Session 1: International perspectives on macroprudential policy

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Session 1: International perspectives on macroprudential policy
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Third ESRB annual conference - 27/28 September 2018 Session 1: International perspectives on macroprudential policy. Global financial integration entails many benefits, but it can also contribute to a build-up of systemic risk within the financial system due to the pro-cyclical nature of capital flows. Addressing the vulnerabilities of financial globalisation leads to new policy challenges for macroprudential authorities. In this session, speakers will present their views on potential risks related to international financial integration and the policy options available to mitigate these risks. Chair: Claudia Buch, Vice President, Deutsche Bundesbank Speakers: Philippe Bacchetta, Professor, HEC Lausanne Şebnem Kalemli-Özcan, Professor, University of Maryland Jeffrey Franks, Director, International Monetary Fund
thank you very much from Francesco it's a always a pleasure to be here back to the to the ESRB and to chair this session and even in a second you will also see all the panelists in the intercession on international perspectives of macro-prudential policy how do I have them okay okay so let me let me just give you a very quick overview of where I think the discussion is in terms of international coordination or perspectives of macro-prudential policy but then we actually have a great panel to talk about this issue so I won't take too much of our time this morning so where I think that international coordination or the International dimension of macro-prudential policy comes in is whenever we talk about spill overs and the panelists will also pick this up and and now spill overs in and of itself is a neutral term for for me so we can have cross border transmission of policies of shocks and and spill overs and those can be a sign that markets are integrated so we would naturally expect that if we implement policies in one country or if their shocks in one country that that has effects on on others but spill overs can also be a sign of contagion of shocks and I think the challenge that we are facing is to identify what types of spill overs are we are we dealing with and also getting a good classification of the spillover so do we have
externalities and I think Philippe about
pocketable also argue there can be positive externalities also externalities usually it has a somewhat of a negative connotation but they can also be positive externalities and then of course give rise to the to the issue should we coordinate policies across borders and I think one reason why it's it's good to be here and good to be here
in the ESRB context is that I think the ESRB is actually also a template for for international policy coordination maybe we'll find out that what we're doing is too complicated in terms of coordination I will also show you a slide related to the procedures that we're actually implementing but I think it's at least a model that we have and I think also some of the international discussions would benefit from looking at what the what the ESRB is doing but I think and this is also where we will get into this discussion really what's important is to have good analytical tools to look at spillovers externalities however you want to call them and the tools that we have to actually identify whether we have externalities let me skip over this slide which is just trying to define a bit what I think is a useful way of thinking about policy making in general namely to have a structured policy cycle I think we need to be very structured and francesco has just mentioned is that whenever we activate some some policies and policy instruments we have to make sure that we actually know why what's the policy objective what are what are indicators we are looking at and then we are activating instruments and of course in the end we have to look at what we have actually done and whether we've accomplished what we were trying to do
so this is just to give you a little bit of mine my mindset and our mindset also in the in the Bundesbank how we should in a very structured way look at look at
policies so once we have done this once
we have really identified the need for policy intervention and also the degree and in the scope of it or we of course have to ask ourselves well what's the what's the type of policy coordination we may need so do we follow this policy cycle that I've just very briefly have described do we follow this only at a national level or do we coordinate with other policy areas and obviously in particular in this building there's also an interesting discussion generally in central bank's to what extent should we coordinate monetary policy and
macro-prudential policy and I would argue the the more effective the risk-taking channel is of monetary policy the more there is a need of macro Putin policy also to react maybe to monetary policy and also the effectiveness of
macro-prudential policies obviously plays an important role I mean without violating the mandates of each policy area but these two things have implications for the for the interaction between monetary policy and macro-prudential policy maybe in the discussion we'll also come to there the interaction which I think is very important in particular when we talk about counter cyclical policies the coordination between micro Pro and and macro Pro all of us who are engaged in these discussions know how difficult it can be sometimes to bring the macro perspective into prudential policy which has a very different perspective at the same time it's interesting and challenging but i think what's the purpose of this particular session is to really talk about the coordination of macro prudential policies across borders and as i've argued we're doing this coordination already in Europe with the ESRB with the financial stability committee of the of the ECB and I think it's interesting to look at how this coordination works and what can potentially be learned and everybody who's who's in the process knows that we can always learn but we have to we have to start at some point and I think this is what we are what we are doing right now so and maybe at some future point in time we will also use this as a template for coordination at a more international level there are discussions about this the BIS has started discussions about macro-prudential policy coordination in an international context I don't think we are there yet maybe we never want to be at this stage that we have a global yes or B which is I mean that is that the in it of itself is already challenging but I think we can learn from the experience that we are currently that we are currently having so very briefly what what is happening in in Europe most of you in the room probably are very much aware of the of the ESRB work and the macro prudential policies this is taken from the the database which is I think a very important point and we need good data on macro-prudential policies and and there
they actually implementation what you see here is that more and more countries are using macro-prudential policies so this is just the number of countries initiating some measures is increment increasing over time this compare 2014 to 2016 and there's a there's a rather
refined methodology of applying also these measures in a reciprocal way across countries that has been briefly mentioned by Francesca I don't go into the details here but this is just to say there are policies being interacted there is some coordination and of course the question is is this effective how can the process be improved and so on
this is just one example did the Estonian systemic risk buffer and how it's been applied across countries which countries follow the request for a reciprocation and which which did not so
just very briefly one of the the analytical approaches I think that we can we can take to look at and now I'm coming to the part of policy effectiveness and actually effects on on lending and on other measures potentially risk the example is the international banking research network that I've been running together with Lena Goldberg from there from the New York Fed and with many many countries
probably also many representatives of these countries are in the room here where we're looking at basically policy spillovers and we use the micro data that are available in the individual central banks to look at policy spill
overs we've done a number of things in terms of in office of liquidity risk of unconventional monetary policy and the cross-border effects of macro prudential policies and i just want to give you with one slide an overview of what we found in this study which is really again trying to do the the first step in my policy cycle mainly to assess what the effects of policies actually are and what we find here is that yes we do have spill overs off of Prudential policies so we actually look at micro-prudential and macro-prudential policies so but it's it's hard to tell the one story how this instrument spills over so there's differences across countries across types of banks by Bank business models by differences according to the Prudential instrument where we're looking at and maybe that's good news maybe it's a it's actually a stabilizing feature that not all the countries all the banks react in exactly the same way to the same type of policy instrument but of course that makes it difficult to also to draw a general conclusion in terms of water spill overs are there always positive or negative I should also say that in this project we don't distinguish between which we don't try to identify externalities and and we just take a very agnostic approach here what is important is that there's market share repositioning um so the obviously the stronger banks find it easier to deal with a tightening of Prudential prudential instruments and overall the International spill overs we look at the effects on loan growth are not very large so it's not that this is the dominating effect driving driving long growth but there's also lots of other things we don't look at in this in this project and maybe that's why we're here to also define a little bit the agenda going forward so with that let me let me just close and and say what I think are the questions that maybe we can we can take a next step towards answering this this morning in this in this session the first is I think there's a lot of analytical issues that we still have to deal with if we want to look at policy coordination policy spill overs the results that I've just shown to you are basically drawn from micro econometrics studies trying to do as good as we can a proper identification of policy effect and then of course means that we have to be very specific with regard to the microbe level effects now usually what
we're interested in when we look at macro-prudential policy and financial stability are the aggregate effects and so I think calumny will have part of the answer of how we can go from the micro
to the to the macro so let me fall for the analytical part maybe stop here data a crucial so that's what we learned in the in the project that it's not always easy to get the right data on activities on the prudential measures so in that sense it's very welcome that the IMF and also the ESRB have datasets on this and then a number of other another issues when it comes to cross-border collaboration one is as I've outlined here the analytical approaches the second is do we have a good overview of the of the of the studies that have actually been been
done and the third is and I think this is also bit the purpose of this of this meeting here I think we have to have a much more intensive dialogue between policymakers and academia asking for the policymakers to define the questions and also for the for academia to tell us what can be what what are the answers we can potentially get from from academia and from theoretical and empirical work so with that let me let me close my introductory remarks and ask the panelists to actually join me here on the on the panel I think we can all be up here and then take it and interns we will have Philippa barqueta from the University of Lausanne and now getting ready for this I was trying to find out what is age helos does and I should have checked it before but yeah yeah
okay okay and so he would tackle the issues that I just lined out more from a theoretical perspective I've if I if I classify her a little bit then we have Shabnam kilometers on from the University of Maryland who will we'll talk about why the empirical aspects of it and then Jeff Frank's from the International Monetary Fund who's in charge of the European office here and with I guess say a little bit more about the policy aspects of it but we're just looking forward to the presentations of all three of you you each have 15 minutes Philippa Boyd start and then we should also have sufficient time for discussion in this group so thank you very much for for being with us and Philippa but what so I think the organizers for inviting me to give some thoughts about this issue of the International dimensions of macro-prudential so I'm an international
macro economist and more on the theory side so my perspective will be very vertically oriented and probably much more abstract than everything else that you might talk about so in the international dimension the macro in the open economy macro prudential is particularly useful because it helps stabilizing the economy when you get external pressure especially when a multi policy can is not enough on the other hand macro prudential become macro Pro become more difficult in the open economy so I'm going to rely on the existing literature and give a few thoughts about related to this literature I'm going to do a whole survey but still there's there are some interesting interesting aspects now the which say the shortcoming is that this literature is very small now the issue a macro Pro is is new at the macro level it's also something you people that started to think about macro-prudential in a closed economy and now they are starting to think about the open economy so this is something it's a very young literature the insights are limited and I'm going to explain a little bit about that now one question that people ask is is it useful to coordinate macro potential policies in my view this is too early to answer this question there are too many aspects that we need to understand to give the answer yes or no some people say oh there are strong gains for cooperation others say no no it's too difficult to cooperate some countries will not gain so I'll refer to an interesting paper review paper by ocean or and pereira da silva at the BIS where they give an overview of all these issues I'm not going to talk about it still there is the
fundamental question which is to know what are for the speedy international spill overs and what are the externalities if you need to coordinate
it means that national macro pros either they do either too much or too little and I think that's a the question in
other words are the international externalities positive or negative talking about externalities merchants distinguish in the closed economy it is basically externalities that justify typically macro-prudential but these are pecuniary or demand externalities but
what we care about that the international context is whether there is also an international dimension to these externalities and I think the literature is trying to understand what are these externalities what all the different spill overs and different
papers go in different directions and this is where the work has to be done that so that we really understand that and there there are different different directions the intuitively you would think that the externality is positive because if microprobe can reduce systemic risk in one country then this is good for the other countries so this is a positive spillover it means that when the country takes its own decision does not take into account the positive effect on the other countries and then it should do more of it so that would say that there may be too little but then there are some Paris papers in the literature that show that you could also have too much of it and let me give you an example that I think is interesting and is also representative of what is being done in in the literature so there's a found three papers at least that have this have this result from our imagine and a Korean bengi where they find that
[Music] macro-prudential may be excessive in a liquidity trap why because the liquidity
trap is typically caused by a situation of excess savings over investment there's too much net saving for example because of strong deleveraging now in a liquidity trap in the global saving glut if you want if you have a country that start to do aggressive macro-prudential they will actually basically reduce even more leverage even more so they will reduce net saving in even more so in these paper they show that such a macro pro will have a kind of a global general equilibrium effect that will even put more pressure on the interest rate and maybe even delay could delay the the
exit of the zero lower bound and can have negative implications so in that case they show that this macro Pro can be can be excessive the other examples were of excessive macro true so if advanced economies increase this push capital towards emerging markets that may be may be booming they may get excessive capital flows so this would be another negative externality now these effects are quite interesting these are general equilibrium effects but they rely on one assumption which is that macro Pro is very powerful and impacts the whole economy and we heard yesterday and I way of course you all know that more remote than I do we heard like my druggie flip lane talking about leakages talking about the fact that only some part of the economy are affected by by macro Pro so the macro proof that is analyzed in international macro model may be too powerful compared to what we find in the data in particular there are two types of leakages that are obvious but we would see we are not considered is the fact that in many cases macro proof only
applied to residence or macro proof only apply to banks both of these if it only applies to residents of course there is a na be charged with foreign foreign lenders and I think this this is well known there's nothing new I can I can say about that except advertising an empirical paper I wrote this is like a diversion from theory now we documented the European firms bore that risky European firms borrowed
more from us from US banks in 2007-2008 we document that and our conjectures
that may have been regulatory arbitrage because at that time buzzer - was applied that in the European Union but was not applied yet in the u.s. so this risk-weighted aspect was not yet present so this is an example of regulatory arbitrage where the European firms maybe lost some market share because because of this of this difference and this is the type of thing that we have in mind if it's the macro pool only goes to the domestic lenders so this measures macro proof for only domestic lenders on the one hand they make it can make them safer but on the other hand it make it increases competition for these for the domestic lenders so there's a tension so we can ask whether there is a big impact on any impact on on systemic risk so this is one one aspect that should be one type of leakage that should be taken into account into account in a in a macro international macro setup of course the many many details know that well you you talk about here in this in this institution the other aspect is that macro crew may only apply to banks but we know that no there's all the non banks could be corporate bonds shadow banking etc so here in that case Mac Group who makes banks more resilient but we are not sure whether this reduces systemic risk actually to me this is a big question yesterday there was some discussion about counter cyclical buffers does it have an impact on total borrowing or is it just a buffer for the banks and to me it's a big big issue now these leakages either like only banks only residents they have not been introduced they have not been considered in the literature nothing this is a big weakness which is why my view it's a bit too early to draw to draw conclusions in the International macro literature I've not seen papers on that I saw paper a recent paper by bengi and Bianchi where they have macro proof with shadow banking which is an interesting it's an interesting paper they find that in their setup it is still useful to have regulation and actually also that the level of regulation is not affected too much by shadow banking because on the one hand regulation becomes less effective it only applies to a one part of the financial sector but on the other hand you have more risk from the non-bank sector so you have to these two effects may in the end they they kind of offset each other so the degree of regulation is they find is not so much affected by shadow banking but what we don't know is what are the international spillovers of that what are the implications for policy for sure if you can can only a macro proof for banks your policy is less effective to stabilise against external shocks so there are now several people who are working on these dimensions right now as I speak but they're not in any any people that that deals with this so I'd like to still make some some some comments in thinking about future work I think this issue here about the banks the macro true is an effect on systemic risk or not or what they just makes banks resilient or not something that I'd like to to know from probably from and paper work it's we don't know yet I mean this is this is very early we not have enough history about that so as a macro economist I ask myself now this macro Pro really macro is it banking sector proof only I think this isn't it's an open question but it's important too if we start to understand the dis
International spillover and externalities and the impact or macro-prudential it is important to know
that to know the answer to this question is it just about making the banks safer or does it have a macro macro effect now in this perspective when you have leakages people some people argue that you should focus on borrowers there is a paper by John and chorionic if you could target directly households and firms
this would be more effective than just targeting banks there is a recent paper from the Bank of England by farad at all they look at not to value ratio at four
firms and compare this with capital ratios for banks they find that the capital ratios for banks is no impact on the probability of crisis it's not useful while the LTV is very very effective and the reason is that in that case also have leakages so capital ratios lead to more financing directly by households to two firms so these are all issue that our interesting should be explored and then should be put into the international context in my last minute I give my last thoughts are about emerging markets this year we will focus on advanced economies now in emerging markets macro prudential ii has been relatively easy because of limited capital mobility and a strong banking sector but this is this has change or this is changing there is more financial integration there is disintermediation so there's a in the next segment we will show us a numbers about that the emerging markets are borrowing more and more outside of the banking the banking sector so this makes micro-firm much more difficult in these in these countries one example is a recent paper by an at all where they look at the impact of effects regulations on banks in emerging markets and they find that this is indeed effective for banks but there is a spillover to the corporate sector and firms actually then increase their borrowing in foreign currency so the total effect is so in that case in this set of countries it sounds very difficult to I would say fill the gaps between banks and non-banks this is there is no yes or B in these in these countries and maybe it's just simply easier to use capital controls for these other types of capital flows so my time is up I conclude I think from the international macro perspective we are missing these leakages they should be introduced in in
models should try to understand that I'm sure we can make progress I still sees challenges something that
macro models will have difficulties with our gross positions which are important but typically in macro model we talk about net net positions so all these issues of growth will raise more difficulties thank you thank you very
much very stimulating presentation and I guess all of us we have lots of questions or just comments for a discussion that we should could could raise but I suggest that we gone with
Chevron first and then try to see the commonalities but maybe also differences between the presentation so you also
want to I have a microphone but I just need it and I can just because I'm going to point to certain things l just can do it from here thank you very much for inviting me great pleasure to be part of this panel as a cloudian Philip
mentioned I'm going to talk about the empirical side of issue to get a better understanding of capital flows International flowers and macro-prudential policy let me start with you know what is that the core of this panel we all know that global financial integration can lead buildup of systemic risk within the financial system and this within the financial system is a broad concept it is you can think this as within the global financial system within the domestic financial system and within the financial system of a certain region like Europe and the key issue here is this happens because of the procyclical nature of the capital force so what I would like to focus on three questions under this statement first is what are the effects of this process on domestic country financial conditions so when I say domestic country think this as the country on the receiving side of capital Falls and second is if there are any differences between advanced countries and emerging markets we have to understand these differences if there are any and then the third is what are the implications for macro-prudential policy you will see that most of my presentation is going to be on the first two because I'm going to under argue that very you know similar to Phillip is the macro-prudential policy academic literature is at its infancy and you know the reason for that is actually not we haven't used macro prudential policies before or macro prudential pulse is very important before they have been always used in fact by emerging markets they have been used extensively and they have been understood to be a very critical component to monetary policy this was always there but academics are the ones actually coming behind not to policymakers as in many cases and the reason why academics coming behind of the policymakers is when you try to model macro-prudential policy you can own the model at the second best and as you know in academic literature there is a theory bias and you know we like to model things as optimal first best if you don't like things at second best but as famous the put buyer Avinash Dixit the real world is at second best at best so it is extremely important to understand in that sense so I is its influency and we are trying to understand theoretically as philip already gave you a very nice overview
but why my presentation is going to focus on 1 & 2 because to understand
theoretical framework to model the theoretical framework behind the macro-prudential policy and to design better macro prudential policies in the policy arena we really have to understand first 1 & 2 you know how these work what are the effects what are the numbers what are the quantity of impacts you know how you
know in any given country can deal with this what are the simple offers you have to put numbers on these things if you don't put numbers on these things you cannot you know design the macro prudential pulse that's going to be the key argument of my presentation ok so within this context i'm going to make four points the first point and then relate each point to the polis implication the first point is about
gross capital inflows by sector so we tend to look at the gross capital inflows as a package you know how much capital you know come in in a country out of a kind in fact we use to look at the net concept only now if you understand that gross concept is extremely important I'm going to go one step further I'm going to argue that you know capital flows by sector is also very important but it means is who is the sector on the receiving side its capital flows coming into the banking sector of a country or the corpus of the country borrowing directly or households of the country borrowing direct this is going to be extremely important not only from a modeling perspective for the party but also to understand the financial stability risk to correct class as the financial stable disc and that's going to be the key thing when you want to design better macro prudential policies number two is this point that I made in my first slide about numbers numbers meaning a good
impact so most of the times we can see things okay you know so when I do this policy you know this Bank does that this firm does that okay great but what is the attitude impact in the economy I mean as you all know and appreciate it is extremely hard to design macro prudential policies to complement the you know meet monetary policy and to coordinated across country so I mean clearly before you know putting that type of effort we have to know the aggregate impact in a given country so how important it is and this really goes through the global psycho why because global financial cycle is what kind of brings together the capital flows on a global level
together with what is going on domestically in any given country that is on the receiving side of the capital Falls and to understand the aggregate impact in a country we have to quantify the impact of global financial cycle on the financial conditions in a given country my third point is going to be on the role of domestic banks we already have a lot of work thanks to a pioneering work by Claudia and Linda through the IPR Network on the role of global banks foreign banks you know they are very important but I'm going to argue that domestic banks are also going to be very important domestic bank meaning you know the bank operate domestically doesn't owned by any big global banking network or doesn't have any foreign ownership but as a big role is a large bank as a big role in terms of domestic credit expansion and I'm going to argue that heterogeneity in this domestic fashion intermediation is going to be extremely important because that interacts with capital flows global financial cycle in a way that transmits the condition so this is going to be the key to international powers and that's going to be important to understand especially the quantitative role of this heterogeneity to understand to design better macro prudential policies and the
fourth point is going to be in terms of this foreign currency borrowing as Philippe all the dimension this is something that is more relevant for emerging markets that's correct but I believe it's also relevant to a certain extent to the European countries and to certain advanced countries like New Zealand and Australia and there's something important here so generally how we think these foreign currency borrowing is well it is cheaper to borrow in foreign currency right I mean you go and you know look at any emerging market you want you you know look at their forms their banks and you see a huge price differential so this is of course a very very big failure of the uip uncovered interest parity condition this is something you already know it's cheaper and then they just you know their short term they don't think the risks in the future you know they don't and all that so that's kind of the standard argument what we were missing is actually this is cyclical the the interest rate differential between borrowing in foreign currency and the local currency that differential increases and decreases cyclically moving together with the global financial cycle with the capital Falls and that's going to be extremely important because that means you can switch between borrowing more in foreign currency or borrowing more in local currency as a function of global financial cycle that immediately connects the whole system together and makes the role of capital flows very important so and this is going to be actually a risk that we all look so far which is again going should be part of the macro prudential design let me detail my points so what I'm going to
show you first is these capital flows by sector so the way this slide is organized is the top probe is going to be advanced economies the bottom row is going to be emerging markets let me just
start with the headline statistics this is going to be actually a big panel there are going to be over 80 countries here advanced and emerging and the headline statistics I want you to take away first is when you look at external borrowing of the countries with all the effort we put to make it more FDI more equity it is still not it ok so on average the bulk of the external borrowing of a given country on average over time is going to be mostly debt okay 60 percent of the external borrowing is going to be debt and when you look at this debt 70 percent of this debt is going to true bank loans okay all these arguments FDI increase corporate bond issues increase over won't correct but that's not going to be the bulk okay so in that sense banks are going to be have a very important role in intermediate in capital Falls globally yes non banks are also important yes you know the bond markets are important but the lion's share is still going to go to banks and this is going to be important when meetings these things in an international context know as I said 70% of the whole that is going to be bank loans and of course the 30% is going to be bonds now when you of
course this is an average you know figure when we go to details of the advanced and emerging so the my pointer is not working but I'm going to point you so the right graph so as I said top probe is advanced economies the first little figure is the debt in advanced economies and each line is a sector okay the red is the bank blue is the corporate green is the sovereign and purple of the central bank so what you're seeing is and this is over time since 1995 till today and what you see
is you know overall in terms of levels more than 60 percent of capital inflows coming into advanced economies is coming to the banking sector okay the rest is coming to a sovereign sector and the corporate sector has shown by blue and green yes there's a declining trend but you know not that strong now within that debt again we are still in the first row the middle little figure that shows the OID ID is in the balance of payment jargon is other investment debt other investment that is mostly
loans okay and the last one is PD portfolio debt which is going to be mostly bones now again in the emerging markets or advanced economy context as you see the the top line is red that
means most of the long base investment again coming into the banking sector this is capital inflows and only around 20 percent coming into the corporate and less than that to the sovereign now the last figure for advanced economies portfolio that this is when you look at palms this is actually equal right why because of course advanced countries have more developed bond markets so here it is kind of a torture third 30 percent is coming into the corporate sector corporate sector borrow in terms of bond issues externally you know solvers issues won't externally and banks also issues won't external so that's kind of a coal ships you move to emerging markets you say drastic difference okay in terms of debt overall actually banking sector corporate sector and the sovereign sector in emerging markets are equal shares right they externally borrow 30 30 30 okay when you look at this law versus board composition in terms of loans which is the the bottom middle of graph you see that the red line and the blue line is on top of each other what does it mean in emerging markets you know there are kind of 30 40 % shares in emerging markets banking sector borrowing a lot in terms of loss that means domestic banks borrowing from foreign banks this is the cross-border
loans and Claudia's work actually you know really bring this data to the forefront through Iberian and green line the sovereigns the government sector of the emerging markets that's less than 20 percent okay now when you look at the bones you see a huge difference this is the loss column and the last figure in the in the bottom you see a huge difference between emerging marks and
advanced countries in terms of bonds portfolio that emerging markets corporates and banks are not tracked why because obviously you know these you
really have clearly be a big bank a big corporate to be able to go out and issue a bond outside right we always see you these like Petrobras you know stories and all that but how many firms are like that in emerging markets not that me and that's going to come back with a great impact that's going to come back how the macro-prudential policy has to be told you see and you think in terms of the bonds the lion's share goes to sort emerging market sovereigns are still the ones who issued the bond outside and who borrow in terms of that so this again gives you the important role of banks for emerging markets which you can say that we already knew that but banks are also going to have an important role for advanced countries this is this is in terms of all external everything like stern on their right we are trying to understand how capital flowing into a sector we can use this data and do a very simple regression to understand the role of the fundamentals versus global factors so in terms of the capital flows actually this is very important when we understand the spillover relate to capital flows through the domestic financial conditions we first have to understand if capital Falls coming to fund because of the fundamentals what does it mean the country is doing both things country is growing forces are right and so forth and that's going to be captured by GDP growth so this is going to be a regression of capital Falls as you see on the lot than fight flow to GDP ratio capital for the person of GDP those little eyes and pleas means country and time at the country time level eyes the country so we are going to regress that on the country's on GDP growth so this supposed to capture if I'm a growing country I'm doing things right obviously foreign investors want to come and invest in my country the other factor as you see is
going to be the VIX this is now you know pretty much the consensus common global the common factor obviously of this to the very influential research by Helen ray and then others follow the Helens research we know that VIX is an important global common factor although it is a stock market volatility index you know belong to the u.s. because it's utilized to the u.s. monetary policy it is a global common factor in terms of telling us how capital flows globally moving and how its allocated so I'm going to take it as a proxy for the supply side of capital flows so this regression meant to capture capital flows coming into a country on average because of demand factors because country is doing something good country fundamental GDP growth and because of supply factors meaning the foreign investors perception you know low interest rates in advanced countries pushing them to emerging markets or vice-versa risky situation in emerging markets pushing them to advanced countries and so forth so that global financial conditions global common factor is going to be picked up pilots what you see in this table is again the top is advanced economies the bottom is emerging markets the first column is just what you would do the first total capital flows right when you regress total capital falls on weeks and GDP growth you actually get exactly the same result in advanced economies and emerging marks that first column tells you look when GDP growth is up you know during booms countries are doing but thanks both advanced economies and emerging markets they do receive capital flows opposed the coefficient and there's a negative coefficient on weeks that says then global financial conditions are tight when there's a lot of uncertainty globally think two thousand seven eight nine crisis then actually capital retracts generally from everywhere on average okay so negative coefficient capital flows yeah the interesting fact when you separate these into sectors so the soles banks and corporates every column after the first column the difference that we just summarized so you don't need to go through every
number but the big difference here is not my pointer number the difference is the the banks and the corporate so this is a private sector right the private capital Falls both in advanced economies and in emerging markets reacts negative of two weeks that means low weeks good called global financial conditions you know banks and corporates private sector receive capital flows Bolton emerging countries an advanced country advanced economies okay but in terms of growth there is actually a difference in emerging markets when emerging markets do things right when they demand capital flows sorry they actually do receive capital Falls it's the positive coverage but the public sector their sovereign lose counter see quickly and this is extremely very important because once you get into these arguments of like
global savings quad you know you know is the China saving a lot and that's really coming to the u.s. you know mention this if you really have to understand this difference between public and private sector because as you see that's clearly you know Chinese government and not the Chinese private sector okay so this is going to be important because our models are not modeling the government sector our models all about modeling the private sector and in terms of you know advanced economies you know then the things are good as you see capital flows coming to the banking sector and the banking sector intermediates the capital yeah let me just so I'm just going to go very quickly on the different views on the importance of the global financial cycle because this is it shows you this kind of the role of weeks and then how it relates are those blocks now the as I said the the leading view on this is global financial cycle is extremely important this is first shown by Helen Reax is Jackson at her Jackson Hole up paper and then by bis work with Michael de bourree Inori Shane and then they are
going to argue that there's a key role of weeks and your sponsor policy in global banks leverage and interaction capital Falls and this is going to imply as Phillip said maybe we should think
about capital controls and limiting capital mobility although their conclusion is not just for emerging market for everyone now cordials work with link back to says it depends because we have to look at the granular data and maybe the cross-border transmission through banks is very strong and that will go with to date I'll show you but maybe into non-bank lending into firms and households private sector there might be a limited role and there is also another line of research that says you know maybe global financial cycle and the capital flow role in terms of domestic financial condition is not that important because exchange rates are going to insulate the questions that are open here are still you know how are the domestic or the conditions are affected and how can we quantify this because the policy is going to respond more to macro-prudential policy and
multiples okay and you know the problem in the empirical research is first its users cost can't a capital flows and I already argue that it's important to go more granular to the sector and I'm going to argue next is that it's you have to go even more granular to Big Data as was argued by governor dragged yesterday today by Francesco and also cross-border activity of global banks is not going to be enough because you are going to missing all this domestic policy response and domestic action same problem with the VAERS you know or less regressions all the VAR s cannot deal with endogeneity flows or the pols response right I mean policy makers makers neither in emerging markets nor advanced economies especially the countries that we see a lot of capital flows they are not just going to sit and wait and do nothing they are going to respond both exact and expose and you know it's hard for our existing techniques to take this into account and then this is going to be very important because if you want to design the right
macro-prudential we have to direct effect on domestic long growth and the real effects of slops not just in the financial sector but in the real sector so I'm going to focus like two pieces of research to give you these numbers that focus on emerging markets why is that because emerging markets always had this problem business cycles credit cycles and capital Falls always correlated in emerging markets and most of the time these end up in financial crisis which is why there have been many many different macro-prudential policy employed by the emerging markets and you know because policymakers they're always told capital flows is a financial step of the risk and multiples is not enough they have to complement mantra positive
attract a potential force so it's a good laboratory to understand the causal effect mechanism and the magnitudes so can we just to find the response of the policymakers the findings are going to tell you that this supply-side capital flows are very important so the global financial cycle is going to be important the numbers are such that you can have up to vampers which point reduction in
borrowing costs and you can explain 43% of the actual aggregate aggregate credit growth by the exogenous capital flows back at originate is extremely going to be is going to be extremely important domestic banks so the procyclical agent in the system is going to be domestic banks but which domestic bank is a large international connected domestic banks these borrow in the international interbank market and then bring that money and intermediate and they are going to be responsible of most of these 43% effect of capital flows on the corporate sector credit growth foreign currency borrowing is going to be cheaper on average but during these risk-on periods where foreign investors
want to invest in emerging markets actually local currency borrowing is going to be relatively cheaper which means you have this huge credit booms up to four to four to five percent of GDP that is also coming from me locals entering the market so this is a extremely important dimension of this generally missed because there's this super emphasis on the foreign currency of everything it always sounds like it's always about foreign currency borrowing you know local currency borrowing is extremely important and risky firms finance borrowing at lower interest rate and not necessarily over borrow this is very important because because this is for deviate from the models that Phillip mentioned the models always think oh there's going to be this all borrowing something because an externality collateral constraint like why because this models are written with the advanced country context although therefore open economy dating capital flows coming directly to the real estate directly to the land direct to the assets increasing the asset values that relaxes the collateral constrain and that external is going to create all this well if the capital flows coming to the banking sector borrowing costs actually equally important even maybe more important than these type of arguments where you really need granular big data to show these things and this is what this research does this uses big big data
loan data over 100 million loans from several countries this one particularly from Turkey that shows you the result in a picture this is the QE period in the US in the gray blocks and the weeks in
the black and borrowing cost both real and nominal bargain cost act agree on at the micro-firm level in red and blue that shows you how this moves it tricks which means borrowing costs which moves with the capital flows and that correlation gets tighter and tighter when the interest rates are really low in advanced countries capture here with the
QE episode and it's important why because this is a picture from Turkey but I'm going to show you a general picture from Georgia markers to the emerging markets banks firms and households don't borrow externally that much right and this shows the bank's external borrowing that is the black line that's goes up to 40 percent of GDP domestic banks borrow externally but don't miss the corporates all into other axis with the blue line red line and the Purple Line these direct borrowing or corporate is very very small as a function of Agra GDP less than 1% not
specific to Turkey all the emerging markets do that as you see this is the credit share you know circulated by domestic banks to households and firms in these all these emerging markets or abandoned proportion is by domestic Phenix not direct external firm so my
last slide on the implication for macro-prudential policy is as I said the literature's most a theoretical evidence we really need evidence from the big data and that evidence so far is saying actually it is mainly better to focus on lenders in emerging markets but advanced countries as Phillip mention households and firms focusing on borrowers also important it's very important to understand who is the prosecutor agent who is the prosecutor sector in a given
economy and the evidence so far saying actually you know it's not really truly externals and collateral concern but it is true borrowing cost and this is also mentioned in the latest SRB publication that you know so much is on the banks and we don't have that much on demand banks and we need to do more work on that but the more work on that requires us to understand these mechanisms and the quantity okay thank you very much set them for a lot of information a lot
of empirical results also comparing the advanced economists and the emerging markets and I think the IMF is also constantly thinking about what volatilities at least in emerging markets as we have seen some of them now seems to be rather I did syncretic for if we never know and so Jeffrey Frank's will thank you give us that perspective so I I think my remarks today will be very complimentary with the presentations that we've just heard about because as you can expect we were very focused on policies and I will concentrate on on
advanced advanced economies in particular on European economies in my remarks I would like to also say that my my boss Paul Thompson was scheduled to speak here and he he sends his apologies and his greetings the focus of my remarks today will be on the role of macro prudential policies and maintaining financial stability in advanced economies I'll draw on the work of the IMF in Europe and other selected advanced countries to try to glean some lessons from what we've seen in practice with macro macro prudential policy in this regard I will also illustrate the role of a range of other policies like tax policy housing finance and restrictions on land supply that have a strong bearing on the underlying issues that macro prudential policies typically seek to address but first since we're here at the ECB a brief word on monetary policy to provide some context of discussion as I'm sure you all know the IMF is very supportive of the ECB's current strong accommodation policy which we think should be maintained until inflation is convinced that convincingly converging to its objective and as net purchases asset purchases draw to a close clear forward guidance is going to be even more important but there are questions that have been raised in some circles about whether this strongly accommodative monetary policy has caused financial instability let me say that our research in the fund does not just suggest that that is not so we see no generalized financial stability concerns at the current Junction to be sure we find that there are some localized pockets of excess for instance there are a few euro area countries where house prices are above historical metrics and in some others where they are growing in double digits and in a few countries corporate debt relative to GDP is also rising fast but importantly these cases are the exception and not the rule of course there are many other markets aside from housing and equity and country level indicators maybe masking as some localized bubbles there is no doubt that policymakers need to remain vigilant to ensure that financial stability risks do not begin to take root this brings me to the the main focus of my remarks on macro prudential policies to reduce systemic risk as you know compared to monetary policy which is only available at the Euro wide euro area wide level macro prudential policies can in principle closely target risks in specific national markets thereby contributing to reducing the heterogeneity and financial and business cycles across euro area member states this is an area where remarkable progress has been made in recent years we have the European systemic risk board a European institution that can warn both countries and EU institutions if risks are increasing more of moreover macro prudential authorities are now operationally in every member state and in the euro area if deemed necessary the capital based macro-prudential tools can be topped up by the ECB which also has myrna macro prudential responsibilities in addition to its micro-prudential role this being said our view is that the EU macro prudential framework would benefit from some simplification procedures to activate macro prudential instruments are complex involving many authorities at different levels a few countries Austria Belgium Finland Luxembourg and the Netherlands were alerted by the ESRB in November 2016 about potential overvaluation in their housing markets and rising household indebtedness in Austria and Luxembourg even though legislation for borrower based tools was introduced these are yet to be fully used and in some cases the activation of capital based tools took over a year let me give you the example of Finland to illustrate this in response to the ESRB November 2016 warning on rising household household indebtedness the macro-prudential authority in finland thin as FSA decided to introduce a bank specific risk wait floor of 15% for residential real estate mortgage loans the first step in this process was to consult the ECB on the appropriateness and adequacy of the measure after the ECB signed off on it thin FSA started the formal notification process in in June 2017 with the European Banking Authority and the ESRB this part of the process ended in the first week of August of 2017 after both the EBA and the ESRB gave favourable opinions next the measure went to the European Commission which gave it it's no objection in the third week of August in and it also decided not to send it up to the council if the council had been required to give it's no objection as well the process would have been longer and could have entered a political process the measure was activated on January 3rd 2018 for one year if in FSA wants to extend it for another year it needs to go through that same process again the recently completed euro area F SAP from the IMF suggested that this process could should be simplified to provide country authorities with better ability to act in a timely manner one option would be to enable country authorities to act once the EBA and the ESRB have given their favorable favorable opinion which should take no more than two months this would avoid the possibility also over some politicization of the process with the measure going to the EC and the council let me move on as you know there's a lively debate on the effectiveness of macro prudential measures many skeptics argue that they remain untested and that we are in uncharted territory we've heard that there's a inconclusive academic literature on the theoretical side in this respect there is also evidence that macro prudential measures are subject to linkages we've discussed that both yesterday and this morning and that they and that they also may become less effective over time due to those linkages as credit shifts to alternative sources what is our view in the IMF our analysis shows that macro-prudential measures targeted towards specific risks work better than instruments that target broad area wide concerns but this also means that the toolkit needs to include specific tools legislated well in advance so that they can be used when needed in view of this it is somewhat problematic that some euro area countries have not yet legislated a full set of borrower based tools these countries include Belgium Germany Greece Italy Malta Portugal and Spain the measures are well known borrower based caps on loan to value and debt service to income ratios these are best suited to address specific risks for all institutions domestic banks foreign branches non-bank financial institutions so the possibility of leakage is relatively low ideally all countries should legislate borrower based tools with harmonized definitions moreover macro prudential authorities should be able to tighten these tools for all lending institutions and they should be applicable to both households and to corporates let me comment on these two groups of borrowers first focusing on macro prudential policies to address housing concerns one of our key findings in this regard is that the underlying issues fueling housing market booms are typically much wider and cannot be addressed by macro prudential policies on their own for is for example supply constraints often play a role at housing cycles as demographics urbanization and income trends outpaced construction thus at least in principle policies to help this make the supply of housing more elastic could help but the case of Spain is is cautionary here when more development land was made available it did not contain the property boom in these more difficult cases even more fundamental maybe needed they may include tax
measures to eliminate biases in favor of ownership and in favor of debt this points to the importance of ensuring that macro-prudential authorities are able to coordinate with fiscal and other authorities not least on tax and loaning restrictions that could be distorting property prices let me briefly touch on measures that some countries have introduced to deter speculation by investors such as higher transaction taxes for non primary residences prominent examples here include Australia and Canada this has been a subject of much debate in and outside of the a of the IMF and not least because in the IMF so-called institutional view measures that differentiate between residents and non-residents are classified as capital flow management measures and that triggers a certain mechanisms and processes inside the inside the IMF the case for applying measures specifically aimed at foreign buyers is not clear-cut on the on the one hand foreign buyers could be paying in cash or borrowing from foreign financial institutions which would not increase the local financial stability risks on the other hand increasing house prices could make it more expensive for first-time buyers there are also adverse consequences of fouling house prices in on the local market when a real estate boom busts while there are reasons to be concerned about the participation of foreign buyers in local housing markets it should be noted that some of the same issues may apply to other buyers such as domestic speculative investors recent IMF research on this issue for Canada shows that non-resident homebuyers represent only a small fraction of existing housing stock in places that have been subject to big booms in the real estate and prices like Vancouver and Toronto to the extent that speculators are found to be driving excessive highest price inflation and raising house housing affordability concerns targeting property transfer taxes on all speculative home buyers is a more effective solution than measures aimed solely at non-resident home buyers this is the this is the practice that has been followed in Hong Kong and in the UK where buyers of a second home for investment purposes irrespective of nationality face higher stamp duties in contrast Australia has only applied stamp higher stamp duties to foreign buyers and recent IMF research has questions such policies given the marginal contribution such buyers have in the speculative demand for housing in Australia another lesson regarding housing is that macro-prudential policy should focus on the resilience of households and banks rather than targeting housing prices the imf's recent research in this regard shows that macro prudential measures usually have a lasting moderating effect on the level of household debt but only a transitory impact on the level of housing prices this is also very much in line with a recent experience of Sweden where amortization requirements and loan-to-value requirements curbed credit growth but had less of an impact on housing prices finally I'm housing I would also note that this discussion points to the need for national level implementation of at least some macro prudential instruments this is indeed the current set up in europe some observers have argued that macro prudential policies are becoming overly fragmented and need to be consolidated at the central level but we would suggest caution there are some good reasons for making sure that some controls are local since they interact in so many ways with various features of the real economy such as housing market zoning and taxation issues besides local macro prudential authorities can oversee both bank and non-bank financial intermediaries which are important targets for borrower based tools and there is also the asymmetric information aspect to consider local regulatory regulators have information about local conditions and complex complex interactions that the center may not have this does not of course mean that the center does not need to pay a quarter play a coordinating role to address in action bias by local regulators and cross-border spill overs and leakages so finally let me turn to the issue of corporate credit tools targeting corporate credit need careful design in the euro area only half of corporate loans come from banks the rest come from non-bank financial sources including shadow banks for which data is scarce and from other corporates moreover the corporate sector of course can access the bond market and still increases indebtedness thus there is considerable considerable potential for leakages that risk rendering the macro-prudential tools ineffective Frances a recent example where macro-prudential measures were introduced to dampen corporate credit growth in view of rising corporate debt the French macro-prudential Authority has tightened the large exposure limit in in big French banks for loans to highly indebted large non-financial corporations such measures will protect the banking center the banking sector against corporate defaults if any at the same time the counter cyclical capital buffer requirement on overall credit was increased from zero to 0.25 percent in view of the rising private-sector indebtedness in France as with housing macro-prudential tools to target corporate credit need to be supplemented by other measures for instance the tax deductibility of interest payments in most corporate income tax systems coupled with no such deductibility for equity financing creates economic distortions and exacerbates leverage one way to mitigate this debt bias is to provide a deduction for equity costs recent IMF work looked at the effect of the belgian allowance for corporate equity a tax incentive to raise equity finance on corporate debt ratios and non-financial firms and banks relative to a control group of similar country companies in other countries it finds that the impact of the belgian legislation is significant and large and the debt ratio in belgium is almost 20 percentage points lower than in the control group of non-financial firms and almost 14 percentage points lower than in the control group for banks of course while such tax measures can be very effective they need to be carefully designed to address concerns about revenue costs and potential for tax avoidance in some cases rising corporate indebtedness is account accompanied by increasing prices in commercial real estate while bank loans can fuel such price spirals like in Ireland before the global financial crisis tightening load of loan-to-value or debt service to income ratios for corporate collateralized borrowing from all financial entities may work better here to coordination with fiscal authorities is key as changes in tax and depreciation rules could spur commercial real estate booms and busts as the experience of the United States in the 1980s shows I would urge that EU authorities close data gate gaps as well in commercial real estate prices to help facilitate regulation in this area let me just conclude now I want to conclude with three essential points here first in the euro area common monetary policy makes macro-prudential tools even more important than in other jurisdictions because of still significant fragmentation member states will often be at different stages of economic and financial cycles and the extent of financial accesses will therefore vary across countries this points to the critical importance of macro prudential policies second the good news is that the framework that has been set up in the EU is a remarkable achievement it could benefit from some simplification as I ate it earlier but Europe has come a long way at the same time not all countries have yet legislated the borrower based tools with harmonized definitions that are best suited to target specific risks and limit damages and third our experience in the IMF suggests that the problems of that the problems that macro-prudential policy seeks to address are often caused by other real sector factors and by distortions in other policy areas so macro prudential policies cannot be a substitute for addressing those underlying problems thank you thank you very much for a very rich
policy perspective on the on the issue one question which is to pry it and it's a it's a broad one which I would give to that like to get to the panel and then I would open up the floor for discussion so one of the aspects that you all
implicitly touched upon but not very explicitly is the question of when should macro-prudential policy act and so to what extent is it a forward-looking measure which is trying to identify risks along the way or to what extent is this crisis management to give my perception it's it should be rather forward-looking so and it's not a crisis management tool in the strict sense of the word and that a related aspect or to do that is if it's really forward-looking how how targeted should it be so you said at the end just that the the very targeted measures are the more effective ones and but can we
actually if we if we see risks along the the way in terms of low interest rates that have led to distorted asset prices how specific can we actually be and wouldn't it also be a contradiction in terms to say where we have to be very specific if then we address macro risks so this was a bit what Philippa said at the beginning maybe we should be targeting different sectors and and and different different types of activity so
these two issues I think they have been related so how forward-looking should we be and how targeted can we can we be and how good without this description of the underlying risks actually be so pick whatever you want of that the broad question and maybe Philippe of what started and I would ask Chapman and then Jeff okay so the thing I will focus on the on the first point button
forward-looking or not I think I was a bit confused myself so I'm living in Switzerland and in Switzerland they introduced is a
counter-cyclical buffer saying that all this will help reducing credit and real estate credit and real estate prices and and this would be very very effective and so this I did this in mind but then I realized and based on the reading discussions etc that well this may not be the so effective and actually this is not true so so so so effective so that did initially this idea of these policies was more about Chris a controlling aggregate credit managing the economy even so all in the Marshall Union this could be useful as a complementary tool because some countries maybe in different parts of the cycle so there's this idea of macro blue could could help so that's what actual so much for some many models that have incorporated but but now I'm not sure about that the evidence is not very very supported so this more about about this forward-looking aspect for the plane was very clear about that that counter cyclical buffers are very useful for safety of future [Music] facing future crisis safety of banks for future crisis so I think it's not yet black and white yes I know but this macro management effect of macro Peru
may may be overstated in the in the literature but I'd like to know a bit more empirical evidence it's something
that I still have my doubts okay I fully
agree with you I think they should be forward-looking crisis management is a total different beast
I think and and this is the essential thing when beating about lower interest rate asset prices you know the credit management all that because during the crisis you you have to do monetary policy I mean this is as you know Jeremy Stein famous to put it nothing is like interest rate
that goes through all the cracks right and that becomes important during crisis crisis management so macro true is supposed to be Prudential really deal with the boom period credit growth excessive leverage and all that so that should be definitely in that transfer
between but but then how targeted your second question this is actually important and sensitive because it is we do want to somehow curb excessive leverage and credit growth right governor lane was mentioning this yesterday too but then where is the line between slowing down a good credit growth and a great demand management actually this is exactly what I don't like with this theoretical literature because depending on the externality it can be a good amendment even or not and if you look at IMF critique on emerging markets they criticize emerging markets that they're saying you use these tools as I could demand management and you cannot right but then if you criticize the emerging market and not the Switzerland that then that's not good right that's this whole problems behind the institutional view and everything so if you have to be very careful that's why this the the sector of dimension is extremely important various the excessive leverage who is the protocol agent in the economy and that's really I think what this session is about because when we think is in the internationally the link is capital Falls right and then I think we have to be very careful I fully agree that you know the aim here is to curb the excessive leverage and slow down the credit quote but you know they can't be used as a good demand
management tools so because then you know there's there's there's an issue and bis has been pushing this a lot because once you get out of this more strong institution advanced kinda
setting to emerging markets then who is the authority who is in charge of it right is that authority politically independent you know then we have all sorts of questions so it's important this targeted question is extremely important yeah but they should be forward I think it's unanimous that
forward-looking is the way go here you know III think of it very much as a complementary tool to monetary
policy itself and we would never argue for monetary policy to be sort of only in the moment we always have to be looking forward I think you need to do the same thing with your with your macro-prudential policy on this issue of targeting I guess the way I would I would look at this issue is to think about having we have we should have a toolkit that has a full spectrum of tools that range from the most macro to the most micro and we should be using the right tool for the problem that we are facing so we should have this
ability to sort of move down from more macro to more Micro policies this might mean something of you know we could ask yourself the question in a country like Canada where there's a huge real estate booming in Vancouver and in Toronto but not in the rest of the country is there some regional specific policies that could help deal with this and and I would I would also echo the caution in my in my opening remarks that we we
can't fix problems with macro proved that weren't caused by macro proof if we could just hark him back for example to the to the to the min the problems that led up to the great financial crisis in the United States you know we were all remember when Alan Greenspan came out and said it's not the job of monetary policy to deal with the housing boom he was actually right but what he should have been doing is applying macro prudential policies and then we also know that that financial crisis was not just a macro prudential problem it was a problem with regulatory framework it was a problem with oversight it was a problem in that you know it had many many layers to it macro crew would have helped but it wouldn't fix the problem by itself okay thank you so we agree
that it took before worth looking but then the question is of course what's the right time to activate in particular when it goes to the counter cyclical measures and then I think it's a debate that we're having right now and I think my personal view is it will always be difficult to exactly pinpoint and to define the excessiveness that we have in
credit yeah so that will be important also at some point of course also for the for the IMF because it immediately raises what are the buffers in the private sector before we have to resort to public safety nets but let me open the floor for comments and yes please we'll
start over there let's assume that you have price stability the budget is pretty low but you have a rising external imbalance and you are an
emerging economy what's been missing in the debate in my view is the size of the economy and the role play divine reserve money providers the key central banks it's not a level playing field and all economies are equal and so on so on but let me let me continue it so you have a rising imbalance external imbalance and the panelists here or they say we don't know about managing aggregate demand but if monetary policy is not effective is pretty low you might even have a budget surplus and you have a rising external imbalance because of the private sector of a boring what do you do I mean did you know at the end of the day the crash is going to happen the downturn is going to come I mean macro-prudential policy is the main the main to the circumstances you have to do it so it's not like like we're taking around the fringes whether we should use it it's because aggregate demand we should use only monetary policy under the circumstances this is a key issue and you have to do it clearly I ask you very pointedly in the case of Turkey there's been enormous overbearing but not a super debate is
the extent of dollarization of euros ation what do you do the banking sectors
in central Eastern Europe have happily dominated by foreign groups what can you do in that and this is why macro-prudential policy coordination is essential if you don't have Austin home country regulators seeing eye to eye we're going to continue with boom and bust dynamics and finally I think one should distinguish between a normal global financial circle and a drifted one and here comes the responsibility centers okay thank you you may want to identify
yourself so that yes I'm Center Parkway schlund so this is a question about so the what is the envelope or marker proof
one one one hunt and capital controls from the others in because at least the two first panel it's rightly pointed out that in emerging market countries and I argue it it doesn't only apply to emerging market countries also applies to many small advanced economies like my my own and others dealing with capital flows in some sense with pirate tools can be needed on occasions if you are going to priests or financial stability so if that is the case wouldn't so-called capital flow management tools beep heart or the macro potential toolkit and I will tell you a small little to that in Iceland we have a special research requirement on capital flows coming into the bond market and high yielding deposits because we are growing much faster than other countries much higher interest rates on the rest of the world and we were being shrunk back up the flows into into this tube to that now the IMF tend to say okay this has kept the flow management the OECD delegation says we like this tool users call it micro Pro and then you'll find and and so that's a question where is the portal and I think that because you can't say you can't deal with it differently by increasing your resilience so you can live with these capital flows on accident rate fluctuations and that is correct but sometimes it is so much that it becomes very difficult so if that is the case I'm asking the panel so shoot capital flow management tool therefore be part of the market potential toolkit and if that is the case you all agree that micro purushu before were looking shooting the use of such tools also P at this part before were lucky okay thank
you very much we can take one more let's take the judgment up here what did to ask something which has to do with the other type of leakages I wanted to do to refer to a few episodes
which have been important for the life of the Secretariat and the SRB in the last and the last months so we have been playing for months about introducing for instance a counter-cyclical margining and collateral in ccp's and the reaction has always been while you cannot do it because liquidity will move from from Europe to New York and the future could go and we are being trying to think about capital measures for insurance and the people have been telling us well there is not an insurance or global capital definition on investment funds we have been working a lot on leverage on liquidity of course the industry says well we go to to New York in the future could be could be London there is a bit of dismantling of the Dodd Frank around so what you say is it possible to do macro-prudential policy even for Europe I mean we are big but maybe we are not big enough I saw another hand the very
back so if you can be very brief I will also take you in but then we give it back to the panel thank you libera stock European systemic risk part wanted to ask the question with the twist to the euro area so given the role of capital
flows in the euro area of the deeper financial integration seems to it will bring more procyclical capital flows among euro area member state and what macro-prudential policy could do to mitigate this risk thank you okay thank
you very much so we have about five minutes and you wanna break if you don't have to answer all the questions but just pick whatever you feel is its most interesting so I take it in reverse order so Jeff would start and maybe I'll jump in on this issue of capital flows management because that's a very very interesting and sensitive issue and and
it kind of fits in with with Daniels point from the Romanian perspective as well you know as you well know we supported capital controls in Iceland during the crisis the provocative part of your question is should we do then do it in a forward-looking man manner I would say it depends upon what kind of policies you're looking at there are some that I think could legitimately be considered macro-prudential and and I'll refer to the Romanian case where in the run-up to the crisis the Romanian Central Bank made a lot of efforts by putting say differential reserve requirements on foreign currency versus domestic currency you know we're had deposit requirements at the central bank for capital inflows those types of mechanisms which amuse not just by Romania but by Chile and other countries I think are are certainly a legitimate part of the toolbox that could be used in certain circumstances when you think about using this sort of in a forward-looking manner I think it's a question of weighing costs and benefits there are enormous benefits to the world economy of having relatively free capital flows and doing it in a pre-emptive manner might cause more cost to the world of Kahn I think almost certainly would cost more to the world economy than the benefits would were to rise so I would say those types of actual capital type controls might be something that you have to hold it only for the crisis situations and not as a standard part of your toolkit so that would be my view on that okay so the
question on Romania and on Turkey so in fact the the the numbers I showed was from Turkey let me clarify that so you
of course do things what you do is you don't wait that the crisis comes exactly as you say and you these countries actually deviate also from the standard IMF advice during this boom period and they they did things and then these things is a large toolkit and you know the two involves things like having different reserve requirement on foreign currency local currency you know interest rate corridor well I mean there were a lot this is exactly why I was saying we have to we have a lot to learn from emerging market experience because emerging markets always have to give this problem they always have this policy dilemma every emerging market central banker knows this very well that it's not as easy as in u.s. you know your mantra pulse is not just a simple output gap you know based concept it is there's an exchange rate concept and there's an output gap concept and the way interest rate and exchange rate moves is exactly opposite so you know during the booms when you want to you know reduce the interest rate and the exchange go the other way during the past when you Inc you know the other way around reduce the exchange rate the exchange the exchange rate depreciate so it's very important for emerging markets that they use these things and they they deal with this problem all the time so these these numbers I gave you 43 percent of the corporate sector credit is because of the capital flows is based on all these macro-prudential policy stated all of them so imagine the counterfactual right what would have done this they only did monetary policy which is an inflation targeting framework and did nothing that could have been maybe 60 percent 70 percent the macro prudential policies also involves you know burning households borrowing in foreign currency and telling corporates only you can borrow if you're an exporter and if you borrow over a million so there were a lot already done and even we pad used to have this capital flow related big part of your corporate sector credit across so it is extremely important so I guess
the answer is you keep doing these things and even you know I never to size you as AG demand management then you
know you try to not use it to thank the man mera Butte but use all these different policies as also Jeff set as part of the total toolkit so this relates to the Iceland question I fully agree that small advanced economies are exactly like emerging markets and I would actually say certain Europe actually is very much like emerging markets so there's again there's a lot to learn for emerging market experience now here when you ask then should the capital flow management and macro pool together to a certain extent yes but I agree with Frank that it is this is a sensitive issue and you say capital flow management that's the big umbrella capital controls is there a lot of emerging markets actually cannot put capital controls I mean Turkey for example cannot they are part of the you know customs union or is if you can do scanners then you go to capital flow management it's not a control it's not a tax but it is these different reserve requirements on you know so then you know how do you
define things becomes an issue but the toolkit should be should be large because it this is important to do these things in a forward-looking manner yeah let me stop here and then
let's fill up to the European questions
we'll go back to this oh you said you didn't we didn't mention this issue of like the capital inflows problem so of
course this is this is there in the literature to something obvious that this is the type of thing you can do with macro proof you can stabilize when you have a capital inflows problem because you cannot use your monetary policy the issue I wanted to raise is that in this context the models are just too simple and then as you mentioned you have a foreign banks of other foreign investors and that's why we need to understand better these these these leakages to understand is the macro so this is totally part of the story that I think that the analysis should be more subtle than what we currently have and this is so this is related to the the Iceland case I think here this is wood-frame this also with the the leakage aspect so either is it impossible to address these issues with other types of macro proof so if you want to argue for this capital portfolio should go I mean at least conceptually say that no this is there's something that we cannot do because otherwise it's it's too easy you can say oh well not there these tools are just introduced captured close while while you could have done maybe more more effort in regulation which is being done in the in the other countries of - to ask for for say like authorization for for this capital flow management be part of macro true I guess it is to be proven that they cannot be this cannot be done otherwise but other than this my action my last slide it seems to be a natural natural part of the tools because it seems for small small countries much more difficult so since nobody has answer the question about it's too large or too small I think we that from from the academic part we don't know that I've seen a couple of papers that show that regulation in the UK at some bit over on the other parts but this is something that is so difficult we don't we don't have evidence on that so this is more like maybe you can just take risk and see what happens so it would be then interesting to have some some experiment to analyse but that's not something we we can we can answer so I think the question is just too difficult at least for what can I had something on the European question I I actually think you
are not because we are not big enough right I mean this is cause also the last gosh it's the energy issue for Europe I mean so I'd like you know if you look at the boom period again this is because we
focus so much on the crisis and then we kind of lose the side of how important is to understand the boom period for the crisis so why we care about this stuff we care about this because at the end we care about investment and productivity and if you look at the boom period all this pain stuff is about capital flows from north europe to southern europe north europe you don't run a more current account surpluses starting your running current account deficit and that money came to spain is completely allocated to the wrong firms right that's the racial domestic banking sector of the spain and then when you use this allocated the wrong firms the investment increase but the product decline and that contribute to the product diverges within europe at the end this is why we want to do these things forward-looking you know why we want to curve leverage and credit growth because we know there is going to be this federal investment and productively down the line now how do you do that i mean like when you answer okay i'm going to do this counter cyclical thing and i'm going to you know regulate this well the stuff is going to move fine then the stuff should move maybe maybe maybe it should have flowed that much to spain at the first place i mean it is important to see these like the overall Europe or overall global system and what is the domestic intermediaries are doing on place because that's going to be an important part of the story can I jump in there just a little bit too because
this is really the big question right I would say a couple of things first of all I mean the very question that you're asking is sort of emphasizes the fact that coordination international coordination is absolutely critical to the extent that certain
types of financial activity are extremely mobile then your ability to
control them in any one jurisdiction is it becomes less and less right the transactions costs are very low the ability to move them is very high they said that if there is a specific borrower in Europe or a lender in Europe you have a legal way of addressing that issue CCP's is a much more complicated question because the entire activity could be moved offshore and and so I think that we have to distinguish there you can use borrower based macro prove measures or a lender based macro parameters as long as they're legally located in your territory but once you've got those types of activities that can move with very low cost all over the world then they're gonna end up in tax havens or they're gonna end up in New York or wherever and that only coordinated actions gonna work in that case okay thank you very much like in the real
world we get conflicting signals how big our buffers are the clock here says we still have a buffer at the clock up there says we've run into the coffee break so let's stop here thanks a lot to the panel and lots of food for thought for the for the coffee break and thank you all for raising questions [Applause]