macroprudential policies: a view from chile a… · 11-12-2015 next steps for macroprudential...

Macroprudential Policies: A View

from Chile

Claudio Raddatz Director, Financial Policy Division

Central Bank of Chile

The views and opinions expressed in this presentation do not necessarily

represent those of the Board of the Central Bank of Chile.

Chile has not been active in the use

of macroprudential tools

• We have been prudent about macroprudential policies

• Pragmatism and a healthy dose of skepticism in the face

of a rising policy framework

• Especially when your financial system has been in good

shape and you do not feel the compelling need to act

• Why did our financial system fared relatively well during

and after the crisis? Does it has any relation to what

today is understood as Macropru?

11-12-2015 Next steps for macroprudential policies 2

What has worked? Why has our

financial system been resilient?

• An internally consistent macro framework.

• Tight regulation and supervision of banks’ behavior and

activities through the cycle aimed at limiting complexity

and interconnections: policy decision to keep it simple.

• Adequate monitoring, evaluation, and communication of

systemic risks by an independent central bank. Signaling

matters.


Outline

• Banking regulation in Chile: simplicity by design

• Signaling by the central bank as a MP tool

• Why did we abandon CAM?


Outline





Chilean financial system is largely

dominated by banks

Source: Central Bank of Chile, SVS, SBIF and SP

39 41 39 41 45 41 40 42 43 43 42

37 37 38 38 32 35 38 35 36 36 37

10 10 11 13 11 13 13 12 12 12 1212 09 08 06 09 08 06 09 08 07 07

0

20

40

60

80

100

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Banks Insurance and Pension Funds

OFIs Central Bank

Public Financial Institutions Non-bank DTIs

Financial Institutions (percent of TFA, end 2014)


Chilean banking law clearly defines

and limits banks activities Allowed operations for banks in Chile (LGB)

Taking deposits, offering current accounts, making transfers and payments

Issuing senior bonds, mortgage linked bonds, guaranteed and unguaranteed loans

Issuing letters of credit, payment orders and guarantees of deposits

Issuing and trading commercial paper

Trading derivatives according to Central Bank regulations, and engaging in exchange rate

operations

Offering services of securities custody

Issuing and operating credit cards

Acting as investment agent and stock underwriter

Buying, keeping and selling securities and other assets in order to provide banking services;

Establishing on-shore subsidiaries and acquiring ownership stakes in foreign firms

Subsidiaries in Chile are allowed to act as securities agents; broker dealers; Mutual or investment

funds administrators; and insurance broker.

Subsidiaries are not allowed to buy shares unless it is stricly necessary for its functions (parent

banks are not allowed to buy or hold shares)


Crucially: no stocks, no commodities, limited set of derivatives

…and is relatively restrictive in terms

of risk weights (…and no IRB)

Bank Assets Basilea II LGB

Cash 0% 0%

Exposure to sovereign or central bank debt 0-100%10 o 100%(2)

Trade credits (1) 0-100% 100%

Commercial mortgages 100% 100%

Multilateral development banks 0% 100%

Banks (1) 20-100% 100%

Consumer 75% 100%

Home mortgages 35% o > 60%

90-day default portfolio (net of provisions) (1) 100% 100%

90-day default portfolio (net of provisions), mortgages 50-100% 100%

Risk weights in the standard Basel II model and in

Chile (General Banking Law)

(1) A weight of over 150% could be applied to: sovereign, state-owned or bank debt or corporate securities rated lower than B–; commercial credit rated lower than BB–; and mortgage loans in default with provisions of less than 20% of the debt. (2) Sovereign or Central Bank of Chile debt: 10%; remainder: 100%. Source: Central Bank of Chile, based on BIS and SBIF data.


As a result, the balance of banks is

relatively simple

Liabilities 2008 july 15

Demand deposits 13 17

Time deposits 47 39

Foreign liabilities 7 4

Foreign bonds 1 5

Debt securities 13 14

Derivatives 6 7

Other liabilities 7 6

Capital and reserves 8 8

Total 100 100

Liabilities of banking system(%)

Assets 2008 sept 15

Cash 4 5

Consumer loans 8 8

Commercial loans 42 41

Home mortgages 16 19

Foreign trade 8 6

Securities 12 9

Derivatives 7 7

Other assets 3 5

Total assets 100 100

Assets of banking system(%)


…and banks’ capital is good quality

CET1

0

5,000

10,000

15,000

20,000

25,000

ago.09 ago.10 ago.11 ago.12 ago.13 ago.14 ago.15

Mill

are

s

capital and reserves Tier II (1)

Regulatory capital of banking system (MMM $)

(1) Includes subordinated bonds, additional provisions, etc.. Source: Central Bank of Chile.


Our regulatory framework also includes

some macroprudential features

• Limits to related lending and interconnections

• Higher capital requirements for larger banks

• Limits to maximum LTVs in securitizable mortgages

– We will soon introduce provision rules that penalize loans in the

banking book with high LTVs

• Requirement to explicitly consider exposures of

borrowers to IR and FX risk and the state of the business

cycle in the determination of provisions.


Indeed during the crisis provisions

increased before NPLs .5

11

.52

2.5

1990m1 1995m1 2000m1 2005m1 2010m1 2015m1date

NPL coupon (% loans) Provision expenses (% loans)


Outline





The Central Bank has maintained for several

years a close monitoring of financial stability

issues

11-12-2015 Next steps for macroprudential policies

0

2

4

6

8

10

12

14

16

18

20

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terra

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Suecia

Austr

alia

Filip

inas

Irla

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Isla

nd

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Austr

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Number of years producing a FSR

14

State, vulnerabilities, and risks, shared

with participants and supervisors

• FSR is shared with supervisors before its public release

• Results of individual-bank stress tests are discussed with

bank supervisors

• FSR is widely disseminated among market participants

and presented to congress twice a year.

• We have occasionally issued specific warnings about

developments in some markets that have had bite even

before actual measures are taken…


Lending conditions in mortgages

tightened after CB warning

(*) The vertical dashed line indicates the central bank warnings about possible risks associated with the dynamics of the housing market. Source: Central Bank of Chile, based on data of SII.

Loan to Value (*) (percent)

40

50

60

70

80

90

100

11 II III IV 12 II III IV 13 II III IV 14 II

P10, P90 P75 Median


Outline





What do we know about the

effectiveness of CAM measures?

• Chile had a system of URR on certain forms of credit during 91-99.

• URR had little to no impact on the overall level of capital inflows.

• URR may have had some impact on the composition of inflows,

reducing ST and increasing LT

– Increase in non-taxed ST flows.

• It required a permanent tinkering with its conditions as loopholes

were discovered

– Changes in the base and holding period

• It had little to no impact on exchange rate or MP room

• Sand in the wheels? Maybe, but our experience suggests that

wheels keep moving fast unless you throw them a rock..


Macroprudential Policies: A View

from Chile

Claudio Raddatz Director, Financial Policy Division

Central Bank of Chile

The views and opinions expressed in this presentation do not necessarily

represent those of the Board of the Central Bank of Chile.

And our SB is mainly concentrated in

mutual funds Other Financial Institutions (OFIs)

(percent)

Source: Central Bank of Chile, SVS, SBIF and SuSeSo


0

20

40

60

80

100

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

MMFs MLTF

Finance Companies Social Credit Entities

Broker dealers Structured Finance Vehicles

Full FX liberalization has reduced firm’s

FX exposures


400

450

500

550

600

650

700

750

-20

-10

0

10

20

30

40

01 04 07 08 09 10 11 12 13 14 15II

Mismatch >= 10% of assets Mismatch <= -10% assets XR(CLP/USD)

Tails of FX mismatch distribution (% of corporate assets)

Short dollar

21

Development of local base of

institutional investors has helped us


-0.25

0.00

0.25

0.50

0.75

1.00

1.25

1.50

1.75

2.00

2.25

Indonesia

Colo

mbia

Philip

pin

es

Mexic

oBra

zil

Turk

ey

Denm

ark

Peru

R.

Kin

gdom

Hungary

Austr

iaFin

land

Germ

any

Sw

eden

I re

slo

N. Zela

nda

Hola

nda

Czech R

ep

Fra

ncia

Canadá

R.

Kore

aBelg

ium

Norw

ay

Austr

alia

Thailand

Bulg

ari

aPola

nd

Sin

gapore

Sp

ain

Mala

ysia

Isra

el

Italy

Chile

Sw

itzerl

and

Chin

aPort

ugal

Slo

venia

South

Afr

ica

Gre

ece

Taiw

an

Russia

Japan

P[75-25] Median

Low correlation of local and global LT rates

(rolling estimated pass-through, local vs US 10y bond)

22

Development of local base of

institutional investors has helped us


Pension funds have dampened movements in capital inflows from non-residents

(US$MM, PFAs 3m moving cumulative flows)

-12,000

-8,000

-4,000

0

4,000

8,000

12,000

ago-08 Oct-09 Dic-10 Feb-12 Abr-13 Jun-14 Ago-15

Domestic Foreign

23

macroprudential policies: a view from chile a… · 11-12-2015 next steps for macroprudential...

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