ecb credit flow restrictions: implementation and coordination issues

8/17/2019 ECB Credit flow restrictions: Implementation and coordination issues

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Credit flowrestrictions:

Implementation andcoordination issues

Macroprudential Policy: The role and experience with

Credit Flow Restrictions

Lietuvos Bankas Conference, 3 July 2015

John Fell

European Central Bank


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Rubric

www.ecb.europa.eu2

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2

3

Considerations for implementation: Details matter

Concluding remarks

Objectives and effectiveness

How do credit flow restrictions relate to macroprudential objectives?

Overview

What trade-offs exist when implementing measures?

What instruments can curb the financial cycle?

How best to counter the risks of leakages?


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Rubric

www.ecb.europa.eu3

1

2

3

Considerations for implementation: The details matter

Concluding remarks



Overview





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Rubric

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What are the macroprudential policy objectives?

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Curbing the financial cycle •Enhancing resilience

1. Objectives and effectiveness

Prevent excessive asset price and credit

fluctuations so as to avoid boom-bust episodes

⇒ Need for instruments that are robust over the cycle

Raise household and financial sector resilience

⇒ Need for instruments that provide buffers to limit

contagion or excessive spending adjustment

Source: Central Bank of Ireland, Banco de España, Eurostat.

Credit and asset price cycle in Spain and Ireland (2007=100)

Source: ECB, Residential Property Price Index Statistics for new and existing

dwellings) and Balance Sheet Items Statistics for households and non-profitinstitutions serving households.

20

40

60

80

100

120

2000 2002 2004 2006 2008 2010 2012 2014

HH credit (IE) HH credit (ES)

House Prices (IE) House Prices (ES)

0

5

10

15

20

25

2006 2008 2010 2012 2014

Unemployment rate (IE) Unemployment rate (ES)

NPL ratio (IE) NPL ratio (ES)

Unemployment and NPL ratio in Spain and Ireland (%)

HH credit

House prices

Unemploymentrate

NPL ratio


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Rubric

www.ecb.europa.eu

Different instrument classes available to counterexcessive credit flows

Borrower-basedinstruments

Capital-basedinstruments

Liquidity-basedinstruments

Mortgage demand

To reduce households’

PDs and LGD

Mortgage supply

To absorb losses

when risks materialise

Funding conditions

To increase funding

stability throughbuffers and maturity

- LTV ratio

- LTI / DSTI ratio

- …

- Capital buffers

- Sectoral risk weights

- …

- Loan-to-deposit ratio

- Loan-to-core funding

- …


5

Past experiences:

Spain: Dynamic loan loss provisions

Ireland: Varying mortgage risk weights based on LTV ratios

Capital-based measures

possibly not enough


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Rubric

www.ecb.europa.eu

Transmission channels of capital-based tools

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SEO: Seasoned equityoffering (new equity

issuance)

Source: CGFS Report “Operationalizing the Selection and Application of Macro-Prudential Instruments”, Dec. 2012


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Rubric

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Transmission channels of borrower-based tools

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Increase resilience

I m p a c t o n t h e

c r e d i t c y c l e

↓ credit demand

↓ property

prices

Loan market

L o w e r L

T V o r D T I c a p s

↓ credit supply

Arbitrageand leakages

to non-

banks

↓ PD and LGD of

borrowersTighter risk

management

Expectation channel

Constrain

borrowers

Source: CGFS Report “Operationalizing the Selection and Application of Macro-Prudential Instruments”, Dec. 2012


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Rubric

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Relative comparative strength of instruments

Curbing the financial cycle Enhancing resilience

Capital-

based

measures

(e.g. CCB)

Impact: Higher funding cost of fin.

intermediaries expected to pass

through to lending rates

In booms capital measures may not

be enough to offset the prospect ofrising asset prices.

Impact: Higher loss absorption

(implementation lags less of an issue)

BCBS (2010): a 1pp. rise in capital

requirements reduces the likelihood of

systemic crises by 20–50%

Borrower-

based

measures

(e.g. LTV, DSTI

limits)

Impact: Counter cyclicality of asset

prices, credit, leverage

Kuttner and Shim (2013): Tighterpolicy reduces credit growth by 4-7pp.

Claessens et al. (2014): Tighter

policy lowers bank leverage and asset

growth during booms.

Impact: Lower Probability of default

(PD), Loss given default (LGD)

Only an indirect effect on the resilienceof financial intermediaries

8


Effective

Effective?

?


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Rubric

www.ecb.europa.eu9

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2

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Considerations for implementation: The details matter

Concluding remarks



Overview





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Rubric

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Implementation considerations and trade-offs

2. Considerations for implementation: The details matter

For all quantitative restrictions Also for asset-based limits

Institutionalcoverage /application

Domestic banks

Subsidiaries

Branches

Non-banks

Legal constraint

Binding

Binding butproportional

Recommen-dation (comply or

explain)

Credit reference

Total debt

Individual loan

Collateral valuation

Market price

Mortgage lendingvalue

Transaction value

Asset use

Principal

dwellings

Non-primarydwellings

Buy-to-let

10


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Rubric

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Domestic banks

Subsidiaries

Branches

Non-banks

Legal constraint

Binding



explain)

Credit reference

Total debt

Individual loan


Market price


Transaction value

Asset use

Principal

dwellings


Buy-to-let

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Rubric

www.ecb.europa.eu

Assets of branches from foreign banking groups(as share of GDP)


Institutional coverage

Source: EBA, Fahr and Żochowski (2015) “A framework for analyzing and assessing

cross-border spillovers from macroprudential policies, ECB Financial Stability Review”,May.

Note: Based on 2013 transparency exercise with EEA counterparties

• Borrower-based instruments mosteffective when applied by activity

• Institution-based applications are

prone to leakages

• Cross-border leakages through branches;

these require reciprocity.But non-EU branches not covered

• Cross-sector leakages to non-banks call

for applying measures also to non-banks.

• Risks of leakages are likely to be dynamic

Account needs to be taken of the fact thatfinancial systems evolve as new regulations are

introduced.

Assets of foreign

branches / GDP

12


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Rubric

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Domestic banks

Subsidiaries

Branches

Non-banks

Legal constraint

Binding



explain)

Credit reference

Total debt

Individual loan


Market price


Transaction value

Asset use

Principal

dwellings


Buy-to-let

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Rubric

www.ecb.europa.eu

Implementation trade-offs: Credit referenceInstitutional and data requirements

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Individual loan Total debt of a borrower

• Role of external appraisers: exact asset

valuation for LTV

• Time-varying LTV limits: stress-tests onvaluation and speed of repayment

• Need for central credit registry: total

debt across all outstanding loans

• Time-varying DSTI limits: stress-testson interest rate and employment status

LTV and LTI limits DTI and DSTI limits

• Definition of eligible income and its verification procedures should be required

• Data comparability at European levelHousehold-Finance and Consumption Survey (HFCS)

Analytical Credit Data Sets (AnaCredit): consistent credit registers across the EU

• Improved data coverage for shadow banking activity

Data improvements


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Rubric

www.ecb.europa.eu

Complementarities and interactions amonginstruments to restrict credit flows

Collateral-based limits (e.g. LTV) Income-based limits (e.g. DSTI)

Effectiveness Lower LGD, PD (lower leverage) Lower PD

Tightness

Sensitive to asset prices:

Aggregate credi t less constrained

in boom periods

Sensitive to interest rate changes:

Use DSTI with stress-tests on

interest rate

Circumvention by uncollateralized loans by lengthening loan maturity

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Joint activation of col lateral- and income-based limits

with loan maturity restrictions

Observed

common

practice


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Rubric

www.ecb.europa.eu

Borrower-based measures activated in Northern & CE European countries.

LTV and DSTI limits often activated jointly.

EU experience: measures currently in force

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Source: FSC note “Macro-prudential Quantitative Restrictions on Private Credit Flows - the EU experience” (March 2015)

Note: LTV / DSTI limits refer to domestic currency denominated loans for principal dwelling houses/permanent residence of non-first time home buyers without any(state or other) guarantee. Comparability of LTV limits is hampered because of different asset valuations across countries. DSTI limit is for debt servicing cost over

monthly net income for households at or below average income values.

Loan-to-value limit s in th e EU

LTV 100%

Not available

Income-based limits in th e EU

DSTI 40%

Internal DSTI limits

LTI limits

Not available

Loan-to-value limi ts Income-based limi ts



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Rubric

www.ecb.europa.eu

Complementarities of borrower-based instruments

LTV limits(depending on loan type)

Income-based limits Max. maturity restriction

S

S

M

Lithuania 85% 2011: DSTI 40%

(2015: w/ interest rate sensit ivity)

2011: 40 years

2015: 30 years

Estonia 85%, 90% DSTI: 50% 30 years

Ireland 70%, 80%, 90% LTI: 3.5

Cyprus 70%, 80% DSTI: 35%

Latvia 95% Internal DSTI limits

Netherlands106%

(1pp per year until 90% in 2028)DSTI: 10-38%

Slovakia 90%, 100% Internal DSTI limits(max. 100%)

30 years

N o n – S

S

M

Hungary 30% - 80% Payment-to-Income: 10-60%

Poland 75% - 90%Internal DTI limits

(40-50%)

Romania 60% - 85% Internal DTI limits

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LTV and DSTI/LTI activated or adjusted jointly, sometimes with maturity cap


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Rubric

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2

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Considerations for implementation: Details matter

Concluding remarks



Overview





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Rubric

www.ecb.europa.eu

3. Concluding remarks

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Borrower-based measures more effective to curb credit cycle

Countering leakages, accounting for financial innovation

Effective pol icy requires granular and consistent data

Capital-based measures mainly enhance resilience: complementary

role of capital- and borrower-based measures

Instrument leakage: Combine LTV, DSTI and loan maturity caps

Institution leakage: Increase coverage (reciprocity / activity-

based application), recognizing potential for financial innovation.

• Credit registry: Analytical Credit Data Sets

• Household-Finance and Consumption Survey (HFCS)

• Data on shadow banking entities and their activities


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• Committee on the Global Financial System (2012), “Operationalising theSelection and Application of Macro-Prudential Instruments”, December.

• Basel Committee on Banking Supervision (2010), “An assessment of the long-

term economic impact of stronger capital and liquidity requirements”, August.

• Claessens, S., S. R. Ghosh and R. Mihet (2014), “Macro-prudential Policies to

Mitigate Financial System Vulnerabilities”, IMF Working Paper 14/155, August.

• Fahr, S. and D. Żochowski (2015), “A framework for analyzing and assessing

cross-border spillovers from macroprudential policies, ECB Financial Stability

Review”, May.

• Kuttner, K. N. and I. Shim (2013), “Can Non-interest Rate Policies Stabilise

Housing Markets? Evidence from a Panel of 57 Economies”, BIS Working Paper

No 433.

20

References

ecb credit flow restrictions: implementation and coordination issues

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