MACROPRUDENTIAL POLICY IN CENTRAL AND EASTERN EUROPEAN COUNTRIES – IS THERE SOMETHING

WE SHOULD LEARN?*

Mirna Dumicic

1*The views expressed in this paper are those of the author and do not necessarily reflect the views of the CNB.

2

Why MPP suddenly became a “hot topic”

Term “macroprudential” - first used in late 1970s

After 2008 - MPP became a “buzzword”

Policymakers, academics, market participants started paying much more attention to: MP and countercyclical approach, systemic risks, buffers,

policy coordination, communication.....3

Galati, G. and Moessner, R., 2011

“Real time” developments

Significant efforts on EU and global level aimed at:

establishing an efficient regulatory and institutional framework – national and international

developing methods and analytical tools for monitoring, identification and analysis of systemic risks

developing MP instruments mitigating systemic risks, increasing resilience design, calibration, thresholds, implementation costs,

effects4

Misperceptions and “oversights” that have contributed to crisis episodes

Oversimplified perception of relationship between FS and monetary policy price stability not sufficent for financial stability

Microprudential regulation not able to identify risks for financial system focus on individual institutions - not sufficient for preserving FS

“Regulatory gap” no one explicitly in charge for systemic risks

Different institutions in charge of different parts of the financial system lack of “big picture” - lower efficiency of MPP even if it has been

used Procyclical regulatory framework Lots of space for cross-border spill-overs 5

Up to 2008 – MPP conducted primarily by EMs

Developed countries -intensified its use after 2008

Most frequently used MP instruments (Lim

et al., 2011) – related to: credit activity liquidity capitalization

6

Note: The y-axis shows the number of countries that use MP measures and instruments.

Source: Sowerbutts (2014)

Why we should be interested in MPP in CEE?

To get a deeper insight into the experiences of a relatively small group of countries that had used MPP

To understand the underlying reasons behind more intense MPP To evalute MPP effectiveness in mitigating systemic risks To underline the importance of better coordination between MPP

and other economic policies To contribute to understanding the costs and benefits of MPP –

“weapon” against inaction bias

Focus on small open economies emphasizes their specific risks - sometimes overlooked in discussions on a global level

7

CEE countries before the crisis

liberalisation + insufficiently developed regulatory and institutional

framework + increased share of foreign banks (battle for market

shares, sometimes inappropriate credit policies) + high global liquidity + low interest rates + increased risk aversion + above average growth potential in CEE + EU accession process = high capital inflows 8

Developments that encouraged MPP in CEE

high capital inflows + expectations that strong inflows are continuous and stable (FP)

= favourable conditions for SR accumulation

Average credit growth - 2001 - 2008Q3 = 13% - 47% Parent banks - till end 2007 - cumulative credit inflows -

38% GDP

(Excessive) credit growth » increased demand » exceeded short-term domestic supply » encouraged import » rising CADs (on average - cca 10% GDP prior 2008) » price stability mostly maintained

But » pressure on financial assets prices (shares, currencies) and non-tradable goods (real-estate) » bubbles 9

Intensity of Use of MPP in Europe

Primarily used by CEE countries (marked yellow)

To "get the feeling" about MPP - simple linear regressions

MPP intensity vs. macroeconomic, monetary and financial characteristics

flow variables – avg. 2000 - 2004 stock variables - end 2000 or 2004

10Source: Lim et al. (2011),

central banks, author’s calculations

CountryIntensity of use of

macroprudential policyCroatia 31Serbia 27Romania 25Bulgaria 22Russia 19Turkey 16Latvia 15Estonia 14Poland 13Portugal 13Lithuania 11Hungary 10Norway 7Austria 5Ireland 5Italy 4Spain 3France 2Slovakia 2Sweden 2Beligium 0Czech Republic 0Finland 0Germany 0Netherland 0Switzerland 0Great Britain 0

Macroeconomic Characteristics and MPP

11

y = 2,806 x - 1,705

0

5

10

15

20

25

30

35

0 2 4 6 8 10GDP, annual perchantage change, average 2000-

2004

Inte

nsity

of u

se o

f m

acro

prud

entia

l pol

icy

y = -1,046 x + 6,373

0

5

10

15

20

25

30

35

-10 -5 0 5

Fiscal balance / GDP, average 2000-2004

Inte

nsity

of u

se o

f m

acro

prud

entia

l pol

icy_

y = -1,139 x + 6,933

-10

-5

0

5

10

15

20

25

30

35

-10 -5 0 5 10 15

Current account balance / GDP, average 2000-2004

Inte

nsity

of u

se o

f m

acro

prud

entia

l pol

icy

y = 1,348 x + 5,794

-5

0

5

10

15

20

25

30

35

-10 -5 0 5 10 15

Financial account balance / GDP, average 2000-2004

Inte

nsity

of u

se o

f m

acro

prud

entia

l pol

icy

y = 0,370 x + 5,846

0

5

10

15

20

25

30

35

-20 -10 0 10 20Change of public debt / GDP ratio (2004 - 2000)

Inte

nsity

of u

se o

f m

acro

prud

entia

l pol

icy

y = 0,287 x + 4,660

0

5

10

15

20

25

30

35

-20 0 20 40 60

Credit growth, average annual rate 2000-2004

Inte

nsity

of u

se o

f m

acro

prud

entia

l pol

icy

Monetary Policy and MPP

12

y = 2,571 x + 3,919

0

5

10

15

20

25

30

35

0 2 4 6 8 10

Credit euroisation, foreign denominated loans and fx indexed loans / total loans, end 2000

Inte

nsity o

f u

se

of

ma

cro

pru

de

ntia

l p

olicy

y = 0,366 x + 1,421

0

5

10

15

20

25

30

35

0 20 40 60 80Deposit euroisation, foreign currency deposits /

total deposits, end 2000

Inte

nsity o

f u

se

of

ma

cro

pru

de

ntia

l p

olicy

y = 2,491 x - 0,090

0

5

10

15

20

25

30

35

0 2 4 6 8

CPI, %, average 2000.-2004.

Inte

nsity o

f m

acro

pru

de

ntia

l

po

licy

y = 4,009 x + 5,493

0

5

10

15

20

25

30

35

0 1 2 3 4 5Currency regime (0 - free float - 4 - currency

board)

Inte

nsity o

f u

se

of

ma

cro

pru

de

ntia

l p

olicy

Credit and deposit euroisation in CEE countries

01020304050

60708090

100

Bulg

aria

Croa

tia

Czec

h R.

Esto

nia

Hun

gary

Latv

ia

Lith

uani

a

Pola

nd

Rom

ania

Slov

enia

Serb

ia

Slov

ak R

.

%

0

5

10

15

20

25

30

35

Credit euroisation Deposit euroisationIntensity of use of macroprudential policy

Ususally not the same clients

CICR

Specific risks – specific measures

Limited role of CB as LOLR – fx liquidity

Sources: IMF (2009); Lim et al. (2011); De Nicolò et al. (2003)

Financial System Characteristics and MPP

14

y = 0,124 x + 3,692

0

5

10

15

20

25

30

35

0 20 40 60 80 100share of foreign banks as a percentage ot total

banking assets, end of 2004In

ten

sity

of u

se o

f m

acr

op

rud

en

tial p

olic

y

y = -0,138 x + 17,837

0

5

10

15

20

25

30

35

0 20 40 60 80 100 120 140 160Financial system development - private sector

loans / GDP; end 2000

Inte

nsi

ty o

f use

of

ma

cro

pru

de

ntia

l po

licy

Ordered probit vs. OLS – same conclusion – in line with simple linear regressions

49 countries = 24 EU + 25 Rest of the World

Combination of higher GDP growth rates, higher inflation and non-flexible exchange rate regimes or higher CAD or FD – led (or increased probability) of more intense MPP

15

Effectiveness of MPP - systemic risks related to credit activity

Several problems related to credit growth: difficult to measure not easy to determine when credit growth is excessive strong credit activity not necessarily related to systemic

risks

On the other hand: literature confirms link between strong credit growth in

the pre-crisis period and financial crisis impossible to construct a general, comparable, systemic

risk indicator MPP often directly or indirectly aimed at risks related to

credit growth16

Modelling effectiveness

11 CEE countries, q1 2000 – q3 2008 Longitudinal panel - Beck and Katz (1995, 2004) - OLS, fixed

effects, cross-section SUR PCSE

Dependant variables: total loans to corporates and households, total bank loans to

private sector (sa, qoq)

Independent variables lagged dependant variable (Kristenssen et al., 2003, B&K,

2004), real GDP (qoq), interest rates (hh, corp., total) and MPP measures and instruments:

credit growth restrictions, CR, RW, LTV, DTI, limits on currency and maturity mismatch, RRs, provisioning requirements, MPP intensity

17

Variables constructed to reflect the use of individual MP instruments

Simple binary variables - 1 when measure is being used or when it is “tighter” than average

Stepwise variables - increase or decrease

depending on whether MPP was tightening or loosening

Real values (i.e. GRR, LTV, DTI, CR…)

MPP intensity

0

1

2

3

4

5

6

00 01 02 03 04 05 06 07 08 09 10 11 12 13

bg

-1

0

1

00 01 02 03 04 05 06 07 08 09 10 11 12 13

cz

0

1

2

3

4

00 01 02 03 04 05 06 07 08 09 10 11 12 13

ee

0

5

10

15

20

25

00 01 02 03 04 05 06 07 08 09 10 11 12 13

hr

0

1

2

3

4

5

6

00 01 02 03 04 05 06 07 08 09 10 11 12 13

hu

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

00 01 02 03 04 05 06 07 08 09 10 11 12 13

lt

0

1

2

3

4

5

00 01 02 03 04 05 06 07 08 09 10 11 12 13

lv

0

1

2

3

4

00 01 02 03 04 05 06 07 08 09 10 11 12 13

pl

0

4

8

12

16

00 01 02 03 04 05 06 07 08 09 10 11 12 13

ro

0.0

0.4

0.8

1.2

1.6

2.0

00 01 02 03 04 05 06 07 08 09 10 11 12 13

si

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

00 01 02 03 04 05 06 07 08 09 10 11 12 13

Intensity of use of macroprudential policy - dummyIntensity of use of macroprudential policy - step

sk

Impact of MP Instruments on Total Loans to Households

20

Dependant variableIndependand variables Spec. 1 Spec. 2 Spec. 3 Spec. 4 Spec. 5 Spec. 6 Spec. 7 Spec. 8 Spec. 9 Spec. 10 Spec. 11 Spec. 12 Spec. 13 Spec. 14 Spec. 15 Spec. 16 Spec. 17 Spec. 18

3.3206 3.3206 14.3530 4.4542 4.4542 3.6533 3.7980 4.5072 4.5072 3.3103 3.3103 3.6234 5.9125 4.3923 3.3071 4.6840 4.5960 4.4238(0.70)** (0.70)** (9.13) (0.76)** (0.76)** (0.72)** (0.79)** (0.75)** (0.75)** (0.70)** (0.70)** (0.71)** (1.40)** (0.79)** (0.72)** (0.77)** (0.81)** (0.77)**

0.5194 0.5194 0.5131 0.4520 0.4520 0.4969 0.5181 0.4737 0.4737 0.5184 0.5184 0.5025 0.4896 0.5062 0.5202 0.4603 0.4907 0.4945(0.07)** (0.07)** (0.07)** (0.07)** (0.07)** (0.07)** (0.07)** (0.07)** (0.07)** (0.07)** (0.07)** (0.07)** (0.07)** (0.07)** (0.07)** (0.07)** (0.07)** (0.07)**

0.7445 0.7445 0.7548 0.6400 0.6400 0.7839 0.7499 0.6586 0.6586 0.7544 0.7544 0.7758 0.7587 0.7404 0.7436 0.6380 0.7334 0.7246(0.24)** (0.24)** (0.24)** (0.24)** (0.24)** (0.24)** (0.24)** (0.24)** (0.24)** (0.24)** (0.24)** (0.24)** (0.24)** (0.24)** (0.24)** (0.24)** (0.24)** (0.24)**

-1.0945 -1.0945 -1.0795 -0.8768 -0.8768 -0.9394 -1.1108 -0.9169 -0.9169 -1.0980 -1.0980 -1.0191 -0.9666 -1.0626 -1.2137 -0.8761 -0.9868 -0.9989(0.38)** (0.38)** (0.37)** (0.36)* (0.36)* (0.37)* (0.37)** (0.35)** (0.35)** (0.38)** (0.38)** (0.37)** (0.36)** (0.37)** (0.41)** (0.35)* (0.36)** (0.36)**

-0.1114

(0.05)*

-0.4456

(0.19)*

-1.3460(1.11)

-0.1360(0.05)**

-6.8023(2.39)**

-3.0772(2.07)

-1.1725(0.65)

-0.0459(0.01)**

-2.2953(0.64)**

-0.0189(0.01)

-0.3783(0.25)

-1.3296(0.60)*

-0.2428(0.11)*

-0.1031(0.03)**

-0.5875(0.57)

-1.9784(0.56)**

-0.3450(0.10)**

-0.2637(0.07)**

Observations: 332 332 332 332 332 332 332 332 332 332 332 332 332 332 324 332 332 332

R2: 0.62 0.62 0.62 0.64 0.64 0.63 0.62 0.64 0.64 0.62 0.62 0.63 0.63 0.62 0.62 0.64 0.63 0.63

F-statistic: 37.11 37.11 37.30 39.92 39.92 37.98 37.23 39.95 39.95 37.01 37.01 37.75 38.65 37.59 36.72 40.43 38.45 38.37

Constant

Total bank loans(-1)

GDP

Interest rate (-1)

Credit growth limit - level (-1)

Increased provisioning requirement - step (-1)

General reserve requirement - step (-1)

Credit growth limit - step (-1)

Capital requirements - razina (-1)

DSI - razina (-1)

DSI - step (-1)

Limited currency mismatch - level (-1)

Limited maturity mismatch - step (-1)

General reserve requirement - level (-1)

Increased risk weights - step (-1)

LTV - DSI - step (-1)

Total level of macroprudential policy - d (-1)

Total level of macroprudential policy - step (-1)

total loans to households, quarterly rate of change

LTV - razina (-1)

LTV - step (-1)

Marginal reserve requirement - level (-1)

Marginal reserve requirement - step (-1)

Impact of MP Instruments on Total Loans to Corporate Sector

21

Dependant variableIndependand variables Spec. 1 Spec. 2 Spec. 3 Spec. 4 Spec. 5 Spec. 6 Spec. 7 Spec. 8 Spec. 9 Spec. 10 Spec. 11 Spec. 12 Spec. 13

3.1764 3.1764 4.0779 2.8750 3.3623 3.0573 3.0573 2.9740 2.7116 2.4956 3.0514 2.6824 2.8294(0.50)** (0.50)** (5.85) (0.48)** (0.58)** (0.49)** (0.49)** (0.49)** (0.84)** (0.58)** (0.51)** (0.54)** (0.53)**

0.2540 0.2540 0.2583 0.2527 0.2550 0.2543 0.2543 0.2447 0.2551 0.2467 0.2449 0.2499 0.2532(0.07)** (0.07)** (0.07)** (0.07)** (0.07)** (0.07)** (0.07)** (0.07)** (0.07)** (0.07)** (0.07)** (0.07)** (0.07)**

0.7133 0.7133 0.7225 0.7260 0.7225 0.7316 0.7316 0.7313 0.7292 0.7501 0.7297 0.7500 0.7442(0.20)** (0.20)** (0.20)** (0.20)** (0.20)** (0.20)** (0.20)** (0.20)** (0.20)** (0.20)** (0.20)** (0.20)** (0.20)**

- 0.0677 -0.0677 -0.0633 -0.1463 -0.0759 -0.0440 - 0.0440 -0.0194 -0.0288 -0.0275 -0.0419 -0.0041 -0.0159(0.27) (0.27) (0.27) (0.27) (0.27) (0.27) (0.27) (0.27) (0.27) (0.27) (0.28) (0.27) (0.27)

-0.0945(0.06)

-0.3781(0.22)

-0.1192(0.72)

3.5267(1.39)*

-0.5422(0.55)

0.0213(0.01)

0.4260(0.29)

1.0803(0.40)**

0.0404(0.07)

0.0654(0.03)*

0.6947(0.52)

0.1413(0.08)

0.0794(0.06)

Observations: 333 333 333 333 333 333 333 333 333 333 325 333 333

R2: 0.32 0.32 0.32 0.34 0.32 0.32 0.32 0.33 0.32 0.32 0.33 0.32 0.32

F-statistic: 10.84 10.84 10.74 11.83 10.78 10.81 10.81 11.15 10.77 10.94 10.78 10.93 10.83

Credit growth limit - step (-1)

Increased risk weights - step (-1)

Total level of macroprudential policy - step (-1)

Total level of macroprudential policy - d (-1)

General reserve requirement - level (-1)

Increased provisioning requirement - step (-1)

Limited maturity mismatch - step (-1)

General reserve requirement - step (-1)

total loans to corporate sector, quarterly rate of change

Capital requirements - razina (-1)

Limited currency mismatch - level (-1)

Marginal reserve requirement - level (-1)

Marginal reserve requirement - step (-1)

Total loans to corporate sector (-1)

Constant

GDP

Interest rate (-1)

Credit growth limit - level (-1)

Impact of MP Instruments on Total B Loans to Private Sector

22

Dependant variableIndependand variables Spec. 1 Spec. 2 Spec. 3 Spec. 4 Spec. 5 Spec. 6 Spec. 7 Spec. 8 Spec. 9 Spec. 10 Spec. 11 Spec. 12 Spec. 13 Spec. 14 Spec. 15 Spec. 17

6.1169 6.0799 16.5310 6.1083 6.1083 6.5093 5.3079 6.3679 6.3679 6.0516 6.0516 6.3719 9.5394 6.9474 5.9072 6.7082(1.29)** (1.29)** (8.33)* (1.56)** (1.56)** (1.50)** (1.36)** (1.49)** (1.49)** (1.30)** (1.30)** (1.37)** (2.39)** (1.44)** (1.30)** (1.41)**

0.1115 0.1119 0.1117 0.1139 0.1139 0.1128 0.1099 0.1130 0.1130 0.1136 0.1136 0.1116 0.1015 0.1090 0.1095 0.1102(0.09) (0.09) (0.08) (0.09) (0.09) (0.09) (0.09) (0.09) (0.09) (0.09) (0.09) (0.09) (0.09) (0.09) (0.09) (0.09)

0.9808 0.9831 0.9768 0.9805 0.9805 0.9743 0.9934 0.9596 0.9596 0.9896 0.9896 0.9809 0.9064 0.9609 0.9935 0.9557(0.31)** (0.31)** (0.30)** (0.33)** (0.33)** (0.31)** (0.31)** (0.32)** (0.32)** (0.31)** (0.31)** (0.31)** (0.31)** (0.31)** (0.31)** (0.31)**

-0.1940 -0.1932 -0.2056 -0.1986 -0.1986 -0.2322 -0.1698 -0.2109 -0.2109 -0.1929 -0.1929 -0.2156 -0.2947 -0.2017 -0.1855 -0.2164(0.10) (0.10) (0.10)* (0.12) (0.12) (0.12) (0.10) (0.11) (0.11) (0.10) (0.10) (0.11)* (0.12)* (0.10)* (0.10) (0.10)*

-0.1244(0.04)**

-0.2979(0.18)

-1.2654(1.01)

-0.0069(0.06)

-0.3460(3.12)

-1.6323(2.40)

1.2102(0.87)

-0.0080(0.01)

-0.3982(0.75)

-0.0102(0.01)

-0.2032(0.23)

-0.7218(0.54)***

-0.2529(0.13)***

-0.0830(0.04)*

0.3378(0.55)

-0.1228(0.07)***

Observations: 349 349 349 349 349 349 349 349 349 349 349 349 349 349 341 349

R2: 0.27 0.26 0.27 0.26 0.26 0.27 0.27 0.26 0.26 0.26 0.26 0.27 0.28 0.27 0.27 0.27

F-statistic: 8.65 8.58 8.68 8.55 8.55 8.63 8.72 8.58 8.58 8.56 8.56 8.64 9.11 8.73 8.41 8.67

Constant

Total bank loans(-1)

GDP

Interest rate (-1)

Credit growth limit - level (-1)

Credit growth limit - step (-1)

Capital requirements - razina (-1)

DSI - razina (-1)

DSI - step (-1)

Limited currency mismatch - level (-1)

Limited maturity mismatch - step (-1)

LTV - razina (-1)

Increased risk weights - step (-1)

Total level of macroprudential policy - step (-1)

total bank loans to private sector, quarterly rate of change

LTV - step (-1)

Marginal reserve requirement - level (-1)

Marginal reserve requirement - step (-1)

Increased provisioning requirement - step (-1)

General reserve requirement - step (-1)

General reserve requirement - level (-1)

Private sector debt structure Corporate sector partially avoided imposed

limitations Easier access to other sources of financing –

domestic and international

Sources: ECB, WB, Ameco, HAAB Research, Lim et al. (2011), central banks, author’s calculations

0%10%20%30%40%50%60%70%80%90%

100%

Serb

ia

Croa

tia

Rom

ania

Esto

nia

Latv

ia

Bulg

aria

Hun

gary

Czec

h R.

Slov

ak. R

.

Pola

nd

Lith

uani

a

0

10

20

30

40

50

60

70

corporates - cross-border loans corporates - domestic loanshouseholds Intensity of MPP - right

0

20

40

60

80

100

120

Serb

ia

Croa

tia

Rom

ania

Esto

nia

Latv

ia

Bulg

aria

Hun

gary

Czec

h R.

Slov

ak. R

.

Pola

nd

Lith

uani

a

% G

DP.

end

of 2

012

0

5

10

15

20

25

30

35

corporates - cross-border loans corporates - domestic loanshouseholds Intensity of MPP - right

What Should We Learn? Country-specific characteristics must be taken

into account

Usage and scope of MPP and other policies – to a large extent stimulated by inherent country characteristics

Important when designing MPP framework and imposing rules and limitations for its usage

Turner (2012) - even in we agree about the theoretical aspects of MPP – “a one-size-fit-all solution” - impossible in practice - different levels of development, historical circumstances, baseline characteristics..... 24

What Should We Learn?Adequate institutional framework –

necessary prerequisite for efficient MPP

MPP more efficient in slowing down credit to households than corporates

Importance of efficient institutional and regulatory framework: on national and international level

reduce the risk of cross-border systemic risk spill-over dissimulate behaviour that increases vulnerabilities in the

“host” countries

Not only formally, but also in practice25

What Should We Learn? MP instruments are very, very complex

CEE experience useful in analysing their: effects efficiency calibration problems optimization problems mutual interaction and interaction with other policies’ measures and

instruments

Special emphasis - financial institutions’ attempts to circumvent them

26

What Should We Learn?Cross-country studies have a limited

scope

Attempts of measuring MPP effectiveness provide general insights

This can be very useful....

...but, when deciding - necessary to take into account all country specificities and current developments which could influence FS

27

What Should We Learn? MPP has potential to alleviate costs of financial crisis

Lower (initial) costs of crisis

28

y = -1,2202x + 11,408

-5

0

5

10

15

20

25

30

35

0 2 4 6 8 10 12

Banks' recapitalizations, % GDP

Inte

nsity

of u

se o

f mac

ropr

uden

tial

polic

y

y = -1,0205x + 12,034

0

5

10

15

20

25

30

35

0 2 4 6 8 10 12 14

Outstanding guarantees and liquidity measures, 2009, % GDP

Inte

nsity

of u

se o

f mac

ropr

uden

tial

polic

y

y = -0,7945x + 10,476

0

5

10

15

20

25

30

35

0 2 4 6 8 10 12 14Outstanding guarantees and liquidity measures, 2012, %

GDP

Inte

nsity

of u

se o

f mac

ropr

uden

tial

polic

y

What Should We Learn? Inaction is costly

Inaction bias Costs visible much sooner than benefits Often not popular among other policymakers, public,

financial market participants...

CEE experience could help “defeating” such perception - raising awareness on the importance and usefulness of MPP

29

What Should We Learn?Coordination between economic policies is a

“must-have”

Not only prior, but also during and after crisis

Special focus on fiscal policy If countercyclical - it can prevent or significantly

reduce systemic risks

In practice - more common undisciplined FP - adds pressure and limits other policies

Lots of potential for further research

30

What Should We Learn?MPP might stimulate inaction bias within other

policies

Reduced pressure for necessary measures and reforms

31

Instead of a conclusion

We should strongly support all the efforts in establishing MP framework...

...keep our eyes open and...

...allow ourselves to think “out of a box”.

32

Thank you!

33