolq.igbr/fwrmpolq.iusa)U.K.- U.S. policy rate gap
- 0.05***
1 With“***” the variable is significant at 1%, with ”**” at 5% and with “*” at 10%
2121
80
90
100
110
120
130
140Pound per $ Euro per $ Yen per $
Dollar Depreciates in the Anchor ScenarioPRA exchange rates, 2013Q4=100
Source: Moody’s Analytics
2222
70
80
90
100
110
120
130Pound per $ Euro per $ Yen per $
The Fed Sets Main Exchange RatesCCAR exchange rates, Severely Adverse Scenario, 2013Q3=100
Source: Moody’s Analytics
23
Fed Taper 2014:FX and Yield Shock5
2424
Jan-08Jan-08Jan-08Jan-08Feb-08Feb-08Feb-08Feb-08Feb-08Mar-08Mar-08Mar-08Mar-08Apr-08Apr-08Apr-08Apr-08May-08May-08May-08May-08May-08Jun-08Jun-08Jun-08Jun-08Jul-08Jul-08Jul-08Jul-08Aug-08Aug-08Aug-08Aug-08Aug-08Sep-08Sep-08Sep-08Sep-08Oct-08Oct-08Oct-08Oct-08Oct-08Nov-08Nov-08Jan-09Jan-09Jan-09Jan-09Jan-09Feb-09Feb-09Feb-09Feb-09Mar-09Mar-09Mar-09Mar-09Apr-09Apr-09Apr-09Apr-09May-09May-09May-09May-09May-09Jun-09Jun-09Jun-09Jun-09Jul-09Jul-09Jul-09Jul-09Jul-09Aug-09Aug-09Aug-09Aug-09Sep-09Sep-09Sep-09Sep-09Oct-09Oct-09Oct-09Oct-09Oct-09Nov-09Nov-09Nov-09Nov-09Dec-09Dec-09Dec-09Dec-09Jan-10Jan-10Jan-10Jan-10Jan-10Feb-10Feb-10Feb-10Feb-10Mar-10Mar-10Mar-10Mar-10Apr-10Apr-10Apr-10Apr-10Apr-10May-10May-10May-10May-10Jun-10Jun-10Jun-10Jun-10Jul-10Jul-10Jul-10Jul-10Jul-10Aug-10Aug-10Aug-10Aug-10Sep-10Sep-10Sep-10Sep-10Oct-10Oct-10Oct-10Oct-10Oct-10Nov-10Nov-10Nov-10Nov-10Dec-10Dec-10Dec-10Dec-10Dec-10Jan-11Jan-11Jan-11Jan-11Feb-11Feb-11Feb-11Feb-11Mar-11Mar-11Mar-11Mar-11Apr-11Apr-11Apr-11Apr-11Apr-11May-11May-11May-11May-11Jun-11Jun-11Jun-11Jun-11Jul-11Jul-11Jul-11Jul-11Jul-11Aug-11Aug-11Aug-11Aug-11Sep-11Sep-11Sep-11Sep-11Sep-11Oct-11Oct-11Oct-11Oct-11Nov-11Nov-11Nov-11Nov-11Dec-11Dec-11Dec-11Dec-11Dec-11Jan-12Jan-12Jan-12Jan-12Feb-12Feb-12Feb-12Feb-12Mar-12Mar-12Mar-12Mar-12Mar-12Apr-12Apr-12Apr-12Apr-12May-12May-12May-12May-12Jun-12Jun-12Jun-12Jun-12Jun-12Jul-12Jul-12Jul-12Jul-12Aug-12Aug-12Aug-12Aug-12Aug-12Sep-12Sep-12Sep-12Sep-12Oct-12Oct-12Oct-12Oct-12Nov-12Nov-12Nov-12Nov-12Nov-12Dec-12Dec-12Dec-12Dec-12Jan-13Jan-13Jan-13Jan-13Feb-13Feb-13Feb-13Feb-13Mar-13Mar-13Mar-13Mar-13Mar-13Apr-13Apr-13Apr-13Apr-13May-13May-13May-13May-13May-13Jun-13Jun-13Jun-13Jun-13Jul-13Jul-13Jul-13Jul-13Aug-13Aug-13Aug-13Aug-13Aug-13Sep-13Sep-13Sep-13Sep-13Oct-13Oct-13Oct-13Oct-13Nov-13Nov-13Nov-13Nov-13Nov-13Dec-13Dec-13Dec-13Dec-13Jan-141.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5U.S. Germany U.K. Fed tapering
first mooted in May 13
Tapering con-firmed to start Jan 14
German Yields Decouple From the U.S. and U.K.
Sources: Bloomberg, Moody’s Analytics
10-yr government bond yields, %
2525
Germany France Italy Spain0.0
0.5
1.0
1.5
2.0
2.5
3.0
BaselineBond yield spike 100 bpsEuro 10% depreciationCombined impact
Fed Tapering Could Affect European GrowthReal GDP growth in 2014 under alternative assumptions, %
Source: Moody’s Analytics
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Output Projections: U.K. and Other Countries and Regions6
2727
» GDP targets across countries and scenarios
– Time series regressions – Severity
» Decomposition of GDP into components
» Aggregates (e.g. Euro zone)– Bottom-up approach– Targeting
Challenges
2828
Variable Description Coef.1
German GDP (dlog(fwgdpl$q_ideu)); R2=0.84, 2000Q2- 2013Q2
C constant -0.0003
dlog(fgdp$_fedb.us)U.S. real GDP under Fed CCAR baseline (Bil. 2009 USD, SAAR)
-0.013
dlog(fwgdpl$q_fedb.ieuzn) Euro zone real GDP under Fed CCAR baseline (Bil. 2005 EUR, SAAR)
1.312***
dlog(fwgdpl$q_fedb.igbr) U.K. real GDP under Fed CCAR baseline (Bil. 2009 GBP, SAAR) -0.249*
dlog(fwgdpl$q_fedb.ijpn)Japan real GDP under Fed CCAR baseline (Bil. 2005 JPY, SAAR)
0.130*
dlog(gdp_febd_asia)Developing Asia real GDP under Fed CCAR baseline ( Bil. 2009 USD, SAAR)
0.025
dlog(fwgdpl$q_ideu(-1))Germany real GDP (Bil. 2005 EUR, SAAR)
0.030
Germany CCAR Target Estimation
1 With“***” the variable is significant at 1%, with ”**” at 5% and with “*” at 10%
2929
U.S. U.K. Euro Zone
Start-to-trough, %
PRA -4.6 -4.8 -5.2
CCAR Adverse -0.4 -0.9 -1.6CCAR Severely Adverse -2.1 -3.7 -3.9
S4 -4.3 -4.4 -4.8
Probability of a worse start-to-trough, %
PRA 4.6 1.5 3.3
CCAR Adverse 34.5 16 23.3CCAR Severely Adverse 17 2.7 8.1
S4 5.5 1.6 4.4
Anchor Scenario Is the Most Severe
3030
Variable Description Coef.1
Real household consumption per capita (dlog((fwcl$q_igbr/fwpopq_igbr)); R2=0.56, 1995Q3-2012Q2
@movav(d(fwrgt10yq.igbr-@pcy(fwcpiq.igbr)),3)10-year discount bond yield (NSA), real
-0.003
pdl(dlog((fwypdlq.igbr()/(fwcpiq.igbr()*fwpopq.igbr()))),4,2,3)
Real disposable income per capita (Bil. 2005 GBP, SA)
0.115***
dlog(@movav(fcpificeboiu.us(-2),4)) Brent crude oil futures price ($ per barrel, NSA)
-0.006
dlog(fwhplq.igbr)Average nominal house prices (GBP, SA)
0.137***
dlog(fwstockpq.igbr) FTSE-100 Index 0.028**
Real fixed investment (dlog(fwifl$q_igbr)); R2=0.36, 1999Q2-2012Q2
d(@movav(fwrmpolq.igbr-@pcy(fwcpiq.igbr),1)) BoE discount rate (NSA), real 0.008
dlog(fwgdpl$q.igbr(-1)) Real GDP (Bil. 2009 GBP, SAAR) 1.155***
dlog(fwstockpq.igbr(-2)) FTSE-100 Index 0.115***
Investment And Consumption in the U.K.
1 With“***” the variable is significant at 1%, with ”**” at 5% and with “*” at 10%
3131
800
900
1,000
1,100
1,200
1,300
1,400
1,500
1,600
1,700C C+I C+I+G C+I+G+(X-M)=GDP
Consumption a Large Portion of the U.K. OutputPRA U.K. GDP components, 2009£ bil, SAAR
Sources: ONS, Moody’s Analytics
3232
-7-6-5-4-3-2-1012345
U.K.
U.S.
Euro zone
Germany
Spain
Anchor Scenario Across Countries and Regions
PRA GDP, % change yr ago
Source: Moody’s Analytics
3333
-5
-4
-3
-2
-1
0
1
2
3
4
Baseline
Adverse
Severely Adverse
Fed U.S. Output Targets for CCAR ScenariosCCAR U.S. GDP, % change yr ago
Source: Moody’s Analytics
3434
-7-6-5-4-3-2-10123456
U.K. U.S. Euro zone Germany Spain
Severe Adverse Caused by a Euro Zone CrisisCCAR Severely Adverse GDP, % change yr ago
Source: Moody’s Analytics
35
Extension to Other Variables7
3636
-18
-14
-10
-6
-2
2
6
10
U.K.
U.S.
Germany
Spain
House Prices Crush in the Anchor Scenario…PRA house prices, % change yr ago
Source: Moody’s Analytics
3737
-12-10
-8-6-4-202468
10
U.K.
U.S.
Germany
Spain
… Retail Sales Decline Initially…PRA retail sales, % change yr ago
Source: Moody’s Analytics
3838
5
10
15
20
25
30
35Euro zone Germany Spain
… Unemployment Rises RisePRA unemployment rate, %
Source: Moody’s Analytics
3939
2
4
6
8
10
12
14
16
18Europe North AmericaEuro zone WorldLatin America Developed AsiaDeveloping Asia
CCAR UnemploymentCCAR unemployment rate, %
Source: Moody’s Analytics
40
Financial Markets and Credit Risk8
4141
» Modelling of the term structure of Government yields. » Modelling of the term structure of swap rates. » Modelling of the term structure of corporate yields (or spreads to
government yields) by ratings. » Modelling of 5-year sovereign CDS indices. » Modelling of rating migration matrices of global issuers of bonds
rated by Moody’s Investors Service. » Return and volatility modelling of stock indices traded on the major
global exchanges. » Return and volatility modelling of major bilateral spot foreign
exchange rates. Decomposition of GDP into components.» Moody’s CreditCycle™ for econometric models
Market Variables and Credit Risk
4242
Financial Models: PRA U.K. Swap Rate Curves
42
Time-series of specific maturities for GBP swap ratesHistory and forecasts, baseline and anchor scenarios
4343
Financial Models: CCAR U.K. Swap Rate Curves
43
Time-series of specific maturities for GBP swap ratesHistory and forecasts, CCAR Baseline, Severe, and Severely Adverse scenarios
44
Concluding Remarks9
4545
» U.K. Stress Testing Framework evolving to a more granular, frequent and rigorous approach (FDSF)
» M.A. Scenario development: “map” the scenario assumptions to a large number of global macro, market, and credit factors (inputs into the ST framework).
» PRA 2014: Delivery in 5 business days.
Summary
Q&A Session
Please send your questions to [email protected]
4646
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