Countercyclical capital requirement reductions, state dependence and macroeconomic outcomes

We use bank-, loan- and firm-level data together with a quasi-natural experiment to estimate the impact of capital requirement reductions on bank lending and real economic outcomes. We find that capital requirement reductions increase lending both to households and firms at the bank- and loan-level, and that the increased lending to firms translates into higher capital investment at the firm-level. Furthermore, the transmission of lower capital requirements to the real economy has a "double state-dependence". The first state-dependence relates to the characteristics of banks. Specifically, the transmission of lower capital requirements to lending is stronger for banks with lower capital ratios. We interpret this result as capital requirement reductions having a larger effect when they are more binding. The second state-dependence relates to the characteristics of the corporate sector. Specifically, the transmission of lower capital requirements to real economic outcomes - via bank lending - is weaker for firms with higher default risk or more leverage, suggesting that capital requirement reductions is most effective in terms of boosting real economic outcomes when firms are financially sound.publishedVersio

Countercyclical capital requirement reductions, state dependence and macroeconomic outcomes

We use bank-, loan- and firm-level data together with a quasi-natural experiment to estimate the impact of capital requirement reductions on bank lending and real economic outcomes. We find that capital requirement reductions increase lending both to households and firms at the bank- and loan-level, and that the increased lending to firms translates into higher capital investment at the firm-level. Furthermore, the transmission of lower capital requirements to the real economy has a "double state-dependence". The first state-dependence relates to the characteristics of banks. Specifically, the transmission of lower capital requirements to lending is stronger for banks with lower capital ratios. We interpret this result as capital requirement reductions having a larger effect when they are more binding. The second state-dependence relates to the characteristics of the corporate sector. Specifically, the transmission of lower capital requirements to real economic outcomes - via bank lending - is weaker for firms with higher default risk or more leverage, suggesting that capital requirement reductions is most effective in terms of boosting real economic outcomes when firms are financially sound

Financial imbalances and medium-term growth-at-risk in Norway

We examine how measures of financial imbalances affect macroeconomic tail risks over the medium-term in Norway and in other advanced economies. We use a broad set of financial indicators to capture cyclical systemic risk in the financial system and different quantile regression models to characterise their effects on the medium-term growth distribution. We find that an increase in financial indicators is associated with both a more adverse prediction for growth-at-risk (5th percentile of growth distribution) and higher downside risks to growth (difference between the median and the 5th percentile of growth distribution). Among financial indicators, credit growth has the most significant effect on downside risks to growth. We also find that downside risks are higher under a fixed exchange rate regime. Using our estimates, we focus on two policy-relevant applications. First, we summarise how financial indicators and growth-at-risk have evolved over time in Norway and how this framework can be used to quantify and communicate risks to the economic outlook. Second, we show how this framework can be used to calibrate the severity of cyclical stress test scenarios.publishedVersio

The countercyclical capital buffer: A cross-country overview of policy frameworks

The countercyclical capital buffer (CCyB) is a relatively new macroprudential tool, but the number of countries that have set a positive buffer level increased significantly over recent years. Furthermore, during the Covid-19 crisis, many countries released their countercyclical capital buffers, marking the first time that the CCyB was used widely in a downturn. In this paper, we provide a comprehensive and systematic overview of the international design of CCyB frameworks, covering a broad set of experiences from 33 countries. We have identified five key areas of focus for our analysis of CCyB frameworks: 1) institutional framework and the use of buffers; 2) objectives and policy over the financial cycle; 3) use of the Basel credit gap and Basel guide; 4) the information basis for setting the buffer; and 5) communication strategy. The frameworks outlined by designated authorities have already started to evolve and it is likely that this will continue as more experience is gained. This paper can be a useful input in that process, summarizing country practices in a comprehensive set of areas relevant for the CCyB policy

Estimates of banks' losses on loans to the corporate sector

Loans to non-financial enterprises are the main source of banks’ losses. Analyses of banks’ losses on corporate loans are therefore important in the assessment of financial stability. This paper presents Norges Bank’s framework for estimating losses on corporate loans built up from microdata for each firm and loan in each bank. Losses are estimated using a stepwise process. First, we estimate revenue developments at industry level and simulate the effect on firms’ future financial statements. This is then used to project firms’ bankruptcy probabilities using Norges Bank’s bankruptcy probability model (KOSMO). Finally, the bankruptcy probabilities are linked to data on banks’ exposures and credit losses are estimated. The estimates will be included in Norges Bank’s assessment of vulnerabilities and risks in the Norwegian banking system. In addition to being included in a general risk assessment, the framework can be used in stress testing and in the assessment of new areas of risk, such as climate risk.publishedVersio

Financial imbalances and medium-term growth-at-risk in Norway

We examine how measures of financial imbalances affect macroeconomic tail risks over the medium-term in Norway and in other advanced economies. We use a broad set of financial indicators to capture cyclical systemic risk in the financial system and different quantile regression models to characterise their effects on the medium-term growth distribution. We find that an increase in financial indicators is associated with both a more adverse prediction for growth-at-risk (5th percentile of growth distribution) and higher downside risks to growth (difference between the median and the 5th percentile of growth distribution). Among financial indicators, credit growth has the most significant effect on downside risks to growth. We also find that downside risks are higher under a fixed exchange rate regime. Using our estimates, we focus on two policy-relevant applications. First, we summarise how financial indicators and growth-at-risk have evolved over time in Norway and how this framework can be used to quantify and communicate risks to the economic outlook. Second, we show how this framework can be used to calibrate the severity of cyclical stress test scenarios

Policy uncertainty in Japan

We develop new economic policy uncertainty (EPU) indices for Japan from January 1987 onwards, building on Baker et al. (2016). Each index reflects the frequency of newspaper articles that contain certain terms pertaining to the economy, policy matters, and uncertainty. Our overall EPU index co-varies positively with implied volatilities for Japanese equities, exchange rates, and interest rates and with a survey-based measure of political uncertainty. It rises around contested national elections and major leadership transitions in Japan, during the Asian financial crisis and in reaction to the Lehman Brothers failure, U.S. debt downgrade in 2011, Brexit referendum, the deferral of a consumption tax hike, and the onset of the COVID-19 pandemic. Our uncertainty indices for fiscal, monetary, trade, and exchange rate policy co-vary positively but also display distinct dynamics. For example, our trade policy uncertainty (TPU) index rocketed upwards when the U.S. withdrew from the Trans-Pacific Partnership. VAR models imply that upward EPU innovations foreshadow deteriorations in Japan's macroeconomic performance, as reflected by impulse response functions for investment, employment, and output. Our study adds to evidence that credible policy plans and strong policy frameworks can favorably influence macroeconomic performance by reducing policy uncertainty

Estimates of banks' losses on loans to the corporate sector

Loans to non-financial enterprises are the main source of banks’ losses. Analyses of banks’ losses on corporate loans are therefore important in the assessment of financial stability. This paper presents Norges Bank’s framework for estimating losses on corporate loans built up from microdata for each firm and loan in each bank. Losses are estimated using a stepwise process. First, we estimate revenue developments at industry level and simulate the effect on firms’ future financial statements. This is then used to project firms’ bankruptcy probabilities using Norges Bank’s bankruptcy probability model (KOSMO). Finally, the bankruptcy probabilities are linked to data on banks’ exposures and credit losses are estimated. The estimates will be included in Norges Bank’s assessment of vulnerabilities and risks in the Norwegian banking system. In addition to being included in a general risk assessment, the framework can be used in stress testing and in the assessment of new areas of risk, such as climate risk

Anslag på bankenes tap på utlån til ikke-finansielle foretak

Lån til ikke-finansielle foretak er den største kilden til tap i bankene. Analyser av bankenes utlånstap til foretak er derfor viktig i vurderingen av finansiell stabilitet. I dette memoet presenterer vi Norges Banks rammeverk for å anslå tap på utlån til foretak bygd opp fra mikrodata for hvert enkelt foretak og lån i hver enkelt bank. Tapsanslagene bygger på en stegvis prosess. Først anslår vi utvikling i omsetning på næringsnivå og simulerer effekten på foretakenes regnskaper. Vi bruker deretter dette i fremskrivingen av foretakenes konkurssannsynligheter ved Norges Banks konkurssannsynlighetsmodell, KOSMO. Til slutt kobles konkurssannsynlighetene med informasjon om bankenes låneengasjementer og vi lager anslag for utlånstap. Anslagene vil inngå som en del av Norges Banks vurdering av sårbarhet og risiko i det norske banksystemet. I tillegg til at rammeverket vil inngå i en generell risikovurdering, kan det også kan brukes i arbeid med stresstester og i vurdering av nye risikoområder, som klimarisiko.publishedVersio

Anslag på bankenes tap på utlån til ikke-finansielle foretak

Lån til ikke-finansielle foretak er den største kilden til tap i bankene. Analyser av bankenes utlånstap til foretak er derfor viktig i vurderingen av finansiell stabilitet. I dette memoet presenterer vi Norges Banks rammeverk for å anslå tap på utlån til foretak bygd opp fra mikrodata for hvert enkelt foretak og lån i hver enkelt bank. Tapsanslagene bygger på en stegvis prosess. Først anslår vi utvikling i omsetning på næringsnivå og simulerer effekten på foretakenes regnskaper. Vi bruker deretter dette i fremskrivingen av foretakenes konkurssannsynligheter ved Norges Banks konkurssannsynlighetsmodell, KOSMO. Til slutt kobles konkurssannsynlighetene med informasjon om bankenes låneengasjementer og vi lager anslag for utlånstap. Anslagene vil inngå som en del av Norges Banks vurdering av sårbarhet og risiko i det norske banksystemet. I tillegg til at rammeverket vil inngå i en generell risikovurdering, kan det også kan brukes i arbeid med stresstester og i vurdering av nye risikoområder, som klimarisiko