macroprudential policies in koreamacroprudential policies in korea - toolkits and experiences tae...
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Macroprudential Policies in Korea
- Toolkits and Experiences
Tae Soo Kang
Bank of Korea
Disclaimer
This presentation represents the views of the author and not
necessarily those of the BOK or BOK policy.
Paris Europlace Financial Forum
New York, April 14, 2014
Contents
Ⅰ. Monitoring and Measuring Macroprudential Conditions
Ⅱ. Macroprudential Toolkits
� LTV, DTI Caps
� FX-related
� Loan to Deposit Cap
Ⅲ. Ongoing Discussions
2/25
I. Monitoring and Measuring Macroprudential Conditions
� 「Financial stability」 : New mandate to the BOK(Bank of Korea Act amendments (Dec. 2011))
� BOK concerns with macroprudential aspects
� A framework for monitoring and measuring macroprudential conditions
3/25
Background
Financial Stability Report
Systemic Risk Assessment Model for Macroprudential Policy (SAMP)
1
2
I- Financial Stability Report
① Analyze and evaluate the potential systemic risk
② Provide early warning of risk
③ Suggest policy alternatives
� Published twice a year, and submitted to the National Assembly
� FSR attempts to …
4/25
1
� Feedback mechanism with domestic and overseas advisor groups
5/25
� Forthcoming FSR (April 2014) identifies five key risks
� To help identify the potential risk factors, BOK conducts Survey of financial
market participants (90 experts) twice a year
① Tapering off of US quantitative easing (77%)
② Slowdowns in growth of China (72%)
③ Household debt problem (70%)
④ Financial instability in emerging market countries (57%)
⑤ Increase in corporate credit risk (41%)
Why
a Model
Needed?
BOK has developed its own systemic risk assessment model
Cannot manage what you cannot measure
InterconnectednessProcyclicality
Sources for Systemic Risk
2
� Examine resilience of financial system (macro stress test)
� Measure individual banks’ contributions to systemic risk (D-SIBs)
I- SAMP
Tail risks unobservable
⇒ For the 2013 FSAP for Korea, SAMP was used to conduct
macro stress test
6/25
Macro
shocks
1st round
loss
2nd round losses due
to default contagion
2nd round losses due
to liquidity contagion
⑤ Multi-period module
• Dynamic update of banks’ B/S
④Funding liquidity contagion module
• Estimation of funding costs and
deleveraging/liquidity withdrawals
• Contagious defaults due to liquidity
withdrawals
① Macro-risk factor module
• Generation of macro-economic
scenarios
③ Default contagion module
• Estimation of 2nd round losses due
to fire sales and credit crunch
• Contagious defaults due to
interbank loan losses
② Bank profit and loss module
• Calculation of bank profits and
losses based on macro scenarios
⑥Systemic riskmeasurement module
• Systemic risk indicators
- Value at Risk
- Expected shortfall
- Probability of systemic crisis
1st & 2nd round
losses
Chart: SAMP Structure
7/25
8/25
Ⅱ. Macroprudential Toolkits
1 LTV, DTI Caps
FX-related
Loan to Deposit Cap
2
3
9/25
II- LTV, DTI Caps
Background
� Real estate in total assets : Korea 73.3% (March 2013)
� Housing booms in early and mid 2000s fueled by rapid increases in home mortgage lending by banks
Household Loans
1
Housing Booms and Bank Lending
Housing price
LTV Cap [September 2002]
� LTV has been adjusted a total of 9 times
(6 times for tightening and 3 times for relaxing)
� Limitation : Housing price → Collateral value
→ Affordable additional borrowing
→ Procyclicality amplified
10/25
DTI Cap [August 2005]
11/25
� Curbs possible procyclical behaviour resulting from LTV Cap
� Puts limit on ratio of annual debt repayment amount to debtor’s annual income
� DTI ratio =
������ �������� ������� ���
��������������
������ ������× 100
� DTI has been adjusted a total of 8 times
(6 times for tightening and 2 times for relaxing)
① Procyclical behavior could be reinforced
Unintended Consequence : LTV Cap
� Boom phase: Mortgage collateral → Affordable additional borrowing
→ Countercyclical?
� Downturn phase: LTV moves above threshold (violation of Cap)
→ Pressure on loan recovery → Housing price (fire sales)
→ Procyclicality amplified
Boom
LTV regulation : Procyclicality worsening
12/25
LTV regulation : Countercyclical ?
Downturn
Housing Price Cycle and the Role of LTV Cap
② Caused Funding Liquidity Risk
13/25
Unintended Consequence : DTI Cap
� Average maturity of mortgage loans : 5.4 years (2004) → 11.3 years (2013)
� Banks’ funding maturity has not changed greatly(Composition of banks’ funding (2013) : Deposit 67%, Wholesale funding 17%, Borrowing 16%)
Mortgage loan maturities
DTI ratio =
������� ����� ����
+ ��������
����� �����DTI ratio =
������� ����� ����
+ ��������
����� �����
� DTI caps designed in favor of
longer maturity
Pre- and Post-crisis Capital flows
14/25
II- FX-related Toolkits
Background
2
Capital Flow Volatility
� Capital flows to Korea : Volatile and procyclical
� About one half of total bank inflows during two-year period prior to Lehman Crisis flowed out within five months after it
‘06.1 ~
‘08.8
‘08.9 ~
‘09.3
Equity -683.8 -65.7
Bond 516.4 -108.5
Bank borrowing 1,084.9 -571.5
(Short-term) (998.5) (-573.8)
(100 million dollars)
Capital inflows to Korea, and GDP Growth
Background
Notes: Currency mismatches = foreign liabilities – foreign assets
Maturity mismatches = short-term foreign liabilities – short-term foreign assets
� A sharp increase in mismatch of short-term external debt through foreign
bank branches drives systemic risk
Domestic Banks Foreign Bank Branches
Currency and Maturity Mismatches
15/25
FXMarket
Pull factors
MajorShip builders
Push factorsForeign investorsForeign financial
institutions
(1) Leverage caps on banks’ FXDerivatives positions
(2) Macroprudential Stability Levy on bank’s non-core FX liabilities
� Volatility and mismatches in FX market can be understood in terms of both pull and push factors
� Pull factor Swollen hedging demand from major ship-builders amid
strong market expectations of currency appreciation
� Push factor Capital inflows resumed from second half of 2009 on back
of ample global liquidity
16/25
S-T External
Debt
(1) Leverage caps [October 2010]
� Aimed at curbing banks’ short-term external debt
Selling FX Forward
Buying $ for hedging
S-T $ Borrowing
Ship
Builders
Domestic
Banks
Foreign
Branches
Foreign
Bank
Branches
Overseas
Banks
� Caps on banks’ FX derivatives positions : 150 % of equity capital for
foreign bank branches, 30 % for domestic banks
17/25
� Aimed at curbing excessive increase in bank’s non-core liabilities
� Lower levies applied to longer-maturity liabilities
Macroprudential Stability Levy
(2) Macroprudential Stability Levy [August 2011]
Bank borrowing and Business cycle
18/25
� Leverage caps have contributed to reductions in currency and maturity mismatches
Maturity Composition of External Debt
(Foreign bank branches)
Note : 1) Black and green vertical lines refer to the dates of the introduction of the Leverage Caps and the
Macroprudential Stability Levy, respectively.
(Domestic banks)
Effects of Leverage Caps
0
20
40
60
80
100
2009Q1 2010Q1 2011Q1 2012Q1 2013Q1
Short term Long term(%)
0
20
40
60
80
100
2009Q1 2010Q1 2011Q1 2012Q1 2013Q1
Short term Long term(%)
19/25
� MSL has reduced arbitrage margin and raised FX funding costs
� Total levy collected estimated to be as large as 12 % of net profits for foreign bank branches (domestic banks : less than 1 %)
Note : 1) Interest differential (3M)-Swap rate (3M)
Arbitrage Transaction Incentives1)
(Foreign bank branches)Ratios of Levy to Net Profits
(As of end-2012)
Note : 1) Estimated ratios
Effects of MSL
0.7
12.4
0
2
4
6
8
10
12
14
Domestic banks Foreign bank branches
(%)
20/25
II- Loan-to-Deposit Cap [December 2009]
Background
3
Textbook CaseReality
(Boom period)
Funding
Lending
Lending opportunity
S-T Funding through
wholesale finance
Lending expansion based on
wholesale funding
� Procyclicality
� Interconnectedness
21/25
Loan-to-deposit ratio = KRW-denominated Loans
KRW-denominated Deposits�
≤ ���%
⇒ With LTD ratio limited to within 100%, banks are forced to reduce
reliance on wholesale funding
Wholesale funding
22/25
Loan-to-Deposit ratio
Effects of LTD Cap
� Reducing procylicality of bank lending behavior and
interconnectedness among financial institutions
23/25
III. Ongoing Discussions
24/25
� The institutional framework for macroprudential policy
� US type (FSOC) vs. UK type (BOE)
� The recent recommendation by the IMF is noteworthy, that the
establishment of a financial stability committee is necessary and that
central bank should play a key role on it
� Macroprudential vs. Capital Flow Management
� Potential conflicts with the Capital Liberalisation
25/25