New setup of Financial Stability framework: Internal conflicts and
cooperation
Central bank of ArmeniaAndranik Grigoryan
Different policy levers
• Price stability ‐ the primary and sometimes sole‐mandate of monetary policy.
• Financial stability ‐ a realm of prudential regulation and supervision (often managed by agencies separate from the central bank).
Benign neglect approach
• Most of the central banks took a “benign neglect” approach where the Monetary policy reacts to movements in asset prices and credit aggregates only to the extent they affect inflation
• The role of monetary policy ‐ to respond to the macroeconomic consequences of financial instability, if and when it is materialized.
As a result…
• Recognition of the need to mitigate crisis risk proactively, rather than only relying on cleaning up after a crisis.
• Evidence that the Price stability is no longer sufficient to ensure macroeconomic stability.
• Shift of emphasis on containing systemic risk by complementing traditional microprudential policies aimed at individual institutions with macroprudential policy frameworks.
Armenian financial system
• 1995‐2002 – “cleaning” of Banking system, Banking supervision and regulation development, Monetary policy challenges to tackle with high inflation
• 2003‐2008 ‐ development of banking system and financial infrastructure, Banking Supervision is in line with Basel, Monetary policy moving to inflation targeting
• 2008‐2015 – Financial system and macro economy suffering from Global financial crisis, Supervisory and macro‐prudential tools to maintain financial system stability, Inflation expectations are mainly anchored
Armenian banking system intermediation
45.3%
35.0%
74.5%
0%10%20%30%40%50%60%70%80%
Loans to GDP Deposits to GDP Assets to GDP
Macroeconomic performance
‐20%
‐15%
‐10%
‐5%
0%
5%
10%
15%
20%
0.0
1.0
2.0
3.0
4.0
5.0
6.0
Trillions AMD
Nominal GDP (left axis) Real GDP growth (right axis)CPI (Dec‐o‐Dec, %) (right axis)
Financial Intermediation
‐20%
0%
20%
40%
60%
80%
100%
120%
140%
160%
0
5
10
15
20
25
30
35
Thou
sand
s US do
llar
GDP per capita 2015 (left axis) 2007‐2014 annual growth in credit to GDP ratio (right axis) PP Credit to GDP 2014 (right axis)
CBA actions during 2009 economic crisis
• Formation of Financial stability committee, frequent meetings of the committee
• FX interventions intended to smooth short time and sharp fluctuations of FX rate
• Continuous decrease of repo rate during the year, after shock
• Increase of repo supply and extension of longer term repo by the CBA
• Interventions in T‐bills secondary market (the CBA increased its T‐bills portfolio to indirectly support market liquidity)
• Intensified and targeted supervision of financial institutions
CBA actions during 2009 economic crisis (2)
• All measures were targeted to ease credit crunch and increase banking liquidity, assure Financial stability
• Inflation was anchored for that period of time
Non‐performing loans vs. total loans
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
‐
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
Jan‐20
08
Apr‐20
08
Jul‐2
008
Oct‐200
8
Jan‐20
09
Apr‐20
09
Jul‐2
009
Oct‐200
9
Jan‐20
10
Apr‐20
10
Jul‐2
010
Oct‐201
0
Jan‐20
11
Apr‐20
11
Jul‐2
011
Oct‐201
1
Jan‐20
12
Apr‐20
12
Jul‐2
012
Oct‐201
2
Jan‐20
13
Apr‐20
13
Jul‐2
013
Oct‐201
3
Jan‐20
14
Apr‐20
14
Jul‐2
014
Oct‐201
4
Jan‐20
15
Apr‐20
15
Jul‐2
015
Oct‐201
5
Jan‐20
16
Billion
s AM
D
Total Assets (left axis) Total Loans (left axis) NPL % (right axis)
Leaning against the wind• The 2009 crisis proved that benign neglect approach is not the best
in coping with growing risks and threats in the economy.• The CBA’s actions on financial stability front proved to be successful
at that time, supporting the monetary policy and price stability goal.
This was the approach where policy stance is chosen to be tighter than the one justified by the stabilization of inflation (traditional central bank goal) to limit the buildup of financial risks
• Proponents of LAW argue ‐ the policy rate may not be the best tool to deal with financial risks, especially when compared to micro and macro prudential tools. And this was true for Armenia.
CBA actions during 2014‐2015 market crisis
• Increase of Lombard repo rate by 1275bp, more than X2• Increase of policy rate by 200bp• Increase of reserve requirement for FX liabilities X2• FX interventions intended to smooth short time and sharp
fluctuations of FX rate• Verbal interventions• Lift of risk weights for FX loans, decrease of risk weights for
AMD mortgage loans• Decrease of reserve requirement for long term liabilities• Inflation was lower of the upper boundary of monetary
policy target
CBA actions during 2014‐2015 market crisis
• Stabilization of FX market, improve short term liquidity, improve liquidity gap by prolongation of the tenor of liabilities
• Changes of risk weights aimed to restrain FX loans and stimulate origination of AMD loans
Policy rate (Refinancing Rate)
15
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
Main tasks of CBA after 2015
• Price stability• Financial stability – according to the latest amendments of Constitution in 2015
Price stability
Starting from 2006 the CBA moved to inflation targeting strategy.
Decision‐making process in th
e CB
A CBA boardOn a monthly basis it makes decisions on policy interest rate based on the information provided by the Forecasting Group.
MP committeeCommittee makes its sessions on a weekly basis and discusses the main developments related to the banking sector, fiscal policy and inflation.
Forecasting groupMeetings are scheduled on a monthly and quarterly basis. During of meetings the main developments, forecasts for upcoming 12‐month period and suggestions on the change of the policy rate are discussed.
Financial StabilityStarting from 2015 Financial Stability maintenance is one of the primarygoals of the CBA
Decision‐making process in the CB
A CBA boardMakes decisions on financial stability policy including macro‐prudential and crisis management policy.
FS committeeCommittee conducts its sessions on a quarterly basis and discusses the main developments of external sector, macro‐economy and financial system. It also discusses the assessments of the financial system stability and resilience (including the results of stress‐tests, satellite models) and makes suggestions on FS policy implementation.
CBA as mega‐regulatorSince 2015 risk based supervision principles are in place (partially, in testing
period). CBA Financial supervision department is in charge of on site and off site supervision of institutions under CBA regulation.
Decision‐making process in the CB
A
Since 2006 the Central Bank was given authority to regulate and supervise activities of all participants of the financial sector:BanksCredit organizationsLombardsInsurance companies, Insurance brokers and Insurance agentsInvestment companies, Investment and Pension Fund managers, Loan Portfolio Securitization Fund, other security market participantsCurrency dealers and Exchange agenciesPayment Organizations
Licensing committeeIt discusses the issues related to procedures of prior approval of getting/terminating the license, registration, licensing of all financial participants, assessment of the professional adequacy and qualification of managers and other responsible employees. It also discusses the violations made by the parcipants and the feasibility of implementing appropriate sanctions.
CBA mandates and tasks contributing to financial stability maintenance
Financial stability
Oversight of payment system
Financial system supervision –on site, off site
Monetary policy tools
Improving of financial literacy
Cooperation with international organizations responsible for Financial stability and financial
institutions supervision
Emergency Liquidity Assistance
Financial stability monitoring, stress tasting and crisis management
The structure of financial stability maintenance
Monitoring and analysis
Macroeconomic Financial Financial Financialenvironment markets institutions infrastructure
Assessment
Preventive Corrective Recovery actions actions actions
Inside the interval of Financial stability
Near the boundaries of Financial stability
interval, the probability of violations
Outside the interval of Financial stability
Financial stability
Identification and analysis of potential risks and their impact
Evaluation of risks and ranges of their fluctuation
Policy implementation
Using projections of MP DSGE model
Quarterly FS committee
meetings after MP forecasting
team
References 1. IMF Working Paper“A Financial Stability and Interest‐Rate Policy: A Quantitative Assessment of Costs and Benefits” Andrea Pescatori and Stefan Laseen20162. IMF staff report“Monetary policy and financial stability”August 20153. Internal working paper “Financial stability framework”, Central bank of Armenia, 20074. “Financial Stability report, 2010”, Central bank of Armenia5. “Financial Stability report, 2015”, Central bank of Armenia
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