Measures of increasing financial intensity 300% 300% 300% 300% - - PowerPoint PPT Presentation

TOO MUCH DEBT, FINANCIAL SYSTEM STABILITY AND WIDER ECONOMIC IMPACTS

16th Annual Chicago Federal Reserve Bank International Banking Conference: Shadow Banking Within and Across National Borders Adair Turner Senior Fellow 7 November 2013

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Measures of increasing financial intensity

1929 1935 1941 1947 1953 1959 1971 1977 1983 1990 1996 2002 2007 10% 50% 100% 150% 200% 250% 300% 1929 1935 1941 1947 1953 1959 1965 1971 1977 1983 1990 1996 2002 2007 10% 50% 100% 150% 200% 250% 300% 1929 1935 1941 1947 1953 1959 1971 1977 1983 1990 1996 2002 2007 10% 50% 100% 150% 200% 250% 300% 1929 1935 1941 1947 1953 1959 1965 1971 1977 1983 1990 1996 2002 2007 10% 50% 100% 150% 200% 250% 300%

50 100 150 200 250 300 350 400 450 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 $Tr OTC interest rate contracts, notional amount outstanding 100 200 300 400 500 600 700 800 900 1,000 1,100 1977 1982 1987 1992 1997 2002 2007 $bn Global nominal GDP, $bn Global FX turnover, annual, $bn Global exports, $bn

US debt as a % of GDP by borrower type Growth of interest rate derivatives values, 1987-2009 FX Trading values & world GDP 1977-2007

$Trn

1

Global issuance of asset-backed securities

Household deposits and loans:

1964 – 2009

Source: Bank of England, Tables A4.3, A4.1

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009

% of GDP

Securitisations and loan transfers Deposits Loans

2

Measures of increasing financial intensity

US debt as a % of GDP by borrower type

3

1971 250% 1929 1935 1941 1947 1953 1959 1965 1977 1983 1990 1996 2002 2007 10% 50% 100% 150% 200% 300%

4

US financial sector assets

0%

50%

100% 150% 200% 250% 300% 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Banks MMMFs GSE Agency and GSE- Mortgage Pools Issuers of ABS Finance Companies Security Broker-Dealer Funding Corporation

NASDAQ index 1990 – 2003

Source: Datastream

1,000 2,000 3,000 4,000 5,000 6,000 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

5

Categories of credit

Loans to businesses / “entrepreneurs”

Loans to businesses / speculators / investors Loans to “impatient” / temporarily cash limited / poorer households Mortgage loans to households

… to finance real investment projects … to finance purchase of existing assets … to bring forward consumption … to finance residential houses

6

7

Categories of debt: UK, 2009

227 1235 243 232

Primarily productive investment Some productive investment and some leveraged asset play Mainly purchase of existing assets Pure life-cycle consumption smoothing Other corporate Commercial real estate Residential mortgage (including securitizations and loan transfers) Unsecured personal

£bn

Credit and asset price cycles

Expectation of future asset price increases Increased credit extended

Low credit losses: high bank profits

• Confidence reinforced
• Increased capital base

Increased asset prices Increased lender supply of credit Favourable assessments of credit risk Increased borrower demand for credit

8

9

Lending to UK households

Percentage changes on a year earlier

Secured Unsecured Households

Source: Bank of England “Trends in Lending”

• 5

5 10 15 20 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Households

Percentage changes on a year earlier

Unsecured Secured

Sectoral financial surpluses/deficits as % of GDP: Japan 1990 – 2012

Source: IMF, Bank of Japan Flow of Funds Accounts

• 15
• 10
• 5

5 10

PNFCs Government

%

10

11

Japanese government and corporate debt: 1990 – 2010

Source: BoJ Flow of Funds Accounts, IMF WEO database (April 2011), FSA calculations

% GDP 50 100 150 200 250 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 20010 Bank lending to non-financial corporates General Government debt

12

Shifting leverage: private and public debt-to-GDP

Source: ONS Note: PNFC = private, non-financial corporates; Public = central and local government Source: BEA Note: PNFC = private, non-financial businesses; Public = federal, state and local government

Source: ECB Note: PNFC = private, non-financial corporates; Public = central and local government

20 40 60 80 100 120 140 Q1 2002 Q1 2003 Q1 2004 Q1 2005 Q1 2006 Q1 2007 Q1 2008 Q1 2009 Q1 2010 Q1 2011 % GDP Household Public PNFCs

UK

20 40 60 80 100 120 Q1 2002 Q1 2003 Q1 2004 Q1 2005 Q1 2006 Q1 2007 Q1 2008 Q1 2009 Q1 2010 Q1 2011 % GDP Household Public PNFCs

US

20 40 60 80 100 120 140 160 Q1 2002 Q1 2003 Q1 2004 Q1 2005 Q1 2006 Q1 2007 Q1 2008 Q1 2009 Q1 2010 Q1 2011 % GDP Household Public PNFCs

Spain

13

Private credit to GDP and growth

Source: S. Cecchetti and E. Kharroubi, BIS Working Paper No. 381 "Reassessing the impact of finance and growth"

Credit and asset prices: with securitised credit and mark-to-market accounting

Decreased VAR

Increased credit extended

Increased asset prices – fewer defaults Decreased margin calls Increased trading Increased short- term liquidity Mark-to-market accounting and VAR based risk management

• Bank profit and capital
• Required bank capital
• Bonuses and animal spirits

Increased price of credit securities

14

15

Irrational exuberance in equity and debt markets

Source: Moody’s KMV, FSA Calculations

Financial firm CDS and share prices

Source: McCulley and Pozsar

Private and public leverage cycles: US

16

1915 1925 1935 1945 1955 1965 1975 1985 1995 2005 50 100 150 200 250 Financial Repression Housing bursts WWII ends Private debt as a % of NGDP Public and

China: total social finance to GDP

100 120 140 160 180 200 220 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 % of GDP

17

Non-financial private sector* credit

• utstanding, % GDP

50 100 150 200 Brazil China India Hungary Indonesia Korea Mexico Russia South Africa Turkey 2002 2007 2012

Source: BIS, Citi Research *Households + corporates

18

Leaning against credit cycles: monetary

• r macro-prudential levers?

19

Monetary policy – interest raises

• Gets into all the cracks
• Elasticity of response

variable by category of credit

Macro-Prudential levers

• Can address specific

credit categories

• Will stimulate

innovation to avoid

Pros Cons