USING MACROPRUDENTIAL MEASURES AND CAPITAL

FLOW MEASURES:

THE VALUE OF INTERNATIONAL COOPERATION

Presentation at the ONB4 November 2016Vienna

Disclaimer: the views expressed during the presentation may not represent the views of the OECD

1) Certain trade-off exists between growth and financial stability, that appears to be perpetuated through the financial market and capital account openness

2) Efforts to boost stability have resulted in the proliferation of macroprudential measures, some with restrictive effects (CFMs, CBMs)

3) These, however, have costs in terms of spillover effects

4) The OECD Code of Liberalisation of Capital Movements can provide a global cooperative platform for discussing and implementing least-restrictive macroprudential measures that are also CFMs

Outline

Minoiu and Reyes (2011) “A Network analysis of global banking: 1978-2009”

Countries represent nodes, while links between countries represent cross-border bank loans (BISlocational banking statistics, yearly). Thicker and darker coloured links indicate larger flows.

The world is more financially interconnected now…

3

Some OECD countries, 2007

Some OECD countries, 1980

Lower growth and lower fragility

Higher growth and lower fragility Higher growth and fragility

Lower growth and higher fragility

-0.50

-0.30

-0.10

0.10

0.30

0.50

-1.00 -0.80 -0.60 -0.40 -0.20 0.00 0.20 0.40 0.60 0.80 1.00

Gro

wth

(Y

axi

s)

Fragility (X axis)

FDI

Portfolio equity

Portfolio debt

Capital account

openness (overall)

Note: The X axis plots the estimated coefficient of a given policy variable on fragility, where fragility is defined as higher likelihood of financial crises (Currency, banking and twin crises). The Y axis plots the overall effect of a policy variable on growth. Source: OECD calculations in Caldera Sanchez and Gori (2016) “Can Reforms promoting growth increase financial fragility? An empirical assessment” 4

… and policy-makers are more aware of the trade-off between

financial stability and growth …

Growth benefits from

capital account

openness outweigh

crises risks

Economic fragility is

linked to portfolio debt

inflows

Financial markets

openness (banking crisis)

OECD work on economic resilience:

https://www.oecd.org/economy/growth/econ

omic-resilience.htm

… and may be acting towards increased use of measures with

prudential intent but also restrictive impact …

5

• Within the wider literature on the increase of financial fragmentation: Fernandez et al (2015): traditional residency control measures Chinn and Ito (2013): fall in financial openness index for EMEs Forbes, Fratzscher and Straub (2013): increase in capital controls and macro-prudential

measures among emerging markets Beck, Beirne, and others (2015): summarises sets of policy measures that contribute to

financial fragmentation (among them CBMs aimed at banks)

DomesticMPMs

Currency based measures

Residency based CFMs

Empirical results:• OECD (De Crescenzio et al, 2015) has built a new database highlighting the

proliferation of currency-based measures (CBMs) 49 countries (35 OECD and 14 non-OECD) between 2005-2013 Targeting measures that are bank regulations discriminating on the basis of the currency of

operation

Severity of likely restriction effects on flows

OECD only interested in these

Universe of measures

• Currency Based Measures (CBMs) have become a common policy tool in the post-crisis period, especially among EMEs

– 92% of CBMs implemented by EMEs in original dataset

– Tightening actions peaked in 2010

• >40% of CBMs target banks’ liabilities

• With the exception of China, only countries suffering from original sin used and tightened CBMs on banks’ FX liabilities.

6

-15

-10

-5

0

5

10

15

20

2005 2006 2007 2008 2009 2010 2011 2012 2013

Tightening adjustment Tightening new measure

Easing adjustment Easing new measure

… OECD has new evidence on the increased use of currency-

based measures …

7

In addition to traditional residency-based capital controls, a lot of measures that target flows based on thecurrency of operations have emerged under the mantle of macroprudential measures.

Targeting measures that are bank regulations discriminating on the basis of the currency of operation

OECD (2015) index of currency-based measures (CBMs) OECD (2015) index of CBMs targeting FX liabilities of banks

… among the emerging but also advanced economies …

8

0

2

4

6

8

10

12

14

16

18

2005q1 2006q1 2007q1 2008q1 2009q1 2010q1 2011q1 2012q1 2013q1

CESEE Countries

CB-CFM MPM

Source: OECD, Cerutti et al (2015)Note: Cumulative easing/ tightening of measures since 2005Q1. Data for 8 CESEE countries (CZ, HU, PL, SK, SI, HR, UA), MPM include DTI, LTV, various sectoral capital buffers and concentration and interbank exposure limits), CB-CFM are currency based measures that have capital flow management features.

-5

0

5

10

15

20

25

2005q1 2006q1 2007q1 2008q1 2009q1 2010q1 2011q1 2012q1 2013q1

OECD Countries (ex CESEE)

CB-CFM MPM

Source: OECD, Cerutti et al (2015)Note: Cumulative easing/ tightening of measures since 2005Q1. Data for 10 OECD countries (AU, AT, CA, CL, IL, IS, KR, MX, TR, UK), MPM include DTI, LTV, various sectoral capital buffers and concentration and interbank exposure limits), CB-CFM are currency based measures that have capital flow management features.

… CESEE countries have seen proliferation of MPMs, while

OECD countries - both MPMs and CBMs…

9

Source: OECD (De Crescenzio et al 2015), Warnock et al (2016), Cerutti et al (2015)

… with variation within the group, as some countries are

worried about currency mismatch …

-3

-2

-1

0

1

2

3

4

5

6

7

2005q1 2006q1 2007q1 2008q1 2009q1 2010q1 2011q1 2012q1 2013q1

POLAND

MPM_borrow MPM_other MPM_sectcapbuf

MPM_total CFMinf_eq CFMinf_bond

CFMinf_bank CFMinf_total CB-CFM

0

0.5

1

1.5

2

2.5

2005q1 2006q1 2007q1 2008q1 2009q1 2010q1 2011q1 2012q1 2013q1

HUNGARY

MPM_borrow MPM_other MPM_sectcapbuf

MPM_total CFMinf_eq CFMinf_bond

CFMinf_bank CFMinf_total CB-CFM

-1.2

-1

-0.8

-0.6

-0.4

-0.2

0

2005q1 2006q1 2007q1 2008q1 2009q1 2010q1 2011q1 2012q1 2013q1

CZECH REPUBLIC

MPM_borrow MPM_other MPM_sectcapbuf

MPM_total CFMinf_eq CFMinf_bond

CFMinf_bank CFMinf_total CB-CFM

-1.5

-1

-0.5

0

0.5

1

1.5

2

2.5

3

3.5

2005q1 2006q1 2007q1 2008q1 2009q1 2010q1 2011q1 2012q1 2013q1

ROMANIA

MPM_borrow MPM_other MPM_sectcapbuf

MPM_total CFMinf_eq CFMinf_bond

CFMinf_bank CFMinf_total CB-CFM

• Some studies point to the effectiveness of CBMs in addressing some financial stability issues but the overall picture is mixed:– CBMs seem to be effective in reducing the share of FX loans, but does not tame credit

growth, nor reducing the share of non core liabilities of banks (Fendoglu 2016)

– Claessens et al (2015) finds that limits on FX lending specifically reduce credit growth but only in EMEs and they increase house prices on the other hand

– Bruno and Shin (2013) suggest that CBMs reduce the sensitivity in EMEs of cross border lending to global credit cycles. But OECD research (Blundell Wignall et al 2015) questions the robustness of the results

– Undergoing OECD research on further understanding which specific tools work for which financial stability problem

• On the other hand, recent OECD evidence shows that CBMs do reduce:– Cross border banking flows (De Crescenzio et al, forthcoming)

– The amount of FX intervention needed by the Central Bank to resist an exchange rate volatility (Blundell Wignall et al 2015), consistent with the finding that countries use CB CFM and CFM more for exchange rate related reasons than macroprudential ones (Pandey et al 2016)

Important to have a clear understanding of the positive and negative effects on the growth/stability trade-off of each tool

… the effects of these measures is currently being studied…

• Besides, CFMs have important international spillovers

– Empirical evidence from various country and cross sectional studies (Forbes et al 2012; Lambert et al 2013, Giordani et al 2014, Ghosh et al 2014, Pasricha et al 2015, Beirne et al 2016)

– May “bubble thy neighbour”

– The resulting financial stability problems of the host country may feed back into international vulnerabilities

• Other countries may be induced to retaliate in imposing restrictions

• Restrictions to flows may limit access to finance for SMEs or those domestic enterprises with are credit-constraint in the first place

Need for a multilateral discussion and framework to coordinate on capital flow management

• Towards a transparent, accountable and efficient response to capital flow volatility

… with important possible repercussion to the domestic and

international economies

OECD Code of Liberalisation of Capital Movements can provide

guidance on the “least restrictive” use of CFMs / CBMs …

12

• History and coverage of the Code

o Functioning since 1961

o Open to non-OECD adherents since 2012

o Currently in a review mode, encouraged by the G20

• Liberalisation “North Star”

o Article 1: members subscribe to the general aim of eliminating between one

another restrictions on capital movements and invisible transactions

o Gradual liberalisation mindful of economic vulnerabilities

o Adherence with reservations is the norm

o Derogations are possible due to temporary and adverse economic

circumstances

o Transparency and accountability of a peer review process

o “collision avoidance” in its cooperative policy approach

… and is currently being reviewed to foster the global dialogue

on managing capital flows without undue restrictions

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Treatment of measures

equivalent to restrictions

under the Code

How to handle measures used with prudential

intent, as there isno broad

prudential carve-out in the

Code

Discussions on the potential need to

introduce permanent and

temporary restrictions to

respond to financial stability

concerns

Boost transparency

and accountability

in the Code and its governance

structure

Discussions currently held at the Task Force meetings

Terms of reference for the review

The review of the OECD Code is currently focused on two key issues:

• How much strengthening and how much flexibility does the Code need in order to support global liberalisation efforts?

• How are currency flow measures with macro-prudential intent to be considered under the Codes?

Instead of a conclusion