Download Turkey’s Experience with Macroprudential Policy Central Bank of Turkey Hakan Kara

Turkey’s Experience with Macroprudential Policy
Hakan Kara*
Central Bank of Turkey
Macroprudential Policy: Effectiveness and Implementation Challenges
CBRT-IMF-BIS Joint Conference
October 26-27, 2015 İstanbul
* The views expressed are those of the presenter and not necessarily those of the Central Bank of Turkey
Turkey’s GDP continued to grow steadily in the post-GFC period,
notwithstanding significant global and geopolitical shocks.
GDP
(Seasonally adjusted, constant prices, billion TL)
35
Geopolitical
shocks
33
EU Debt
crisis
31
Taper
Tantrum
29
27
GFC
25
23
21
19
17
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2
2003
Source: TURKSTAT.
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Last Observation: 2015 Q2
2
Outline
1.
2.
3.
Background for Turkish prudential framework
Implementation of macroprudential policies
The outcome
3
Background and Initial Conditions
4
Establishing an institutional framework for financial stability
TWO MAIN INFLECTION POINTS

2001 crisis: redesigning microprudential framework

2011: explicit macro-approach to financial stability
5
2001 crisis: Once bitten, twice shy…

Restructuring and recapitalization of the banking system

Strengthened bank regulation and supervision
•

Foundation of the banking regulation and supervision agency (BRSA)
Implementation of tight regulation and supervision
6
The pace of financial deepening since 2003 highlighted the need for
macroprudential policies.
Private Credit/GDP Ratios (%)
140
Upper income (OECD countries)
120
Turkey
100
Emerging Markets
80
60
40
20
2014
2008
2002
1996
1990
1984
1978
1972
1966
1960
0
Source: World Bank
7
Extending maturities were also instrumental in credit boom
through higher affordability, limiting the impact of monetary policy.
Average maturity of personal loans (months)
50
45
40
35
30
25
20
15
10
5
04.2011
10.2010
04.2010
10.2009
04.2009
10.2008
04.2008
10.2007
04.2007
10.2006
04.2006
10.2005
04.2005
10.2004
0
8
The need for a macro approach have further intensified after the
QE, with rapid credit growth and marked currency appreciation.
Total Loan Growth Rates
Real Exchange Rate (2003=100)
(13 Weeks Moving Average,
Annualized, FX Adjusted, Percent)
125
60
120
45
30
115
15
110
0
105
Beginning of QE
by Fed
QE
Source: CBRT
0910
0610
0310
1209
0909
100
0609
0510
0210
1109
0809
0509
0209
1108
-30
0309
-15
Sharp widening in the current account deficit, financed with
short-term inflows called for an immediate policy action.
Current Account Balance
Main Sources of External Financing*
(Seasonally Adjusted, Quarterly Average, Billion USD )
(12-months Cumulative, Billion USD)
80
0
Portfolio and Short-Term*
FDI and Long-Term**
70
-1
Current Account Deficit
60
-2
50
-3
40
30
-4
20
-5
10
-6
0
-7
-10
Source: TURKSTAT, CBRT.
2011:01
2010:11
2010:09
2010:07
2010:05
2010:03
2011
2010:01
1
2009:11
2010
4
2009:09
3
2009:07
2
2009:05
1
2009:03
2009
4
2009:01
3
2008:11
2
2008:09
2008
1
2008:07
4
2008:05
3
2008:03
2
2008:01
1
2007:11
4
2007:09
-20
-8
*Short-term capital movements are sum of banking and real sectors' short
term net credit and deposits in banks. Long-term capital movements are
sum of banking and real sectors’ long term net credit and bonds issued by
banks and the Treasury.
Source: CBRT.
Capital outflows are closely associated with output losses across EMs.
Source: Claessens and Ghosh (2013)
11
Historically, sharp capital flow reversals (sudden stops) in
Turkey are associated with large output losses.
Net Capital Flows / GDP
10
GDP Growth Rate
8
6
4
2
0
-2
-4
2015*
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
Cumulative Output Loss
14,3%
12,3%
15,1%
2002
2000
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
-10
1999
-8
1998
Crisis Year
1994
2001
2008-2009
2001
-6
. * As of Q2, annualized. Source: CBRT.
12
MaP under Institutional Constraints

Rapid credit growth and widening current account deficit
have required an urgent response by the end of 2010.

No institution had the mandate and/or explicit objective at
the time to deliver the necessary response.

The CBRT stepped in by

•
Incorporating financial stability into the IT framework
•
Redesigning the toolkit to respond to macro financial risks
Reserve requirements and interest rates were used jointly
for both monetary policy and MaP purposes.
13
Monetary Policy Framework: Financial stability augmented IT
Price Stability
Price Stability
Financial Stability
Policy Rate
Policy Rate
Interest Rate Corridor
Reserve Req. Policy
14
Initial phase of MaP implementation (September 2010-Mid 2011):
Interest rate policy used jointly with Reserve Requirement Ratios
12
14
Overnight
Lending
Rate
Interest Rate
Corridor
10
Overnight Rate (%,5-day MA)
One-Week Repo Rate (%)
12
10
8
8
6
6
4
4
2
10
8
Jun-…
Jun-…
May…
May…
May…
Apr-…
Apr-…
Mar…
Mar…
Feb-…
Feb-…
Jan-…
Jan-…
Dec-…
Dec-…
Nov…
Nov…
Nov…
Oct-…
Oct-…
Sep-…
Sep-…
Aug…
Aug…
Jul-10
Jul-10
Jun-…
Jun-…
12
Jun-…
140
2
0
14
12
Reserve Requirement ratio (RRR)
10
Effective RRR
8
0
Jun-11
0
Apr-11
2
Feb-11
2
Dec-10
4
Oct-10
4
Aug-10
6
Jun-10
6
15
RRR hikes and the new policy strategy have somewhat
contained further acceleration in credit growth.
Total Loan Growth Rate
(Year on Year Change, Percent)
40
Financial Stability
Committee and BRSA
measures
RRR Hikes
35
30
25
20
15
Source: CBRT.
11.12
09.12
07.12
05.12
03.12
01.12
11.11
09.11
07.11
05.11
03.11
01.11
11.10
09.10
07.10
05.10
03.10
01.10
10
Total credit is inclusive of all types of banks (deposit banks, participation banks, and
development/investment banks) and credit cards.
16
Yet, the new approach posed challenges for policy communication.

Complex transmission mechanism of new tools

Inherently vague nature of financial stability: difficulty of
linking each tool to objectives (unlike IT)

Even so, this episode has increased the awareness for the need
to adopt a more explicit institutional MaP framework.

Paved the way for the foundation of a financial stability committee.
17
Second Phase of MaP Implementation:
Financial Stability Committee
18
Financial Stability Committee (FSC) was a significant step for
the establishment of a formal institutional framework for MaP.
Organization Structure
UNDERSECRETARIAT OF
TREASURY
CENTRAL BANK OF THE
REPUBLIC OF TURKEY
FINANCIAL
STABILITY
COMMITTEE
•
Founded in June 2011.
•
Enhances information sharing,
coordination, and cooperation.
•
Main duties are to assess the
systemic risks, identify necessary
measures, and make relevant
policy recommendations.
•
No decision power or tools; the
power rests with the authorities
represented in the Committee.
•
Each institution has its own
mandate and responsibility.
BANKING
REGULATION AND
SUPERVISION AGENCY
CHAIR: DEPUTY PRIME MINISTER
CAPITAL MARKETS
BOARD
SAVINGS DEPOSIT
INSURANCE FUND
19
Broad Objectives of Macroprudential Policy


Increase sustained growth prospects
•
Contain credit growth and household overborrowing
•
Improve the quality of financing
•
Bolster safety nets against external financial shocks
Dampen the financial amplification channels
•
Interaction between capital flows, credit, and exchange rate
20
Intermediate Target 1: contain credit growth and change the
composition of credit to reduce the share of household borrowing.
MAIN TOOLS:
Financial Institutions Based

Risk weights

Loan-loss provisions
Borrower Based

LTV ceilings

Maturity limits

Limits on # of installments
21
Why focus on credit growth and household borrowing?

Credit booms are the most robust and significant
predictors of financial crises.
•

Borio and Lowe (2002), Reinhart and Rogoff (2009), Jorda et al
(2011), Gourinchas and Obstfeld (2012), Schularick and Taylor (2012)
A rise in the household debt to GDP ratio predicts lower
output growth over the medium-run.
•
Mian, Sufi and Verner (2015)
22
Household borrowing displays a strong relationship with the current account deficit.
Consumer Loans and the Current Account
(Change YoY, % of GDP for Consumer Loans, % of GDP for Current Account Deficit)
10
5,0
9
4,5
8
4,0
3,5
7
3,0
6
2,5
5
2,0
4
1,5
3
1,0
CAD/GDP
2
ΔConsumer Loans Stock/GDP(RHS)
Jun-15
Dec-14
Jun-14
Dec-13
Jun-13
Dec-12
Jun-12
Dec-11
Jun-11
Dec-10
Jun-10
Dec-09
Jun-09
Dec-08
Jun-08
Dec-07
Jun-07
0,0
Dec-06
1
0,5
Source: TURKSTAT, CBRT.
23
The macroprudential measures to smooth credit cycle and to
contain household debt were implemented in two major steps.
First Round (2011)

Higher risk weights and provisions for consumer loans.

Limits to credit card payments

LTV cap for housing loans
Second Round (2013-2014)

Caps, limits, and higher risk weights on credit cards

Maturity restrictions (36 months) for uncollateralized
consumer loans

LTV cap for vehicle loans
24
Macroprudential policies have succeeded in containing loan growth.
Loan Growth Rates
(Annual percentage change)
50
50
I
45
45
40
40
Two Rounds of
Macroprudential
Policies
35
30
35
II
30
Commercial
25
25
20
20
15
15
Consumer
10
10
Source: CBRT.
0715
0415
0115
1014
0714
0414
0114
1013
0713
0413
0113
1012
0712
0412
0112
1011
0711
0411
0111
1010
0
0710
0
0410
5
0110
5
Last Observation: September 11, 2015.
Inclusive of loans extended by all types of banks (deposit banks,
Participation banks, and development/investment banks). FX adjusted.
25
The share of consumer loans in total loans have declined
considerably since 2011.
27
Consumer Loans / Total Loans
I
26
25
II
24
23
MaP to curb
consumer loans
22
21
06.15
12.14
06.14
12.13
06.13
12.12
06.12
12.11
06.11
12.10
06.10
12.09
06.09
12.08
06.08
12.07
06.07
12.06
06.06
20
26
The MaPs have been instrumental in reversing the upward trend
in the household indebtedness ratio in recent years.
Household Assets and Liabilities
(Billion TL, Percent)
Total Assets
Total Liabilities
Liabilities/Assets (RHA)
Source: CBRT Financial Stability Report May 2015
08.15
30
06.15
-500
03.15
35
12.14
-250
09.14
40
06.14
0
03.14
45
12.13
250
09.13
50
06.13
500
03.13
55
12.12
750
12.11
60
12.10
1000
Last Observation: August 2015
27
Intermediate Target 2: increase the quality of financing (liabilities)

MAIN TOOLS: reserve requirement policy

Strategy: adjust RRR and remuneration rates to favor
•
Core liabilities over non-core liabilities
•
Long-term over short-term
•
TL over FX
28
Reserve Requirements were used in several dimensions to
improve the quality of external finance and bank liabilities.
17,0
Short vs Long (core)
11,0
20
10,0
18
Non-Core short
16
Non-Core long
Core TL short
Core TL long
06.2015
03.2015
12.2014
09.2014
06.2014
03.2014
12.2013
09.2013
06.2013
03.2013
12.2012
09.2012
06.2012
06.2015
03.2015
12.2014
09.2014
06.2014
03.2014
12.2013
09.2013
6
06.2013
4,0
03.2013
8
12.2012
5,0
09.2012
10
06.2012
6,0
03.2012
12
12.2011
7,0
03.2012
14
12.2011
8,0
06.2015
Short vs Long (Non-core)
12,0
9,0
03.2015
03.2013
12.2012
09.2012
06.2012
12.2011
06.2015
03.2015
12.2014
09.2014
06.2014
10,0
03.2014
10,0
12.2013
11,0
09.2013
11,0
06.2013
12,0
03.2013
12,0
12.2012
13,0
09.2012
13,0
06.2012
14,0
03.2012
14,0
12.2011
Non-Core FX
15,0
12.2014
FX short
15,0
Core FX
16,0
03.2012
16,0
09.2014
TL short
06.2014
18,0
03.2014
18,0
12.2013
19,0
09.2013
19,0
17,0
Core vs Non-core (FX)
20,0
06.2013
TL vs FX (short term)
20,0
29
RR measures have been effective in extending the maturity of
the noncore liabilities …
Maturity Breakdown of Non-Core FX Liabilities
(Percent)
RR Measures to encourage
maturity extension
60
Up to 1-Year
50
40
Longer than 3-Years
30
20
1 to 3-Years
10
Source: CBRT
09.15
08.15
07.15
06.15
05.15
04.15
03.15
02.15
01.15
12.14
11.14
10.14
09.14
08.14
07.14
06.14
05.14
04.14
03.14
02.14
01.14
0
Last Observation: October 9, 2015.
30
… as well as stabilizing credit to deposit ratios.
Credit/Deposit Ratio
(Percent)
130
130
120
120
110
110
100
100
RR Measures to
Support Core Liabilities
Source: BRSA
07/15
04/15
01/15
10/14
07/14
04/14
01/14
10/13
07/13
04/13
01/13
10/12
07/12
04/12
01/12
10/11
07/11
04/11
70
01/11
70
10/10
80
07/10
80
04/10
90
01/10
90
Last Observation: September 11, 2015.
31
Intermediate Target 3: Bolster safety nets against external shocks

MAIN TOOL: CBRT FX Reserves

Strategy: Create direct FX liquidity provision facilities for
banks to build resilience against external finance shocks.
•
Reserve option mechanism
•
FX deposit facility
32
FX liquidity readily available to the financial system is now
considerably above the short term debt stock of the banks.
Short-term Debt Stock* and FX Liquidity Facilities to Banks (Billion USD )
ROM FX and Gold Reserves+Short-Term FX Borrowing Facility
100
100
Short Term FX External Debt of the Banking System (RHA)
30
65
20
60
*According to remaining maturity.
** Data as of September 2015 is flow and subject to change.
Source: CBRT
09.15**
70
05.15
40
01.15
75
09.14
50
05.14
80
01.14
60
09.13
85
05.13
70
01.13
90
09.12
80
05.12
95
01.12
90
Last Observation: September 30, 2015.
33
Intermediate Target 4: dampen the financial amplification
mechanisms triggered by cross border flows
MAIN TOOLS:

Wide Interest Rate Corridor
•

Flexible interest rate policy against sudden shifts in capital flows
Reserve Option Mechanism
•
Build reserves with low sterilization costs during inflows.
•
Reduce sensitivity of credit and exchange rates to capital inflows.
34
CBRT has expanded the policy toolkit to weaken the
amplification mechanisms triggered by global liquidity cycles.
Flexible
Interest Rate
Corridor
Global Liquidity
Capital Inflows
Reserve
Option
Mechanism
Currency Appreciation
Rapid Credit Growth
External Borrowing
Balance sheet and
collateral effects,
further credit growth
35
The interaction between capital flows, exchange rate and bank loans
have been dampened considerably since the implementation of MaPs.
Capital flows, exchange rate, and credit cycles
(HP filtered, standardized)
2
Loans (t)
REER (t+3)
Inflows (t+3)
1,5
1
0,5
0
-0,5
-1
-1,5
The New Policy Mix
2016Q1
2015Q3
2015Q1
2014Q3
2014Q1
2013Q3
2013Q1
2012Q3
2012Q1
2011Q3
2011Q1
2010Q3
2010Q1
2009Q3
2009Q1
2008Q3
2008Q1
2007Q3
2007Q1
2006Q3
2006Q1
2005Q3
2005Q1
2004Q3
-2
Source: CBRT.
36
Macro Outcomes of MaP Implementations
37
Current account balance has shown a persistent and sizeable
improvement in recent years, despite the volatility in capital flows.
Current Account Deficit and Net Capital Inflows
100
100
Net Capital Inflows
90
90
CAD (excluding gold, right axis)
80
Thousands
(12 Month Cumulative, Billion USD)
80
70
MaP
70
60
50
60
40
50
CBRT starts using
ROM actively
30
40
20
30
10
0715
0115
0714
0114
0713
0113
0712
0112
0711
0111
0710
0110
0709
10
0109
-10
0708
20
0108
0
Source: CBRT.
38
The share of long-term and FDI inflows have increased since 2011.
Net Capital Inflows
(12-Months Cumulative, Billion USD)
Portfolio and Short Term**
100
FDI and Long Term*
New
Policy
Mix
80
60
40
20
0
0107
0407
0707
1007
0108
0408
0708
1008
0109
0409
0709
1009
0110
0410
0710
1010
0111
0411
0711
1011
0112
0412
0712
1012
0113
0413
0713
1013
0114
0414
0714
1014
0115
0415
0715
-20
Source: CBRT.
*Long term capital movements are sum of banking and real sectors’ long term net credit and bonds
issued by banks and the Treasury. Short term capital movements are sum of banking and real
sectors' short term net credit and deposits in banks.
Last Observation: August 2015.
39
GDP growth stayed relatively stable since 2011, despite the
heigthened volatility in capital flows.
Annual Change in Net Capital Flows/GDP (percent)
GDP (real, annual growth, percent, right axis)
15
20
15
10
10
5
5
0
0
-5
-5
-10
-10
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
-20
2000
-20
1999
-15
1998
-15
Source: CBRT.
40
The contribution of global factors to Turkey’s monetary and financial
conditions have declined after the implementation of MaP policies.
% Share of Global Factors* in Explaining Turkey’s Financial Conditions
100
90
80
70
MaP measures
60
50
40
30
2014
2013
2012
2011
2010
2009
2008
20
*Global Factors are VIX index, global growth, US treasury 10-year yield and 10-2 year spread.
Source: Kara, Özlü and Ünalmış (2015)
41
Inflation expectations improved during the initial stages; yet deteriorated
since the taper tantrum due to persistent depreciation in TL.
10,0
Medium-term (2-year ahead) Inflation Expectations (Percent)
9,0
Adoption of the New
Policy Framework
8,0
Taper tantrum and
political uncertainty
7,0
6,0
Target
5,0
4,0
3,0
2,0
1,0
Source: CBRT.
09/15
05/15
01/15
09/14
05/14
01/14
09/13
05/13
01/13
09/12
05/12
01/12
09/11
05/11
01/11
09/10
05/10
01/10
0,0
Last Observation: September 2015.
42
Final Remarks

Macroprudential policies in Turkey have engineered a soft
landing and improved sustained growth prospects.

Sensitivity of economic activity to capital flow volatility
have declined considerably.

Overall, the Turkish experience suggests that well targeted
countercyclical MaP can improve the policy tradeoffs.
•

Building buffers in good times, using them in bad times
Yet, neither monetary policy nor macroprudential policy
can substitute for deeper structural reforms.
43
Turkey’s Experience with Macroprudential Policy
Hakan Kara*
Central Bank of Turkey
Macroprudential Policy: Effectiveness and Implementation Challenges
CBRT-IMF-BIS Joint Conference
October 26-27, 2015 İstanbul
* The views expressed are those of the presenter and not necessarily those of the Central Bank of Turkey