Financial Stability Implications of Changing Global Finance: Policy Panel Global Finance in Transition May 7 and 8, 2013 İstanbul, Turkey
Outline 1 The Financial System 2 Weak Growth 3 4 5 Unprecedented Monetary Stimulus Withdrawing the Monetary Accommodation Final Remarks 2
Objectives of Reforms Reduce the probability and the impact of banks failures. Ending Too-big-to fail. Increase transparency in OTC Markets. Review perimeter of regulation and prevent regulatory arbitrage. Align incentives. 3
Main Reforms Increase quality and quantity of capital. Improve banks supervision and resolution. OTC standardization, central clearing reporting, LEI. Strengthen regulation of shadow banking system. Rating agencies, compensations practices, accounting standards. 4
2008 2009 2011 2013 Uneven progress in implementation of reforms and capital restoration Progress in implementation of the Basel Capital Framework Completed Pending Basel II Basel 2.5 Basel III 24 22 11 3 5 16 Price to book ratios 1/ Percent US Banks 2/ EU Banks 3/ 1.5 1.0 Total 27 27 27 0.5 0.0 Source: BIS, Report to G20 Finance Ministers and Central Bank Governors on monitoring implementation of Basel III regulatory reform. Position as of end-march 2013. Data as of April 2013. 1/ Weighted average of banks in region by assets. 2/ Bank of America, JP Morgan, Citigroup, Morgan Stanley and Wells Fargo. 3/ BNP Paribas, Credit Agricole, Societe Generale, Natixis, Deutsche, Commerzbank, Unicredit, Intesa, Santander, BBVA, ING, and Dexia. Source: Bloomberg. 5
National Initiatives beyond the International agreed Reforms Volcker Rule. Vickers. Liikanen Report. German and French Initiatives. Subsidiarisation. 6
Dichotomy between economic and legal reality Global Banks managed as an unique economic entity. Legal responsibilities remain within national borders. Difficult to implement single point of entry resolution strategies. 7
Unintended Consequences Home-bias. Liquidity in host EMEs. Uneven playing field in host-countries. Infrastructure financing. Balkanization. 8
After the world financial crisis there has been significant progress in improving the financial system. Risks: ❶ ❷ ❸ Uneven implementation. Coordination. Unintended consequences. 9
Outline 1 The Financial System 2 Weak Growth 3 4 5 Unprecedented Monetary Stimulus Withdrawing the Monetary Accommodation Final Remarks 10
1970 1971 1973 1974 1976 1977 1979 1980 1982 1983 1985 1986 1988 1989 1991 1992 1994 1995 1997 1998 2000 2001 2003 2004 2006 2007 2009 2013 US Reference Rates: 1970-2013 Percent 25 FED overnight 3 months 6 months 1 year 5 years 10 years 20 30 years 15 10 5 0 Source: Bloomberg. 11
2008 2009 2011 2013 2014 Central Banks' Balance Sheets As a Percent of GDP Federal Reserve European Central Bank Bank of Japan Forecast 70 60 50 Bank of England 40 30 20 10 0 Source: National Central Banks and Haver Analytics. 12
2006 2007 2008 2009 2011 2013 Libor-OIS Spread 3 day moving-average in basis points 400 US Eurozone 1/ 350 300 250 200 150 100 50 0 1/ Libor Eonia Source: Bloomberg. 13
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2011 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2011 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2011 2013 US: Household Debt As a percent of Disposable Personal Income 140 US: Household Debt As a percent of Net Worth 31 US: Composite-20 Case-Shiller Housing Price Index Index 2000=100, s.a. 250 130 120 28 25 200 110 22 19 150 100 16 100 90 13 80 10 50 Source: Federal Reserve. Source: Federal Reserve. s.a./ Seasonally adjusted. Source: Case-Shiller, S&P. 14
2007 2008 2009 2011 2013 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2011 Eurozone: Net Balance with the Eurosystem (Target2) Cumulative Flows, Billion Euros Eurozone: Unit Labor Costs Relative to Germany Index 2000 = 100 1000 150 Italy Spain 800 Greece Ireland 140 Germany 600 Italy 400 Portugal Spain 130 200 120 0 110-200 -400 100-600 90 Source: National Central Banks. Source: European Commission. 15
2005 2006 2007 2008 2009 2011 2013 2005 2006 2007 2008 2009 2011 2013 US: Credit of Financial Institutions to the Non Financial Private Sector Percent 25 20 15 10 5 0-5 -10-15 -20 Eurozone: Credit of Financial Institutions to the Non Financial Private Sector Percent 16 14 12 10 8 6 4 2 0-2 -25-4 Source: Federal Reserve. Source: ECB. 16
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2014 Global Growth Percent Forecast 10 8 6 4 2 0 US Eurozone Emerging Economies -2-4 -6 Source: International Monetary Fund. 17
1998 2000 2002 2004 2006 2008 2014 2016 Current Accounts As a Percent of GDP U.K., Portugal, Ireland, Greece, Spain and EM Rest of the World Germany and Japan Oil Exporting Countries China and Emerging Asia U.S. Discrepancy Forecast 7 6 5 4 3 2 1 0-1 -2-3 Source: International Monetary Fund, World Economic Outlook Database, April 2013. 18
2001 2002 2003 2003 2004 2005 2006 2007 2008 2008 2009 2011 2013 Multilateral Real Effective Exchange Rate Index 2001 = 100 China Brazil Euro area United States Japan Mexico Depreciation 200 180 160 140 120 100 80 60 Source: Bank of International Settlements, as of March 2013. 19
Weak growth has led to unprecedented monetary stimulus in advanced economies. Risks: ❶ ❷ ❸ Is it the appropiate tool? Prolonged stagnation. Unchartered waters. 20
Outline 1 The Financial System 2 Weak Growth 3 4 5 Unprecedented Monetary Stimulus Withdrawing the Monetary Accommodation Final Remarks 21
2005 2006 2007 2008 2009 2011 2013 US: Average Yield of Corporate Bonds Percent 27 Investment grade High yield 24 21 18 15 12 9 6 3 0 Source: Bloomberg. 22
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 Accumulated Capital Flows into Emerging Markets (Bonds) Billion USD Accumulated Capital Flows into Emerging Markets (Equity) Billion USD 2007 2008 2009 50 2007 2008 2009 100 2011 2013 40 30 2011 2013 80 60 20 40 20 10 0 0-20 -10-40 -20-60 Weeks Weeks Source: EPFR. Source: EPFR. 23
2008 2009 2011 2013 Nominal Exchange Rates Index January 1, 2008 = 100 170 Brazil Chile Colombia Korea Mexico Poland Depreciation against the USD 160 150 140 130 120 110 100 90 80 Source: Bloomberg. 24
The unprecedented monetary stimulus can have steep financial stability costs, some of which may not even be yet identified. Risks: ❶ ❷ ❸ ❹ Mispricing of risk. Dependence on low interest rates. Asset price bubbles. Risk concentration. 25
Outline 1 The Financial System 2 Weak Growth 3 4 5 Unprecedented Monetary Stimulus Withdrawing the Monetary Accommodation Final Remarks 26
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2011 2013 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2011 2013 Eurozone: Headline CPI Inflation Year over Year 5.0 US: Headline CPI and Personal Consumption Expenditures Inflation Year over year 7 4.0 CPI PCE 6 5 3.0 4 3 2.0 2 1 1.0 0 0.0-1 -2-1.0-3 Source: Eurostat. Source: BLS and BEA. 27
Withdrawing or gradually reverting the extraordinary monetary accommodation poses big challenges. Risks: ❶ ❷ ❸ Domestic costs. Externalities. Orderly vs. disorderly scenarios. 28
Outline 1 The Financial System 2 Weak Growth 3 4 5 Unprecedented Monetary Stimulus Withdrawing the Monetary Accommodation Final Remarks 29
Final Remarks ❶ The effort of international financial reform is designed to: Align incentives more effectively. Price risk efficiently. Make the global financial system more resilient. ❷ There are presently important risks to this effort: In an open, highly interconnected world, the system must be efficiently integrated. Fragmentation, balkanization. Theory of the second best issues. Unintended consequences for EMDEs. Unleveled playing field. 30
Final Remarks ❸ What role is the global financial system playing in the global economy s adjustment process, in light of very accommodative monetary policies? US has possibly made the most progress. Europe still in a difficult situation. Reform effort will possibly lead to higher interest rates. Monetary policy in this case is possibly [and understandably] working in opposite direction. Large probability of, again, mispricing of risk. ❹ Highly accommodative monetary policies should be part, in many cases, of the adjustment mechanism. Other policies. Huge flows to EMEs. Volatility. Asset price bubbles a distinct possibility. Macroeconomic management issues (Monetary, fiscal and macro prudential). For EMEs growth, potential problems could arise. Level playing field, balkanization, home bias, trade finance, project finance. 31
Final Remarks ❺ Global growth equilibrium seems to have slowed down. The global financial system should give sustainable support to growth or, at least, not hinder it and certainly, with a reduced probability of crises. However, in advanced economies there seems to be an important problem of sustained productivity growth. Monetary policy can t do it alone. ❻ Everybody should be preparing for an eventual increase in interest rates in the US. This scenario can certainly be a very complicated one, with or without the FED having to sell assets. ❼ Thank you. 32