Schweizerische Nationalbank · SIX:SNBN
Schweizerische Nationalbank — Technical Presentation (May 2011)
33 slides from Schweizerische Nationalbank's technical presentation, May 16, 2011
Slide 1: The Impact of Banking Sector Stability on the Real Economy
The Impact of Banking Sector Stability on the Real Economy Stability on Real Economy Impact of Banking Sector Terhi Jokipii & Pierre Monnin 8th Annual NBP-SNB Joint Seminar 16.05.2011
Slide 2: Motivation
Motivation • Increased incidence of crisis • Research: Stability on Real Economy • Links between banking sector and long-term growth Impact of Banking Sector • Quantifying costs of crises 16.05.2011 © Schweizerische Nationalbank, Zürich/Bern
Slide 3: Findings
Findings • The degree of development and openness of the banking sector is important for long term economic growth Stability on Real Economy Impact of Banking Sector • Banking crises coincide with, or precede, substantial economic slowdowns 16.05.2011 © Schweizerische Nationalbank, Zürich/Bern
Slide 4: Main questions addressed
Main questions addressed • Does banking sector stability have an impact on real output growth? … • … and on inflation? Stability on Real Economy Impact of Banking Sector • Can banking sector stability indicators help improve output and inflation forecasts? 16.05.2011 © Schweizerische Nationalbank, Z
Slide 5: Innovations of the paper
Innovations of the paper • Use a continuous index of banking sector stability instead of binary indicator • Use a panel VAR to capture two-way effect (output growth & banking sector stability) Stability on Real Economy Impact of Banking Sector • Allow output variance to be dependant on banking secto
Slide 6: Conclusions
Conclusions • Banking sector stability has an impact on GDP growth … • … and uncertainty about future GDP growth • Banking sector stability indicators seem to Stability on Real Economy Impact of Banking Sector improve output growth forecasts • No significant impact on inflation 16.05.2011 © Schweize
Slide 7: Definitions
Definitions • Instability: Probability that the banking sector becomes insolvent within the next quarter • Insolvency: Stability on Real Economy Impact of Banking Sector Banking sector is insolvent if, at the end of the quarter, the market value of its total assets is not sufficient to repay its tot
Slide 8: Assumptions
Assumptions • The assets of the banking sector follows a Brownian motion • The debt grows at a continuously Stability on Real Economy Impact of Banking Sector compounded growth rate 16.05.2011 © Schweizerische Nationalbank, Zürich/Bern
Slide 9: Merton’s model
Merton’s model • Equity is equivalent to a call option on its assets • Using Black-Scholes formula we can obtain Stability on Real Economy Impact of Banking Sector the probability of exercising the option (A>D) • and the probability of not exercising the option (A<D) = DD 16.05.2011 © Schweizerische
Slide 10: Duan’s method
Duan’s method • There is a one-to-one mapping between the observable equity and the unobservable asset The unknown parameters can be estimated Stability on Real Economy by maximum log likelihood method Impact of Banking Sector 16.05.2011 © Schweizerische Nationalbank, Zürich/Bern
Slide 11: Data
Data • Sample : 1980 to 2008 • Quarterly data • 521 banks in 18 OECD countries Stability on Real Economy • Linear interpolation for transforming annual Impact of Banking Sector debt data to quarterly data • Quarterly market value of equity is the minimum observed during the quarter 16.05.2011 © Schw
Slide 12: Stability on Real Economy
Stability on Real Economy Impact of Banking Sector 16.05.2011 © Schweizerische Nationalbank, Zürich/Bern
Slide 13: Stability on Real Economy
Stability on Real Economy Impact of Banking Sector 16.05.2011 © Schweizerische Nationalbank, Zürich/Bern
Slide 14: Unbalanced Panel VAR with state dependant variance
Unbalanced Panel VAR with state dependant variance • Panel VAR equation Stability on Real Economy • Variance equation Impact of Banking Sector • Estimated with maximum log likelihood 16.05.2011 © Schweizerische Nationalbank, Zürich/Bern
Slide 15: Stability on Real Economy
Impact of Banking Sector Stability on Real Economy 16.05.2011 15
Slide 16: Banking sector stability on output growth
Banking sector stability on output growth • Two-way relationship • Higher output growth followed by greater banking sector stability Stability on Real Economy Impact of Banking Sector • Banking sector stability induces growth in subsequent periods 16 16.05.2011
Slide 17: Stability on Real Economy
Impact of Banking Sector Stability on Real Economy 16.05.2011 17
Slide 18: Variances
Variances • Levels have impact on own variance • Higher output growth = lower output variance Stability on Real Economy • Variance in DD increases when DD is high Impact of Banking Sector Unstable banking sector more likely to be followed by more instability 18 16.05.2011
Slide 19: Variances
Variances • Stable banking sector reduces uncertainty about future output growth Stable banking sector more likely to be Stability on Real Economy Impact of Banking Sector followed by high output growth than an unstable banking sector is to be followed by low output growth 19 16.05.2011
Slide 20: Stability on Real Economy
Impact of Banking Sector Stability on Real Economy 16.05.2011 20
Slide 21: Stability on Real Economy
Impact of Banking Sector Stability on Real Economy 16.05.2011 21
Slide 22: Stability on Real Economy
Impact of Banking Sector Stability on Real Economy 16.05.2011 22
Slide 23: Stability on Real Economy
Impact of Banking Sector Stability on Real Economy 16.05.2011 23
Slide 24: Non linear impact
Non linear impact • Linear links are driven predominantly by unstable periods rather than a smooth and continous link between banking sector and the real economy Stability on Real Economy Impact of Banking Sector 24 16.05.2011
Slide 25: Stability on Real Economy
Impact of Banking Sector Stability on Real Economy 16.05.2011 25
Slide 26: Stability on Real Economy
Impact of Banking Sector Stability on Real Economy 16.05.2011 26
Slide 27: Stability on Real Economy
Impact of Banking Sector Stability on Real Economy 16.05.2011 27
Slide 28: Stability on Real Economy
Impact of Banking Sector Stability on Real Economy 16.05.2011 28
Slide 29: Stability on Real Economy
Impact of Banking Sector Stability on Real Economy 16.05.2011 29
Slide 30: Stability and Fed forecasts
Stability and Fed forecasts • Forecasts made by Fed • Five-year delay sample 1980Q1-2001Q4 • Forecasts based on econometric models and judgment Stability on Real Economy Impact of Banking Sector 16.05.2011 © Schweizerische Nationalbank, Zürich/Bern
Slide 31: Stability on Real Economy
Impact of Banking Sector Stability on Real Economy 16.05.2011 31
Slide 32: Stability on Real Economy
Impact of Banking Sector Stability on Real Economy 16.05.2011 32
Slide 33: Conclusions
Conclusions • Banking sector stability has an impact on real output growth … • … and on uncertainty about output growth • Banking sector stability indicators can Stability on Real Economy Impact of Banking Sector improve output growth forecasts • No significant impact on inflation 16.05.2011 © Schwe
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