Macroprudential Policies in Korea - Toolkits and Experiences Tae Soo Kang Bank of Korea Disclaimer This presentation represents the views of the author and not necessarily those of the BOK or BOK policy. Paris Europlace Financial Forum New York, April 14, 2014
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Macroprudential Policies in Korea
- Toolkits and Experiences
Tae Soo Kang
Bank of Korea
Disclaimer
This presentation represents the views of the author and not
necessarily those of the BOK or BOK policy.
Paris Europlace Financial Forum
New York, April 14, 2014
Contents
Ⅰ. Monitoring and Measuring Macroprudential Conditions
Ⅱ. Macroprudential Toolkits
� LTV, DTI Caps
� FX-related
� Loan to Deposit Cap
Ⅲ. Ongoing Discussions
2/25
I. Monitoring and Measuring Macroprudential Conditions
� 「Financial stability」 : New mandate to the BOK(Bank of Korea Act amendments (Dec. 2011))
� BOK concerns with macroprudential aspects
� A framework for monitoring and measuring macroprudential conditions
3/25
Background
Financial Stability Report
Systemic Risk Assessment Model for Macroprudential Policy (SAMP)
1
2
I- Financial Stability Report
① Analyze and evaluate the potential systemic risk
② Provide early warning of risk
③ Suggest policy alternatives
� Published twice a year, and submitted to the National Assembly
� FSR attempts to …
4/25
1
� Feedback mechanism with domestic and overseas advisor groups
5/25
� Forthcoming FSR (April 2014) identifies five key risks
� To help identify the potential risk factors, BOK conducts Survey of financial
market participants (90 experts) twice a year
① Tapering off of US quantitative easing (77%)
② Slowdowns in growth of China (72%)
③ Household debt problem (70%)
④ Financial instability in emerging market countries (57%)
⑤ Increase in corporate credit risk (41%)
Why
a Model
Needed?
BOK has developed its own systemic risk assessment model
Cannot manage what you cannot measure
InterconnectednessProcyclicality
Sources for Systemic Risk
2
� Examine resilience of financial system (macro stress test)
� Measure individual banks’ contributions to systemic risk (D-SIBs)
I- SAMP
Tail risks unobservable
⇒ For the 2013 FSAP for Korea, SAMP was used to conduct
macro stress test
6/25
Macro
shocks
1st round
loss
2nd round losses due
to default contagion
2nd round losses due
to liquidity contagion
⑤ Multi-period module
• Dynamic update of banks’ B/S
④Funding liquidity contagion module
• Estimation of funding costs and
deleveraging/liquidity withdrawals
• Contagious defaults due to liquidity
withdrawals
① Macro-risk factor module
• Generation of macro-economic
scenarios
③ Default contagion module
• Estimation of 2nd round losses due
to fire sales and credit crunch
• Contagious defaults due to
interbank loan losses
② Bank profit and loss module
• Calculation of bank profits and
losses based on macro scenarios
⑥Systemic riskmeasurement module
• Systemic risk indicators
- Value at Risk
- Expected shortfall
- Probability of systemic crisis
1st & 2nd round
losses
Chart: SAMP Structure
7/25
8/25
Ⅱ. Macroprudential Toolkits
1 LTV, DTI Caps
FX-related
Loan to Deposit Cap
2
3
9/25
II- LTV, DTI Caps
Background
� Real estate in total assets : Korea 73.3% (March 2013)
� Housing booms in early and mid 2000s fueled by rapid increases in home mortgage lending by banks
Household Loans
1
Housing Booms and Bank Lending
Housing price
LTV Cap [September 2002]
� LTV has been adjusted a total of 9 times
(6 times for tightening and 3 times for relaxing)
� Limitation : Housing price → Collateral value
→ Affordable additional borrowing
→ Procyclicality amplified
10/25
DTI Cap [August 2005]
11/25
� Curbs possible procyclical behaviour resulting from LTV Cap
� Puts limit on ratio of annual debt repayment amount to debtor’s annual income