utilización de las centrales de información de riesgo en ...€¦ · profitability solvency....

FINANCIAL STABILITY DEPARTMENT

Utilización de las centrales de información de ries go en los informes de estabilidad financiera

Jesús Saurina Director. Financial Stability Department Banco de España

BANCO CENTRAL DE BOLIVIA/CEMLA SEMINAR La Paz

7 de Octubre de 2008

FINANCIAL STABILITY DEPARTMENT2

Caveat

The views expressed here are those of the author and not necessarily those of the Banco deEspaña or the Eurosystem


Outline

� Introduction

� Financial Stability Review

– Production

– Structure

– Goals

– Discussion

� Credit Register

� Description

� Utilization for FSR


Introduction- Mandate and concept of FS

� The Bank of Spain has been assigned, among its duti es, to promote the stability of the financial system.

– Law 13/1994 of autonomy of the Bank of Spain, Art. 7, 5b)

� There is no a single definition of financial stabil ity, but

– We have learned that• The effects of instability are severe for the real economy.• The financial stability requires, among other elements: appropriate institutional framework, appropriate macro policies, markets infrastructures, prudential regulation and supervision, etc.

– Financial stability connects the analysis of each particular institution (micro level) with the study of the behaviour of the whole financial system (macro level).


Introduction- Financial Stability Department

� The overall objective is to promote the financial s tability

� Produce the Financial Stability Report (FSR)

� Regular and specific notes for the decision bodies of the Bank of Spain– Regular: activity, doubtful asset ratios and profit and loss performance– Specific: for instance, impact of the new accounting regulation

� Policy design– Loan loss provisions and capital requirements

� Cost-benefit analysis of banking regulation

� Research– Empirical and regulatory policy orientation – Bank topics (risks, competition, regulation, financial integration)

� Participation in working groups dependent of intern ational institutions– BSC (BCE), RTF (BCBS),…


The Financial Stability Report


The Financial Stability Report: general principles

� Spain: the analysis is performed from the perspective of the stability of the Spanish financial system

� The Spanish financial system presents a high degree of bancarisation: the main target of the analysis are, therefore, the deposit institutions

� The assessment is considered in aggregate terms, but also takes into account the relative position of each institution through dispersion analysis

� Risk analysis is key– Shocks that are improbable, but possible, and of a high impact

� Once the risks are identified, resilience is analysed – Profitability– Solvency

� Analysis at consolidated level, but not only

� Importance of research


The Financial Stability Report: production

� The Directorate General (DG) of Regulation, through the Department of FS, is in charge of preparing much of the FSR, as w ell as its coordination

� Contributions are received from other General Direc torates

– Research Department• Macroeconomic outlook of Spain and the euro area

– International • International macroeconomic and financial markets outlook

– Supervision• Qualitative assessment of risks and resilience

– Operations• Markets liquidity and infrastructures

� In fact, there is an Editorial Committee

– Chairman: DG of Regulation– One member from each DG– Secretariat: Director of the FS Department


The Financial Stability Report: organization

Editorial Committee

First

Draft

Editorial Committee

Executive Commission

� The FSR is published twice a year: May and November . The process:

Governing Council


The Financial Stability Report: structure

� The FSR is organised in three chapters

– Chapter I: Macroeconomics risks and financial markets– Chapter II: Deposit institutions and other participants in financial markets

• Deposit institutions– Banking risks

– Profitability

– Solvency

• Other financial market participants– Insurance companies

– Other financial intermediaries

– Chapter III: Infrastructures


The Financial Stability Report: structureChapter I – Macroeconomic risks and financial market

� Information on spreads and stock markets

� Risk indices– Credit Default Swaps– Stock price volatility

� Macroeconomic information– Economic growth


The Financial Stability Report: structureChapter II – Deposit institutions and others

� Credit risk: it is the most important– Deposit institutions: credit policy

• Analysis of its consolidated balance sheet

• Credit growth (total, sectors, activities, …)• Doubtful assets and doubtful assets ratios

• Financial assets abroad

� Liquidity and market risks– Debt, stock and exchange rate markets. Markets infrastructures

– Institutions: liquidity gap, assets and liabilities by degree of liquidity

� Profitability

� Solvency


The Financial Stability Report: structureChapter II – Deposit institutions and others

� Other participants in financial markets

– Insurance companies

– Collective investment institutions– Private equity


The Financial Stability Report: structureChapter III – Infrastructures

� Market infrastructures– Clearing and settlement systems

� Regulatory infrastructures – Accounting regulations– Prudential regulation

– Monetary policy instruments

– Payment systems


The Financial Stability Report : goals

� Contribute to promote the financial stability

� Provide the Bank of Spain assessment on financial s tability– International comparison

� A vehicle to dialog with banks on regulatory matter s– Instrument to send messages to institutions

� Instrument to educate financial services customers– Simple and clear analysis

� Research


Discussion

� Ownership

– Cooperation

� Macro perspective versus micro bank level

– Financial Stability Report/Financial Stability Department

� To enhance financial stability is the main goal of a FSR

� Role of research


The Spanish Credit Register (CIR)


Credit Register information

� Low threshold: 6.000 euros

� Comprehensive coverage: all credit institutions

� Population of loans to firms and mortgages

� Information about default, collateral, maturity, instrument, amount, industry, province

� No information on interest rates


Use of Credit Register

� Direct use

� Main purpose of Spanish Credit Register (CIR)

� Support inspectors/examiners work

� Extract information from CIR

� Sampling for planning visits

� Monitoring of borrowers (exposures and quality)

� Indirect use

� Financial stability analysis/regulatory policy/research

� All the three filter into the Financial Stability Report


Financial stability usage

� Analysis of credit risk

� Credit lines

� Collateral

� Relationship lending

� Lending cycle and risk taking

� Dynamic provisions

� Monetary policy and risk taking

� Impact assessment

� Procyclicality

� Mortgages

� Corporate loans

� Calibration of alternative proposals


NPL (long term perspective) / Vintages (short term)

0

1

2

3

4

5

6

7

8

9

1986 1993 2000 2007

FIRMS

HOUSEHOLDS

%

DOUBTFUL ASSETS RATIO.

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

0 2 4 6 8 10 12 14 16 18 20

1991

19921993

2005

20062007

%

DEFAULT RATE CURVES.INDIVIDUALS' MORTGAGES.

0

1

2

3

4

5

6

7

8

9

1986 1993 2000 2007

FIRMS

HOUSEHOLDS

%


0

1

2

3

4

5

6

7

8

9

1986 1993 2000 2007

FIRMS

HOUSEHOLDS

%


0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

0 2 4 6 8 10 12 14 16 18 20

1991

19921993

2005

20062007

%


0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

0 2 4 6 8 10 12 14 16 18 20

1991

19921993

2005

20062007

%



Stress testing

0 20,000 40 ,000 60 ,000 80 ,000

2006

2007

2007 S TRES S TES T

EL (2006)

EL (2007)

EL (2007)

STRESS

VaR (2006)

VaR (2007)VaR (2007)

STRESS

€m


Credit lines

� CIR contains information on amount drawn andundrawn

� Usage ratio = drawn / (drawn + undrawn)

� Jiménez, Lopez and Saurina (RFS 2009)


Credit lines

� Differences in the usage ratio depending on the qua lity of the firm

40

45

50

55

60

65

70

75

80

-5 -4 -3 -2 -1 0

Defaulted credit line. Median Non-defaulted credit line. Median

No. of years from default


Collateral

� Theory: collateral vs adverse selection and moral hazard

� Willingness to post collateral signals good credit quality

� Collateral posted increases incentives to repay the loan

� Empirical evidence: Jiménez, Salas and Saurina (JFE 2006)

� Collateral asked for riskier loans


Relationship lending� It is good for a bank AND a borrower to have a long term relationship

� Less of a capture and much more on a mutually produ ctive relationship

-60

-40

-20

0

20

40

60

80

J un-03 J un-04 J un-05 J un-06 J un-07 J un-08

NEW

LESS THAN 1 YEAR

FROM 1 TO 2 YEARS

MORE THAN 2 YEARS

MORE THAN 10 YEARS

TOTAL

%

A. YEAR ON YEAR RATE OF CHANGE IN CREDIT BY YEARS OF RETATIONSHIP WITH INSTITUTIONS

0

5

10

15

20

25

30

35

40

45

50

J un-03 J un-04 J un-05 J un-06 J un-07 J un-08

ONE

TWO

THREE OR FOUR

BETWEEN 5 AND 10

MORE THAN 10

TOTAL%

B. YEAR ON YEAR RATE OF CHANGE IN CREDIT BY NUMBERS OF BANKING RELATIONSHIPS.


Lending cycle and risk taking

� Banks’ lending mistakes are more prevalent during upturns

� Borrowers and lenders are overconfident about investment projects (financing NPV<0 projects)

� Banks’ over optimism implies lower credit policy standards

� During recessions, banks suddenly turn very conservative and tighten credit standards (well bey ond NPV>0)

� Lending cycle with impact on the real economy



� Jiménez and Saurina (IJCB, 2006)

� Relation between credit growth and problem loans at bank level?

� Evidence of a direct, although lagged, relationship between credit growth and credit risk (a rapid increase in loan portfolios is positively associated with an increase in non-performing loan ratios later on)

� Analysis of default probabilities of individual loa ns:

� Loans granted during boom periods have a higher PD than those granted during slow credit growth periods

� Impact of the cyclical position on collateral requi rements, loan by loan

� In boom periods collateral requirements are relaxed while the opposite happens during recessions



� There is (robust) evidence of looser credit standar ds during expansions

� Banking supervisors’ concerns are well rooted both i n theoretical and empirical grounds

� A prudential tool is needed to cope with the potent ial problems due to too rapid credit growth

� Dynamic provisions


Monetary policy and risk taking

� Do low interest rates encourage bank risk-taking, b ut at the same time reduce credit risk on outstanding loans?

� What is the impact of the stance and path of MP on credit risk?

� Duality of interest rate:

� On the one hand, low interest rates may create excessive risk-taking

� On the other hand, low interest rates may reduce the risk of outstanding bank credit

� Jiménez, Ongena, Peydró and Saurina (WP 2008) provide the first hard evidence on this dilemma



� We find that banks soften their lending standards w ith lower interest rates

� They lend more to borrowers with a bad credit history and with higher uncertainty

� More importantly, we also find evidence of the duali ty of interest rates:

� Credit risk increases with lower interest rates at loan origination

� But also increases as a result of higher rates during the life of the loan, i.e., conditioning on the loan being granted, lower rates reduce the credit risk of outstanding loans

� Our results, therefore, suggest that low rates enco urage risk-taking, reduce credit risk in the short-term but worsen it in the medium-term

� We find that risk-taking is not equal for all type o f banks

� Small banks and more liquid banks take on more extra risk than other banks when interest rates are lower



23

45

23

45

0.4

0.5

0.6

0.7

0.8

0.9

1

1.1

1.2

1.3

Policy rate until maturityPolicy rate prior to origination

Haz

ard

rate



� Bank risk-taking increases when rates prior to loan origination are low

� There is a completely different impact of lower int erest rates on the credit risk of new vs outstanding loans

� In the short-run lower interest rates reduce total credit risk of banks sincethe volume of outstanding loans is larger than the volume of new loans

� In the medium term, lower interest rates increase credit risk in the economy

� A period of low interest rates followed by a severe monetary contraction maximizes credit risk, as the already “hazardous” cohort of new loans gets exposed to higher interest rates as outstanding loans

� On the other hand, and asymmetrically, vertical declines in interest rates minimize total credit risk ceteris paribus


Impact assessment

� Impact of Basel II on lending to SMEs

� Hot topic for the BCBS some time ago

� Use Credit Register to assess the impact

� Sample PD converges to population PD

� Plug PD in Basel II formulas and obtain capital requirements

� Compare new requirements with old ones

� Saurina and Trucharte (JFSR 2004)


Impact assessment

0 1 2 3 4 5 6 7 8

1994 1995 1996 1997 1998 1999 2000 2001

Sales <€50 million Exposure >€1 million

Turnover >€50 million

Turnover <€50 million Exposure <€1 million

0 1 2 3 4 5 6 7 8 9

IRB

SA

Current system

SMEs (exp.>€1million)

Large firms

SMEs (exp.<€1million)


Procyclicality

� A model of PDs for mortgages using Credit Register information only

� Calculate PDs PIT and TTC

� Plug in the estimated PDs in Basel II curves

� Saurina and Trucharte (JFSR 2007)


Procyclicality-mortgages


Adjusting procyclicality

� Repullo, Saurina and Trucharte (G20 2009)

� Concern: bank capital regulation may amplify busine ss cycles

� In particular, contraction in loan supply in downtu rns due to

� Lower bank capital due to higher default rates

� Possibly higher capital requirements (Basel II)

� Basel II will make things worse

� Rationale for cyclical adjustment of cap. Requireme nts

� How should cyclical adjustment of Basel II be made?

� Two basic alternatives

� Smooth the inputs of the Basel II formula

� Through-the-cycle ratings

� Smooth the output (with point-in-time ratings)


Adjusting procyclicality

� Estimate model of probabilities of default (PDs)

� Data on Spanish firms’ loans for the period 1984-2007 from Credit Register

� Compute corresponding Basel II capital requirements

� Smooth cyclical behavior using Hodrick-Prescott (HP) filter

� Compare different smoothing procedures

� Using root mean square deviations from HP benchmarkRoot mean square deviations (RMSD) from HP benchmark

RMSD (%)

TTC ratings 0.45

GDP growth multiplier (α = 0.086) 0.36

Credit growth multiplier (α = 0.066) 0.60

Stock market multiplier (α = 0.017) 0.75

Autoregressive adjustment (δ = 0.30) 0.48


Procyclicality-corporates


Alternative adjustments- GDP


Conclusions� Main purpose of a Credit Register:

� To support inspectors/examiners work

� Micro-prudential approach

� However, plenty of scope to be used in other areas

� Financial stability: understanding bank lending

� Monitoring of credit risk, credit lines usage, role of collateral, lending standards, MP and risk taking

� Policy design

� Dynamic provisions, Basel II calibration, impact assessment

� Research

� Filter into Financial Stability Review

� Credit Registers are a key element of a macro-prudenti al approach


References

� Jiménez, G., Lopez, J.A., and Saurina, J. 2009. “Emp irical analysis of corporate credit lines”, forthcoming Review of Financial Studies.

� Jiménez, G., Salas Fumás, V. and Saurina, J., 2006. “ Determinants of Collateral”. Journal of Financial Economics, 81, 255-281.

� Jiménez, G and Saurina, J., 2006. "Credit Cycles, Cr edit Risk, and Prudential Regulation". International Journal of Central Banking, June, 65-98.

� Jiménez, G., Peydró, J.L., Ongena, S., Saurina, J. 200 8. “Hazardous times for monetary policy: What do twenty-three million b ank loans say about the effects of monetary policy on credit risk-takin g?” WP 0833 Banco deEspaña.

� Repullo, R. J. Saurina and C. Trucharte (2009): “Mitiga ting theProcyclicality of Basel II”, in Macroeconomic Stability and Financial regulation: Key Issues for the G20, edited by M. Dewatripont, X. Freixasand R. Portes. RBWC/CEPR


References

� Saurina, J. and Trucharte, C. 2004. “The Impact of B asel II on Lending to Small- and Medium-Sized Firms: A Regulatory Policy As sessment Based on Spanish Credit Register. Journal of Financial Services Research.Volume 26, Issue 2. Pp. 121-144.

� Saurina, J. and Trucharte, C. 2007. “An assessment o f Basel IIprocyclicality in mortgage portfolios. Journal of Financial Services Research; Volume 32, No. 1-2, 81-101.

� Saurina, J. (2009a): “Dynamic Provisioning. The exp erience of Spain.”Crisis Response. Public Policy for the Private Sect or. Note Number 7. July. The World Bank.

� Saurina, J. (2009b): “Countercyclical loan loss prov isions in Spain”. Depróxima publicaicón en Estabilidad Financiera.

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