Financial Stability Implications of Changing Global Finance ......BBVA, ING, and Dexia. Source: Bloomberg. 5 Uneven progress in implementation of reforms and capital restoration Financial

Financial Stability Implications of Changing Global Finance: Policy Panel

May 7 and 8, 2013 İstanbul, Turkey

Global Finance in Transition

Outline

The Financial System 1

Weak Growth 2

Unprecedented Monetary Stimulus 3

Withdrawing the Monetary Accommodation

4

2 Financial Stability Implications of Changing Global Finance : Policy Panel

Final Remarks 5

Objectives of Reforms

Reduce the probability and the impact of banks’

failures.

Ending “Too-big-to fail.”

Increase transparency in OTC Markets.

Review perimeter of regulation and prevent regulatory

arbitrage.

Align incentives.


Main Reforms

Increase quality and quantity of capital.

Improve banks supervision and resolution.

OTC standardization, central clearing reporting, LEI.

Strengthen regulation of shadow banking system.

Rating agencies, compensations practices, accounting

standards.


Progress in implementation of the Basel Capital Framework

Price to book ratios1/

Percent

Source: BIS, Report to G20 Finance Ministers and Central Bank Governors on monitoring implementation of Basel III regulatory reform. Position as of end-March 2013.

Data as of April 2013. 1/ Weighted average of banks in region by assets. 2/ Bank of America, JP Morgan, Citigroup, Morgan Stanley and Wells Fargo. 3/ BNP Paribas, Credit Agricole, Societe Generale, Natixis, Deutsche, Commerzbank, Unicredit, Intesa, Santander, BBVA, ING, and Dexia. Source: Bloomberg.

5

Uneven progress in implementation of reforms and capital restoration

Financial Stability Implications of Changing Global Finance : Policy Panel

Basel II Basel 2.5 Basel III

Completed 24 22 11

Pending 3 5 16

Total 27 27 27

0.0

0.5

1.0

1.5

200

8

200

9

201

0

201

1

201

2

201

3

US Banks 2/

EU Banks 3/

National Initiatives beyond the International agreed Reforms

Volcker Rule.

Vickers.

Liikanen Report.

German and French Initiatives.

Subsidiarisation.


Dichotomy between economic and legal reality

Global Banks managed as an unique economic entity.

Legal responsibilities remain within national borders.

Difficult to implement single point of entry resolution

strategies.


Unintended Consequences

Home-bias.

Liquidity in host EMEs.

Uneven playing field in host-countries.

Infrastructure financing.

Balkanization.


After the world financial crisis there has been significant progress in improving the financial system.

Risks:

❶ Uneven implementation.

❷ Coordination.

❸ Unintended consequences.


Outline

Weak Growth 2



4


Final Remarks 5


US Reference Rates: 1970-2013

Percent

Source: Bloomberg.


0

5

10

15

20

25

1970

1971

1973

1974

1976

1977

1979

1980

1982

1983

1985

1986

1988

1989

1991

1992

1994

1995

1997

1998

2000

2001

2003

2004

2006

2007

2009

2010

2012

2013

FED overnight 3 months 6 months

1 year 5 years 10 years

30 years

Central Banks' Balance Sheets As a Percent of GDP

Source: National Central Banks and Haver Analytics.


0

10

20

30

40

50

60

70

200

8

200

9

2010

201

1

201

2

201

3

201

4

Federal Reserve

European Central Bank

Bank of Japan

Bank of England

Forecast

Libor-OIS Spread

3 day moving-average in basis points

1/ Libor – Eonia Source: Bloomberg.


0

50

100

150

200

250

300

350

400

2006

2007

2008

2009

2010

2011

2012

2013

US Eurozone 1/

US: Household Debt As a percent of Disposable

Personal Income

US: Household Debt As a percent of Net Worth

US: Composite-20 Case-Shiller Housing

Price Index Index 2000=100, s.a.

Source: Federal Reserve. Source: Federal Reserve. s.a./ Seasonally adjusted. Source: Case-Shiller, S&P.


80

90

100

110

120

130

140

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

10

13

16

19

22

25

28

31

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

50

100

150

200

250

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

Eurozone: Net Balance with the Eurosystem (Target2)

Cumulative Flows, Billion Euros

Eurozone: Unit Labor Costs Relative to Germany

Index 2000 = 100

Source: National Central Banks. Source: European Commission.


90

100

110

120

130

140

150

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Greece

Ireland

Italy

Portugal

Spain

-600

-400

-200

0

200

400

600

800

1000

2007

2008

2009

2010

2011

2012

2013

Italy

Spain

Germany

US: Credit of Financial Institutions to the Non Financial

Private Sector Percent

Eurozone: Credit of Financial Institutions to the Non Financial

Private Sector Percent

Source: Federal Reserve. Source: ECB.


-4

-2

0

2

4

6

8

10

12

14

16

2005

2006

2007

2008

2009

2010

2011

2012

2013

-25

-20

-15

-10

-5

0

5

10

15

20

25

2005

2006

2007

2008

2009

2010

2011

2012

2013

-6

-4

-2

0

2

4

6

8

10

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

US

Eurozone

Emerging Economies

Forecast

Global Growth Percent

Source: International Monetary Fund.


-3

-2

-1

0

1

2

3

4

5

6

7

199

8

200

0

200

2

200

4

200

6

200

8

201

0

201

2

201

4

201

6

U.K., Portugal, Ireland, Greece, Spain and EM

Rest of the World

Germany and Japan

Oil Exporting Countries

China and Emerging Asia

U.S.

Discrepancy

Current Accounts

As a Percent of GDP

Source: International Monetary Fund, World Economic Outlook Database, April 2013.


Forecast

Multilateral Real Effective Exchange Rate Index 2001 = 100

Source: Bank of International Settlements, as of March 2013.


60

80

100

120

140

160

180

200

2001

2002

2003

2003

2004

2005

2006

2007

2008

2008

2009

2010

2011

2012

2013

China

Brazil

Euro area

United States

Japan

Mexico

Depreciation

Weak growth has led to unprecedented monetary stimulus in advanced economies.

Risks:

❶ Is it the appropiate tool?

❷ Prolonged stagnation.

❸ Unchartered waters.


Outline

Weak Growth 2



4


Final Remarks 5


US: Average Yield of Corporate Bonds Percent

Source: Bloomberg.


0

3

6

9

12

15

18

21

24

27

2005

2006

2007

2008

2009

2010

2011

2012

2013

Investment grade

High yield

Accumulated Capital Flows into Emerging Markets (Bonds)

Billion USD

Accumulated Capital Flows into Emerging Markets (Equity)

Billion USD

Source: EPFR. Source: EPFR.


-20

-10

0

10

20

30

40

50

1 4 7

10

13

16

19

22

25

28

31

34

37

40

43

46

49

52

2007 2008 2009

2010 2011 2012

2013

-60

-40

-20

0

20

40

60

80

100

1 4 7

10

13

16

19

22

25

28

31

34

37

40

43

46

49

52

2007 2008 2009

2010 2011 2012

2013

Weeks Weeks

Nominal Exchange Rates Index January 1, 2008 = 100

Source: Bloomberg.


80

90

100

110

120

130

140

150

160

170

2008

2009

2010

2011

2012

2013

Brazil Chile Colombia

Korea Mexico Poland

Depreciation against

the USD

The unprecedented monetary stimulus can have steep financial stability costs, some of which may not even be yet identified.

Risks:

❶ Mispricing of risk.

❷ Dependence on low interest rates.

❸ Asset price bubbles.

❹ Risk concentration.


Outline

Weak Growth 2



4


Final Remarks 5


Eurozone: Headline CPI Inflation

Year over Year

US: Headline CPI and Personal Consumption Expenditures

Inflation Year over year

Source: Eurostat. Source: BLS and BEA.


-1.0

0.0

1.0

2.0

3.0

4.0

5.0

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

-3

-2

-1

0

1

2

3

4

5

6

7

199

0

199

1

199

2

199

3

199

4

199

5

199

6

199

7

199

8

199

9

200

0

200

1

200

2

200

3

200

4

2005

200

6

200

7

200

8

200

9

201

0

201

1

201

2

201

3

CPI PCE

Withdrawing or gradually reverting the extraordinary monetary accommodation poses big challenges.

Risks:

❶ Domestic costs.

❷ Externalities.

❸ Orderly vs. disorderly scenarios.


Outline

Weak Growth 2



4


Final Remarks 5


Final Remarks ❶ The effort of international financial reform is designed to:

Align incentives more effectively.

Price risk efficiently.

Make the global financial system more resilient.

❷ There are presently important risks to this effort:

In an open, highly interconnected world, the system must be efficiently integrated.

Fragmentation, balkanization.

Theory of the second best issues.

Unintended consequences for EMDEs.

Unleveled playing field.


Final Remarks ❸What role is the global financial system playing in the global economy´s

adjustment process, in light of very accommodative monetary policies?

US has possibly made the most progress.

Europe still in a difficult situation.

Reform effort will possibly lead to higher interest rates. Monetary policy in this case is possibly [and understandably] working in opposite direction.

Large probability of, again, mispricing of risk.

❹Highly accommodative monetary policies should be part, in many cases, of the adjustment mechanism.

Other policies.

Huge flows to EMEs. Volatility. Asset price bubbles a distinct possibility. Macroeconomic management issues (Monetary, fiscal and macro prudential).

For EMEs growth, potential problems could arise. Level playing field, balkanization, home bias, trade finance, project finance.


Final Remarks ❺Global growth equilibrium seems to have slowed down. The global financial

system should give sustainable support to growth or, at least, not hinder it and certainly, with a reduced probability of crises. However, in advanced economies there seems to be an important problem of sustained productivity growth. Monetary policy can´t do it alone.

❻ Everybody should be preparing for an eventual increase in interest rates in the US. This scenario can certainly be a very complicated one, with or without the FED having to sell assets.

❼ Thank you.


Documents

Financial Stability Implications of Changing Global Finance ......BBVA, ING, and Dexia. Source: Bloomberg. 5 Uneven progress in implementation of reforms and capital restoration Financial