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MACROPRUDENTIAL POLICY IN CENTRAL AND EASTERN EUROPEAN COUNTRIES – IS THERE SOMETHING WE SHOULD LEARN? *

MACROPRUDENTIAL POLICY IN CENTRAL AND EASTERN EUROPEAN COUNTRIES – IS THERE SOMETHING WE SHOULD LEARN? * . Mirna Dumicic. *The views expressed in this paper are those of the author and do not necessarily reflect the views of the CNB. 2. Term “ macroprudential ” - first used in late 1970s

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MACROPRUDENTIAL POLICY IN CENTRAL AND EASTERN EUROPEAN COUNTRIES – IS THERE SOMETHING WE SHOULD LEARN? *

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  1. MACROPRUDENTIAL POLICY IN CENTRAL AND EASTERN EUROPEAN COUNTRIES – IS THERE SOMETHING WE SHOULD LEARN?*

    Mirna Dumicic *The views expressed in this paper are those of the author and do not necessarily reflect the views of the CNB.
  2. 2
  3. Term “macroprudential” - first used in late 1970s After 2008 - MPP became a “buzzword” Policymakers, academics, market participants started paying much more attention to: MP and countercyclical approach, systemic risks, buffers, policy coordination, communication..... Why MPP suddenly became a “hot topic” Galati, G. and Moessner, R., 2011 3
  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 preservingFS “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. Developed countries -intensified its use after 2008 Most frequently used MP instruments (Lim et al., 2011) – related to: credit activity liquidity capitalization Note: The y-axis shows the number of countries that use MP measures and instruments. Source: Sowerbutts (2014) Up to 2008 – MPP conducted primarily by EMs 6
  7. To get a deeper insight into the experiences of a relatively small group of countries that had used MPP To understand theunderlying reasons behind more intense MPP To evalute MPP effectiveness in mitigating systemic risks To underline the importance of better coordinationbetween 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 Why we should be interested in MPP in CEE?
  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 - 2001 - 2008Q3 = 13% - 47% Parent banks - till end 2007 - 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. 2000 - 2004 stock variables - end 2000 or 2004 Source: Lim et al. (2011), central banks, author’s calculations 10
  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) ofmore 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, q1 2000 – q3 2008 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
  21. Impact of MP Instruments on Total Loans to Corporate Sector
  22. Impact of MP Instruments on Total B Loans to Private Sector
  23. Private sector debt structure Corporate sectorpartially 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..... 24
  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. 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 What Should We Learn?Coordination between economic policies is a “must-have” 30
  31. Reduced pressure for necessary measures and reforms What Should We Learn?MPP might stimulate inaction bias within other policies 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!
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