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Utilización de las centrales de información de riesgo en los informes de estabilidad financiera Jesús Saurina Director. Financial Stability Department Banco de España BANCO CENTRAL DE BOLIVIA/CEMLA SEMINAR La Paz 7 de Octubre de 2008 FINANCIAL STABILITY DEPARTMENT Caveat The views expressed here are those of the author and not necessarily those of the Banco de España or the Eurosystem FINANCIAL STABILITY DEPARTMENT 2 Outline Introduction Financial Stability Review – Production – Structure – Goals – Discussion Credit Register Description Utilization for FSR FINANCIAL STABILITY DEPARTMENT 3 Introduction- Mandate and concept of FS The Bank of Spain has been assigned, among its duties, to promote the stability of the financial system. – Law 13/1994 of autonomy of the Bank of Spain, Art. 7, 5b) There is no a single definition of financial stability, but – We have learned that • The effects of instability are severe for the real economy. • The financial stability requires, among other elements: appropriate institutional framework, appropriate macro policies, markets infrastructures, prudential regulation and supervision, etc. – Financial stability connects the analysis of each particular institution (micro level) with the study of the behaviour of the whole financial system (macro level). FINANCIAL STABILITY DEPARTMENT 4 Introduction- Financial Stability Department The overall objective is to promote the financial stability Produce the Financial Stability Report (FSR) Regular and specific notes for the decision bodies of the Bank of Spain – Regular: activity, doubtful asset ratios and profit and loss performance – Specific: for instance, impact of the new accounting regulation Policy design – Loan loss provisions and capital requirements Cost-benefit analysis of banking regulation Research – Empirical and regulatory policy orientation – Bank topics (risks, competition, regulation, financial integration) Participation in working groups dependent of international institutions – BSC (BCE), RTF (BCBS),… FINANCIAL STABILITY DEPARTMENT 5 The Financial Stability Report FINANCIAL STABILITY DEPARTMENT 6 The Financial Stability Report: general principles Spain: the analysis is performed from the perspective of the stability of the Spanish financial system The Spanish financial system presents a high degree of bancarisation: the main target of the analysis are, therefore, the deposit institutions The assessment is considered in aggregate terms, but also takes into account the relative position of each institution through dispersion analysis Risk analysis is key – Shocks that are improbable, but possible, and of a high impact Once the risks are identified, resilience is analysed – Profitability – Solvency Analysis at consolidated level, but not only Importance of research FINANCIAL STABILITY DEPARTMENT 7 The Financial Stability Report: production The Directorate General (DG) of Regulation, through the Department of FS, is in charge of preparing much of the FSR, as well as its coordination Contributions are received from other General Directorates – Research Department • Macroeconomic outlook of Spain and the euro area – International • International macroeconomic and financial markets outlook – Supervision • Qualitative assessment of risks and resilience – Operations • Markets liquidity and infrastructures In fact, there is an Editorial Committee – Chairman: DG of Regulation – One member from each DG – Secretariat: Director of the FS Department FINANCIAL STABILITY DEPARTMENT 8 The Financial Stability Report: organization The FSR is published twice a year: May and November. The process: Editorial Committee First Draft FINANCIAL STABILITY DEPARTMENT Editorial Committee Executive Commission Governing Council 9 The Financial Stability Report: structure The FSR is organised in three chapters – Chapter I: Macroeconomics risks and financial markets – Chapter II: Deposit institutions and other participants in financial markets • Deposit institutions – Banking risks – Profitability – Solvency • Other financial market participants – Insurance companies – Other financial intermediaries – Chapter III: Infrastructures FINANCIAL STABILITY DEPARTMENT 10 The Financial Stability Report: structure Chapter I – Macroeconomic risks and financial market Information on spreads and stock markets Risk indices – Credit Default Swaps – Stock price volatility Macroeconomic information – Economic growth FINANCIAL STABILITY DEPARTMENT 11 The Financial Stability Report: structure Chapter II – Deposit institutions and others Credit risk: it is the most important – Deposit institutions: credit policy • Analysis of its consolidated balance sheet • Credit growth (total, sectors, activities, …) • Doubtful assets and doubtful assets ratios • Financial assets abroad Liquidity and market risks – Debt, stock and exchange rate markets. Markets infrastructures – Institutions: liquidity gap, assets and liabilities by degree of liquidity Profitability Solvency FINANCIAL STABILITY DEPARTMENT 12 The Financial Stability Report: structure Chapter II – Deposit institutions and others Other participants in financial markets – Insurance companies – Collective investment institutions – Private equity FINANCIAL STABILITY DEPARTMENT 13 The Financial Stability Report: structure Chapter III – Infrastructures Market infrastructures – Clearing and settlement systems Regulatory infrastructures – Accounting regulations – Prudential regulation – Monetary policy instruments – Payment systems FINANCIAL STABILITY DEPARTMENT 14 The Financial Stability Report : goals Contribute to promote the financial stability Provide the Bank of Spain assessment on financial stability – International comparison A vehicle to dialog with banks on regulatory matters – Instrument to send messages to institutions Instrument to educate financial services customers – Simple and clear analysis Research FINANCIAL STABILITY DEPARTMENT 15 Discussion Ownership – Cooperation Macro perspective versus micro bank level – Financial Stability Report/Financial Stability Department To enhance financial stability is the main goal of a FSR Role of research FINANCIAL STABILITY DEPARTMENT 16 The Spanish Credit Register (CIR) FINANCIAL STABILITY DEPARTMENT 17 Credit Register information Low threshold: 6.000 euros Comprehensive coverage: all credit institutions Population of loans to firms and mortgages Information about default, collateral, instrument, amount, industry, province maturity, No information on interest rates FINANCIAL STABILITY DEPARTMENT 18 Use of Credit Register Direct use Main purpose of Spanish Credit Register (CIR) Support inspectors/examiners work Extract information from CIR Sampling for planning visits Monitoring of borrowers (exposures and quality) Indirect use Financial stability analysis/regulatory policy/research All the three filter into the Financial Stability Report FINANCIAL STABILITY DEPARTMENT 19 Financial stability usage Analysis of credit risk Credit lines Collateral Relationship lending Lending cycle and risk taking Dynamic provisions Monetary policy and risk taking Impact assessment Procyclicality Mortgages Corporate loans Calibration of alternative proposals FINANCIAL STABILITY DEPARTMENT 20 NPL (long term perspective) / Vintages (short term) DOUBTFUL ASSETS RATIO. DEFAULT RATE CURVES. INDIVIDUALS' MORTGAGES. 1991 1992 1993 2005 FIRMS 2006 2007 HOUSEHOLDS % 9 1.6 8 % 1.4 7 1.2 6 1.0 5 0.8 4 0.6 3 2 0.4 1 0.2 0 0.0 1986 1993 FINANCIAL STABILITY DEPARTMENT 2000 2007 0 2 4 6 8 10 12 14 16 18 20 21 Stress testing 2006 2007 2007 S TRES S TES T EL (2006) EL (2007) EL (2007) STRESS VaR (2006) VaR (2007) VaR (2007) STRESS €m 0 FINANCIAL STABILITY DEPARTMENT 2 0 ,0 0 0 4 0 ,0 0 0 6 0 ,0 0 0 8 0 ,0 0 0 22 Credit lines CIR contains information on amount drawn and undrawn Usage ratio = drawn / (drawn + undrawn) Jiménez, Lopez and Saurina (RFS 2009) FINANCIAL STABILITY DEPARTMENT 23 Credit lines Differences in the usage ratio depending on the quality of the firm 80 75 70 65 60 55 50 45 40 -5 -4 Defaulted credit line. Median FINANCIAL STABILITY DEPARTMENT -3 -2 No. of years from default -1 0 Non-defaulted credit line. Median 24 Collateral Theory: collateral vs adverse selection and moral hazard Willingness to post collateral signals good credit quality Collateral posted increases incentives to repay the loan Empirical evidence: Jiménez, Salas and Saurina (JFE 2006) Collateral asked for riskier loans FINANCIAL STABILITY DEPARTMENT 25 Relationship lending It is good for a bank AND a borrower to have a long term relationship Less of a capture and much more on a mutually productive relationship A. YEAR ON YEAR RATE OF CHANGE IN CREDIT BY YEARS OF RETATIONSHIP WITH INSTITUTIONS B. YEAR ON YEAR RATE OF CHANGE IN CREDIT BY NUMBERS OF BANKING RELATIONSHIPS. NEW LESS THAN 1 YEAR FROM 1 TO 2 YEARS MORE THAN 2 YEARS MORE THAN 10 YEARS TOTAL ONE TWO THREE OR FOUR BETWEEN 5 AND 10 MORE THAN 10 TOTAL % % 50 80 45 60 40 40 35 30 20 25 0 20 15 -20 10 -40 5 0 -60 J un- 03 J un-04 J un- 05 FINANCIAL STABILITY DEPARTMENT J un- 06 J un-07 J un- 08 J un- 03 J un-04 J un-05 J un- 06 J un-07 J un-08 26 Lending cycle and risk taking Banks’ lending mistakes are more prevalent during upturns Borrowers and lenders are overconfident about investment projects (financing NPV<0 projects) Banks’ over optimism implies lower credit policy standards During recessions, banks suddenly turn very conservative and tighten credit standards (well beyond NPV>0) Lending cycle with impact on the real economy FINANCIAL STABILITY DEPARTMENT 27 Lending cycle and risk taking Jiménez and Saurina (IJCB, 2006) Relation between credit growth and problem loans at bank level? Evidence of a direct, although lagged, relationship between credit growth and credit risk (a rapid increase in loan portfolios is positively associated with an increase in non-performing loan ratios later on) Analysis of default probabilities of individual loans: Loans granted during boom periods have a higher PD than those granted during slow credit growth periods Impact of the cyclical position on collateral requirements, loan by loan In boom periods collateral requirements are relaxed while the opposite happens during recessions FINANCIAL STABILITY DEPARTMENT 28 Lending cycle and risk taking There is (robust) evidence of looser credit standards during expansions Banking supervisors’ concerns are well rooted both in theoretical and empirical grounds A prudential tool is needed to cope with the potential problems due to too rapid credit growth Dynamic provisions FINANCIAL STABILITY DEPARTMENT 29 Monetary policy and risk taking Do low interest rates encourage bank risk-taking, but at the same time reduce credit risk on outstanding loans? What is the impact of the stance and path of MP on credit risk? Duality of interest rate: On the one hand, low interest rates may create excessive risktaking On the other hand, low interest rates may reduce the risk of outstanding bank credit Jiménez, Ongena, Peydró and Saurina (WP 2008) provide the first hard evidence on this dilemma FINANCIAL STABILITY DEPARTMENT 30 Monetary policy and risk taking We find that banks soften their lending standards with lower interest rates They lend more to borrowers with a bad credit history and with higher uncertainty More importantly, we also find evidence of the duality of interest rates: Credit risk increases with lower interest rates at loan origination But also increases as a result of higher rates during the life of the loan, i.e., conditioning on the loan being granted, lower rates reduce the credit risk of outstanding loans Our results, therefore, suggest that low rates encourage risk-taking, reduce credit risk in the short-term but worsen it in the medium-term We find that risk-taking is not equal for all type of banks Small banks and more liquid banks take on more extra risk than other banks when interest rates are lower FINANCIAL STABILITY DEPARTMENT 31 Monetary policy and risk taking 1.3 1.2 1.1 Hazard rate 1 0.9 0.8 0.7 0.6 0.5 0.4 5 4 Policy rate prior to origination FINANCIAL STABILITY DEPARTMENT 3 2 2 3 4 5 Policy rate until maturity Monetary policy and risk taking Bank risk-taking increases when rates prior to loan origination are low There is a completely different impact of lower interest rates on the credit risk of new vs outstanding loans In the short-run lower interest rates reduce total credit risk of banks since the volume of outstanding loans is larger than the volume of new loans In the medium term, lower interest rates increase credit risk in the economy A period of low interest rates followed by a severe monetary contraction maximizes credit risk, as the already “hazardous” cohort of new loans gets exposed to higher interest rates as outstanding loans On the other hand, and asymmetrically, vertical declines in interest rates minimize total credit risk ceteris paribus FINANCIAL STABILITY DEPARTMENT 33 Impact assessment Impact of Basel II on lending to SMEs Hot topic for the BCBS some time ago Use Credit Register to assess the impact Sample PD converges to population PD Plug PD in Basel II formulas and obtain capital requirements Compare new requirements with old ones Saurina and Trucharte (JFSR 2004) FINANCIAL STABILITY DEPARTMENT 34 Impact assessment 8 Current system 7 6 5 4 3 SA Turnover <€50 million Exposure <€1 million Sales <€50 million Exposure >€1 million IRB 2 1 Turnover >€50 million 0 0 1994 1995 1996 1997 FINANCIAL STABILITY DEPARTMENT 1998 1999 2000 2001 1 2 3 4 5 6 7 SMEs SMEs Large (exp.<€1million) (exp.>€1million) firms 8 9 35 Procyclicality A model of PDs for mortgages using Credit Register information only Calculate PDs PIT and TTC Plug in the estimated PDs in Basel II curves Saurina and Trucharte (JFSR 2007) FINANCIAL STABILITY DEPARTMENT 36 Procyclicality-mortgages FINANCIAL STABILITY DEPARTMENT Procyclicality-mortgages FINANCIAL STABILITY DEPARTMENT Adjusting procyclicality Repullo, Saurina and Trucharte (G20 2009) Concern: bank capital regulation may amplify business cycles In particular, contraction in loan supply in downturns due to Lower bank capital due to higher default rates Possibly higher capital requirements (Basel II) Basel II will make things worse Rationale for cyclical adjustment of cap. Requirements How should cyclical adjustment of Basel II be made? Two basic alternatives Smooth the inputs of the Basel II formula Through-the-cycle ratings Smooth the output (with point-in-time ratings) FINANCIAL STABILITY DEPARTMENT 39 Adjusting procyclicality Estimate model of probabilities of default (PDs) Data on Spanish firms’ loans for the period 1984-2007 from Credit Register Compute corresponding Basel II capital requirements Smooth cyclical behavior using Hodrick-Prescott (HP) filter Compare different smoothing procedures Using root mean square deviations from HP benchmark Root mean square deviations (RMSD) from HP benchmark RMSD (%) FINANCIAL STABILITY DEPARTMENT TTC ratings 0.45 GDP growth multiplier (α = 0.086) 0.36 Credit growth multiplier (α = 0.066) 0.60 Stock market multiplier (α = 0.017) 0.75 Autoregressive adjustment (δ = 0.30) 0.48 40 Procyclicality-corporates FINANCIAL STABILITY DEPARTMENT Procyclicality-corporates FINANCIAL STABILITY DEPARTMENT Alternative adjustments- GDP FINANCIAL STABILITY DEPARTMENT Conclusions Main purpose of a Credit Register: To support inspectors/examiners work Micro-prudential approach However, plenty of scope to be used in other areas Financial stability: understanding bank lending Monitoring of credit risk, credit lines usage, role of collateral, lending standards, MP and risk taking Policy design Dynamic provisions, Basel II calibration, impact assessment Research Filter into Financial Stability Review Credit Registers are a key element of a macro-prudential approach FINANCIAL STABILITY DEPARTMENT 44 References Jiménez, G., Lopez, J.A., and Saurina, J. 2009. “Empirical analysis of corporate credit lines”, forthcoming Review of Financial Studies. Jiménez, G., Salas Fumás, V. and Saurina, J., 2006. “Determinants of Collateral”. Journal of Financial Economics, 81, 255-281. Jiménez, G and Saurina, J., 2006. "Credit Cycles, Credit Risk, and Prudential Regulation". International Journal of Central Banking, June, 65-98. Jiménez, G., Peydró, J.L., Ongena, S., Saurina, J. 2008. “Hazardous times for monetary policy: What do twenty-three million bank loans say about the effects of monetary policy on credit risk-taking?” WP 0833 Banco de España. Repullo, R. J. Saurina and C. Trucharte (2009): “Mitigating the Procyclicality of Basel II”, in Macroeconomic Stability and Financial regulation: Key Issues for the G20, edited by M. Dewatripont, X. Freixas and R. Portes. RBWC/CEPR FINANCIAL STABILITY DEPARTMENT 45 References Saurina, J. and Trucharte, C. 2004. “The Impact of Basel II on Lending to Small- and Medium-Sized Firms: A Regulatory Policy Assessment Based on Spanish Credit Register. Journal of Financial Services Research. Volume 26, Issue 2. Pp. 121-144. Saurina, J. and Trucharte, C. 2007. “An assessment of Basel II procyclicality in mortgage portfolios. Journal of Financial Services Research; Volume 32, No. 1-2, 81-101. Saurina, J. (2009a): “Dynamic Provisioning. The experience of Spain.” Crisis Response. Public Policy for the Private Sector. Note Number 7. July. The World Bank. Saurina, J. (2009b): “Countercyclical loan loss provisions in Spain”. De próxima publicaicón en Estabilidad Financiera. FINANCIAL STABILITY DEPARTMENT 46