Transcript mpc govc

Diego Rodriguez Palenzuela
Capital Market and Financial
Structure
Directorate Monetary Policy
How can security
markets finance longterm growth?
Brussels
1 October 2013
Rubric
Motivation
-
The post-crisis regulatory landscape should address the pitfalls that led to the
2007-08 and 2010-12 financial crises, based on the analysis of their causes.
-
Yet, worries have been voiced whether the transition costs could hamper the
on-going recovery, so that the transition to the new (better) equilibrium may be
more protracted and painful than foreseen.
-
As a case in point, a scenario of frontloading by banks of capital requirements
has materialised. Observers claim that frontloading by banks of capital
requirements has had a contractionary impact on output.
-
However, looking through the transient impact of banks’ recapitalisation, higher
capital ratios should bestow resilience to the medium term growth outlook
We focus role of securities markets for enhancing resilient LT funding
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Rubric
Scope:
the banking regulations considered
Legislative situation
Main components
Where do we stand?
Min CET1 ratio
Capital
requirements
Passed (CRD IV) implementation
2013-2018.
Leverage
Passed (CRD IV) implentation in
2018
Liquidity
Amended in January 2013 by the
BCBS - LCR already in CRD IV
(implementation 2013-2018), NSFR
will follow (implemnetation in 2018)
Securitisation
BCBS: 1st proposal in Dec. 2012.
Final global standards to be issued
by the BCBS in 2014.
OTC
derrivatives
Preliminary analysis - Impact
studies ongoing at the BCBS level
Structural
perimeter
Liikanen report in October 2012. EC
issued a consultative paper in May
2013. 1st legislative proposal by
end 2013.
Capital conservation buffer
Phase in of deductions
Reweighting
G-SIBs surcharges
LCR
NSFR
Change in the risk weights and capital
requirements
Increased standardisation
Establish margin calls
Favour CCP
Ring-fencing of retail and investment activities
Capital and liquidity requirements at the level of
each unit
A lot of progress made
well ahead of the
regulatory phasing-in
arrangements
(frontloading) - still,
several banks are
under restructuring
schemes and even for
the others, the tail of
the distribution has
some gaps to fill.
First proposals known
and under discussion.
Implementation to
determine. Final
outcome uncertain.
Looking forward, the
effects could be
substantial for
securitisation and
structural perimeter.
Transfer across units at market prices
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Rubric
Channels
whereby bank adjustment affects activity
-
Higher capital requirements usually met through more earnings retention,
equity issuance and/or deleveraging and risk weight optimisation
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Liquidity requirements: Should lead to higher quality assets and better
matching of asset-liability maturities, but also to lower net interest income when
yield curve upward sloped and potentially also more reliance on central bank
funding
-
OTC derivative: Collateralisation is expensive
-
Banking separation: tends to limit the economies of scale between
activities
In the transition to a new steady state, adjusting to new regulation is likely to
be detrimental to bank income; banks charge higher margins and tend to
tighten provision of credit (e.g. Berrospide and Edge (2010), Francis and Osborne (2012),
Maurin and Toivanen (2012))
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Rubric
Progress
made regarding capital and liquidity requirements
Capital requirements (% RWA)
12
Liquidity requirements ratios
120
100
8
80
60
4
40
20
0
0
Dec. 10
Jun. 11
Dec. 11
Current CT1
min. with cap. cons. buffer
Jun. 12
Dec. 12
Dec. 10
Jun. 11
Dec. 11
Jun. 12
Dec. 12
Basel III CET1
LCR
NSFR
Min. ratio in 2018
Sources: ECB computations based on BCBS (internal version of the Basel III monitoring exercise, September 2013. Note:
Unpublished and confidential
- Important progress since end 2010: banks have frontloaded.
- Distribution matters. Looking through the banking sector – and excluding the part
under restructuring scheme – some gaps remain.
- More recently, the attention has turned to the leverage ratio as some suspicion as
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emerged around the calibration of risk weights.
Rubric
Did
benefits already materialised?
CDS spread to sovereign and Tier 1 capital ratio
Change in capital ratios and in stock prices
80
Change in stock price (%)
Tier 1 capital ratio (percentages)
14
12
10
8
0
100
200
300
CDS spread (basis points)
400
40
0
-40
-80
-120
-4
-2
0
2
4
6
8
10
12
Change in CT1 capital ratio (p.p.)
Source: ECB computations based on DATASTREAM, listed banks. Note: CDS spread from the 5 year sovereign bond averaged
over 12Q2-13Q2 (LHS) average over the first two quarters of 2013 reported to the average in 2009 (RHS).
Some positive effects of the increased confidence in the banking system could have started
to materialise with lower funding cost (lower liquidity risk and default risk)
Indeed, negative relationship between solvency ratio and CDS spread would suggest that
higher capital ratios are associated to lower funding costs.
These effects are difficult to capture with structural models (unless banks can fund
themselves directly on the non-deposit margin). Previous analysis may overestimate the
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costs.
Rubric tapping of the market by corporations
Direct
Contributions (de-meaned annual rate of growth in percentage, contributions in percentage points)
to NFCs loan growth
to NFCs debt issuance
to investment growth
Source: ECB estimations. See Maurin (2013)
Loans affected by weak overall demand and specific factors entrenched in the banking sector
(regulations, funding, risk…).
Strong debt issuance activity party resulting from adverse access to bank loans from end 2011
until beg. 2013. Possible substitution. But largely resulting from idiosyncratic factors (large
corporations in a few countries).
Adverse credit environment exerts an overall negative impact on business investment.
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Rubricfactors for enhancing securities markets
Key
• Adverse selection
• Conjunctural
• Transition to new
regulations
[ Shorter term ]
• Information infrastructure
• Structural
• Taxes and legal
harmonisation
• Better instruments
[ Medium term ]
• Ratings
• Development banks
• “Steady state” regulation
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Rubric
Information
infrastructure
- Problems in accessing quality information remain major barriers for
better capital market funding , in particular of SMEs
- Part of these challenges have been mitigated through the use of
scoring companies and credit registers …
- … and the establishment of the European Data Warehouse,
[banks have been required since January 2013 to provide loan level information
on SME securitisations, in accordance with a standardised template, as a
necessary condition to be eligible as collateral for Eurosystem credit operations]
- Improving the transparency and quality of SME loan data –
including on loan performance – would support investor
confidence and provision of capital market funding, especially of
SMEs
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Rubricharmonisation of key legal procedures
Higher
- Need to give priority to the longer-term goal of achieving better
integrated capital markets
- Currently European equity markets are relatively small and
fragmented and the cross-border ownership of corporate bonds is
also underdeveloped
- Fostering the integration of European equity markets will require
inter alia a higher harmonisation of insolvency legislation
[See Andre Sapir and Guntram Wolff (2013) The neglected side of banking union:
reshaping Europes Financial System; note for the Informal ECOFIN 13/14
September 2013,Vilnius ]
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Rubric securitisation markets
Reviving
-Securitisation markets can provide an additional source of funding for
banks, affecting positively their capacity to finance economic growth,
but since 2008 confidence in the securitisation industry is damaged
-This is as a major constraint on SME access to finance: AFME
estimates that ca. €200‐300 billion of funding could be provided
through securitisations sold to third party investors, including
insurance companies, pension funds, banks and others
-Reviving the securitisation market in the EU requires achieving the
right balance between financial stability and the need to improve
maturity transformation by the financial system
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Rubric
Estimating
the impact of the regulatory change envisaged for securitisation
Distribution of ABS held by European bank by
rating (%)
Impact on risk weights of the regulatory change (%,
1 year LHS, 5 years, RHS)
160
160
120
120
80
80
40
40
0
0
Revised
RBA
Sources: ECB computations based on JPM
Current
RBA
Revised Current
RBA
RBA
Sources: ECB computations based on BCBS, Dec. 2012 and JPM
 EA net flow of ABS: 200 billions in 2006 (mostly RMBS, housing loans), around
20% of new loans granted to the non fin private sector.
 Increase in average risk weight, from 70% to 90% (under RBA, one approach),
and in minimum capital requirement, to 7%, with implications for bank capital
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Concluding
remarks
Rubric
Very difficult to disentangle the contributions of demand, policies
and regulatory changes on actual credit outturns
A large part of the capital and liquidity adjustments has already
occurred. In addition, some positive effects appear to already be
materialising
Regulatory uncertainty remains harmful and to be avoided
Looking forward, a key challenge remains in aspects affecting the
banks’ funding side (e.g. ABS and shift to secured funding);
Clear scope to improve scope for securities markets for SMEs
through a variety of instruments
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Rubric
Thank you for your
attention
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