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Lamfalussy Lectures Conference
On the effectiveness of non-standard monetary policy measures in Slovenia
Boštjan Jazbec
Banka Slovenije
Budapest, 2 February 2015
2
Summary
• The decoupling of real and financial cycles is symptomatic of a balance-sheet recession, which impairs the effectiveness of monetary policy. Credit continues to decline, while the economy is back on a growth path. The economic recovery is "domestic credit-less", but not "funding-less".
• Main impediments to more effective non-standard monetary policy measures rest with risk-averse domestic banking system as well as with the undeveloped market for alternative instruments that would support these measures.
• In small open economies, and especially in a country with boom-bust legacy, spill-overs of non-standard monetary policy measures complement and could even dominate their direct effects.
• Monetary policy could be effective in providing liquidity, but is not able to repair the impaired transmission channels without assistance of other policies.
3
The decoupling of real and financial cycles in Slovenia is related to balance-sheet recession and to unsustainable model of debt-financed economic growth during the pre-crisis period.
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Perc
ent d
evia
tion
from
tren
d
Cyclical comp. of foreign funding of resident banks
Cyclical comp. of real GDP
Cyclical comp. of firm credit
4
The contraction of loans to private sector in Slovenia persists. Hence, the economic recovery is a "domestic credit-less", but not a "funding-less" one.
Source: Bank of Slovenia.
2007 2008 2009 2010 2011 2012 2013 2014-35-30-25-20-15-10
-505
1015202530354045
Loans to non-banking sector
Loans to corporates (non-financial corporations and OFIs)
Loans to non-banking sector, excluding transfer to BAMC
Loans to corporates (non-financial corporations and OFIs), excluding transfer to BAMC
Crisis begins
VLTRO
OMT
BAMC
TLTRO
y-o-y growth; %
5
Monetary policy was effective in filling the liquidity / funding gap of banking sector after shut down of wholesale markets via FRFA, and later on VLTROs and TLTROs.
0%
200%
400%
600%
800%
1000%
1200%
1400%
2007 2008 2009 2010 2011 2012 2013 2014 20150%
200%
400%
600%
800%
1000%
1200%
1400%
SI excess liquidityEuro area excess liquidity
VLTRO
OMT
TLTROBAMC
Crisis begins
EUR million
1st VLTRO 2nd VLTRO Total VLTRO
VLTRO as share of MFI tota l
assets 1st TLTRO 2nd TLTROTotal TLTRO
Share of initial
a l lowance
Slovenia 1.466,00 2.233,00 3.699,00 7,1% 75,50 630,88 706,38 71,0%
Eurosystem 489.190,75 529.530,81 1.018.721,56 3,0% 82.601,57 129.840,13 212.441,70 53,0%
Source: ECB, Bank of Slovenia. Bank of Slovenia calculations.
6
Excess liquidity had no effect on bank lending rates in Slovenia – not even for prime borrowers.
0
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Perc
ent (
MRO
), Pe
rcen
tage
poi
nts
ECB MRO rate Spread over MRO - "prime" borrowers (A) Spread over MRO - "subprime" borrowers (C)
Crisis begins VLTROTLTROOMT
BAMC
interest rates on new loans
Source: ECB, Bank of Slovenia. Bank of Slovenia calculations
7
Why has there been no impact on lending interest rates in Slovenia?
-15%
-10%
-5%
0%
5%
10%
15%
20%
0
1000
2000
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4000
5000
6000
7000
8000
9000
2008 2009 2010 2011 2012 2013 2014
Non-performing claims, EUR million (left)
Non-performing ratio in %
Transfers to BAMC
Source: Bank of Slovenia.
• High level of NPLs
• High leverage of a part of the corporate sector
8
In Slovenia, banks have been deleveraging since the beginning of the crisis, notwithstanding the non-standard monetary policy measures.
161,5
142,9 145,3134,8 129,8
107,9
88,4
50
100
150
200
250
300
2008 2009 2010 2011 2012 2013 2014
Banking system
Large domestic banks
Small domestic banks
Banks under majority foreign ownership
Source: Bank of Slovenia.
Loan to deposit ratio
9
Banks in Slovenia have been left with a high level of NPLs. They have not transferred the excess liquidity to the real sector of the economy and at the same time they deleveraged.
• Such a situation required decisive policy action which included a balance sheet-repair.
• This was done in the second half of 2013 by a comprehensive review of the banking sector, recapitalisation of major banks and the transfer of NPLs to BAMC.
• So why are banks not lending even then?– Strengthened risk management practices in banks– Stronger supervisory oversight– The realities of the private sector
• Some parts of the corporate sector are still suffering from debt overhang• Corporate sector is still deleveraging• Better clients are able to tap alternative sources of financing, mainly abroad -
both by borrowing loans and by issuing bonds
10
Slovenian banks keep their credit standards tightened.
-9
-6
-3
0
3
6
9
2007 2008 2009 2010 2011 2012 2013 2014-9
-6
-3
0
3
6
9
Level of credit standards - SILevel of demand for financing - SILevel of demand - EALevel of credit standards - EA
Source: Bank of Slovenia
BLS: Demand and supply of loans: NFC
cumulated net percentage change over the last three months
Crisis begins
VLTRO
OMT
BAMC
TLTRO
11
In Slovenia, there is an increased recourse of private (viable, mostly export oriented corporate) sector to funding from abroad.
The share of foreign held securities in total liabilites of corporate sector reached 1.6% in 2014, compared to 0.6% in 2008.
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Perc
ent
Share of loans to NFC from abroad
Share of short-term loans from abroad in all short-term loans
Share of long-term loans from abroad in all long-term loans
12
Why additional non-standard monetary policy measures may not be effective in Slovenia?
• ABS and covered bond programmes face obstacles in Slovenia
• ABS/covered bonds do not exist owing to small amounts of underlying assets, first mover disadvantage, to smaller extent also due to remaining legal uncertainty and tax issues.
• Diversification of risks by means of securitisation is weaker, because the pool of underlying assets that can be securitised is small.
• Banks which are losing their best clients magnify these problems as they may not have sufficient volume of eligible loans.
• QE – the effect of bond purchases may be limited in Slovenia
• It does not ensure that banks will pass the - yet additional provision of - liquidity into the private sector. Although yield curves are flatter, these effects are not expected to be transmitted to loan pricing conditions.
• It does not guarantee that banks will be willing to sell bonds at all – given that they are risk-averse and faced with very low-yield (or negative-yield) alternative assets.
• It is expected that the main effect will be an indirect one via spill-overs from other countries, where the above issues are less relevant
13
Summary
• The decoupling of real and financial cycles is symptomatic of a balance-sheet recession, which impairs the effectiveness of monetary policy. Credit continues to decline, while the economy is back on a growth path. The economic recovery is "domestic credit-less", but not "funding-less".
• Main impediments to more effective non-standard monetary policy measures rest with risk-averse domestic banking system as well as with the undeveloped market for alternative instruments that would support these measures.
• In small open economies, and especially in a country with boom-bust legacy, spill-overs of non-standard monetary policy measures complement and could even dominate their direct effects.
• Monetary policy could be effective in providing liquidity, but is not able to repair the impaired transmission channels without assistance of other policies.