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Global Evidence on Capital Buffers and Net Stable Funding Ratios
Oscar Carvallo Valencia Alberto Ortiz Bolaos CEMLA CEMLA and EGADE
XI Seminar on Risk, Financial Stability and Banking Sao Paulo
August 10-12, 2016
The views expressed in this presentation are those of the authors, and not necessarily those of CEMLA. We appreciate the contributions to this work of CEMLAs economists Jonathan Barboza and Ignacio Garron.
Global evidence on capital buffers and net stable funding ratios Motivation: banking crisis are costly. Basel III, through capital and
liquidity regulations, tries to enhance the supervision and risk management of the banking sector. However, these regulations were calibrated mostly against BIS membership information. There is need to understand these variables at a global scale and undercover potential heterogeneities across countries and income groups.
Objective: (i) understand the determinants of banks choice of capital buffers, and (ii) analyze the role of banks net stable funding ratio (NSFR) in explaining future financial instability.
Methodology: aided by theoretical frameworks, we designed econometric specifications to test different hypotheses exploiting the information of almost 11,000 banks across 143 countries for the 2001 2015 period.
Contribution: give a global analysis of the regulated variables by examining a large sample of banks and countries while we factor in multiple dimensions, incorporate methodological improvements and conduct robustness checks.
Where to find the extended versions:
Bank capital buffers around the world: cyclical patters and the effect of market power. Oscar A. Carvallo and Alberto Ortiz.
Net Stable Funding Ratio and Financial Stability: Global Evidence. Oscar A. Carvallo, Alberto Ortiz, Jonathan Barboza and Ignacio Garrn.
Both available upon request with Oscar Carvallo ([email protected]) or me ([email protected]).
Costs of systemic banking crises in Latin America and the Caribbean
020406080
100120
Arge
ntin
a 19
80 -
1982
Arge
ntin
a 20
01 -
2003
Braz
il 19
90 -
1994
Boliv
ia 1
986
Chile
197
6
Chile
198
1 - 1
985
Colo
mbi
a 19
82
Colo
mbi
a 19
98 -
2000
Ecua
dor 1
982
- 198
6
Ecua
dor 1
998
- 200
0
Haiti
199
4 - 1
998
Jam
aica
199
6 - 1
998
Mex
ico
1981
- 19
85
Mex
ico
1994
- 19
96
Nic
arag
ua 1
990
- 199
3
Pana
ma
1988
- 19
89
Para
guay
199
5
Peru
198
3
Uru
guay
198
1 - 1
985
Uru
guay
200
2 - 2
005
Uni
ted
King
dom
200
7 -
Uni
ted
Stat
es 2
007
-
Output loss (% of GDP) during systemic banking crises *
Source: Laeven and Valencia (2013). Systemic banking crisis database. IMF Economic Review 61: 225-270
* Cumulative sum of the differences between actual and trend real GDP over the period (T, T+3), expressed as a percentage of trend real GDP, with T the starting year of the crisis.
Banking crisis outcomes, 1970 - 2011
Country Output loss Increase in debt
Monetary expansion
Fiscal costs
Fiscal costs
Duration
Peak liquidity
Liquidity support
Peak NPLs
Medians
% of GDP
% of financial system assets
In years % of deposits and foreign liabilities % of total
loans
All 23.0 12.1 1.7 6.8 12.7 2.0 20.1 9.6 25.0
Advanced 32.9 21.4 8.3 3.8 2.1 3.0 11.5 5.7 4.0
Emerging 26.0 9.1 1.3 10.0 21.4 2.0 22.3 11.1 30.0
Source: Laeven and Valencia (2013). Systemic banking crisis database. IMF Economic Review 61: 225-270
Banking regulatory framework
"Basel III" is a comprehensive set of reform measures, developed by the Basel Committee on Banking Supervision, to strengthen the regulation, supervision and risk management of the banking sector. These measures aim to:
improve the banking sector's ability to absorb shocks arising from financial and economic stress, whatever the source
improve risk management and governance strengthen banks' transparency and disclosures.
The reforms target: bank-level, or microprudential, regulation, which will help raise the resilience of
individual banking institutions to periods of stress. macroprudential, system wide risks that can build up across the banking sector as well
as the procyclical amplification of these risks over time.
These two approaches to supervision are complementary as greater resilience at the individual bank level reduces the risk of system wide shocks.
It builds on the International Convergence of Capital Measurement and Capital Standards document (Basel II).
http://www.bis.org/publ/bcbs128.htmhttp://www.bis.org/publ/bcbs128.htm
Basel III phase-in arrangements
Bank capital buffers
Bank capital buffers, which are holdings of banks capital-to-asset ratio in excess of the regulatory minimum, are persistent both across countries and over time.
-20
-10
0
10
20
30
40
50
60
70
80
0
2
4
6
8
10
12
14
16
18
20
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Q75/Q25 range Average Capital BufferCapital Buffer (right axis)
Developed
4,934 banks 37 countries
average:8.6%
What are the determinants of the observed levels of banks capital buffers?
-20
-10
0
10
20
30
40
50
60
70
80
0
2
4
6
8
10
12
14
16
18
20
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Q75/Q25 range Average Capital BufferCapital Buffer (right axis)
Following Jokipii and Milne (2008) we define the capital buffer as the bank capital ratio less the Minimum Capital Ratio (MCR). The bank capital ratio is approximated by the Total Capital Ratio (TCR), which measures the actual regulatory capital ratio in each jurisdiction. TCR data comes from Bankscope, MCR data from WB database The Regulation of Banks around the World, surveys I, II, III and IV. Barth et al. (2001, 2004, 2006, 2012).
Developing
2,184 banks 106 countries
average:10.4%
Partial adjustment model
The presence of highly persistent capital buffers could indicate that banks approach their optimum target with a partial adjustment.
, = ,
not observable
+ 1 ,1 + bankspecific determinants
The empirical model will be specified as:
, = 0 + 1,1 + ,vector of variables
that determine ,
+ + ,i.i.d error term
050
100
Cap
ital B
uffe
r
0 50 100
Capital Buffer(t-1)
Developed DevelopingLinear regression Fitted values
= +1+1 +1
+1 +1
, = 0 + 1,1 + ,vector of variables that
determine ,
+ bankspecificdeterminants
+ ,i.i.d error term
Source: Bankscope.
Variable Description Hypotheses Total Mean Sd. Obs.
Buffer (BUF)
Following Jokipii and Milne (2008) we define the capital buffer as the bank capital ratio less the Minimum Capital Ratio (MCR). The bank capital ratio is approximated by the Total Capital Ratio (TCR), which measures the actual
regulatory capital ratio in each jurisdiction.
9.14 10.97 40,181
Bank variables
Bank size (Size) Logarithm of total banks asset Moral hazard motives could imply a
negative relation with capital buffers, charter value a positive one.
14.20 2.08 40,053
Return Over Average Assets
(ROAA) Net income/ average total assets
According to the model, profitability is positively associated with the level
of capital buffers. 0.75 2.20 40,103
Return Over Average Equity
(ROAE) Net income / average total equity
According to the model, profitability is positively associated with the level
of capital buffers. 6.90 21.10 40,099
Boone Indicator (BOONE)
Measure of competition linking marginal costs to market share
Higher competition could lead to lower (EME) levels of buffers due to lower profitability and charter value, but if pool of borrowers is affected by competition, then could lead to
higher (OECD) levels to cover losses.
-0.05 0.12 35,649
Loan Loss Reserve Gross Loans
(LLRGL) Non-performing loans / total bank assets
The higher the ratio of non-performing loans as a percentage of
total bank assets, the larger the capital buffers, a positive relation.
3.29 5.13 31,731
Cost of Funding (CF)
Interest Expenses/ total funding According to the model, the cost of capital is positively associated with
the level of capital buffers. 1.20 66.21 19,496
Sources: Bankscope for bank variables and World Bank database The Regulation of Banks around the World, surve