The financial crisis and some lessons for Danmarks Nationalbank. Hugo Frey Jensen Danmarks Nationalbank 17 May 2010

Transcription

1 The financial crisis and some lessons for Danmarks Nationalbank Hugo Frey Jensen Danmarks Nationalbank 17 May 21

2 Outline Financial Markets Department Government debt management Foreign exchange reserves Financial stability LIQUIDITY

3 GOVERNMENT DEBT Debt increase from 11 to 23 per cent of GDP in 2-year period 29: primarily due to the Credit Package 21: budget deficit (lower receipts and higher expenditure) Central government debt Per cent of GDP Larger deficits than projected in the 215 plan Plan for consolidation of public finances the coming years Government budget surplus Per cent of GDP Act ual 215 plan Convergence Programme

4 Danish Funding Rules Domestic funding rule Issuance in DKK to cover the deficit and redemptions of domestic debt T-bills and fixed rate bullet loans Method: Auction and tap Foreign funding rule Issuance in foreign currency to maintain an adequate foreign-exchange reserve Dollar and euro loans Method: Syndication

5 Domestic issuance strategy Low sale 25-oct. 28 => focus 1-year bonds After crisis: more flexibility in strategy due to volatility 3-year bond issued due to the pension sector Increased borrowing need => 2-, 5- and 1-year bonds and T- bills reintroduced Issuance of government bonds DKK billion årig 5-årig 1-årig 3-årig

6 Lessons on domestic issuance Front loading of issuance very important Front loading of bond issuance DKK billion May Jan Feb M ar Apr M ay Jun Jul Aug Sep Oct Nov Dec 2-year segment 1-year segment 5-year segment Bond issuance requirement Keep a high cash balance as a precautionary measure Higher term to maturity => lower refinancing risk DKK Government account

7 From tap sale to auctions The crisis led to lower liquidity in the secondary market, which made tap sale more difficult Auctions were introduced in mid-29, which: Enabled investors to buy large amounts directly from the government Enabled banks to steer clear of the risk linked to holding bonds on their balance sheets Encouraged banks to intensify their marketing Lessons: Price discovery and liquid bond markets are very important to attract investors => new quoting obligations for primary dealers Good relationship (trust) between primary dealers helps during a crisis

8 Foreign issuance strategy Outflow from foreign-exchange reserve in October 28 DKK billion 5 DKK billion 5 Subsequent build up via borrowing and interventions First short term borrowing then shift to medium term borrowing Dollar end euro loans, but end exposure only euro Short term borrowing Medium term borrowing Int ervent ion Exchange reserve (right) Lessons: The financial crisis has highlighted the importance of being present in the market on a regular basis Increased focus on investor relations

9 Outlook for 21 EMU debt, per cent of GDP ITA GRE SW E BEL Euro area GER AUT NLD FIN DEN FRA POR SPA IRE UK Deficit, per cent of GDP

10 Financing costs can quickly increase Investors have been very selective following the financial crisis It can be very costly to finance the debt without a clear plan for consolidation of government finances 1-year yield spreads t o Germany Basis points DEN NLD ITA SPA IRE POR GRE

11 DANMARKS NATIONALBANK 11 FOREIGN EXCHANGE RESERVE Purpose of currency reserve is currency policy fixed exchange rate Basic assumptions: Fast acces to funding through government Commercial Papers High interest rate elasticity of capital flows The level of reserves are adequate Instruments behaviour are by and large stable over time

12 DANMARKS NATIONALBANK 12 DKK exchange rate peg DKK per 1 EUR Lehman 725 Fluctuation band +/-2,25 per cent Cent ral rat e (1 euro=7,4638 kroner) M arket value Net buying of euro as intervention billion kr

13 DANMARKS NATIONALBANK 13 Lessons learned Billion kr FX reserves Increased need for currency reserves Larger outflows Less interest rate elasticity CP market unreliable Increased need for liquidity Intervention etc

14 DANMARKS NATIONALBANK 14 Reserve composition changed DKK bill T-bills Closed repo Gov++ Bills 5 jan 7 mar 7 jun 7 aug 7 Deposit Liquidity okt 7 jan 8 mar 8 jun 8 aug 8 okt 8 jan 9 Buffer mar 9 jun 9 aug 9 okt 9 jan 1

15 DANMARKS NATIONALBANK 15 Currency exposure - change in net euro exposure DKK bill Dollar to hedge gold - limited net exposure Dollar incl. gold (left scale) Euro (right scale) Euro - residual currency DKK bill. aug-8 nov-8 f eb-9 maj-9 aug-9 nov-9 f eb-1 maj

16 Interest rate exposure increased as T-Bills absorbed the increase in reserves DKK bill sep-8 nov-8 jan-9 mar-9 maj-9 jul-9 sep-9 nov-9 jan-1 mar-1 maj-1 Act ual Neut ral

17 The view on credit risk management changed banks are less safe DANMARKS NATIONALBANK 17 Unsecured (deposits) and secured lending (repos) to banks played an important part in reserve management. Lehman collapse 1st hand experience of a repo default. Turbulence followed. Our initial reaction: tighten rating requirements and concentrate on remaining banks. Adjust to new reality: Change to long term ratings taking into account expectation of government support.

18 Sovereigns are no longer safe? (1-year spread to Germany) Percentage point 4, 3,5 3, 2,5 2, 1,5 1,,5, -,5-1, -1, Italy Sp ain Portugal Ireland

19 DANMARKS NATIONALBANK 19 Lessons FX reserves stay high and liquid Inferences on past observations be careful Instruments and markets change quickly

20 FINANCIAL STABILITY Profitability Pct ,1-198,2 Gruppe 1 Gruppe 2 Pengeinstitut i gruppe 1 Pengeinstitut i gruppe 2 Vægtet gennemsnit

21 Loan loss provisions Pct. af udlån og garantier 2, 1,5 1,,5, 1.kvt. 2.kvt. 3.kvt. 4.kvt. 1.kvt. 2.kvt. 3.kvt. 4.kvt. 1.kvt. 2.kvt. 3.kvt. 4.kvt. 1.kvt. 2.kvt. 3.kvt. 4.kvt Gruppe 1 Gruppe 2

22 Solvency Pct. af risikovægtede poster Danske Bank FIH Erhvervsbank Jyske Ban k Nordea Bank Danmark Nykredit Bank Sydbank Alm. Brand Bank Amagerbanken Arbejdernes Landsbank Forstædernes Bank Ringkjøbing Landbobank Spar Nord Bank Sparbank Sparekassen Sjælland Vestjysk Bank Individuelt solvensbehov Kapitaloverdækning

23 Mortgage arrears Pct. 4, 3,5 3, 2,5 2, 1,5 1,,5, Private, Nykredit Erhverv, Nykredit Private ejerboliger, i alt

24 Bankruptcies Ant al Industri Byggeri Handel mv. Transport mv. Forretningsservice mv

25 Foreclosure rate in agriculture Pct. 2, 1,8 1,6 1,4 1,2 1,,8,6,4,2,

26 Household wealth Pct. af disponibel indkomst Nettoformue Bolignettoformue Finansiel nettoformue

27 Excess solvency Procentpoint Forklaringsnøgle: 9 pct.-fraktilen 75 pct.-fraktilen 25 pct.-fraktilen 1 pct.-fraktilen Hist orisk Basisscenario Scenario 1 Forværret finans- og tillidskrise i dansk økonomi Scenario 2 International gæl dskri se Scenario 3 Stærk og langvarig dansk og int. recession

28 Excess solvency; large losses in agriculture, construction and real estate Procentpoint Forklaringsnøgle: 9 pct.-fraktilen 75 pct.-fraktilen 25 pct.-fraktilen 1 pct.-fraktilen Hist orisk Basisscenario M ax M ax x 2

29 Loans-to-deposits ratio Pct Gruppe 1 Gruppe 2 Gruppe 3

30 Due date profile for issues with original maturity above 1 year Pct Forfald før 1. oktober år 2 år 3 år 4 år 5 år eller derover

31 Keyword is LIQUIDITY Liquidity and government debt Liquidity and foreign exchange reseves Liquidity in banking system