Macroprudential surveillance at the Riksbank. I Reunión de Estabilidad Financiera, Mexico City, November 2011

Transcription

1 Macroprudential surveillance at the Riksbank I Reunión de Estabilidad Financiera, Mexico City, November 2011

2 Overview of presentation A Bird s eye view of the Swedish financial system Macroprudential indicators Stresstesting liquidity- and credit risk in LCFI The views expressed in this presentation should not be attributed to the Board of Governors of the Riksbank

3 The Riksbank (RB) Founded in 1668 Operates an inflation target (±2 % p.a.) Not a part of the euro zone Non-regulatory central bank Executive Board with 6 members Financial Stability Department has about 50 employees (out a total 380 RB staff) Financial stability mandate promote a safe and payment mechanism LoLR function

4 Swedish financial system Dominated by four large banks (80 per cent of total assets) SEB, Swedbank (SWD), Nordea (NDA) and Handelsbanken (SHB) Total assets > 300 per cent of GDP Assets are mainly loans to the general public Substantial of cross-border lending (approx 50 percent of assets are non-domestic) High reliance on whole sale markets for funding (esp in FX)

5 Macroprudential surveillance Wide range of indicators are used for macroprudential surveillance (heat map, stress index, credit gaps, JPoD and CoVaR) Stresstests employed to investigate identified weaknesses Credit risk Liquidity risk Purpose of stress testing Inform the public of the Riksbank s view in FSR Serve as input to macroprudential policy

6 Heat map

7 International stress index Chart 1:8. Sources: Reuters EcoWin, Bloomberg and the Riksbank

8 Contracyclical capital buffers in the Nordic countries Per cent 3,0 2,5 2,0 1,5 1,0 0,5 0, Sweden Finland Norway Denmark Chart B3:5 Sources: Reuters EcoWin and the Riksbank

9 Contracyclical capital buffers for Swedish banks Per cent 3,0 2,5 2,0 1,5 1,0 0,5 0, Swedbank SEB Handelsbanken Nordea Chart B3:7 Sources: The Riksbank and banks annual reports

10 Sannolikhet Probability that the four banks fail simultaneously 0, ,00025 Lehman Brother ansöker om konkursskydd Information om nyemission av svensk bank Stöd, eller ansökan om stöd, från EMU/IMF 0, , , , ,00000 Systemriskindikatorn Note: for computational details see Segoviano, M. and Goodhart, C, Banking stability Measures, IMF WP 09/04

11 Figure 1-95% CoVaR between the system and each bank Note: work in progress

12 Why stress testing for credit risk? Main Financial Stability motivation for RB : ultimate provider of liquidity (e.g. LoLR) RB will not grant credit to insolvent/non-viable institutions, but insolvency often initially masquerades as illiquidity How large losses can the banks sustain without resorting to deleveraging? Scenario analysis, how will capital ratios evolve in a stressed scenario over a three year period?

13 The major Swedish banks core Tier 1 capital ratios according to Basel II and Basel III, initially and in the stress test Per cent 16% 14% 12% 10% 8% 6% 4% 2% 0% 11 Kv Kv Kv Kv Handelsbanken Nordea SEB Swedbank Chart 4:7. Source: The Riksbank

14 Trilemma of macro stress testing Desirables Tough but realistic macro economic scenarios High credit losses Model based results What should the focus be? Expected outcome under a tough scenario? Unexpected outcome under less tough scenario?

15 Liquidity risk monitoring Main motivation part of the Riksbank s communication on Financial stability highlight the strengths and weaknesses of Swedish banks regarding liquidity and to communicate this information. Act as a driving force to improve transparency and disseminate information. At present, there is a lack of transparency in the banks reporting of liquidity risks. Based on public data (liquidatum) Pro: publication of results possible Facilitates comparison with other international banks Con: inferior granularity in data cf. supervisory data

16 Two measures for liquidity risk The Riksbank s short-term liquidity measure Stressed outflows vs liquidity reserve In spirit close to LCR 3 month horizon Gross outflows The Riksbank s structural liquidity measurement Measures maturity mismatch Very close to NSFR Stop-gap measure until new Basel measures (LCR and NSFR) become publically available

17 The Riksbank s structural liquidity measurement for the major Swedish banks compared with the average for a selection of European banks Stable funding in relation to illiquid assets, per cent Chart 4:9. Source: Liquidatum and the Riksbank

18 Survival period for the major Swedish banks in the stressed scenario, compared with the average for a selection of European banks Number of months Chart 4:10. Sources: Liquidatum and the Riksbank

19 Banks reactions to stress test Not a one way street need to engage with banks at an early stage Takes time to build credibility for the stress tests Banks are given the opportunity to review how they fare in the stress tests prior to publication Banks not allowed to change the underlying scenarios, but may have useful input on the parameters (exposures, pd and lgd) Banks may not always agree with results, but as the Riksbank often is seen as an honest broker, they too can benefit from publication

20 Thank you!