A macroprudential perspective on the low interest rate environment Presentation for the Belgian Finance Club Financial repression: risks and perspectives 28 June 2017 Hans Dewachter NBB, Prudential policy and financial stability
Disclaimer: the views expressed in this presentation do not necessarily reflect the views of the NBB nor those of the ESCB. 4/25
Overview MacroprudentialReport NBB identified a number of risk factors Low interest rate environment againstthe background of moderate q growth and potential search for yield Build-up of risks in the real estate market q Cyber risks q Point of attention: shadow banking q This presentation focusses on 1. Low interest rate environment: structural versus cyclical views 2. Low interest rate environment: impact on the financial sector 3. Build-up of systemic risks in the real estate market 5/25
The low interest rate environment: structural versus cyclical views 6/25
The low interest rate environment: some perspective Historical short and long-term interest rates Interest rates are historically low, literally ! As reported by A. G. Haldane in a speech at the Open University Milton Keynes, 30 June 2015 7
The low interest rate environment: some perspective Trend-wise decrease of LT nominal and real yields Low interest rate environment not fully attribued to financial crisis: last 40 years characterized by decreasing interest rates both in nominal and real terms Sovereign real 1 yields 10 yr. maturity Sovereign nominal yields 10 yr. maturity (percentages, monthly averagesJan 2017) (percentages, monthly averagesJan 2017) 16 16 14 14 12 12 10 10 8 8 6 6 4 4 2 2 0 0 -2 -2 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 BE DE FR NL EA US JP Sources: OECD, Thomson Reuters Datastream. 1 Difference between nominal yield and yearly smoothed inflation rate. 8
The low interest rate environment: some perspective Structural view Structural explanations for trendwise decrease in equilibrium real rates: increased savings supply combined with decreased investment demand and lower potential growth R * = a. g * + S/I Increased savings supply: Real interest rate Ageing population and increasing post- ► Savings supply retirment life expectancy increase need for additional savings Increasing income and wealth inequality ► R* shifting resources towards richer households with higher savings ratios Uncertainty: increased precautionary ► savings R* Investment Decreased investment demand: demand Lower potential growth as a result of lower ► productivity gains and decreased population Saving/investment growth Decreased public investment ► Increased economic uncertainty ► 9
The low interest rate environment: some perspective Structural view Potential output growth has decreased trendwise and is expected to remain moderate for the coming years Potential growth rate Euro area: breakdown by factors Factors explaining the reduced (percentage points) 3.0 potential output growth : 2.5 Decreased productivity growth ► 2.0 Decreasing contribution of ► 1.5 growth in labor force 1.0 (participation) Decreasing contribution from ► 0.5 capital formation 0.0 -0.5 Very similar patterns for different EA members, including Belgium -1.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Growth potential (percentage points) Contribution: Labor Capital productivity 10 Source: EC.
The low interest rate environment: some perspective Structural view Estimates of the (structural) equilibrium (real) interest rate are at a historically low level both for the USA and EA … . Holston, Laubach & Williams (2016) estimate of the equilibrium real rate R* Euro area USA 6 6 5 5 4 4 3 3 2 2 1 1 0 0 -1 -1 -2 -2 1975 1980 1985 1990 1995 2000 2005 2010 2015 1975 1980 1985 1990 1995 2000 2005 2010 2015 R* Trend of gdp growth Bron: NBB based on HLW (2016). 11
The low interest rate environment: some perspective Cyclical view Accommodative conventional and non-conventional monetary policy may help to restore the long-run equilibrium by moving real interest rates below the equilibrium real rate R = a. g * + S/I + R – R * Real interest Fall in equilibrium interest rate following Accommodating rate the financial crisis: conventionaland non-conventional monetary policy Fall in potential growth ► Increased saving supply (precautionary ► R* saving, ageing?...) Decreased investment demand ► Additional fall in aggregate demand R* Inflation and output below equilibrium values ► R Additional demand shortfall Need for conventional and non-conventional ► monetary policy responses to set real interest Saving/investment rates below the equilibrium rate 12
The low interest rate environment: some perspective Cyclical view The financial crisis generated important (and persistent) output and inflation gaps that justified conventional and unconventional monetary policy. Inflation for the euro area Unemployment and output gaps for EA (in percentage points) (deviation from potential, in percentage point) 4 5 3 4 2 3 1 0 2 -1 1 -2 0 -3 -4 -1 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2012 2013 2014 2015 2016 2017 2018 2011 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Core inflation HICP inflation GDP gap Unemployment gap Bronnen: EC, ECB. 13
The low interest rate environment: some perspective Cyclical and structural views combined Estimates of equilibrium (real) dynamics suggest that structural as well as cyclical factors underly the observed decreased in the (real) interest rates in US and EA Holston, Laubach & Williams (2016) estimate of the equilibrium rate R* Euro area USA 6 6 5 5 4 4 3 3 2 2 1 1 0 0 -1 -1 -2 -2 -3 -3 -4 -4 1975 1980 1985 1990 1995 2000 2005 2010 2015 1975 1980 1985 1990 1995 2000 2005 2010 2015 R-R* R* Trend growth GDP Bron: NBB based on HLW (2016). 14
The low interest rate environment: some perspective Cyclical and structural views combined Low for long? Most recent market data suggest yields substantially below average and FOMC central bankers indicate lower rates in the long-run FOMC “dot chart “ representing members’ 1-year forward yields long-term expectations on interest rates (in percentage points) 6 5 5 4 4 3 2 3 1 0 -1 2 0 1 2 3 4 5 6 7 8 9 FOMC January 2012 FOMC March 2017 Years ahead US EA 1 Average 2002-2004 20 June 2017 Source: Thomson Reuters. 1 Triple A countries only.lower 15 15
The low interest rate environment: impact on the financial sector 16
The low interest rate environment: impact on the financial sector Banking sector Faster decrease in the funding costs brought the net interest rate margin at very high levels in 2015 and 2016 Implied interest rates on assets and liabilities Interest margin of banking sector on an unconsolidated basis 8 15 150 7 6 10 125 5 5 100 4 0 75 3 2 50 -5 1 25 -10 0 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 0 -15 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Approx. Margin Growth of interest bearing assets (lhs) Implied rate on assets Interest margin (bps) (rhs) Implied rate on liabilities 17
The low interest rate environment: impact on the financial sector Banking sector IRRBB projections suggest a downward pressure on net interest rate margins, almost independently of the scenario, pointing to important repricing backlog Net interest rate income and IRRBB projections Preserving future profitability? 15 Additional risk taking: 14.5 Search for yield: increasing fraction of ► high yielding assets (increase in 14 duration, credit risk, … ); 13.5 Commercial margins : 13 Counter decreases in commercial ► 12.5 margins induced by strong competition 12 Cost reduction : 11.5 Additional restructuring of the sector ► Q4 2010 Q2 2011 Q4 2011 Q2 2012 Q4 2012 Q2 2013 Q4 2013 Q2 2014 Q4 2014 Q2 2015 Q4 2015 Q2 2016 Q4 2016 Q4 2018 NII in bn. (past and projected in baseline scenario) NII in bn. (+100 bps. rise scenario) NII in bn. (-100 bps. fall scenario) NII in bn. (+200 bps. rise scenario) NII in bn. ( no change scenario) 18
The low interest rate environment: impact on the financial sector Banking sector While the economic environment is becoming more challenging, Belgian banks have sufficient capital buffers and start from a sound profitability 19
Build-up of systemic risks in the real estate market 20
Recommend
More recommend
