Emergence in the Post-Crisis World: Increasing Role for - - PowerPoint PPT Presentation

Emergence in the Post-Crisis World: Increasing Role for Macroprudential Policies

CENTRAL BANK OF THE REPUBLIC OF TURKEY

1

October 2012, Istanbul

Mehmet Yörükolu Deputy Governor

The Need for Macroprudential Tools

Policy Rate

Interest Rate Curve for Financial Stability

Policy Rate

r

F > r P

Occurrence of r

F

Interest Rate Curve for Financial Stability

When the Macroprudential Tools are not Used When the Macroprudential Tools are used

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Interest Rate Curve for Price Stability (Taylor Rule)

Output Gap

Occurrence of Financial Risks r

P

Interest Rate Curve for Price Stability (Taylor Rule)

Increasing Need for Macroprudential Tools:

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• 1. Structural Reasons
• 2. Conjectural Reasons

Structural: Differences in Monetary Policy

• Convergence dynamics together with the

consumer basket asymmetries;

– Inflation in EMEs and developing countries has an upward pressure; – EME Central Banks are more concerned about inflation whereas advanced countries’ about inflation whereas advanced countries’ Central Banks are more concerned about growth. – In EMEs and developing economies,

• Tighter monetary policy
• Exchange rate appreciation
• Higher inflation targets

Growth Differential

Growth Rates (annual change)

4 6 8 10

5

Source: Bloomberg, CBRT

• 6
• 4
• 2

2 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Advanced Countries Emerging Countries

Inflation Differential

Core Inflation (annual change)

3 4 5

Advanced Countries Emerging Countries

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Source: Bloomberg, CBRT

1 2 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11

Interest Rate Differential

Policy Rates (percent)

6 8 10 12 Advanced Countries Emerging Countries

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Source: Central Banks, CBRT

2 4 6 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11

Conjectural: Quantitative Easing

TURKISH ECONOMY AS OF LATE 2010 TURKISH ECONOMY AS OF LATE 2010

Challenge: Macro Financial Risks

Monthly Imports and Exports (Seasonally Adjusted, Million USD) Main Sources of Current Account Deficit Finance (12-months Cumulative, Billion USD)

20 30 40 50 60 70

Portfolio and Short-Term* FDI and Long Term Current Account Deficit

12000 14000 16000 18000 20000

Exports (excluding gold) Imports

• 20
• 10

10 2007:01 2007:03 2007:05 2007:07 2007:09 2007:11 2008:01 2008:03 2008:05 2008:07 2008:09 2008:11 2009:01 2009:03 2009:05 2009:07 2009:09 2009:11 2010:01 2010:03 2010:05 2010:07 2010:09 2010:11 6000 8000 10000 12000 2007:01 2007:03 2007:05 2007:07 2007:09 2007:11 2008:01 2008:03 2008:05 2008:07 2008:09 2008:11 2009:01 2009:03 2009:05 2009:07 2009:09 2009:11 2010:01 2010:03 2010:05 2010:07 2010:09 2010:11

*Short-term capital movements are sum of banking and real sectors' short

term net credits and deposits in banks.

Source: CBRT. *Source: TurkStat.

Global imbalances combined with the post-crisis dynamics led to a divergence between external and domestic demand and a surge in short term capital inflows.

Current Account Deficit and Credit Growth

Credit Use and Current Account Deficit Current account deficit was driven by excess credit growth.

Real Exchange Rates

CPI and PPI Based Real Effective Exchange Rates

(2003=100)

Source: CBRT.

POLICY RESPONSE POLICY RESPONSE

Modifying the conventional IT framework

Enrich the set of policy instruments Supplementary objective: Financial Stability Supplementary objective: Financial Stability Rebalance the economy through a slowdown in credit growth and a realignment of the exchange rate

One-week repo rate

Instruments

Credit Policy

• Reserve

requirements

• Macro-prudential

tools

Liquidity Policy

• Interest rate

corridor

• Other liquidity

facilities

Multiple Instruments, Multiple Goals

Intermediate Target

• Exchange Rate
• Credit Growth

Instruments

PRICE STABILITY FINANCIAL STABILITY

Goals

Implementation of Monetary Policy

TL Required Reserve Ratios

(Percent)

CBRT Policy Rates

(Percent)

Source: CBRT. Source: CBRT.

TL TL and Other EM Currencies Against USD*

(11 November 2010=1)

Exchange Rates vis-à-vis Emerging Markets

cation

CBRT Measures

Average of EM countries: Brazil, Chile, Czech Republic, Hungary, Mexico, Poland, S. Africa, Indonesia, South Korea and Colombia. Latest observation: February 23, 2012. Source: CBRT and Bloomberg.

EM Average

Deprec Apprecaton

Consumer and Total Loans Growth

(y-o-y, percent, 13 weeks moving average)

Impact of the Policy Mix on Credit Growth

BRSA Measures RRR Hikes

Source: CBRT

Maturity Extension

Percentage Change in Turkish Lira Deposits by Maturity after Reserve Requirement Measures

100 150 200

(Percent)

Source: CBRT. Note: Period covers from November 2010 to September 2011.

• 100
• 50

50 Up to 1 month 1-3 months 3-6 months 6 months-1 year 1 year and more

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• 19

• A bank must hold its RR, in TL for its TL

liabilities and in U.S. dollar or euro for FX liabilities, in its accounts with the CBRT. Furthermore, up to 60 % of TL RR can be maintained in US dollar or euro and

Reserve Requirements Reserve Requirements

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up to 30 % of it can be maintained in stardard gold, by multiplying certain reserve option coefficients (ROC) for each tranches. RR for the precious metal deposit accounts, part of FX RR, can be maintained in standard gold.

TL TL

TL

• TL
• FX
• FX
• Gold

(max 30%)

Gold

(max 30%)

Foreign Currency Foreign Currency

FX FX

• precious
• precious

• The remuneration for both of RRs were terminated after Lehman crisis in
• rder to increase the effectiveness of the policy tool.

There is carry carry-over

• ver facility,

facility, which allows depository institutions to carry over 5 percent of excess or deficiency of their TL RR in a MP to be used or made up only in the following MP. Lastly, there is a non non-compliance compliance penalty penalty in effect. If a bank fails to comply

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Lastly, there is a non non-compliance compliance penalty penalty in effect. If a bank fails to comply with RR on time or with insufficient amounts, it is required to hold interest-free deposits in blocked accounts with the CBRT in the amount double the deficient portion of TL RR in term of TL, three-fold the deficient portion of the foreign currency RR in term of U.S. dollar, taking into account the periods of deficiency.

Definition of ROC

Reserve Option Coefficients (ROC), in effect since June 8, 2012, is used for calculating of the amount of FX or gold to be held for fullfiling TL RR

• bligations, if the bank wants to use the facility.

70% 80% 90% 100%

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0% 10% 20% 30% 40% 50% 60% 70%

16.09.11 30.09.11 28.10.11 30.03.12 08.06.12 22.06.12 06.07.12 20.07.12 17.08.12 31.08.12 28.09.12

TL FX Gold

Definition of ROC

ROC for Gold Facility ROC for FX Facility

23

Definition of ROC

ROC for FX Facility ROC for Gold Facility

24 Portin of TL RR that could be held in FX Portin of TL RR that could be held in gold

Preconditions for Effective ROC Mechanism

Relatively high level of RRRs Unremunerated RR

• 25

Substantial interest rate differential between domestic and foreign currencies

Utilization Ratios

60 70 30 35 90 95 100

FX Facility for TL RR Gold Facility for TL RR Gold Facility for FX RR Banks have adapted to the ROC policy quickly and 56,3/60 of FX facility and 25,4/30 of gold facility was used as of 14.09.2012.

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10 20 30 40 50 16.09.11 14.10.11 11.11.11 09.12.11 06.01.12 03.02.12 02.03.12 30.03.12 27.04.12 25.05.12 22.06.12 20.07.12 17.08.12 14.09.12 Limit FX Facility for TL RR 5 10 15 20 25 16.09.11 14.10.11 11.11.11 09.12.11 06.01.12 03.02.12 02.03.12 30.03.12 27.04.12 25.05.12 22.06.12 20.07.12 17.08.12 14.09.12 Limit Gold Facility for TL RR 50 55 60 65 70 75 80 85 90 16.09.11 14.10.11 11.11.11 09.12.11 06.01.12 03.02.12 02.03.12 30.03.12 27.04.12 25.05.12 22.06.12 20.07.12 17.08.12 14.09.12 Limit Gold Facility for FX RR

Conclusion

Reserve requirements system in Turkey

has been used very actively since Lehman crisis. is very comprehensive and flexible. contains many dimentions for lenghtening maturity, controlling credit

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growth and capital flows

ROC is a macro-prudential tool, contributing to financial stability. It plays a crutial role as a buffer and creates flexibility in times of high volatility in capital flows.

Emergence in the Post-Crisis World: Increasing role for Macroeconomic Policies

CENTRAL BANK OF THE REPUBLIC OF TURKEY

28

October 2012, Istanbul

Mehmet Yörükolu Deputy Governor