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Presentation on theme: "MACROPRUDENTIAL POLICY IN CENTRAL AND EASTERN EUROPEAN COUNTRIES – IS THERE SOMETHING WE SHOULD LEARN?* Mirna Dumicic 1 *The views expressed in this paper."— Presentation transcript:

1 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.

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3 Why MPP suddenly became a “hot topic”  Term “macroprudential” - first used in late 1970s  After MPP became a “buzzword” Policymakers, academics, market participants started paying much more attention to: MP and countercyclical approach, systemic risks, buffers, policy coordination, communication Galati, G. and Moessner, R., 2011

4 “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, effects 4

5 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

6 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)

7 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

8 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

9 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 Q3 = 13% - 47%  Parent banks - till end 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

10 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  stock variables - end 2000 or Source: Lim et al. (2011), central banks, author’s calculations

11 Macroeconomic Characteristics and MPP 11

12 Monetary Policy and MPP 12

13 Credit and deposit euroisation in CEE countries  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)

14 Financial System Characteristics and MPP 14

15 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

16 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 growth 16

17 Modelling effectiveness  11 CEE countries, q – q  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

18 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…)

19 MPP intensity

20 Impact of MP Instruments on Total Loans to Households 20

21 Impact of MP Instruments on Total Loans to Corporate Sector 21

22 Impact of MP Instruments on Total B Loans to Private Sector 22

23 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

24 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

25 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 practice 25

26 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

27 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

28 What Should We Learn? MPP has potential to alleviate costs of financial crisis  Lower (initial) costs of crisis 28

29 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

30 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

31 What Should We Learn? MPP might stimulate inaction bias within other policies  Reduced pressure for necessary measures and reforms 31

32 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

33 Thank you! 33


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