Public credit registries as a tool for bank regulation and supervision

This paper is about the importance of the information in Public Credit Registries (PCRs) for supporting and improving banking sector regulation and supervision, particularly in the light of the new approach embodied in Basel III. Against the backdrop of the financial crisis and the existence of information data gaps, the importance of complete, accurate and timely credit information in the financial system is evident. Both in normal times and during crises, authorities need a device that allows them to look at the universe of credits in a detailed and readily way. And more importantly, they need to develop tools that exploit as much as possible the information therein contained. PCR databases contain individual credit information on borrowers and their credits which makes it possible to implement advanced techniques that measure banks'credit risk exposure. It allows optimizing the prudential regulation ensuring that provisioning and capital requirements are properly calibrated to cover expected and unexpected losses respectively. It also permits validating banks'internal rating systems, performing stress tests and informing macroprudential surveillance. In this respect, it is envisioned that the existence of a PCR will be a key factor to enhance the supervision and regulation of the financial system. Furthermore, the extent, accuracy and availability of the information collected by the authorities will determine the usefulness of the PCR as part of their toolkit to monitor the potential vulnerabilities not only on a microprudential level, but also on a macroprudential one.Banks&Banking Reform,Access to Finance,Financial Intermediation,Debt Markets,Bankruptcy and Resolution of Financial Distress

RISK AND PROFITABILITY IN BANKING SECTOR OF NEW MEMBERS STATES AND CANDIDATE COUNTRIES

With the recent accession of the new member states to the European Union, there is clearly a need for detailed analysis of their banking system risk and profitability. Rapid credit growth has been a recent feature of financial development in all countries under review and thus constitutes the main financial stability challenge. In general, monetary authorities have responded to these challenges by tightening monetary conditions and prudential standards, with concrete measures also reflecting the different monetary and exchange rate regimes in the region.risk, profitability, candidate countries, new member’s states,

Lessons learned from the financial crisis for financial stability and banking supervision

The financial crisis that began in 2007 has revealed a need for a new supervisory and regulatory approach aimed at strengthening the system and containing the risk of future financial and economic disruptions. Three ingredients are needed to ensure financial stability: robust analysis, better regulation, and international cooperation. First, financial stability analysis must be improved to take full account of the different sources of systemic risk. Data coverage of the balance sheets of both non-bank financial institutions and the non-financial sectors should be increased. Moreover, to address the problems raised by the interconnections among financial institutions more granular and timely information on their exposures is needed. There must be further integration of macro- and micro-information and an upgrading of financial stability models. The second ingredient is the design of robust regulatory measures. Under the auspices of the G20 and the Financial Stability Board, the Basel Committee on Banking Supervision recently put forward substantial proposals on capital and liquidity. They will result in more robust capital base, lower leverage, less cyclical capital rules and better control of liquidity risk. Finally, the third ingredient is strong international cooperation. Ensuring more effective exchanges of information among supervisors in different jurisdictions and successful common actions is key in preserving financial integration, while avoiding negative cross-border spill-overs. Better resolution regimes are part of the efforts to ensure that the crisis of one institution does not impair the ability of the financial markets to provide essential services to the economy.financial crisis, international cooperation, macroprudential analysis, procyclicality, prudential regulation, stress tests

Measuring the performance and achievement of social objectives of development finance institutions

This paper develops and tests a proposed methodology that puts forward a new integrated method for evaluating the performance of development finance institutions. This methodology applies assessment criteria that take into account both the social objective that the development finance institution addresses and the subsidies it received in order to achieve such an objective. This methodology is applied to two pilot case studies-Banadesa (Honduras) and Banrural (Guatemala). The authors calculate the previously tested subsidy dependence index, which measures the degree of an institution's subsidy dependence. The paper develops and estimates a new measure-the output index- which indicates the level to which the institution fulfills the social objectives of the state. The analysis integrates the subsidy dependence index and the output index to assess the effectiveness associated with meeting the social objective. The findings suggest that the integration of the two indexes can constitute the basis of a meaningful evaluation framework for the performance of development finance institutions. This new methodology can also be a useful metric for policy makers who are seeking to decide on an optimal allocation of scarce funds for development finance institutions that pursue social goals and for management that seeks improved performance outcomes.,Access to Finance,Debt Markets,Banks&Banking Reform,Economic Theory&Research

Macroprudential policy and bank systemic risk

This paper investigates the effectiveness of macroprudential policy to contain the systemicrisk of European banks between 2000 and 2017. We use a new database (MaPPED) collected by experts at the ECB and national central banks with narrative informationon a broad range of instruments which are tracked over their life cycle. Using a dynamicpanel framework at a monthly frequency we assess the impact of macroprudential tools and their design on the banks’ systemic risk both in the short and the long run. We furthermore decompose the systemic risk measure in an individual bank risk component and a systemic linkage component. This is of particular interest because microprudential policy focuses on the tail risk of an individual bank while macroprudential policy targets systemic risk by addressing the interlinkages and common exposures across banks. In general, the announcements of macroprudential policy actions have a downward effect on bank systemic risk. On average, all banks benefit from macroprudential tools in terms oftheir individual risk. We find that credit growth tools and exposure limits exhibit the most pronounced downward effect on the individual risk component. However, we find evidence for a risk-shifting effect which is more pronounced for retail-oriented banks. The effects are heterogeneous across banks with respect to the systemic linkage component. Liquidity tools and measures aimed at increasing the resilience of banks decrease the systemic linkage of banks. Moreover, these tools appear to be most effective for distressed banks.Our results have implications for the optimal design of macroprudential instruments

On the Impact of Financial Inclusion on Financial Stability and Inequality: The Role of Macroprudential Policies

Financial Inclusion - access to financial products by households and firms - is one of the main albeit challenging priorities, both for Advanced Economies (AEs) as well as Emerging Markets (EMs), even more so for the latter. Financial inclusion facilitates consumption smoothing, lowers income inequality, enables risk diversification, and tends to positively affect economic growth. Financial stability is another rising priority among policy makers. This is evident in the re-emergence of macroprudential policies after the global financial crisis, minimizing systemic risk, particularly risks associated with rapid credit growth. However, there are significant policy tradeoffs that could exist between both financial inclusion and financial stability, with mixed evidence on the link between the two objectives. Given the importance of macroprudential policies as a toolbox to achieve financial stability, we examine the impact of macroprudential policies on financial inclusion - a potential cause for financial instability if not carefully implemented. Using panel regressions for 67 countries over the period 2000-2014, our results point to mixed effects of macroprudential policies. The usage (and tightening) of some tools, such as the debt-to-income ratio, appear to reduce financial inclusion whereas others, such as the required reserve ratio (RRR), increase it. Specifically, both institutional quality and financial development appear to increase the effectiveness of macroprudential policies on financial inclusion. Institutional quality helps macroprudential policies boost financial inclusion, with mixed effects as a result of financial development, but the results are more significant when we include either institutional quality or financial development. This leads us to believe that macroprudential policies conditional on better institutional quality and financial development improves financial inclusion. This has important policy implications for financial stability

The Trade Deficit and Banking Sector Results in Romania and Bulgaria

We tested for the significance of macroeconomic variables that condition non-performing loan ratios. Our estimates for Bulgaria and Romania support the hypothesis that the growth of available finance might harm banking performance and deteriorate NPL dynamics, most probably due to the overheating of economies. Since we confirmed that the dynamics of net exports of these economies deteriorated the NPL ratio, the weakening of growth in export-oriented industries could lead to economic contraction with a direct impact on the sustainability of banking-sector results in these countries. Large current account deficits are typical for emerging markets and do not pose a problem as long as they are caused by the importing of capital goods, and, if future export growth is strong enough to reimburse foreign debt. Structural dependence on external financing - which is in part a by-product of the effect of low levels of internal saving - have led to large current account deficits and financial instability.cyclicality, non-performing loans, systemic risk, asset quality, economic growth

Pro-cyclicality of capital regulation: is it a problem? How to fix it?

We use a macroeconomic euro area model with a bank sector to study the pro-cyclical effect of the capital regulation, focusing on the extra pro-cyclicality induced by Basel II over Basel I. Our results suggest that this incremental effect is modest. We also find that regulators could offset the extra pro-cyclicality by a countercyclical capital-requirements policy. Our results also suggest that banks may have incentives to accumulate countercyclical capital buffers, making this policy less relevant, but this finding is depends on the type of economic shock posited. We also survey different policy options for dealing with procyclicality and discuss the pros and cons of the measures available.Basel accord, pro-cyclicality

Beyond the crisis: the Basel Committee’s strategic response.

A variety of factors led or contributed to the current financial crisis, including loose monetary policy; excessive financial market liquidity, leverage and maturity mismatch; weak risk management and underwriting standards; and poor incentives and regulatory gaps in some important segments of the fi nancial system. These weaknesses were amplified by certain procyclical dynamics in regulatory, accounting and risk management frameworks. The banking sector was at the centre of the crisis as the market stress led to an acute re-concentration of on- and off-balance sheet risks in banks, putting pressure on capital buffers, liquidity and credit availability. The weaknesses in the banking sector amplified the transmission of shocks from the financial sector to the real economy.Strengthening the banking sector and how it is managed and regulated is critical to a return to both nearand long-term financial stability. The Basel Committee’s programme to promote a more robust supervisory and regulatory framework for the banking sector has five key components: strengthening the regulatory capital framework; increasing banks’ liquidity buffers; enhancing bank governance, risk management and supervision; improving market transparency; and deepening cross-border supervisory cooperation for internationally active banks. Taken together, and reinforced through a macroprudential approach to regulation and supervision, these efforts will promote a banking sector that is more resilient to future periods of economic and financial stress and help reduce systemic risk.