Banque Nationale De Belgique Sa · EURONEXT:BNB
Banque Nationale De Belgique Sa — Technical Presentation
44 slides from Banque Nationale De Belgique Sa's technical presentation
Slide 1: The Bank Capital Channel of Monetary Policy
THE BANK CAPITAL CHANNEL OF MONETARY POLICY Skander Van den Heuvel Federal Reserve Board The views presented are solely those of the author and do not necessarily represent those of the Federal Reserve Board or its staff. 1
Slide 2: Do bank capital and capital requirements matter for monetary policy transmission?
Do bank capital and capital requirements matter for the transmission of monetary policy to bank lending? • Traditional monetary theory has largely ignored bank equity and capital requirements. • Increased importance of capital requirements (since the Basel Accords). • ‘Capital crunch’ during the 199
Slide 3: Do bank capital and capital requirements matter for monetary policy transmission?
Do bank capital and capital requirements matter for the transmission of monetary policy to bank lending? • Traditional monetary theory has largely ignored bank equity and capital requirements. • Increased importance of capital requirements (since the Basel Accords). • ‘Capital crunch’ during the 199
Slide 4: Do bank capital and capital requirements matter for monetary policy transmission?
Do bank capital and capital requirements matter for the transmission of monetary policy to bank lending? • Traditional monetary theory has largely ignored bank equity and capital requirements. • Increased importance of capital requirements (since the Basel Accords). • ‘Capital crunch’ during the 199
Slide 5: Do bank capital and capital requirements matter for monetary policy transmission?
Do bank capital and capital requirements matter for the transmission of monetary policy to bank lending? • Traditional monetary theory has largely ignored bank equity and capital requirements. • Increased importance of capital requirements (since the Basel Accords). • ‘Capital crunch’ during the 199
Slide 6: Do bank capital and capital requirements matter for monetary policy transmission?
Do bank capital and capital requirements matter for the transmission of monetary policy to bank lending? • Traditional monetary theory has largely ignored bank equity and capital requirements. • Increased importance of capital requirements (since the Basel Accords). • ‘Capital crunch’ during the 199
Slide 7: Do bank capital and capital requirements matter for monetary policy transmission?
Do bank capital and capital requirements matter for the transmission of monetary policy to bank lending? • Traditional monetary theory has largely ignored bank equity and capital requirements. • Increased importance of capital requirements (since the Basel Accords). • ‘Capital crunch’ during the 199
Slide 8: This paper: Yes
Do bank capital and capital requirements matter for the transmission of monetary policy to bank lending? This paper: Yes. In the presence of financial frictions, capital requirements generate a mechanism whereby monetary policy changes bank loan supply through its effect on bank capital. 8
Slide 9: Outline
Outline 1. Regulatory background 2. Model 3. Calibration and quantitative results 4. Empirical test 9
Slide 10: Regulatory background for U.S.
Regulatory background for U.S. Pre – Basle: core capital ≥ 0.03 * total assets higher requirement for all but “the most highly rated banks” Basel I Accord (1988): tier 1 capital ≥ 0.04 * risk-weighted assets total capital ≥ 0.08 * risk-weighted assets risk-weights: reflect credit risk of asset categ
Slide 11: Regulatory background
Regulatory background Basel II (never implemented in US) Pillar1: More refined risk weights, based on ratings • external • internal Pillar 2 incorporates some similar elements to the FDICIA Basel III • work in progress… 11
Slide 12: Model: Introduction
Model: Introduction Dynamic bank asset and liability management model with: 1. Risk-based capital requirements 2. Imperfect market for bank equity 3. Maturity transformation by the bank 1 and 2 bank lending depends on bank capital 3 interest rate risk Combined, this gives rise to a ‘bank capital
Slide 13: Model: Introduction
Model: Introduction Model provides an alternative to the conventional bank lending channel • No special role of reserves • Bank lending channel requires financial frictions for all nonreservable bank liabilities 13
Slide 14: Model: Introduction
Model: Introduction Main implications: 1. Bank lending depends on the bank’s capital adequacy even when the regulatory constraint is not momentarily binding. 2. Shocks to bank profitability, such as loan defaults, have a persistent impact on lending. 3. The model generates a ‘bank capital channel’ o
Slide 15: The Model
The Model The bank’s objective: maximization of shareholder value. • Shareholders do not price the bank’s risk • Short market interest rate rt exogenous process ∞ s −1 −1 Vt max ∞ Et ∑ ∏ (1 + rt +u ) Dt + s {N t + s , Dt + s }s=0 = s 0= u 0 15
Slide 16: Assets and Liabilities
Assets Liabilities Loans Lt Debt (including Bt deposits) Securities St Equity Et Total Assets At At Assets Liabilities Loans Lt+Nt Debt Bt+Nt+ΔSt+Dt Securities St+ΔSt Equity Et – Dt Total Assets At+Nt+ΔSt At+Nt+ΔSt 16
Slide 17: Loans
Loans: • Constant maturity structure of loan portfolio: • fraction δ due each period. • Average maturity: 1/ δ > 1. • Actual repayments uncertain: δ t +1 • Bad loans cause charge-offs. Lt +1 =(1 − δ t +1 − ωt +1 ) Lt + (1 − δ t +1 − bt +1 ) N t • Downward sloping loan demand: higher N in given perio
Slide 18: Bank debt and securities
Bank debt and securities: • All short (maturity transformation). • Bank debt insured, securities risk-free market interest rate rt • Abstracts from liquidity problems. No ‘bank lending channel’ in model. 18
Slide 19: Equity and accounting profits
Equity: Et +1 = Et − Dt + (1 − τ )π t +1 • Corporate income tax generates tax advantage of debt finance, relative to equity. Accounting profits: π t +1= ρ ((1 − ωt +1 ) Lt + (1 − bt +1 ) Nt ) − rt ( Lt − Et + Nt + Dt ) − (ωt +1Lt + bt +1 Nt ) + π F 19
Slide 20: Capital Regulation
Capital Regulation: • Loans: 100% in risk weighted assets. • Securities: zero risk weight. • Regulations limit asset growth and dividends: Et ≥ γ Lt ⇒ Et − Dt ≥ γ ( Lt + N t ) Et < γ Lt ⇒= N t 0 and= Dt 0 Financial Constraint: Dt ≥ 0 20
Slide 21: Risk
Risk: 1. Default risk, ω 2. Interest rate risk, r 3. ‘Liquidity risk’, δ Markov in r State variables: ( Et , Lt , rt ) 21
Slide 22: A useful benchmark: no financial friction
A useful benchmark: no financial friction ‘Financially unconstrained bank’: • No financial constraint imposed; D < 0 without cost. • Modigliani-Miller result for lending: N U ( Et , Lt , rt ) = N U (rt ) (‘balance sheet does not matter’) • This bank always keeps capital at the regulatory minimum: DU
Slide 23: Calibration
Calibration b( N , ω ) = α N ηω Table 1.1. Parameters values (at annual rates): γ 0.08 τ 0.40 ρ0 0.08 α 4.00 η 8.00 πF - 0.094 Distr. Of: Min: Mode: Max: ω - 0.005 0.005 0.040 δ 0.200 0.250 0.300 • ω and δ i.i.d., triangular densities 23
Slide 24: Results
Results Capital requirement slack: ∂N ∂E =0 60 % E – D – γ(L+N) > 0 81 % ∂N ∂E > 0 40 % Capital requirement binding: 1/ γ 19 % ∂N ∂E = E – D – γ(L+N) = 0 Capital Inadequacy: 0.43 % ∂N ∂E =0 E – γL < 0 Bankruptcy: 0.02 % Exit E≤0 24
Slide 25: New Loans
New Loans Dividends Excess Excess Capital Capital E – γL E – D –γ(L+N)
Slide 26: Risk based total capital ratios
Risk based total capital ratios 45 40 35 % bank assets 30 25 20 15 10 5 0 0.00 0.05 0.10 0.15 0.20 0.25 0.30 0.35 0.40 0.45 0.50
Slide 27: Optimal policy as a function of excess capital
Optimal policy as a function of excess capital for r1 = 0.05 and r2 = 0.06
Slide 28: New Loans (N)
precautionary ‘unconstrained’ lending cuts lending (financial constr.) capital New constrained Loans lending (N) Existing Excess Capital Loans
Slide 29: New Loans (N)
precautionary ‘unconstrained’ lending cuts lending (financial constr.) New constrained Loans lending (N) Existing Excess Capital Loans
Slide 30: Response to interest rate shock: 'average' bank
Response to interest rate shock: ‘average’ bank New NewLoans Loans Dividends Excess Capital (p.p.) Loans (%dev) Profits Interest rate
Slide 31: Response to interest rate shock: 'average' bank
Response to interest rate shock: ‘average’ bank New NewLoans Loans Dividends Excess Capital (p.p.) Loans (%dev) Profits Interest rate
Slide 32: Response to interest rate shock: 'average' bank
Response to interest rate shock: ‘average’ bank New NewLoans Loans Dividends Excess Capital (p.p.) Loans (%dev) Profits Interest rate
Slide 33: Response to interest rate shock: 'average' bank
Response to interest rate shock: ‘average’ bank New NewLoans Loans Dividends Excess Capital (p.p.) Loans (%dev) Profits Interest rate
Slide 34: Response to Interest Rate Shock: Capital Requirement Binding
Response to Interest Rate Shock: Capital Requirement Binding New Loans Dividends Excess Capital (p.p.) Loans (%dev) Profits Interest rate
Slide 35: Response to Interest Rate Shock: Capital Requirement Binding
Response to Interest Rate Shock: Capital Requirement Binding New Loans Dividends Excess Capital (p.p.) Loans (%dev) Profits Interest rate
Slide 36: Response to Interest Rate Shock: Capital Requirement Binding
Response to Interest Rate Shock: Capital Requirement Binding New Loans Dividends Excess Capital (p.p.) Loans (%dev) Profits Interest rate
Slide 37: Aggregated Response in 'Good Times'
Aggregated Response in ‘Good Times’ (ro=0.05) New Loans Dividends Excess Capital (p.p.) Loans (%dev) Profits Interest rate
Slide 38: Aggregated Response in 'Bad Times'
Aggregated Response in ‘Bad Times’ (ro=0.06) New Loans Dividends Excess Capital (p.p.) Loans (%dev) Profits Interest rate
Slide 39: Aggregated Response to Interest Rate Cut in 'Bad Times'
Aggregated Response to Interest Rate Cut in ‘Bad Times’ (ro=0.06) New Loans Dividends Excess Capital (p.p.) Loans (%dev) Interest rate Profits
Slide 40: A Look at the Data
A Look at the Data: “Do Monetary Policy Effects on Bank Lending Depend on Bank Capitalization?” Model predicts a negative lending response to a monetary policy induced rise in the interest rate: ∂ Et [ ∆Lt + s | ( Et , Lt , rt )] ≤ 0, for s ≥ 0 ∂rt which is more pronounced for low capital banks: ∂ 2
Slide 41: Empirical Method
Empirical Method: Idea: ∆Lit = α (Cit −1 ) + γ (Cit −1 )∆rt + ... + ε it Lit Log of Total Loans of bank i at the end of quarter t Cit Capital Asset Ratio of bank i at the end of quarter t ∆rt Identified monetary policy shock, Christiano, Eichenbaum, Evans (1994) ∂γ (Cit −1 ) Expect ∂C ≥0 it −1 27
Slide 42: Empirical specification by capitalization and size class
∆Lit = α [ it ] + B[ it ] ( L)∆Lit −1 + Γ[it ] ( L)∆rt + ... + ε it where [it] = lo if Cit-5 < 0.06 [it] = mid if 0.06 < Cit-5 < 0.09 [it] = hi if Cit-5 > 0.09 Estimated separately for three different size classes: Percentiles Perc. of lo mid hi in size distr. assets Small 0 – 90 20 % 0.08 0.52 0.40
Slide 43: Larger Banks
Larger Banks: • May have better access to stock market and better hedging smaller bank capital channel • Tend to have a more diversified loan portfolio than small banks (lower charge-off risk), so they tend to hold a smaller buffer stock of equity. If maturity mismatch is the same as small banks
Slide 44: Small Banks Small Banks
-0.36 -0.24 -O.12 -0.00 Small Banks Small Banks ul i=) 1 © [= 1 9 1 t a) 1 2 3 4 Change in Loans Loans Medium Size Banks Medium Size Banks ® i=) 0.3 \ 7 0.1 A -0.8 Change in Loans Large Banks 1.8 1.4 1.0 0.2 0.6 0 4 2 3 4 Loans Large Banks Change in Loans
Banque Nationale De Belgique — Technical Presentation on 6ix