Stress Testing at Banque de France

Transcription

1 Sress Tesing a Banque de France By Olivier de Band (*) Banque de France Macroeconomic Analysis and Forecasing Direcorae (*) wih conribuions from C. Marin and M. Tiesse (French Banking Commission)

2 Plan Curren framework A. Modelling he impac of macroeconomic sress scenarios on differen oucomes of bank s loan porfolios (ineres margin, PDs) and exrapolae effec on banks solvency. B. Ad hoc shocks on he corporae credi porfolio of major French banks (sensiiviy analysis) C. Ad hoc shocks on he EL of a single bank New insrumens Loan Loss Provisions and he Macroeconomy Equilibrium in he corporae deb marke

3 I Curren framework I-A Macroeconomic sress esing exercises Scenarios Margin model Sressed capial level Macroeconomic model Sressed macroeconomic variables Simulaion Transiion marices model Sressed solvency raios Sressed RWA level

4 I Curren framework I-A- Macro sress esing 1- Analysis of inermediaion Margin Esimaed on he basis of panel daa analysis (GMM esimaion) of banks ne ineres margin, period: Dynamic approach (persisence) Main explanaory facors: yield curve, credi volumes and credi qualiy M M r * i, i, * p, L i, i, M (17.99) adjused R² 0.83 i, r (10.19) credi margin for bank loan growh for bank * ( 4.96) 5y-3mrisk freeineres raeslope * 2 p, 0.29r L volailiy of 5y-3mrisk freeineres raeslope cos of risk expecedby bank i a ime PD i 0.59 i a ime i, * i,.lgd 0.20 i, 0.65 i,

5 I Curren framework I-A Macro sress esing 2- Capial requiremens model (Risk-weighed asses) Esimaes of risk weighed asse are compued using he probabiliy of migraion from one raing o anoher, in banks corporae porfolios (ransiion marix) Markovian approach : logisic funcion/ dynamic approach M z z X ij ij Pr( raing Pr( raing log Pr( raing z ij ij, 1 ij j ij raing j j X 1 raing raing i) 1 1 macroeconomicvariables ( GDP, ineres p ij 1 1 ij i) i) A sressed loan porfolio P is hen calculaed wih: P PM rae, ec.)

6 I Curren framework I-A Macro sress esing 3-Capial requiremens model The increase in capial requiremens due o a change in he credi raings afer a shock is hen compued from he sressed porfolio, using Basel II formulae: ( ) P capial requiremens Basel II funcion for credi risk compuaion The iniial credi porfolio is obained from : Banks residen individual exposures on corporaes (credi regiser) A breakdown of hese exposure by risk classes (BDF inernal raings) Iniial (before he shock) risk weighed asses can be compued, using Basel II hypoheses on LGDs and asse correlaion.

7 I Curren framework I-A Macro sress esing 4- Sress scenario design (1/2) Scenarios are eiher severe or more realisic Parly inspired by iniial FSAP scenarios (2003/2004): 20 % drop in world demand for French goods Decrease in consumpion growh or in invesmen growh such as riggering a recession for he French economy. Rise in oil price (100 USD) Depreciaion of USD/EUR 200 BP parallel shif of ineres rae curve Flaening and Inversion of he yield rae curve (+200bp ST / +100bp LT)

8 I Curren framework I-A Macro sress esing 4- Sress scenario design (2/2) 2 ypes of shocks simulaed: - Transiory shocks (macroeconomic), ha are implemened progressively over he period. Afer 2 years, shocked variables reurn o heir iniial level - Permanen shocks (markes), whose impac is enirely aken ino accoun a he sar of he sress period and mainained hroughou he period: ineres raes, exchanges raes, Bren oil prices ec. Sressed exogenous facors (inpus in he sress esing banking models) come from BDF inernally used macroeconomeric models (Mascoe, Nigem). - GDP growh - Ousanding loans o he privae secor - Ineres raes and yield curve

9 I Curren framework I-A Macro sress esing 5- Sress scenario resuls (1/4) Final resuls provide us wih an esimae of sressed solvency raios for he banking secor represened by is main large and complex financial insiuions The new level (afer he shock) of own funds is compued aking accoun of he change in banks operaing income numeraor of he raio is impaced The ransiion marices model provides an esimae of sressed RWA, according o boh a volume effec (change in credi volumes) and a risk effec (change in he raing of credi counerpars) denominaor is impaced FP ( 1 M ) FP M FP capial risk effec volumeeffec RWA ( 1 ) ( 1 ) RWA 1 banks'margin growh Operaingincomefor he7 French LCFIs The sressed solvency raio (Basel II ype) is hen compared o a benchmark (acual raio for he BS BS S S large French banks) sress FP RWA FP RWA 1

10 I Curren framework I-A Macro sress esing 5- Sress scenario resuls (2/4) Impac of he shocks on banks profiabiliy (cumulaed effec, %) Cumulaed Change in Profiabiliy baseline Consumpion World Demand Invesmen Upward shif yield curve Inversion yield curve 20% depreciaion US$

11 I Curren framework I-A Macro sress esing 5- Sress scenario resuls (3/4) Scenarios impac on RWA Growh of Risk Weighed Asses baseline Consumpion World Demand Invesmen Upward shif yield curve Inversion yield curve % depreciaion

12 I Curren framework I-A Macro sress esing 5- Sress scenario resuls (4/4) Solvency Raios baseline 11,5 Consumpion 11 10,5 World Demand Invesmen 10 9, Upward shif yield curve Inversion yield curve 20% depreciaion US$

13 I - Curren framework I-B. Ad hoc shocks on a credi porfolio Overall or secor-specific downgrade of credi raings : One noch for all raings Or wo noches for specific secors/counries and one noch for he ohers Using Banque de France daa base : For raed companies For exposures (credi regiser)

14 I - Curren framework I-B Ad hoc shocks on a credi porfolio Risk disribuion of he banks exposures on raed enerprises 35% 30% 25% 20% 15% 10% 5% 0% P Source : SCR 12/2006 disribuion obs. en disribuion obs. en

15 I- Curren framework I-B Ad hoc shocks on a credi porfolio A simulaed overall-sysem sressed solvency raio is calculaed This sressed simulaed raio is compared o he benchmark solvency raio

16 I - Curren framework I-C Ad hoc shocks on he EL of a single bank For an individual bank, a banking analysis ool, named SAABA 2: Sress insananeously he individual expeced losses Ge he resuling sressed solvency raio for he seleced bank

17 II New approaches Improvemens desired: Ad hoc naure of he link beween macro and banking secor (credi demand equaion) Absence of feedback effecs on he macroeconomy (independence beween volumes and risk) Model he supply and demand equilibrium in one componen of credi marke : corporae deb => Panel invesigaion of he European corporae deb marke (S&Dd) exension possible o HH Sress esing exercises: measures of he effecs of large macroeconomic shocks ( increase in ineres raes, severe recession, large oil shocks, ) on he equilibrium in he corporae deb marke include feedback effecs from shifs in boh supply and demand schedules

18 II New approaches An example in response o an adverse macro shock : deb supply shifs o he righ, as well as demand lower deb level (Q1 o Q2) and higher ineres rae (r1 o r2)

19 II New approaches II-A Supply and demand schedules The demand equaion is derived from he demand equaion bu addiional indicaors are inroduced: D Log( P i ) 10 i 11Log( Turni) 12Invi 13Roai 14 r D i d i where Inv i, Turni Roa and i are companies invesmen, sales growh and reurns on asses The supply equaion ( r L i r i D a equilibrium) r D i r Log( D / P) 20i R fail) i 23 i s i 20i where is a funcion he ineres margin, can be compared across companies, alhough is absolue level is no deermined

20 II New approaches II-B Esimaion mehods A his sage, he esimaion is saic We have o accoun for heerogeneiy in a panel conex We have o face an endogeneiy problem, usual in esimaing supply/demand equaions (simulaneiy bias) his problem is avoided by implemening a 2SLS (Two sage leas square) esimaion mehod : W2SLS is preferred mehod

21 II New approaches II-C Daa (1/2) We use he EU Commission s Harmonized BACH daabase which provides harmonized balance shee, profis and loss accouns for differen counries: we have reained France, Germany, Spain and Ialy The daa are annual and available according o a breakdown by indusrial secors and hree size classes ( small/medium/large): he individual index i is herefore a counry-secor-size riple and he ime index denoes a year We focus on he (T=12 periods) and N=144 (12 secors x 3 sizes x 4 counries), selecing 12 secors (manufacuring (excluding energy),consrucion, wholesale and reail rade)

22 II New approaches II-C Daa (2/2) The variables are he following: De = log(oal financial deb, divided by he GDP deflaor) In = ineres burden in % of oal financial deb (rd ) Turn = year-on year growh of sales Inv = invesmen raio= invesmen/sales Roa = ne profis divided by oal asses Gar(i)= amoun of collaeral available o he company Gar(1) for he small companies and Gar(2) for he medium size companies Size = oal asses in logarihm The defaul probabilies are jus available for counries The daa are aggregaes (sum over he companies of a same class) Indicaors in level are averages over he number of companies of he class Raios are compued as (weighed) average raios (raios of aggregaes)

23 II New approaches II-D Empirical resuls : main resuls (1/3) Davidson and MacKinnon ess confirm he exisence of endogeneiy in mos cases. The parial R² and he parial F indicae ha he choice of insrumens is all in all accepable. All esimaion mehods provide very similar esimaes for he parameers of he supply equaion; wih he collaeral variables included, i is he same for he demand equaion

24 II New approaches II-D Empirical resuls : main resuls (2/3) The empirical fi of he supply equaion o he daa is beer han he one of he demand equaion W2SLS Esimaion of he supply equaion provides coefficiens of he correc sign and order of magniude Fixed effecs in he supply equaion indicaes ha he degree of compeiion (for fund suppliers) is higher for large han for small companies

25 II New approaches II-D Empirical resuls : main resuls (3/3) Model wih collaerals

26 II New approaches II-E Implemening sress esing exercises (1/5) Loans o corporae firms are a large componen of oal asses of euro area financial insiuions In pracice: Macro shocks Effec on equilibrium ineres rae and deb Impac on banks porfolio, based on share of corporae loans in banks oal porfolio

27 II New approaches II-E Implemening sress esing exercises (2/5) Two macro scenarios are considered: A significan reducion in world demand (originaing in he US) leading o a recession in Europe An increase in oil price ( +70%) wih a reacion of moneary policy o counerac he second round effecs on inflaion We refer o macroeconomic models o calibrae he sress scenarios: - we ge he responses of macroeconomic variables ( real GDP, GDP deflaor, companies s invesmen/value added, growh of value added in nominal erms, gross operaing surplus/capial sock) o he iniial shocks - we use bridge equaions which link he exogeneous variables included in he corporae model o he macroeconomic aggregaes: for exemple : Inv is linked o he raio of companies invesmen/value added, defaul o (inverse) GDP growh.

28 II New approaches II-E Implemening sress esing exercises (3/5) Coefficiens of he reduced form model = Elasiciies of deb and ineres raes o he exogenous variables

29 II New approaches II-E Implemening sress esing exercises (4/5) Impac of he shocks on he exogenous variables and oal impac on De and r D

30 II New approaches II-E Implemening sress esing exercises (5/5) Sress Tesing Resuls : Scenario 1 : recession following a reducion in foreign demand Shock : negaive growh in sales (urnover), lower RoA, higher bankrupcy raes Equilibrium on he corporae deb marke : lower demand from negaive growh in sales, parially offse by posiive effec from lower Roa + lower supply from higher bankrupcy raes Impac on corporae deb volume is negaive (equal conribuion from supply and demand) : De % Impac on lending rae is posiive: significan conribuion from higher bankrupcy (supply) r D bp Scenario 2 : An increase in oil price ( +70%) wih a reacion of moneary policy o counerac he secound round effecs on inflaion Shock : sligh acceleraion in sales (urnover), slighly higher bankrupcy raes, higher ineres raes following ECB reacion Equilibrium on he corporae deb marke : slighly higher demand + significanly lower supply from higher bankrupcy raes, bu mainly from higher refinancing raes Impac on corporae deb volume is negaive, mainly from higher refinancing raes : De % Impac on lending rae is posiive: from higher refinancing rae and bankrupcy r D bp

31 Perspecives for fuure work Dynamics in deb marke Liquidiy shocks Non lineariy Impac of macroeconomic shocks on (expeced) corporae defauls and effec on banks Enrich macro models wih real variables (house price shock hrough wealh effecs or oher channels) Analysis of conagion in inerbank marke