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8/17/2019 ECB Credit flow restrictions: Implementation and coordination issues
1/20
Credit flowrestrictions:
Implementation andcoordination issues
Macroprudential Policy: The role and experience with
Credit Flow Restrictions
Lietuvos Bankas Conference, 3 July 2015
John Fell
European Central Bank
8/17/2019 ECB Credit flow restrictions: Implementation and coordination issues
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Rubric
www.ecb.europa.eu2
1
2
3
Considerations for implementation: Details matter
Concluding remarks
Objectives and effectiveness
How do credit flow restrictions relate to macroprudential objectives?
Overview
What trade-offs exist when implementing measures?
What instruments can curb the financial cycle?
How best to counter the risks of leakages?
8/17/2019 ECB Credit flow restrictions: Implementation and coordination issues
3/20
Rubric
www.ecb.europa.eu3
1
2
3
Considerations for implementation: The details matter
Concluding remarks
Objectives and effectiveness
How do credit flow restrictions relate to macroprudential objectives?
Overview
What trade-offs exist when implementing measures?
What instruments can curb the financial cycle?
How best to counter the risks of leakages?
8/17/2019 ECB Credit flow restrictions: Implementation and coordination issues
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Rubric
www.ecb.europa.eu
What are the macroprudential policy objectives?
4
Curbing the financial cycle •Enhancing resilience
1. Objectives and effectiveness
Prevent excessive asset price and credit
fluctuations so as to avoid boom-bust episodes
⇒ Need for instruments that are robust over the cycle
Raise household and financial sector resilience
⇒ Need for instruments that provide buffers to limit
contagion or excessive spending adjustment
Source: Central Bank of Ireland, Banco de España, Eurostat.
Credit and asset price cycle in Spain and Ireland (2007=100)
Source: ECB, Residential Property Price Index Statistics for new and existing
dwellings) and Balance Sheet Items Statistics for households and non-profitinstitutions serving households.
20
40
60
80
100
120
2000 2002 2004 2006 2008 2010 2012 2014
HH credit (IE) HH credit (ES)
House Prices (IE) House Prices (ES)
0
5
10
15
20
25
2006 2008 2010 2012 2014
Unemployment rate (IE) Unemployment rate (ES)
NPL ratio (IE) NPL ratio (ES)
Unemployment and NPL ratio in Spain and Ireland (%)
HH credit
House prices
Unemploymentrate
NPL ratio
8/17/2019 ECB Credit flow restrictions: Implementation and coordination issues
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Rubric
www.ecb.europa.eu
Different instrument classes available to counterexcessive credit flows
Borrower-basedinstruments
Capital-basedinstruments
Liquidity-basedinstruments
Mortgage demand
To reduce households’
PDs and LGD
Mortgage supply
To absorb losses
when risks materialise
Funding conditions
To increase funding
stability throughbuffers and maturity
- LTV ratio
- LTI / DSTI ratio
- …
- Capital buffers
- Sectoral risk weights
- …
- Loan-to-deposit ratio
- Loan-to-core funding
- …
1. Objectives and effectiveness
5
Past experiences:
Spain: Dynamic loan loss provisions
Ireland: Varying mortgage risk weights based on LTV ratios
Capital-based measures
possibly not enough
8/17/2019 ECB Credit flow restrictions: Implementation and coordination issues
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Rubric
www.ecb.europa.eu
Transmission channels of capital-based tools
6
1. Objectives and effectiveness
SEO: Seasoned equityoffering (new equity
issuance)
Source: CGFS Report “Operationalizing the Selection and Application of Macro-Prudential Instruments”, Dec. 2012
8/17/2019 ECB Credit flow restrictions: Implementation and coordination issues
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Rubric
www.ecb.europa.eu
Transmission channels of borrower-based tools
7
1. Objectives and effectiveness
Increase resilience
I m p a c t o n t h e
c r e d i t c y c l e
↓ credit demand
↓ property
prices
Loan market
L o w e r L
T V o r D T I c a p s
↓ credit supply
Arbitrageand leakages
to non-
banks
↓ PD and LGD of
borrowersTighter risk
management
Expectation channel
Constrain
borrowers
Source: CGFS Report “Operationalizing the Selection and Application of Macro-Prudential Instruments”, Dec. 2012
8/17/2019 ECB Credit flow restrictions: Implementation and coordination issues
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Rubric
www.ecb.europa.eu
Relative comparative strength of instruments
Curbing the financial cycle Enhancing resilience
Capital-
based
measures
(e.g. CCB)
Impact: Higher funding cost of fin.
intermediaries expected to pass
through to lending rates
In booms capital measures may not
be enough to offset the prospect ofrising asset prices.
Impact: Higher loss absorption
(implementation lags less of an issue)
BCBS (2010): a 1pp. rise in capital
requirements reduces the likelihood of
systemic crises by 20–50%
Borrower-
based
measures
(e.g. LTV, DSTI
limits)
Impact: Counter cyclicality of asset
prices, credit, leverage
Kuttner and Shim (2013): Tighterpolicy reduces credit growth by 4-7pp.
Claessens et al. (2014): Tighter
policy lowers bank leverage and asset
growth during booms.
Impact: Lower Probability of default
(PD), Loss given default (LGD)
Only an indirect effect on the resilienceof financial intermediaries
8
1. Objectives and effectiveness
Effective
Effective?
?
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Rubric
www.ecb.europa.eu9
1
2
3
Considerations for implementation: The details matter
Concluding remarks
Objectives and effectiveness
How do credit flow restrictions relate to macroprudential objectives?
Overview
What trade-offs exist when implementing measures?
What instruments can curb the financial cycle?
How best to counter the risks of leakages?
8/17/2019 ECB Credit flow restrictions: Implementation and coordination issues
10/20
Rubric
www.ecb.europa.eu
Implementation considerations and trade-offs
2. Considerations for implementation: The details matter
For all quantitative restrictions Also for asset-based limits
Institutionalcoverage /application
Domestic banks
Subsidiaries
Branches
Non-banks
Legal constraint
Binding
Binding butproportional
Recommen-dation (comply or
explain)
Credit reference
Total debt
Individual loan
Collateral valuation
Market price
Mortgage lendingvalue
Transaction value
Asset use
Principal
dwellings
Non-primarydwellings
Buy-to-let
10
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Rubric
www.ecb.europa.eu
Implementation considerations and trade-offs
2. Considerations for implementation: The details matter
For all quantitative restrictions Also for asset-based limits
Institutionalcoverage /application
Domestic banks
Subsidiaries
Branches
Non-banks
Legal constraint
Binding
Binding butproportional
Recommen-dation (comply or
explain)
Credit reference
Total debt
Individual loan
Collateral valuation
Market price
Mortgage lendingvalue
Transaction value
Asset use
Principal
dwellings
Non-primarydwellings
Buy-to-let
11
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Rubric
www.ecb.europa.eu
Assets of branches from foreign banking groups(as share of GDP)
2. Considerations for implementation: The details matter
Institutional coverage
Source: EBA, Fahr and Żochowski (2015) “A framework for analyzing and assessing
cross-border spillovers from macroprudential policies, ECB Financial Stability Review”,May.
Note: Based on 2013 transparency exercise with EEA counterparties
• Borrower-based instruments mosteffective when applied by activity
• Institution-based applications are
prone to leakages
• Cross-border leakages through branches;
these require reciprocity.But non-EU branches not covered
• Cross-sector leakages to non-banks call
for applying measures also to non-banks.
• Risks of leakages are likely to be dynamic
Account needs to be taken of the fact thatfinancial systems evolve as new regulations are
introduced.
Assets of foreign
branches / GDP
12
8/17/2019 ECB Credit flow restrictions: Implementation and coordination issues
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Rubric
www.ecb.europa.eu
Implementation considerations and trade-offs
2. Considerations for implementation: The details matter
For all quantitative restrictions Also for asset-based limits
Institutionalcoverage /application
Domestic banks
Subsidiaries
Branches
Non-banks
Legal constraint
Binding
Binding butproportional
Recommen-dation (comply or
explain)
Credit reference
Total debt
Individual loan
Collateral valuation
Market price
Mortgage lendingvalue
Transaction value
Asset use
Principal
dwellings
Non-primarydwellings
Buy-to-let
13
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Rubric
www.ecb.europa.eu
Implementation trade-offs: Credit referenceInstitutional and data requirements
14
2. Considerations for implementation: The details matter
Individual loan Total debt of a borrower
• Role of external appraisers: exact asset
valuation for LTV
• Time-varying LTV limits: stress-tests onvaluation and speed of repayment
• Need for central credit registry: total
debt across all outstanding loans
• Time-varying DSTI limits: stress-testson interest rate and employment status
LTV and LTI limits DTI and DSTI limits
• Definition of eligible income and its verification procedures should be required
• Data comparability at European levelHousehold-Finance and Consumption Survey (HFCS)
Analytical Credit Data Sets (AnaCredit): consistent credit registers across the EU
• Improved data coverage for shadow banking activity
Data improvements
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Rubric
www.ecb.europa.eu
Complementarities and interactions amonginstruments to restrict credit flows
Collateral-based limits (e.g. LTV) Income-based limits (e.g. DSTI)
Effectiveness Lower LGD, PD (lower leverage) Lower PD
Tightness
Sensitive to asset prices:
Aggregate credi t less constrained
in boom periods
Sensitive to interest rate changes:
Use DSTI with stress-tests on
interest rate
Circumvention by uncollateralized loans by lengthening loan maturity
15
2. Considerations for implementation: The details matter
Joint activation of col lateral- and income-based limits
with loan maturity restrictions
Observed
common
practice
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Rubric
www.ecb.europa.eu
Borrower-based measures activated in Northern & CE European countries.
LTV and DSTI limits often activated jointly.
EU experience: measures currently in force
16
Source: FSC note “Macro-prudential Quantitative Restrictions on Private Credit Flows - the EU experience” (March 2015)
Note: LTV / DSTI limits refer to domestic currency denominated loans for principal dwelling houses/permanent residence of non-first time home buyers without any(state or other) guarantee. Comparability of LTV limits is hampered because of different asset valuations across countries. DSTI limit is for debt servicing cost over
monthly net income for households at or below average income values.
Loan-to-value limit s in th e EU
LTV 100%
Not available
Income-based limits in th e EU
DSTI 40%
Internal DSTI limits
LTI limits
Not available
Loan-to-value limi ts Income-based limi ts
2. Considerations for implementation: The details matter
8/17/2019 ECB Credit flow restrictions: Implementation and coordination issues
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Rubric
www.ecb.europa.eu
Complementarities of borrower-based instruments
LTV limits(depending on loan type)
Income-based limits Max. maturity restriction
S
S
M
Lithuania 85% 2011: DSTI 40%
(2015: w/ interest rate sensit ivity)
2011: 40 years
2015: 30 years
Estonia 85%, 90% DSTI: 50% 30 years
Ireland 70%, 80%, 90% LTI: 3.5
Cyprus 70%, 80% DSTI: 35%
Latvia 95% Internal DSTI limits
Netherlands106%
(1pp per year until 90% in 2028)DSTI: 10-38%
Slovakia 90%, 100% Internal DSTI limits(max. 100%)
30 years
N o n – S
S
M
Hungary 30% - 80% Payment-to-Income: 10-60%
Poland 75% - 90%Internal DTI limits
(40-50%)
Romania 60% - 85% Internal DTI limits
17
2. Considerations for implementation: The details matter
LTV and DSTI/LTI activated or adjusted jointly, sometimes with maturity cap
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Rubric
www.ecb.europa.eu18
1
2
3
Considerations for implementation: Details matter
Concluding remarks
Objectives and effectiveness
How do credit flow restrictions relate to macroprudential objectives?
Overview
What trade-offs exist when implementing measures?
What instruments can curb the financial cycle?
How best to counter the risks of leakages?
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Rubric
www.ecb.europa.eu
3. Concluding remarks
19
Borrower-based measures more effective to curb credit cycle
Countering leakages, accounting for financial innovation
Effective pol icy requires granular and consistent data
Capital-based measures mainly enhance resilience: complementary
role of capital- and borrower-based measures
Instrument leakage: Combine LTV, DSTI and loan maturity caps
Institution leakage: Increase coverage (reciprocity / activity-
based application), recognizing potential for financial innovation.
• Credit registry: Analytical Credit Data Sets
• Household-Finance and Consumption Survey (HFCS)
• Data on shadow banking entities and their activities
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• Committee on the Global Financial System (2012), “Operationalising theSelection and Application of Macro-Prudential Instruments”, December.
• Basel Committee on Banking Supervision (2010), “An assessment of the long-
term economic impact of stronger capital and liquidity requirements”, August.
• Claessens, S., S. R. Ghosh and R. Mihet (2014), “Macro-prudential Policies to
Mitigate Financial System Vulnerabilities”, IMF Working Paper 14/155, August.
• Fahr, S. and D. Żochowski (2015), “A framework for analyzing and assessing
cross-border spillovers from macroprudential policies, ECB Financial Stability
Review”, May.
• Kuttner, K. N. and I. Shim (2013), “Can Non-interest Rate Policies Stabilise
Housing Markets? Evidence from a Panel of 57 Economies”, BIS Working Paper
No 433.
20
References