Post on 22-Feb-2016
description
transcript
Implications of Ring-Fencing for European Cross-Border Banks
Eugenio Cerutti (with A. Ilyina, Y. Makarova and C. Schmieder)
Vienna – October 3 , 2011
Bankers Without
Borders?
Bankers without Borders? - Motivation
Statement at the end of the European Bank Co-ordination Initiative’s Second Full Forum
MeetingIMF Press Release No. 10/106
March 22, 2010 “The large bank groups with systemic presence
in those [Eastern European] countries have committed to maintain their exposure and keep
their subsidiaries well capitalized.”
On the one hand,
many cross-border banking
groups acted as Lenders of Last
Resort for their CESE subsidiaries
during the crisis.
Bankers without Borders? - Motivation
The Croatian National Bank Governor, Željko Rohatinski,
Press conference held on 18 February 2009“the CNB would not look favorably upon
attempts [by foreign parent banks] to withdraw capital, deposits or pay out total accumulated
profits, because that would destabilize the domestic banking system. In such a case, the CNB would be forced to undertake protective measures, regardless of thus connected risks.”
On the other hand, host country
regulators might ring fence foreign
affiliates within their jurisdictions
due to:
• Banking-stability considerations (e.g. the need to protect the domestic banking system from negative spillovers from the rest of the group)
• Macro-stability considerations (e.g. avoid capital outflows)
Bankers without Borders? - Motivation
Ring Fencing Outcome: cross-border banking groups’
ability to re-allocate funds from subsidiaries with excess
capital/liquidity to those in need of capital/liquidity is
limited.
The Question we attempt to answer in the paper:
What are the capital needs of banking groups under
different ring-fencing assumptions?
A “stylized” cross-border banking group:with subsidiaries in countries A, B, C
Parent Bank Sub A Sub B Sub C
Losses (net of provisions) at each of the subs Sub A Sub B Sub C
Regional credit shock
Buffers Profits and Capital at each of the subs
Sub A Sub B Sub C
Outcome Recapitalization needs (if any) at each of the subs
Sub A Sub B Sub C
Bankers without Borders? – Stylized Example
Bankers without Borders? – Stylized Example
Degree of ring-fencing
Capital needs (post regional credit shock) under different ring-fencing assumptions
No ring-fencing CN(1) = sum of recapitalization needs of all subsidiaries – sum of excess profits and capital of all subsidiaries – profits of the parent bank
Partial ring-fencing CN (2) = sum of recapitalization needs of all subsidiaries – sum of excess profits of all subsidiaries – profits of the parent bank
Complete ring-fencing
CN (3) = sum of recapitalization needs of all subsidiaries – profits of the parent bank
Stand-alone subsidiarization
CN (4) = sum of recapitalization needs of all subsidiaries
At the group level, the capital need (CN) is the total amount of capital required to restore the CARs of all of the group’s affiliates to their regulatory minimums.
Bankers without Borders? – Stylized Example
25 Banking Groups/113 CESE subsidiaries
Parent Bank Parent bank's home country Sl
oven
ia
Cze
ch R
epub
lic
Slov
akia
Pola
nd
Turk
ey
Bul
garia
Rom
ania
Hun
gary
Alb
ania
Bos
nia
Cro
atia
Serb
ia
Esto
nia
Latv
ia
Lith
uani
a
Rus
sia
Ukr
aine
Bel
arus
Erste Group AustriaRZB AustriaVolksbank AustriaBank Austria 1/ AustriaHypo Alpe Adria Group 2/ AustriaDexia BelgiumKBC BelgiumDNB Nord DenmarkBNP Paribas FranceSocGen FranceCredit Agricole FranceBayern LB GermanyCommerzbank GermanyDeutsche GermanyAlpha GreeceEurobank EFG GreeceNBG GreecePiraeus GreeceAllied Irish Bks IrelandIntesa Italy Unicredit Italy ING NetherlandsNordea SwedenSEB Sweden Swedbank Sweden
Bankers without Borders? – Data Sample
Description and Calibration of the shock
Time frame: 2009-2010 (2 years):Description of the shock:
2009: Use of preliminary data (GFSR) 2010: Use regression models to determine (a)
“baseline” (WEO forecast for GDP, CPI and interest rates); (b) “Adverse Shock” (same as baseline, except for GDP growth - half of the one in 2009)
Method: Use of dynamic panel models to forecast i) NPLs and ii) Profit for 2010
Bankers without Borders? – Scenario Analysis
Capital Needs arising from a regional credit shock affecting the CESE subsidiaries (in percent of group’s regulatory capital):
CN(1) – no ring-fencing (both excess capital and profits can be re-allocated)CN(2) – partial ring-fencing (only excess profits can be re-allocated)CN(3) – complete ring-fencing (only transfers from parent bank are allowed)CN(4) – stand-alone subsidiarization (no intra-group transfers are allowed)
Bankers without Borders? – Scenario Analysis
• The capital needs of cross-border banking groups to ensure adequate capitalization of all parts of the group (after a shock) are higher under complete/partial ring-fencing than under no ring-fencing.
• These differences are more significant for more geographically diversified banking groups.
• Hence, the standard stress tests of cross-border banking groups based on consolidated balance sheet data (which implicitly assume no restrictions on intra-group transfers) may lead to the wrong conclusions about the adequate level of the group’s capitalization.
Bankers without Borders? – Conclusions
• A credible and well-designed framework for the resolution of cross-border banking groups could help to avoid unilateral and likely more costly solutions.
• Setting minimum capital requirements for cross-border banking groups would have to take into account the potential presence of ring-fencing.
• The capital buffer needs for cross-border banking groups could be even larger in future crises if recent reforms, pursuing logical individual country perspectives (e.g. UK), trigger new higher levels of ring fencing during crisis.
Bankers without Borders? – Policy Implications
Background Slides
The Dynamic Panel Regression: CESE NPLs
Variable Fixed Effects Arellano-Bond Arellano-Bover
NPL (t-1) 0.6113*** 0.6445*** 0.728***
GDP (t) -0.2597*** -0.2902*** -0.3558***
Interest (t) 0.1544*** 0.1758*** 0.1048**
Inflation (t) -0.0352 -0.0577 -0.0514
Constant 2.1217*** 1.9921*** 2.173***
# of Observations 170 143 161
# of Groups 18 18 18
R2 0.69 NA NA
Wald Chi2 NA 359 425
Calibration of the shock: NPL assumptions
2008 Median
2009 Median 1/
2010 Baseline
Median 2/
2010 Adverse
Median 3/Baltic
countries3.6 15.0 16.0 18.5
CEE-4 3.3 5.5 6.3 7.9
CIS/4 3.8 9.5 9.3 10.9
SEE 4.3 6.1 7.5 8.4
Footnotes:
1/ Most recent provisional data is available for each country (GFSR);
2/ Estimated based on a dynamic panel regression;
3/ Adverse scenario assumes a double-dip recession, i.e., 2010 GDP growth is equal to ½ of 2009 GDP growth
The Dynamic Panel Regression: CESE ROAs
Variable Fixed Effects Arellano-Bond Arellano-Bover
ROA (t-1) 0.0856 0.1326** 0.0834
GDP (t) 0.0723*** 0.0840*** 0.0768***
Interest (t) -0.0523*** -0.0318*** -0.0230***
NPLs (t) -0.0479*** -0.0514*** -0.0799***
Constant 1.7519*** 1.5055*** 1.7181***
# of Observations 157 139 157
# of Groups 18 18 18
R2 0.52 NA NA
Wald Chi2 NA 146 232
Calibration of the shock: ROA assumptions
2008Median
2009Median /1
2010 Baseline
Median 2/
2010 Adverse
Median 3/Baltic
countries1.2 -0.1 0.1 -0.5
CEE-4 1.2 1.1 1.3 1.0
CIS 1.4 0.5 0.9 0.4
SEE 1.7 0.8 0.9 0.8
Footnotes:
1/ Actual data from GFSR (and model output for Albania, Croatia, Romania and Slovenia)
2/ Estimated based on a dynamic panel regression using CESE 1999-2008 NPLs, GDP growth, nominal interest rates and NPLs;