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Globalization of Financial Markets and Shadow Banking Jan Frait Executive Director Financial Stability Department June 2013.

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Prezentace na téma: "Globalization of Financial Markets and Shadow Banking Jan Frait Executive Director Financial Stability Department June 2013."— Transkript prezentace:

1 Globalization of Financial Markets and Shadow Banking Jan Frait Executive Director Financial Stability Department June 2013

2 2 I. I. Fear of Finance

3 Fear of Finance – The Economist Supplement – September 1992 Twenty years from now with think economists of the 1980s not as the decade of international debt crisis, nor of the dollar‘s boom and bust, still less of monetarism... All these mattered, but none of them marked a decisive change that drive the world economy. Yet the 1980s witnessed such a change…many of the boundaries between national financial markets dissolved, and a truly global capital market began to emerge…for this the decade will be remembered … the next one will be remembered for the world‘s struggles to cope with it. What was most powerful force for financial change? Deregulation!

4 Fear of Finance – The Economist Supplement – September 1992 Strukturu domácích finančních trhů v 60. a 70. letech charakterizují následující termíny: segmentace, kontrola, vztahy a ochrana. Trh finančních služeb byl v té době rozdělen do segmentů. V poválečném období vlády postupně upevňovaly hranice mezi těmito segmenty, když se pokoušely udělat finanční sektor bezpečnějším a stabilnějším. Trhy segmentované regulací mají tendenci sklouzávat k monopolismu. Na to reagovali regulátoři zvýšenou kontrolou trhů. Ta byla prováděna regulací cen (úrokových sazeb) a regulací kvantity (množství úvěrů). Nikdo si v podstatě nestěžoval, monopolisté měli své a chápali, že za to musí něco obětovat. Regulované ceny ale nemohly sloužit jako základní tržní informace a proto finančníci museli najít jiný způsob předávání informací. Banky měly určitý zaručený počet klientů a proto s nimi vyvinuly těsné vztahy. Aby tento systém fungoval, vlády zavedly ochranu domácích finančních trhů před zahraniční konkurencí.

5 Fear of Finance – The Economist Supplement – September 1992 V průběhu 70. a zejména 80. let začal svět financí založený na segmentaci, kontrole, vztazích a ochraně postupně mizet. Tržní segmenty byly narušeny novými finančními institucemi a jejich inovacemi Domácí kontroly byly pod tlakem trhů postupně zrušeny, vztahy byly narušeny sekuritizací a ochrana před zahraničím začala ztrácet smysl. Která z těchto změn nejvíce přispěla k zániku tradičního finančního systému? Většina ekonomů tvrdí, že deregulace, což je zjednodušené. Systémy regulací, které narušují ceny, se postupně hroutí, ať už se to vládám líbí nebo ne. Narušené ceny vytvářejí úzká místa na trhu a tím vznikají ziskové příležitosti. Lidé a firmy se pak snaží nalézt nové cesty, jak tyto příležitosti využít. Proto je deregulace často výsledkem "poznané nutnosti" a ne příčinou změn.

6 Fear of Finance – The Economist Supplement – September 1992 Break-up of traditional banking

7 Fear of Finance – The Economist Supplement – September 1992 Lepší vysvětlení rozpadu tradičního finančního systému najdeme v obr. 1, který ukazuje vztahy mezi mezinárodními financemi a mezinárodním obchodem na jedné straně, a mezi mezinárodními financemi a inovacemi plus deregulací na straně druhé. Nahoře vidíme vztahy mezi financemi a obchodem. Jak se obchod rozšiřuje, rozšiřuje se také potřeba financování. Lepší přístup k mezinárodním financím zároveň vede k dalšímu rozšiřování obchodu. Vztah mezi financemi a inovacemi. Finanční firmy motivované ziskovými příležitostmi, které vytváří regulace, produkují inovace, které rozšiřují mezinárodní finance. Následkem toho roste konkurence a finanční firmy jsou nuceny k dalším inovacím. Zatímco konkurence představuje motor mezinárodního finančního systému, inovace představují jeho palivo. Finanční inovace segmentují, transferují a diversifikují riziko. Rovněž umožňují ekonomickým subjektům vstup na dříve nepřístupné trhy a k jejich daňovým pravidlům. Právě inovace mají velkou zásluhu na dramatickém růstu mezinárodní mobility kapitálu.

8 Fear of Finance – The Economist Supplement – September 1992 Regulační instituce se inovacím většinou snaží zpočátku čelit, to je ale obtížné. Deregulace je urychlována procesem regulační arbitráže, v rámci níž uživatelé finančních trhů emitují a obchodují cenné papíry ve finančních centrech s nejpříznivějšími regulačními standardy a s nejnižšími náklady. Finanční firmy v zemích se silnou regulací cítí, že jsou v konkurenční nevýhodě a proto začnou lobovat za deregulaci. Finanční centra se následně snaží obnovit svůj podíl na obchodu tím, že ruší zastaralé, neúčinné a nákladné regulace. Růst mezinárodních financí tak dále podporuje deregulaci a ta zpětně podporuje růst mezinárodních financí. Tak se začíná hroutit tradiční finanční systém. Tlak mezinárodních financí vede k rušení kontrol, bez kontrol nelze bránit hranice mezi tržními segmenty a bez segmentů je vztahové financování nahrazováno cenovým financováním.

9 Fear of Finance – The Economist Supplement – September 1992 Emergence of international banking

10 Fear of Finance – The Economist Supplement – September 1992 Mechanismus, který podporuje vznik nového řádu, naznačuje obr. 2. O expanzi mezinárodních financí se zasloužil především mix politik administrativy prezidenta Reagana v letech a recyklování petrodolarů zemí OPEC po ropných krizích. Kombinace přísné monetární a volné fiskální politiky v USA posílila mezinárodní finance třemi způsoby. Americký běžný účet šel do výrazného deficitu a byl financován především přebytkem běžného účtu Japonska a Německa a petrodolary prostřednictvím mezinárodních finančních trhů. Dalším faktorem byl růst a pokles hodnoty USD v 80. letech, který vedl ke zvýšení kursového rizika v mezinárodním obchodě a investování a finanční trhy na něj reagovaly zvýšenou nabídkou derivátů, kterými lze toto riziko zajišťovat. Růst úrokových sazeb a jejich zvýšená volatilita pak vytvořily další podněty k obcházení domácích regulací, což vedlo k dalšímu tlaku na jejich eliminaci.

11 Fear of Finance – The Economist Supplement – September 1992 Dalším klíčovým faktorem byl rozvoj technologií. Zlevnění a zlepšení počítačové komunikace umožnilo prakticky nepřetržité obchodování a zavedení nových finančních produktů, které lze obchodovat přes národní hranice. Nové produkty a techniky pak urychlily rozklad vztahového bankovnictví. Velké firmy se přestávaly spoléhat na financování od bank a raději se nechávaly ohodnotit ratingovými agenturami a získaly finance prodejem cenných papírů institucionálním investorům. Posledním důležitým faktorem byla politika. V USA, ve Velké Británii i v některých dalších zemích nastoupila konzervativní politika, jejímž programem byla deregulace a internacionalizace, a to nejen v oblasti financí. Expanze mezinárodních financí v 80. letech však byla hnána „trhem“ a nastala by pravděpodobně i bez této politické podpory. Na začátku 90. let se finanční model založený na segmentaci, kontrole, vztazích a ochraně ve vyspělých zemích prakticky rozpadl..

12 Fear of Finance – The Economist Supplement – September 1992 Post-war financial system: segments, control, relationship, protection. Break-up in 1980s: markets segments were overrun by newcomers, domestic controls were greatly reduced, relationship banking has given ground to securitization and other sorts of price-based finance, most capital controls were swept away. The problems with globalization driven by deregulation was that besides uncertain effects (known unknowns) there were number of unexpected and non-anticipated ones (unknown unknowns).

13 13 Knowns, Unknowns and Policy Directions crisis in emerging markets created a strong case for financial stability policies. Unfortunately, with the end of crisis, the view started to prevail that a “Great Moderation” had occurred in the world economy and that a long period of low and stable inflation and high and stable economic growth lay ahead. Strong belief in macroeconomic management predominantly by monetary policy started to prevail. „Mainstream“ economists were convincing each other that know uknowns were turned to known knowns (fallacy of US academia?). The fear of finance and of unknown unknowns were forgotten … policy of no reaction installed … the road to current crisis was open.

14 14 II. Financial Markets Elasticity and Shadow Credit

15 15 Credit growth over the boom: where the funding comes from? Between 2002 and 2008 bank credit increased markedly in advanced economies, no sharp deleveraging after 2009 except for the UK. Could this happen within traditional financial intermediation model? No, but wait for a while!

16 Leveraging in the globalization period Central banking community discussed heavily what was behind the „excessive global liquidity“ in 2005 and Financial deepening was really fast till 2007 – bonds were the winners.

17 Global liquidity creation puzzle resolved (1) Traditional intermediation - savers deposit their money with banks and banks make loans. money is then being created (multiplicated) via deposits/loans chain. The past decade has witnessed rapid growth in an new form of financial intermediation: shadow banking and its shadow „credit“. two most important shadow banking activities: securitisation and collateral intermediation. Securitisation, is a process that repackages cash flows from loans to create assets that are perceived by market participants as almost fully safe and liquid. repackaging occurs in steps, and takes the form of risk transfer, crisis revealed risks associated with securitization, activity at this market declined significantly. Collateral intermediation – shadow banking …

18 Global liquidity creation puzzle resolved (1b) Due to the shadow banking definition of credit/money should be reconsidered: By “money” or “credit” (broadly defined) or global liquidity one should understand not only what is traditionally viewed by money or credit, but also the funding obtained by using collateral outside traditional sectors. In other words, such “money” or “credit” is created in both formal and shadow collateral-based banking and by both private and public entities. There has been a lot of attention paid to this concept in writings by Gary Gorton and Andrew Metrick from Yale, Daniel Tarullo from Georgetown University/Fed, Manmohan Singh of the IMF, Credit Suisse analysts, and others in recent years.

19 Global liquidity creation puzzle resolved (1c)

20 Global liquidity creation puzzle resolved (2) Collateral-based operations include secured funding (of both banks and nonbanks), securities lending, and hedging. nonbanks (hedge funds, pensions funds, insurers) and smaller banks allow re-use of their primary collateral (primarily debt securities) and get sometimes funding in exchange; money market funds get collateral and provide funding, dealer banks (large multinationals) intermediate pledged collateral, i.e. they allow collateral to be re-used. Shadow banking system deals with high-quality collateral scarcity through its intensive re-use (rehypothecation) the same collateral is used several times (‘velocity’ of collateral), multiplier of the volume of transactions to the volume of collateral was recently about 2.5 to 3 (Singh 2011), re-use of pledged collateral creates credit in a way that is to a large extent analogous to the traditional money-creation process.

21 Global liquidity creation puzzle resolved (3) While facilitating the effective use of scarce collateral, collateral chains create sources of systemic risk a risk for global financial stability in three ways: increase interconnectedness in global financial system, create excess concentration: a small number of dealer banks is crucially important for functioning of this segment, they are exposed to significant liquidity and credit risks, add to procyclicality in financial institutions/markets behaviour. Shadow banking activities feed into procyclical component of systemic risk in two ways increase elasticity of credit supply (better ability to supply shadow credit through collateral re-use and securitization in reaction to higher demand), provide impetus to booms (nearly unlimited amount of credit available), creates downward pressures in bust (shadow credit becomes scarce and more expensive due to the increase in haircuts owing to increased counterparty risk).

22 Global liquidity creation puzzle resolved (4) Money vs. shadow money money supply/total supply of collateral after re-uses, base money vs. volume of eligible collateral, velocity of money circulation vs. re-use of collateral in a chain, policy or money market rate/reserve ratio vs. haircut, money multiplier based on insured deposits (creature of government regulation and central bank policies)/ collateral multiplier is very much a creature of the market. Why did economists ignore shadow credit in pre-crisis times? Why does this phenomenon lack theory and rigorous empirical treatment? international/global data coverage is poor, statistics and reporting still nationally oriented, academic researchers need to publish, publishers require “rigorous” approaches with data evidence.

23 Global liquidity creation puzzle resolved (5) Some economists augment standard monetary aggregates shadow credit (shadow money) to document development of global stock of money which may be relevant, but risk of double-counting, lower transparency and problematic statistical coverage, poor conceptual treatment. Shadow banking is a complex and heterogeneous ecosystem. it combines multiple nonbank agents, is linked to traditional banks, and extensively uses the services of dealer banks, it works through diverse instruments and operations, various classes of debt assets can become a source of shadow credit – system can be rather elastic.

24 Global liquidity creation puzzle resolved (5b) Source: Singh and Stella (2012)

25 Shadow credit and crisis (1) IMF‘s and some other economists warn against the impacts of collateral shortage financial lubrication was over 30 trn. USD before Lehman (10 trn. USD of this was of shadow credit - 1/3 came through pledged collateral, 1/3 of pledged collateral was of primary source, i.e. multiplier equals 3), crisis lead to decline in collateral viewed as safe, to increase in haircuts and to reduction of velocity (re-uses), i.e. to reduced moneyness of assets used as collateral, due to heightened counterparty risk, onward pledging does not occur, the collateral thus remains idle in the sense that it creates no extra credit (Singh and Stella, 2012), warnings against risk of disorderly deleveraging owing to shortage of good/safe/liquid collateral, stock of AAA sovereign bonds down by 60 % (Triffin dilemma of 21st century?), QE and LTRO may not be sufficient …

26 Shadow credit and crisis (1b) James Sweeney, Credit Suisse (2012): When Collateral is King

27 Shadow credit and crisis (2) Pressures on central banks and governments to “act” or at least allow time and space for orderly deleveraging not fully legitimate: there does not seem to be a shortage of collateral today, fiscal deficits have created a lot of “safe and liquid” collateral, system is elastic and may be able to turn more private assets to eligible collateral.

28 Shadow credit and crisis (2b) The reaction of authorities to crisis consisted of offsetting the drop in private shadow credit generation by public shadow credit supply (via issuing government debt, providing IMF loans, and by central banks’ providing liquidity and purchasing securities). James Sweeney, Credit Suisse (2012): When Collateral is King

29 Shadow credit and crisis (2c) The reaction of authorities to crisis consisted of offsetting the drop in private shadow credit generation by public shadow credit supply (via issuing government debt, providing IMF loans, and by central banks’ providing liquidity and purchasing securities). Source: Claessens et al. (2012)

30 Shadow credit and crisis (2d) James Sweeney, Credit Suisse (2013): King Collateral, presentation

31 Shadow credit and crisis (2e) James Sweeney, Credit Suisse (2013): King Collateral, presentation

32 Shadow banking and the euro area Expanding external imbalances in the euro area in particular prior to the crisis were to a large extent associated with loose private credit financing driven by both local and international banks with significant cross-border component. i n some countries, the financing of government deficits w as adding steam too. The diversity of external imbalances in the euro area is no surprise since the issuance of broadly defined “credit” is not liable to a full coordination here. In other words, both private and public entities of the euro area member states tend to create different relative sizes of “credit” owing to dissimilar national business and financial cycles, structures of financial systems and governments’ readiness to issue debt.

33 Shadow banking and the euro area This has ultimately reflected in high relative size of external imbalances in countries with private credit boom and loose fiscal policies. This particular explanation also means that it is rather tricky to tell the cyclical factors behind external imbalances from the structural ones. It is because the credit swings are due pro-cyclical as well as structural features in behaviour of the entities issuing “credit”. Under such setting, it is natural that after the outset of crisis when private credit providers started to price the risks in and collateralized lending shrunk, the public sector financing had to fill the gap to avoid an economic disaster.

34 Shadow banking and the euro area The official cross-border flows, i.e. IMF funding and central banks funding visible in the TARGET2 balances have helped prevent a disorderly unwinding of external imbalances in the stressed economies. There are also risks. The market may start to interpret the steps of policymakers in the euro area in a way that the risks own to individual economies’ “credit” are fully covered by the whole. The households in individual economies may also rethink the higher propensity to save induced by the stress. If this happens and if the mechanisms that should ensure coordinated control of “credit” creation do not work, the financial imbalances could widen again preventing from the continuation of external rebalancing.

35 Shadow credit and risks for stability (1) Monetary and prudential authorities may become “event-takers” without a possibility to use first best policies it is rather difficult to tame shadow credit boom, not “assisting” in bust may mean excess liquidation of financial assets. Shadow banking may hamper capacity of markets to equilibrate and eliminate macroeconomic imbalances it will finance their emergence while forcing public authorities to replace them in financial distress, if this is the case, unless a fundamental change comes, imbalances is a thing we will have to live with. Consequence for central bank policies: power of action constrained (impaired efficiency of both macro- and prudential policies), necessity to be careful and symmetric in both periods of credit cycle.

36 Shadow credit and risks for stability (2) Policy approaches to risks associated with shadow credit accept as a fact and adjust policies accordingly, regulation of shadow banking participants, regulation of dealer banks (large multinational SIBs) and targeted structural reforms (ring fencing, downsizing, splitting …), more intrusive micro- and macroprudential policies, some other approaches (known unknowns) …

37 THANK YOU FOR YOUR ATTENTION Financial Stability Department in the CNB: CNB: Financial Stability Reports, various issues - available at Jan Frait Financial Stability Department Czech National Bank Na Prikope 28 CZ Prague Tel.:


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