Polish Experience in Managing Systemic Risk in the Financial System in the Financial System Piotr Szpunar and Dobromił Serwa Financial System Department National Bank of Poland Istanbul, September 2012 National Bank of Poland ational Bank of Poland
Agenda • Dimensions of systemic risk management • Crisis management • Crisis prevention • Identification of risks 2 National Bank of Poland ational Bank of Poland
Managing Systemic Risk • Two dimensions of managing systemic risk Normal Crisis times times times times Crisis Crisis prevention managment 3 National Bank of Poland ational Bank of Poland
Agenda • Dimensions of systemic risk management • Crisis management • Crisis prevention • Identification of risks 4 National Bank of Poland ational Bank of Poland
„Confidence Package” • 2008 – true test • CP introduced in response to global market turmoil following Lehman Brothers collapse • Two main goals: � enabling banks to obtain funds in foreign currencies � enabling banks to obtain funds in PLN for periods longer than one day 5 National Bank of Poland ational Bank of Poland
Instruments of the „Confidence Package” • FX swap transactions (USD, EUR, CHF) • Liquidity-providing fine-tuning repo operations with a 3 and 6-month maturity • Introducing so-called netting of eligible collateral used in subsequent repo operations • Earlier redemption of the NBP’s 10-year bonds issued in 2002 • Lowering the required reserve rate from 3.5% to 3.0% 6 National Bank of Poland ational Bank of Poland
Effects of the „Confidence Package” • WIBOR 3M rates movements in line with policy rate 7.0 6.5 6.0 5.5 WIBOR 3M declined by declined by % 5.0 264 bp 4.5 4.0 Lehman Brothers 3.5 default 15.09.2008 3.0 01-09-2008 01-10-2008 01-11-2008 01-12-2008 01-01-2009 01-02-2009 01-03-2009 01-04-2009 01-05-2009 01-06-2009 01-07-2009 01-08-2009 01-09-2009 01-10-2009 01-11-2009 01-12-2009 01-01-2010 01-02-2010 01-03-2010 01-04-2010 01-05-2010 The reference rate was reduced by 250 bp WIBOR3M NBP reference rate 7 National Bank of Poland ational Bank of Poland
Effects of the „Confidence Package” • Higher confidence of banks due to NBP’s FX swap window • Reappearance of bilateral quotations on the interbank Reappearance of bilateral quotations on the interbank depo market for transactions longer than O/N • Redistribution of liquidity in the banking sector National Bank of Poland ational Bank of Poland
What else could be done? • Division of functions in the Safety Net INSTITUTION DEPOSIT MINISTRY OF CENTRAL SUPERVISORY INSURANCE AUTHORITY FINANCE BANK ROLE FUND • assistance • guarantees • guarantees • Lender of Last Resort • Lender of Last Resort programmes • rehabilitation CRISIS • state support • Outright buy of MANAGEMENT programmes • deposit Government bonds • nationalisation payout • oversight of the • authorisation payment systems • regulations and CRISIS • financial system • systemic risk recommendaions PREVENTION • regulations analyses reduction • inspections • contribution to • sanctions financial stability Financial Stability Committee 9 National Bank of Poland ational Bank of Poland
Agenda • Dimensions of systemic risk management • Crisis management • Crisis prevention • Identification of risks 10 10 National Bank of Poland ational Bank of Poland
Main risk prior to the crisis • Strong growth of FX mortgage loans for households • Most borrowers were not hedged against exchange rate fluctuations • Potential risks for financial stability: • Increased credit risk due to households sensitivity to depreciation • Volatility of collateral value (LtV) • Funding and liquidity risk for banks • Volatility of capital requirements • Distorted transmission of monetary policy impulses • Contribution to credit booms and price bubbles 11 11 National Bank of Poland ational Bank of Poland
Risk minimization towards FX Lending • Recommendations for banks introduced by the Polish Financial Supervision Authority • Recommendation S – introduced in 2006, amended in 2008 and 2011 • Recommendation T – introduced in 2010 Recommendation T – introduced in 2010 • Increased risk weights for FX mortgages (2012) • NBP’s stance that FX housing loans should be a niche product, offered only to hedged borrowers • Reccomendations issued in Financial Stability Reports (form of moral suasion) 12 12 National Bank of Poland ational Bank of Poland
Recommendation Recommendation Recommendation T Recommendation S SII S** Date of 2006 2008 2010 2011 issuance All types of mortgage exposures All types of mortgage All retail exposures All types of exposures Subject exposures financing real estate Measures • Higher creditworthiness • All measures set by • Assessment of the borrowers’ • Unless otherwise stated, requirement in case of unhedged Recommendation S creditworthiness on the basis of the credit risk borrowers – creditworthiness have been stress-test results – banks should assessment in case of calculates under assumption that confirmed . calculate the maximum ratio of retail exposures foreign interest rate is at least • Repayment of FX borrowers’ debt-repayment burden financing real estate equal to the domestic interest rate loans in foreign to income by taking into account should follow and the loan value is 20% higher currency – banks 400 bps increase of interest rates guidelines set by than the contractual one. should enable their (floating interest rate loans) and Recommendation T. • Stress-testing the FX exposures – borrowers to change 30% domestic currency • Maximum maturity for at least once a year banks should the FX loan depreciation (FX loans). assessment of assess the credit risk posed by contracts in a way • Maximum debt-repayment burden creditworthiness – in unhedged borrowers under unhedged borrowers under that allows that allows – the debt-repayment burden – the debt-repayment burden case of exposures with case of exposures with assumption of 30% depreciation repayment of cannot exceed 50% of borrowers’ maturity over 25 years, of domestic currency within a 12 installments direct in average net income (net income calculation of months horizon. foreign currency. below the level of average salary) borrowers’ • Stress - testing for changes in and 65% (other borrowers). creditworthiness should interest rates – in case of floating • Additional buffer in case of FX be based on maturity of interest rate loans, at least once a loans to unhedged borrowers – 25 years. year banks should assess the credit calculating the maximum debt- • Maximum debt- risk stemming from interest rate repayment burden requires repayment burden for changes under assumption of 400 increasing the outcome of the FX loans – in case of bps interest rate increase within a value obtained in the FX stress-test FX exposures, the debt- 12 months horizon. by an additional safety buffer of repayment burden • LtV limitations – banks are minimum 10% of the loan cannot exceed 42% of required to set maximum LtV repayment value in case of loans borrowers’ average net ratios for different mortgage with maturity up to 5 years and income. exposures. 20% otherwise. 13 13 National Bank of Poland ational Bank of Poland
Effects of the mitigating actions • FX mortgages do not generate excessive credit risk despite significant PLN fluctuations • NPL ratios for FX mortgages low and comparable to PLN loans 7% NPL ratio for housing loans NPL ratio for housing loans 6% 5% 4% 3% 2% 1% 0% Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 PLN FX TOTAL 14 14 National Bank of Poland ational Bank of Poland
Effects of the mitigating actions • Dynamic growth of FX loans came to a halt • Bulk of new loans denominated in PLN 100% Currency structure of new housing loans 120% Annual growth of housing loans 90% 100% 80% 80% 70% 60% 60% 50% 40% 40% 30% 20% 20% 0% 10% -20% 0% Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Jan-07 Apr-07 Oct-07 Jan-08 Apr-08 Oct-08 Jan-09 Apr-09 Oct-09 Jan-10 Apr-10 Oct-10 Jan-11 Apr-11 Oct-11 Jan-12 Apr-12 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Source: NBP Source: NBP PLN FX TOTAL PLN USD EUR CHF 15 15 National Bank of Poland ational Bank of Poland
Risks ahead: potential for a new credit boom ? • C onvergence process: � lower interest rates, more stable FX rates, capital inflow and increasing demand • Structural and demographic factors: � increasing number of new households, poor quality of housing • Financial innovation and liberalization • Economic recovery after the financial crisis 16 16 National Bank of Poland ational Bank of Poland
How to tackle the risk of a credit boom? • Recommended instrument: • Debt Service-to-Income limits • Other potential instruments: • Other potential instruments: • Loan to Value (LtV) limits • Countercyclical buffer 17 17 National Bank of Poland ational Bank of Poland
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