Download Monetary Policy and Financial Stability Turalay Kenç Deputy Governor

Monetary Policy and Financial Stability
Turalay Kenç
Deputy Governor
July 7, 2011
Beijing, China
Monetary Policy is a Science

Sound monetary frameworks lowered sharply the level and
volatility of inflation




Price stability is the main policy objective
Independent central banks
Formal inflation targets
But financial stability was neglected

Reliance on market discipline and microprudential policies
Interactions between Monetary
Policy and the Financial System (I)

Price stability is a necessary condition for FS

But it is not a sufficient condition

MP affects FS by influencing



the leverage
maturity mismatch
risk-taking behaviour of the financial sector.
Interactions between Monetary
Policy and the Financial System (II)

FS is a necessary precondition for MP



The original motivation for creating CBs
Orderly functioning of the transmission of MP
New monetary economics: Short-term policy rates are
important per se

The bulk of finance for financial institutions is very much short-term.
Interactions between Monetary
Policy and the Financial System (III)

How should MP incorporate FS?



Asset prices
Financial and monetary imbalances
Monetary and financial quantities
Microprudential Regulation vs
Macroprudential Regulation

To repair their ratio of


in crisis, banks can:
Raise new capital; or
Shrink their balance sheet



𝑐𝑎𝑝𝑖𝑡𝑎𝑙
𝑎𝑠𝑠𝑒𝑡𝑠
This could lead to fire sales!
Negative externality: cost of excessive borrowing is not fully internalized
Macroprudential approach:
Incentives to raise capital rather than balance sheet restructing
(Hanson, Kashyap and Stein, 2010)
Macroprudential Policies

The objective of macroprudential policy is to reduce
systemic risk by
1. (Time dimension) reducing the pro-cyclicality of the financial
sector
2. (Cross-sectional dimension) improving its resilience to adverse
shocks

by explicitly incorporating the inter-linkages between, and common
exposures of, all institutions
Incorporating Financial Stability

How can price stability and financial stability be aligned
1. Adding financial stability as a separate objective for monetary
policy
2. Macroprudential policy: Linking prudential tools to
macrofinancial developments



Central banks are less effective on long-term rates
Foreign-financed consumptions generate less inflationary pressure but
current account deficits
It is global liquidity that builds financial imbalances
Macroprudential Tools
1. Policies to reduce pro-cyclicality in the financial system
i.
ii.
Instruments (e.g. counter-cyclical capital buffers) to limit
supply-driven credit expansions
Instruments (e.g. loan-to-value ratio) to limit demand driven
credit booms
2. Calibrate prudential tools to individual institutions’
contribution to systemic risk
i.
ii.
Tools to strengthen institutions
Tools to change the structure of the industry
Asian Experience with
Macroprudential Tools
Objective
Tools
Examples
Manage aggregate risk over
time (ie procyclicality)
•
Countercyclical capital
buffers linked to credit
growth
Countercyclical
provisioning
Loan-to-value (LTV) ratios
•
China
•
China, India
•
Debt-to-income (DTI)
ratios
Direct controls on lending
to specific sectors
•
China, Hong Kong Korea,
Singapore
Korea
•
Korea, Malaysia,
Philippines, Singapore
Capital surcharges for
systemically important
banks
Liquidity requirements /
funding
Limits on currency
mismatches
Loan-to-deposit
requirements
•
China, India, Philippines,
Singapore
•
India, Korea, Philippines,
Singapore
India, Malaysia,
Philippines
China, Korea
•
•
•
•
Manage aggregate risk at
every point in time
(ie systemic oversight)
•
•
•
•
Source: BIS
•
•
Indicators to Assess Risks
Related to Procyclicality
1.
2.
3.
4.
5.
6.
7.
Domestic, external and sectoral balances
Leverage ratios
Credit-to-GDP gap measures
Fundamental analysis (Noncore liabilities)
Asset prices
Various Value-at-Risk (VaR) models
Macro stress tests
Methodologies to Assess Risks
Related to Interconnectedness
1.
2.
3.
4.
Linkages through bilateral balance sheets exposures
Contingent claims analyses
Probabilities of distress
Measures of financial institutions’ contributions to systemic
risk
5. Other market-based indicators (detecting regime shifts)
A Case for Macroprudential Policy: Turkey



Central banks are less effective on long-term rates
Foreign-financed consumptions generate less inflationary
pressure but current account deficits
It is global liquidity that builds financial imbalances
The Policy Challenge

Unbalanced composition of growth




Strong domestic demand vs. sluggish external demand
Strengthening but shortening capital inflows
Rapid credit expansion and worsening current account
deficit
Raising noncore liabilities
Indicators to Assess Risks
Related to Pro-cyclicality
1.
2.
3.
4.
Domestic, external and sectoral balances
Leverage ratios
Credit-to-GDP gap measures
Fundamental analysis (Noncore liabilities)
Current Account, Credit Growth and
External Finance
Main Sources of Current Account Deficit Finance
Credit Use and Current Account Deficit
9
(12-months cumulative, billion USD)
14
Portfolio and Short-Term
8
Current Account Deficit/ GDP*
12
7
70
FDI and Long Term
Current Account Deficit
60
10
50
6
8
5
40
30
4
6
20
3
4
2
∆ in Credit Stock/GDP (right axis)**
1
0
2
-20
2006:12
2007:02
2007:04
2007:06
2007:08
2007:10
2007:12
2008:02
2008:04
2008:06
2008:08
2008:10
2008:12
2009:02
2009:04
2009:06
2009:08
2009:10
2009:12
2010:02
2010:04
2010:06
2010:08
2010:10
2010:12
2011:02
2011:04
0
-10
0104
0404
0704
1004
0105
0405
0705
1005
0106
0406
0706
1006
0107
0407
0707
1007
0108
0408
0708
1008
0109
0409
0709
1009
0110
0410
0710
1010
0111
0411
0
10
*12-months cumulative current account deficit / GDP
** Rate of annual change in credit stock / GDP
Source: BRSA, CBRT.
*Short-term capital movements are sum of banking and real sectors' short term net credits and
deposits in banks.
Source: CBRT.
Excessive Credit Growth
Total Credits Extended to Private Sector/GDP
(2008Q3=100)
Source: IMF, CBRT
Trade Balance
Monthly Imports and Exports (Seasonally Adjusted)
22000
20000
18000
imports
16000
imports
(excluding energy)
14000
12000
10000
exports (excluding gold)
8000
Source: CBRT.
05-11
03-11
01-11
11-10
09-10
07-10
05-10
03-10
01-10
11-09
09-09
07-09
05-09
03-09
01-09
11-08
09-08
07-08
05-08
03-08
01-08
6000
Non-Core Liabilities:
A source of funding for excessive credit?
Non-Core Liabilities/M2 (%)
Source: CBRT
Last observations: March, 2011
Non-Core Liabilities: Procyclicality



During booms: credit growth > deposit growth
Need for alternative sources of funding!
Excess liquidity: both before and after crises!


Shin (2010)


Capital flows to emerging markets.
U.S. is a net creditor in the banking sector even though it is a
very large debtor overall. In effect, the U.S. borrows long and
lends short through the banking sector.
Non-core liabilities: an indicator for financial stability?
Non-core liabilities: Turkish Case
Non-Core Liabilities (thousand TL)
250,000,000
CENTRAL BANK
MONEY MARKETS
PAYABLES TO BANKS
FUNDS FROM REPO
FUNDS
SECURITIES ISSUED
SUBORDINATED DEBT
200,000,000
150,000,000
100,000,000
50,000,000
Source: CBRT
Last observations: March, 2011
03-11
12-10
09-10
06-10
03-10
12-09
09-09
06-09
03-09
12-08
09-08
06-08
03-08
12-07
09-07
06-07
03-07
12-06
09-06
06-06
03-06
12-05
09-05
06-05
03-05
12-04
09-04
06-04
03-04
12-03
09-03
06-03
03-03
12-02
0
Non-core liabilities: Turkish Case
Payables to Foreign Banks
(TL billion)
•
Source: CBRT
Last observations: March, 2011
Strong recovery after the crisis.
Non-core liabilities: Turkish Case
Leverage Growth and Asset Growth of Turkish Banks
(14 banks listed in ISE)
0.20
Total Assets (log change)
0.15
0.10
0.05
0.00
-0.05
-0.10
-0.15
-0.06
-0.04
-0.02
0.00
0.02
Leverage (log change)
Source: CBRT
Last observations: May, 2011
0.04
0.06
0.08
0.10
3
0
-2
-5
Source: IMF
Latest Data Available varies btw 2009-2010
Portugal
Greece
Australia 1
Lithuania
Slovenia
Spain
Italy
Poland
France
Norway
Slovak Republic
Sweden
Latvia
Ireland
Netherlands
Hungary
Romania
Czech Republic
Bulgaria
Switzerland
Turkey (Feb'11)
Russian
Turkey ('10)
Estonia
Latvia
Romania
Greece
Hungary
Netherlands
Slovenia
France
Italy
Estonia
Sweden
Switzerland
Portugal
Slovak Republic
Spain
Russia
Poland
Norway
Bulgaria
Lithuania
Czech
Turkey (Feb'11)
Turkey (2010)
Outstanding outlook in the banking sector…
Return on Assets
(%)
Capital Adequacy Ratio
(%)
25
2
1
20
15
-1
10
-3
-4
5
0
Source: IMF
Latest Data Available varies btw 2009-2010
16
14
8
6
0
Source: IMF, BRSA
Latest Data Available varies btw 2009-2010
02.08
04.08
06.08
08.08
10.08
12.08
02.09
04.09
06.09
08.09
10.09
12.09
02.10
04.10
06.10
08.10
10.10
12.10
02.11
Switzerland
Norway
Australia 1
Netherlands
Turkey (Feb'11)
Portugal
Turkey (10)
Poland
France
Spain
Slovak Republic
Estonia
Czech Republic
Slovenia
Lithuania
Bulgaria
Greece
Hungary
Russian Federation2
Italy
Romania
Ireland
Latvia
…with comparatively very low NPL ratios,
NPL Ratios of Selected Countries
(%)
NPL Ratios in Turkey
(%)
8
7
12
10
SME
Corporate
6
Total
Individual
5
4
4
2
3
2
Source: IMF, BRSA
Latest Data Available varies btw 2009-2010
Healthy household’s balance sheets…
Household Liabilities to GDP Ratios (%)
Turkey
Romania
Slovakia
Slovenia
Czech Rep
Bulgaria
Belgium
Hungary
Litvania
Italy
Poland
Greece
Latvia
Austria
France
Estonia
Finland
EU27
Germany
The Netherlands
UK
Sweden
Luxembourg
Portugal
Spain
Ireland
Denmark
Household FX Positions
15.4
0
Source: Eurostat, CBRT
Last observations:Sep. 2010
20
40
60
80
100
120
140
160
2009
Sep.
2010
Households FX Assets*
67,597
69,338
Households FX
Liabilities*
2,172
1,572
FX Position*
65,425
67,766
GDP*
616,753
734,723
FX Position/GDP (%)
+10.6
+9.2
Source: Eurostat, CBRT
Last observations:Sep. 2010
… with very low short-term FX positions of
non-financial sector
Bank Loans to Non Financial Companies
(% of GDP)
Poland
Romania
Czech Republic
Slovakia
Turkey
Hungary
Finland
Belgium
Lithuania
Germany
United Kingdom
Greece
France
Bulgaria
EU27
Estonia
Latvia
Italy
Austria
Sweden
Netherlands
Slovenia
Denmark
Portugal
Spain
Malta
Ireland
Cyprus
Luxembourg
FX Positions of Non Financial Companies (NFC)
December
2010
28
0
20
40
60
80
100
120
140
160
NFC FX Assets*
86.7
NFC FX Liabilities*
181
FX Position*
-94.3
FX Position/GDP (%)**
-12.8
180
Source: Eurostat, CBRT
* Million USD.
Last observations: December, 2010
** Note that the short FX position for short term liabilities are less
than 1% of GDP (USD 313 mio). Non-Banking Sector FX position is
balanced.
27
…and sound public balances
all support financial stability.
Public Debt Forecast for 2011
(% of GDP)
Budget Deficit Forecast for 2011
(% of GDP)
Hungary
Sweden
Estonia
Luxembourg
Finland
Germany
Bulgaria
Turkey*
Malta
Austria
Denmark
Czech Rep.
Netherlands
Belgium
Italy
Romania
Cyprus
Slovenia
Slovak Rep.
Latvia
Portugal
Poland
France
Lithuania
Spain
Greece
UK
Ireland
-11
Estonia
Luxembourg
Bulgaria
Maastricht
Criterion
Maastricht
Criterion
Austria
Sweden
Romania
Turkey*
-2.8
40.6
Czech Republic
Slovenia
Latvia
Lithuania
Slovak Republic
Denmark
Finland
Poland
Cyprus
Spain
Netherlands
Malta
Hungary
Germany
UK
France
Portugal
Belgium
Ireland
Italy
Greece
-9
-7
-5
-3
-1
1
3
*: Turkey’s budget deficit figure is MTP (2011-2013 projection) for central
govenment. IMF WEO April 2011 budget deficit forecast for Turkey is 1.7%
and better than what was envisaged in Turkey’s MTP as 2.1% for general
government.
Source: MoF, Treasury, MTP (2011-2013) Targets, IMF WEO April 2011
0
20
40
60
80
100
120
140
160
*: Turkey’s debt figure is MTP (2011-2013) projection. IMF WEO
April 2011 public debt forecast for Turkey is 39.4%.
28
The New Policy Mix
1.A lower policy rate
2.Wider interest rate corridor
3.Reserve requirement policy
i.Higher ratios on both TL and FX deposits
ii.Unremunerated
iii.Differentiated rates across maturities
4.Tighter liquidity management
29
Policy Mix
TL Reserve Requirement Ratios
(Percent)
CBRT Policy Rates
(Percent)
25
18
Overnight Lending - Borrowing Interest Rate Spread
1 Week Repo Rate
The Maximum and Minimum Reserve Requirement Ratios
Weighted Average Reserve Requirement Ratio
16
20
14
Introduction of 1 week
repo rate as policy rate
15
12
10
8
10
6
4
5
2
Source: CBRT
0511
0211
1110
0810
0510
0210
1109
0809
0
0509
0511
0211
1110
0810
0510
0210
1109
0809
0509
0209
1108
0808
0508
0208
0
Source: CBRT
30
Liquidity Management - 1
The liquidity shortage of the banking system realized as 56.3 billion TL on average in June.
Liquidity Level
Source: CBRT
31
Liquidity Management - 2
Volatility in O/N interest rates, which has increased after widening of the corridor,
continued in June.
O/N Interest Rates
Source: CBRT
32
Exchange Rates
TRY and Other EM Currencies Against USD*
(4 Jan. 2010=1)
1.15
Announcement of QE2 by
the FED
Depreciation
TRY
1.1
1.05
1
Appreciation
0.95
EM Average
06.11
05.11
04.11
03.11
02.11
01.11
12.10
11.10
10.10
09.10
08.10
07.10
06.10
05.10
04.10
03.10
02.10
01.10
0.9
*Average of EM countries: Brazil, Chile, Czech Rep. Hungary, Mexico, Poland, S.Africa, Indonesia, South Korea and Colombia.
Source: CBRT and Bloomberg
33
Credit Growth
Total Credits (Annualized, 20 days moving averages)
80
80
70
70
60
60
50
50
40
40
30
30
20
20
10
10
2011
2006-2010 Ave.
2010
Dec
Nov
Oct
Sep
Agu
Jul
Jun
May
Apr
Feb
Mar
0
Jan
0
Consumer Credits (Annualized, 4 weeks moving averages)
70
BRSA
Measures
60
50
40
30
20
10
2010
Source: CBRT
2011
Dec
Nov
Oct
Sep
Agu
Jul
Jun
May
Apr
Mar
Feb
Jan
0
2006-2010 Ave.
34
Credit Volume
Monthly Change of Total Credit Volume
(Adjusted for FX)
5,0
Average of Previous Five Years
Last Period
Difference
4,0
RR
Hikes
QE2
3,0
2,0
1,0
0,0
-1,0
July
Aug
Sept
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
June
Source: BRSA, CBRT
35