Rio de Janerio, December 2014
MACROPRUDENTIAL POLICYMAKING: THE PERUVIAN EXPERIENCE
Paul Castillo B.
Central Reserve Bank of Peru
*The opinions expressed in this presentation correspond to the author and do not necessarily reflect the
position of the Central Reserve Bank of Peru.
Inflation targeting in Peru takes into account the risks that financial
dollarization imposes to financial stability.
2
7
Inflation Targeting
Control of Dollarization Risks
Liquidity Risk :• High reserve requirement on foreign
currency liabilities
Exchange Risk (Balance Sheet Effect)• Sterilized FX Intervention to reduce
volatility of exchange rate• Preventive accumulation of international
reserves
• Inflation target : 2% +/- 1%• Operational Target: Overnight interest
rate
+
• Limiting the capability of the Central Bank to act as a lender
of last resort in foreign currency.
• Increasing bank’s solvency risk associated to exchange rate
fluctuations.
• Reducing the effectiveness of conventional monetary policy.
Why? Because dollarization affects financial stability through:
3
• Helping banks to internalize dollarization risks
• Reducing the likelihood of spreading the impact of shocks.
• Increasing the capacity of the financial system to absorb
shocks.
Non-conventional policy instruments are intended to reduce these risks
by:
4
Reserve requirements affect credit market conditions by reducing
loanable funds and financial margins, and increasing lending rates
5
Financial mark-up
Interest rate spread
Loanable funds
Liquidity position
Money multiplier
Remuneration
Reserve requirement ratio
Interest rates
Lending and deposits
Aggregatedemand
Inflation
• Preserving the transmission mechanism of monetary
policy during episodes of financial stress. By cutting
reserve requirements a central bank can inject liquidity to the
financial system and reduce pressures over the short-term
interest rate.
• Damping the financial cycle: Higher reserve requirements
increase the cost of financial intermediation for banks, which
leads to an increase in the lending rates.
• Reducing the incentives of banks to intermediate in
foreign currency: By setting higher reserve requirements
rates for liabilities in foreign currency the BCRP increases the
cost of providing loans in foreign currency.
Reserve requirements contribute to reducing dollarization risks by
6
Price stability and high reserve requirement in dollars have
contributed to reduce dollarization of credits.
7
1/ Estimado con el tipo de cambio de setiembre de 2014.
Fuente: Balances de Comprobación.
20
30
40
50
60
70
80
90
En %
Banca: Ratio de Dolarización de los Créditos y Depósitos 1/
Créditos
Depósitos
The scope of use of RR by BCRP has evolved over time. Currently it is used counter-cyclically to dampen the volatility of credit cycles, and differentiated by type of banks liabilities to discourage bank’s external short-term external borrowing and credit dollarization
8
0.0
10.0
20.0
30.0
40.0
50.0
60.0
Reserve requerimests in domestic and foreign currency(As % of total liabilities subject to reserve requirements)
Average required in domestic currency
Marginal requirement in domestic currency
Average required in foreign currency
Higher RR on short-term bank’s external borrowing has lengthen
the average maturity of bank’s external liabilities.
9
32
18
86
47
72
85
75
0
10
20
30
40
50
60
70
80
90
100
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
Jan-
07
Mar
-07
May
-07
Jul-
07
Sep
-07
No
v-0
7Ja
n-0
8M
ar-0
8M
ay-0
8Ju
l-0
8Se
p-0
8N
ov-
08
Jan-
09
Mar
-09
May
-09
Jul-
09
Sep
-09
No
v-0
9Ja
n-1
0M
ar-1
0M
ay-1
0Ju
l-1
0Se
p-1
0N
ov-
10
Jan
-11
Mar
-11
May
-11
Jul-
11
Sep
-11
No
v-1
1Ja
n-1
2M
ar-1
2M
ay-1
2Ju
l-1
2Se
p-1
2N
ov-
12
Jan
-13
Mar
-13
May
-13
Jul-
13
External Bank's Liabilities (Balance in US$ million and ratio in percentage
Long term external liabilities Short term external liabilities Long term external liabilities /Total external liabilities
The long term financing increased after the increase in the reserve
requirement for short-term external liabilities.
RR has proven to be effective in reducing the credit cycle,
particularly for small financial institutions
10
.13
.14
.15
.16
.17
.18
.19
.20
.21
.22
4
6
8
10
12
14
16
18
20
22
2006 2007 2008 2009 2010 2011 2012
Liquid assets as proportion of total assetsReserve requirement in domestic currency
Liquid assetss as proportion of total assets and
Reserve Requirements
1.00
1.05
1.10
1.15
1.20
1.25
1.30
1.35
1.40
4
6
8
10
12
14
16
18
20
2006 2007 2008 2009 2010 2011 2012
average annual credit growth rate
reserve requirement in domestic currency
Annual growth rate and reserve Requirements
.13
.14
.15
.16
.17
.18
.19
.20
.21
.22
.70
.71
.72
.73
.74
.75
.76
.77
.78
.79
06 07 08 09 10 11 12
Credit as proportion of total assets
Liquid assets as proportion of total assets
Liquid assets and Credit as proportion of total assets
26
28
30
32
34
36
38
40
42
44
.13
.14
.15
.16
.17
.18
.19
.20
.21
.22
06 07 08 09 10 11 12
Liquid Assets as proportion of total assets
Reserve Requirement in Foreign Currency
Liquid assets and Reserve requirments in foreign currency
Macro prudential policy in Peru has successfully smoothed the credit
cycle during the period that followed the quantitative easing of the FED
11
5,4
44,7
25,0
30,0
35,0
40,0
45,0
50,0
-5,0
0,0
5,0
10,0
15,0
20,0
25,0
30,0
35,0
Jan/
07
Apr
/07
Jul/
07
Oct
/07
Jan/
08
Apr
/08
Jul/
08
Oct
/08
Jan/
09
Apr
/09
Jul/
09
Oct
/09
Jan/
10
Apr
/10
Jul/
10
Oct
/10
Jan/
11
Apr
/11
Jul/
11
Oct
/11
Jan/
12
Apr
/12
Jul/
12
Oct
/12
Jan/
13
Apr
/13
Jul/
13
Oct
/13
Jan/
14
Apr
/14
Year-on-year credit growth Average reserve rate
Bank system foreign-currency credit to the private sector and average reserves
• The evidence provided by the Peruvian experience shows
that RR is an effective tool in reducing the trade-offs that
expansionary monetary policies in development economies
are generating the financial systems of emerging market
economies.
• Empirical evidence shows that RR reduce the credit cycle by
increasing lending rates and reducing the supply of credit.
• Central banks need to closely monitor the use of this type of
instrument to minimize its potential costs.
• A close coordination with the regulatory authorities is also
necessary to complement RR with the use of other prudential
instruments such us counter-cyclical provisioning and capital
requirements.
Concluding Remarks
12
Rio de Janerio, December 2014
MACROPRUDENTIAL POLICYMAKING: THE PERUVIAN EXPERIENCE
Paul Castillo B.
Central Reserve Bank of Peru
*The opinions expressed in this presentation correspond to the author and do not necessarily reflect the
position of the Central Reserve Bank of Peru.
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