Ten years after the crisis: lessons learnt and forward risks for the - PowerPoint PPT Presentation

Ten years after the crisis: lessons learnt and forward risks for the Belgian economy and the financial sector Jean Hilgers Directeur Authors: De Prest, E. Deroose, M. Dresse, L. Schepens, Th. DS.18.09.374

Overview I. Flashback: A crisis in different stages called for strong monetary policy actions II. National and EU authorities also took their part in the policy response to the crisis III. Where do we stand? Risks and challenges going forward for the Belgian economy IV. Outlook for the financial sector and risks going forward 2

A worldwide crisis in different phases Worldwide Euro area American Euro area money macro- property government markets economy market debt Money market Government debt House prices Unemployment rate (spread between unsecured and (real indices 2010 = 100) securities (%) secured loans; (spread against 10-year Bund; 3 months; percentage points) percentage points) 130 4 15 14 3,5 12 120 12,5 3 10 110 2,5 10 8 2 100 7,5 1,5 6 90 1 5 4 0,5 80 2,5 2 0 70 0 -0,5 0 2005 2008 2011 2014 2017 2005 2008 2011 2014 2017 2005 2008 2011 2014 2017 2005 2008 2011 2014 2017 IT IE ES United States United States United States Euro area PT BE Euro area Euro area Sources: OECD, Thomson Reuters Datastream. 3

PHASE 1 American property market House prices (real indices 2010 = 100) 130 120 110 100 90 80 70 2005 2008 2011 2014 2017 United States Euro area Sources: OECD, Thomson Reuters Datastream. 4

Build-up of vulnerabilities in the pre-crisis period … Macroeconomic environment Annual GDP growth (%) • Strong growth and low inflation (Goldilocks economy) • Rising global imbalances • Low interest rates à buoyant lending to households and companies Inflation (%) Microeconomic factors • Search for yield • Financial innovation (e.g. securitisation) • Underestimation of bank risk (Too) easy regulation o Weak internal risk management o Inadequate supervision o Euro area US Source: OECD. 5

… amplified the triggers of the financial crisis Tensions spread globally in Summer ‘Subprime’ crisis in US mortgage 2017 market in 2006 (following Fed interest rate hike) • Increased uncertainty and risk repricing • Liquidity crisis September 2008: Bankruptcy Lehman Brothers Financial unrest escalated Source: JP Moran Chase. 6

PHASE 2 Worldwide money markets Money market (spread between unsecured and secured loans; 3 months; percentage points) 4 3,5 3 2,5 2 1,5 1 0,5 0 -0,5 2005 2008 2011 2014 2017 United States Euro area Sources: OECD, Thomson Reuters Datastream. 7

In a context of financial turmoil, the ECB is "lender of last resort" ► Concern about the quality of bank balance sheets and collapse of Lehman Brothers lead to major turmoil on international money markets ► Borrowing money on the financial markets becomes virtually impossible for many banks ► Central banks and governments have to put together support measures Normal times Liquidity problems 8

Between 2008 and 2012, the central bank balance sheet fluctuated along with the financial tensions and thus demand for liquidity from banks 60 0,8 40 0,6 20 0,4 0 0,2 -20 0 -40 -0,2 2008 2009 2010 2011 2012 Eurosystem balance sheet total (year-on-year growth, left-hand scale) Indicator of systemic stress in the financial system (CISS) (moving average over 5 weeks, right-hand scale) Source: ECB. 9

The government also aided the banking sector (e.g. through capital injections), contributing to a rising debt ratio Government debt (in % of GDP) 120 110 100 90 80 70 60 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 Euro area Belgium Source: EC. 10

PHASE 3 Euro area government debt Government debt securities (spread against 10-year Bund; percentage points) 15 12,5 10 7,5 5 2,5 0 2005 2008 2011 2014 2017 IT IE ES PT BE Sources: OECD, Thomson Reuters Datastream. 11

Mutual contagion between banks and sovereigns is finally halted in summer 2012 … ( Credit Default Swaps ( CDS ), 5 year, senior, basis points) Banks¹ Governments 1600 1600 Banking Union Whatever it takes OMT 1200 1200 800 800 400 400 0 0 2008 2010 2012 2014 2016 2018 2008 2010 2012 2014 2016 2018 DE BE ES IT PT Source: Thomson Reuters Datastream. 1 Banks’ country average. 12

… after which the financial fragmentation in the euro area was greatly reduced Yields on 10-year Money market Interest rate on NFC loans (lending up to €1 million, up to 1 government bonds (spread between unsecured and secured loans; 3 months; percentage points) year, %) (%) 18 1,5 8 Banking Union Whatever it takes 16 OMT 1,2 14 6 12 0,9 10 4 8 0,6 6 2 4 0,3 2 0 0 0 2012 2014 2016 2018 2012 2014 2016 2018 2012 2014 2016 2018 DE BE FR IT ES PT Sources: ECB, Thomson Reuters Datatsream. 13

PHASE 4 Euro area macro- economy Unemployment rate (%) 14 12 10 8 6 4 2 0 2005 2008 2011 2014 2017 United States Euro area Sources: OECD, Thomson Reuters Datastream. 14

Double-dip recession in the euro area caused considerable economic slack … GDP Output gap (year-on-year growth) (% of potential GDP) 6 4 Recovery 4 2 2 0 0 -2 -2 -4 -6 -4 2000 2004 2008 2012 2016 2000 2004 2008 2012 2016 Employment Total gross fixed capital formation (index: peak 2008Q1 = 100) (index: peak 2008 = 100) 105 102 100 100 98 95 96 90 94 85 92 80 90 2008 2012 2016 2008 2012 2016 In hours worked In persons employed Sources: EC, ECB. 15

… that pushed inflation down. Euro area inflation Euro area long-term inflation expectations (%) (%) 5 3 4 APP 2,5 APP announcement announcement 3 2 2 1,5 1 1 0 0,5 0 -1 2005 2007 2009 2011 2013 2015 2017 1999 2003 2007 2011 2015 Headline inflation Underlying inflation¹ From financial markets² From surveys³ Sources: Bloomberg, ECB. 1 Total HICP inflation excluding energy and food. 2 Implicit inflation rate derived from swap contracts hedging the inflation risk in the euro area during a five-year period starting five years after conclusion of the contract. 3 Average of the aggregate probability distribution of five-year inflation expectations. The data were obtained from the ECB’s quarterly survey of professional forecasters. 16

Monetary stimulus intended to support the economy and bring inflation in line with its target Key policy rates and money market rate Eurosystem balance sheet (%) (billion €) 6 5000 Start APP 5 4000 4 3000 3 2 2000 1 1000 0 -1 0 2007 2009 2011 2013 2015 2017 2007 2009 2011 2013 2015 2017 Deposit facility rate Main refinancing rate Marginal lending facility rate Eonia Source: Thomson Reuters Datastream. 17

Recessions associated with financial crises are longer and more severe than other recessions Output following financial versus other recessions (pre-recession peak = 100) 106 104 102 100 98 96 94 0 1 2 3 4 5 6 7 8 9 10 11 12 Years Recessie met financiële crisis Financial crisis Andere recessies All other Recessions ► How can we prevent them from happening again? Source: IMF. 18

Overview I. Flashback: A crisis in different stages called for strong monetary policy actions II. National and EU authorities also took their part in the policy response to the crisis III. Where do we stand? Risks and challenges going forward for the Belgian economy IV. Outlook for the financial sector and risks going forward 19

Increasing resilience in the medium term: reforms have been achieved but further steps may need to be taken Realised Unfinished agenda Fiscal policy and reform of Stability and Growth increase transparency of the rules surveillance Pact (SGP) and improve implementation need for a fiscal stabilisation function? Macro-economic Macroeconomic imbalance improve implementation of surveillance procedure (MIP) and European country specific Semester recommendations (CSR) Emergency financial European Stability Mechanism Strengthening and further assistance (ESM) development of the ESM Single Supervisory Mechanism (SSM) Single Resolution Mechanism last resort fiscal backstop for the Banking union (SRM) and Single Resolution Single Resolution Fund Fund (SRF) European Deposit Insurance Scheme (EDIS) 20

Overview I. Flashback: A crisis in different stages called for strong monetary policy actions II. National and EU authorities also took their part in the policy response to the crisis III. Where do we stand? Risks and challenges going forward for the Belgian economy IV. Outlook for the financial sector and risks going forward 21

In Belgium, activity has been growing at a continuous (but moderate) pace for 5 years GDP profile since the crisis (Index 2008Q1 = 100) 115 Euro area Worldwide sovereign debt Great Recession crisis 110 105 100 95 90 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Belgium Euro area Germany France The Netherlands Sources: EC, NAI. 22