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Macroeconomic framework and credit cycle in Europe
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Transcript of Macroeconomic framework and credit cycle in Europe
October 2014
Jorge Sicilia
Chief Economist. BBVA Group
Macroeconomic framework and credit cycle in Europe
Page 2
The current economic context is affecting both the demand and the supply of credit
Changes in demand and supply of loans to enterprises, Euro Area* (net percentages of banks) Source: BBVA Research based on ECB Bank Lending Survey, July 2014
Demand: negatively affected mainly by the lack of fixed investment
Supply: negatively affected by risk perceptions, cost of funds and balance-
sheet constraints
Expectations point to a gradual improvement of demand and supply
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Demand Supply
* Positive values: Easing credit conditions (supply) or positive demand
Why?
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Demand: weak cycle and low potential growth
Economic growth, cyclical comparison GDP pc level Initial downturn t=100; Historical: average cycle of recession and recovery since 1950; Latest: 0=2007 but Germany (2008). Source: BBVA Research, World Bank, IMF and Angus Maddison
Germany
Spain
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Latest Historical
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Cyclical recovery is weak and bumpy (0.0% 2Q and 0.1-0.2% expected in 3Q)
Few measures to increase trend potential growth
Demand stimulus lower than in other developed areas
Italy
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Latest Historical
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Demand: a deleverage process far from finished
Debt of the Non Financial Private Sector from the Banking Sector, %GDP Source: BBVA Research, BIS and OECD
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Eurozone Spa Ger Fra United Kingdom
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Supply: Weak, in particular in some countries and for some types of credit
Most pressing problem (% answers, by firm size) Source: BBVA Research based on ECB Access to Finance of SMEs, April 2014 Supply constraints are more of an issue in
peripheral economies than in core countries
Supply issues are more relevant in small companies than in large companies
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Large firms, EMU SMEs, EMU Large firms, Spain SMEs, SpainFinding customers Competition
Access to finance Costs of production or labour
Availability of staff or managers Regulation
Other
Are we sure that supply and demand factors are well identified?
Supply and demand are affected by different factors…, What happened in Spain?
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Activity declines at some companies, so they no longer have demand for credit
This is a common pattern in Spanish crises
The most promising sectors are those related to exports
There is asymmetric information: some clients have to resort to another financial
entity that does not know them
Projects have higher risk due to the economic situation
Financial fragmentation affects funding conditions. Regulation and supervision
are stricter
Credit Demand
Economic situation and uncertainty: Businesses are not investing
The restructuring affects a limited number of entities, which do not have access to
liquidity
Corporate size is negatively related to reliance on bank credit
Employees per firm size Source: BBVA Research based on BACH and Eurostat
80% 75%63% 63%
20% 25%37% 37%
0%
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20%
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60%
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100%
Italy Spain France Germany
-250 employees +250 employees
Avg. size 931 Avg.
size 949
Avg. size
1300
Avg. size
1009
Avg. size 7.6
Avg. size 3.8
Avg. size 3.6
Avg. size 3.2
SMEs' exposure to
credit institutions*
25% 28%20%23%
* Liabilities with credit institutions (% of total balance-sheet)
Careful: According to recent history, the flow of new credit improves first, followed by stocks
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Average evolution of consumption+investment vs. credit stock (C+I=100 at the through of the cycle, average of crises in Finland, Japan, Norway, Spain and Sweden) Source: Biggs et al (2009)
Average evolution of consumption+investment vs. credit flow (new business) (C+I=100 at the through of the cycle, average of crises in Finland, Japan, Norway, Spain and Sweden) Source: Biggs et al (2009)
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t-3 t-2 t-1
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Consumption + Investment (left) Credit Stock (right)
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t-3 t-2 t-1
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Consumption + Investment (left) Credit Flow (right)
Spain, Private Sector: New Loans and Repayments (Quarterly figures, EUR mn) Source: Bank of Spain and BBVA Research
Data show that new lending transactions have bottomed in 4Q’13.
Upward trend confirmed in 2014
New lending will exceed repayments (outstanding credit will grow) by end-
2015
In Spain, new loans are starting to increase, albeit gradually
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100000
150000
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New Business Repayments and write-offs
France Spain ItalyCommercial policy 0,5 -- --ECB official rate 1,06 1,26 1,1Spread 12 months (12m-Euribor) 0,74 0,66 --Spread EMU (10y-Euribor) 0,24 0,25 --Spread sovereign (10y country-10y EMU) -- 0,14 0,41Firms default rate -- 0,11 0,22
-- Does not differ significantly from zero
Interest rates on new bank lending (%)
(to non-financial corporations, less than 1 million €, less than 1 year) Source: ECB
Determinants of interest rates on new bank lending (to non-financial corporations Source: BBVA Research based on ECB and Bloomberg. Working Paper to be published
Should we think that the Say’s law applies to credit?
Legacy issues also affect credit conditions, in particular in peripheral countries
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2,0
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3,0
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Euro Area Spain Italy France
Will ECB policies do the trick?
Alternative finance must be promoted, but it is, in any case, a long term process
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Disintermediation is welcome but we must learn from experience: there are
no free lunches
The less regulated shadow banking can bring about nasty surprises (as part of
the financial system did)
Alternative sources of funding should be under similar scrutiny
…Long legislative process (governing law,corporate law, tranparency and
information)
Structural changing to a more balanced funding pattern (including a capital
markets union) will take time…
Adequate regulation and oversight to avoid new sources of vulnerabilities and protect consumers (or inform
them)
A level playing field must be promoted
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Today: Spanish issuance in MARF 0.03% of private credit, MAB
capitalization 0.12%, venture capital 0.06% new funds per year…
Long term: a healthy system with alternative sources of funding
In the meantime, we better have a healthy and resilient banking system ready to provide credit when demand
starts
Size matters, probably due to transparency
Long term: It has to be less of an issue but needs to be worked now
To ensure enough credit for the real economy in the years to come
Today: On-the-spot information on the firms matters a lot
Larger firms, more transparency, better competition, level playing field
Financial Regulation: “In medio, virtus”
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If regulatory activism continues, the uncertainty will linger and banks will likely factor this uncertainty in their decisions
Time for a regulatory
stay
From regulatory tsunami…
“Just between the two of us” — that “I recently tried to refinance my mortgage and I was
unsuccessful in doing so.” B. Bernanke
Study of cumulative
impacts
New focus
Times are
hard
Coordinated implementation
…To an almost completed
reform
October 2014
Jorge Sicilia
Chief Economist. BBVA Group
Macroeconomic framework and credit cycle in Europe
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Demand: a deleverage process far from finished
Debt of the Non Financial Private Sector Source: BBVA Research, BIS and OECD
Total, from all creditors, % GDP Total, from the Banking sector, % GDP
Non Financial Corporations, from all creditors Households Debt, from all creditors
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Recent data on new loans
Total Upto 1M Over 1M Total Housing Consumer Other
Mar-14 -5,8% -9,4% 5,1% -16,7% 22,9% 40,9% 26,5% 0,1%Apr-14 -9,2% -11,1% 2,8% -19,3% 4,4% 3,6% 11,5% -0,3%
May-14 -11,0% -13,2% 4,9% -24,0% 3,8% 4,1% 11,5% -3,3%Jun-14 0,2% -1,6% 10,0% -6,3% 14,8% 26,0% 14,7% 0,1%Jul-14 -6,4% -9,1% 12,4% -21,6% 12,1% 17,7% 16,1% 1,1%
Aug-14 -2,9% -3,4% 5,5% -9,5% 0,2% -3,4% -6,2% 13,5%
Mar-14 -6,6% -9,7% -1,0% -12,7% 2,4% -0,1% 8,2% 3,6%Apr-14 -3,4% -3,5% -2,9% -3,7% -3,2% -5,4% 0,6% -0,6%
May-14 -6,7% -8,0% -6,0% -8,8% -3,4% -6,1% 2,4% -0,7%Jun-14 -5,3% -5,7% -0,3% -7,4% -4,1% -4,5% 1,3% -7,4%Jul-14 -4,1% -3,4% 1,4% -5,1% -5,9% -7,5% 2,9% -8,4%
Aug-14 -6,1% -6,0% -5,0% -6,4% -6,4% -8,0% 6,8% -12,7%Source: ECB, Bank of Spain and BBVA Research
Total Non financial Corporations Households
New Credit Operations
Eurozone
Spain
Alternative finance in Spain
Concept EUR Million Number% Private
Sector Credit % GDPMARF Issuance 381 5 bonds, 16 commercial paper 0,03% 0,04%MAB Market Cap 1.659 24 firms 0,12% 0,16%Venture capital New funds, 2013 872 0,06% 0,09%
Public funds, endowmentFond-ICO Global 1.200 0,08% 0,12%Fond-ICO Pyme 250 0,02% 0,02%Fond-ICO Infraestructuras 250 0,02% 0,02%
Business Angels Investment 2013 63 0,004% 0,006%Crowdfunding Funds 2013 19 0,001% 0,002%Source: MARF, MAB, IEE, Crowdfunding Spanish Association
MAB: Average turnover EUR 25 million SMEs definition: less than 250 persons employed and annual turnover of up to EUR 50 million, or a balance sheet of no more than EUR 43 million
The majority of Spanish SMEs have a limited size
94,5 93,8 93,3 92,282,8
4,9 5,4 5,6 6,514,1
0%
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Italy Spain France EU 27 Germany
Micro (0-9) Small (10-49) Medium-sized (50-249) Large (+250)
Proportion of firms per number of employees (% number of firms in the country) Source: Eurostat, 2009
SMEs’ sources of financing: mainly via banks
SMEs: Funding source used in the last six months (% positive answers) Source: BBVA Research based on ECB Access to Finance of SMEs, April 2014
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Germany Spain France Italy TotalRetained earnings and sale of assetsBank overdraft, credit line or credit cards overdraftBank loanTrade creditDebt securities issuedEquity
Efficiency
Profitability
Innovation
Financial inclusion
Stability
No national fragmentation (ring-fencing)
No arbitrage/ Shadow banking
No delay in economic recovery
In the long term, only an efficient financial system
can be stable
Regulation: New rules should balance efficiency and stability
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