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Wen | Sun Guofeng
Director, Institute of Finance, People's Bank of China
(This article is authorized by the author)
The 2008 global financial crisis has shaken previous consensus on macroeconomic policies, especially in monetary policy. The consensus before the crisis was that monetary policy should only focus on inflation rates without having to reverse the credit and asset price bubbles.
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Nowadays, the central bank has not only enhanced the traditional lender's function in a timely manner in terms of scale and scope, but also became a “no-edge epee†in preventing the accumulation of systemic risks and managing systemic crises. The prudential policy framework is not yet fully clear and today plays the role of “caretakerâ€.
The book "Systemic Risk, Crisis and Macroprudential Supervision", which was introduced and translated by Prof. Wang Qing from China Finance Research Center of Southwestern University of Finance and Economics, is a front-line academic study aimed at summarizing and discussing the current financial stability assessment framework and macro-prudential supervision issues. In the analysis of the causes and nature of systemic risks, the process of financial imbalance, the effects of financial contagion, the cost of crisis, the future of macro-prudential supervision, etc., provide a lot of useful literature views, gather the strengths of the family, and have the enlightening significance of the stone. I think it is a good book that must be read in terms of systemic risk.
It is worth mentioning that the book puts forward some constructive views on the new role and new positioning of monetary policy in the post-crisis era in managing systemic risks. To some extent, it also interacts with the PBC’s exploration in recent years. The license also caused me to think about this issue, and it is necessary to conduct an in-depth analysis here.
From the actual situation of monetary policy practice in the world in recent years, we can roughly see the following new ideas:
First, the central bank abandoned the “neutral†stance and began to pay attention to financial stability and asset prices, emphasizing de-leverage and risk prevention;
Second, although the loose monetary policy has begun to fade after the financial crisis has eased, it still needs to play a necessary supporting role for various structural reforms;
Third, the trend of convergence or differentiation between the counter-cyclical macro-prudential policy and monetary policy is still evolving, and the reforms set by the regulatory agencies are in the ascendant.
From the perspective of systemic risk prevention and control that we are concerned with, we can analyze the potential and actual effects of monetary policy in both front and back.
Beforehand, monetary policy can play a preventive role in the prosperity before the crisis broke out;
In the aftermath, monetary policy can reduce the systemic costs caused by the credit crunch and the lack of liquidity of financial institutions.
The impact of monetary policy on the credit cycle
The most dangerous endogenous source of systemic risk is the financial imbalance caused by financial intermediaries through credit leverage and excessive risk-taking. This mainly involves two aspects:
The first is the credit cycle analysis based on the financial accelerator theory;
The second is the analysis of market risk behavior based on agency problems.
The two core concepts of financial accelerator theory are "
“External financing premium†and “net value.†The information asymmetry between banks and enterprises causes enterprises to obtain more costs from the credit market, that is, the external financing premium, which is the most important between the real economy and the financial system. Force media.
On this basis, due to the asymmetry of liquidity and the asymmetry of asset value, real economic friction or financial friction will lead to the balance sheet effect of enterprises and banks, causing fluctuations in net value and showing strong procyclicality. .
Appropriate monetary policy can have a negative impact on the credit cycle through credit channels (premium) and bank balance sheet channels (net).
The first is a direct credit channel between banks and businesses. For example, an increase in the statutory reserve ratio can enable banks to reduce the supply of loans, thereby increasing the cost of capital for borrowers who rely on bank credit.
The principle of its connotation is that banks cannot absorb enough funds under the frictionless conditions of the Modigliani-Miller Miller-Modigliani model to compensate for the liquidity shortage caused by the central bank's increase in the statutory reserve ratio.
At the same time, some borrowers (such as SMEs) cannot find a perfect substitute for bank loans. Therefore, changes in bank credit supply caused by monetary policy will also have an important impact on non-financial companies.
The second channel through which monetary policy affects the credit cycle is the balance sheet channel for banks and companies. For example, raising short-term interest rates will lower the bank's net worth and reduce the liquidity of financing, which will have a negative impact on bank loans, causing significant fluctuations in the total amount of bank loans.
At the same time, monetary policy tightening has also exacerbated the liquidity constraints of small businesses in inventory and investment decisions, that is, tight monetary policy has weakened the credibility of small businesses, thereby weakening their ability to raise any external funds, not just bank loans. .
In addition, some scholars believe that monetary policy has another channel that affects the credit cycle. Banks' interest rate risk exposure also plays an important role in monetary policy transmission. When banks borrow short-term funds and lend at a fixed interest rate for a long time, the short-term policy rate hike will reduce the bank's cash flow, making the bank face additional capital demand. And because the cost of issuing stocks is high, banks can only reduce lending to prevent excessive leverage.
In short, the monetary cycle does affect the credit cycle, and it should be noted that the credit channel of monetary policy is more effective in bank-led economies (such as the euro zone and China), and is mainly funded by non-bank financial intermediaries and markets. The economy (as in the case of the United States, the effect is weaker.
The impact of monetary policy on risk-taking behavior
Due to implicit and explicit government subsidies, high leverage, weak market constraints, corporate governance deficiencies, and incentives for distortions, banks face serious agency problems, which are endogenous causes of systematic risk behavior.
Many scholars believe that monetary policy measures can affect the risk appetite of financial intermediaries, which in turn affects the bank's risk-taking behavior, which leads to changes in the total supply and risk composition of credit supply, namely “the risk-taking channel of monetary policyâ€.
Taking short-term interest rates as an example, the previous view is that the importance of short-term interest rates is only due to their impact on long-term interest rates, that is, long-term interest rates are risk-adjusted expectations for future short-term interest rates. But the latest research shows that expansionary monetary policy may increase the risk transfer effect of loans by increasing the funds provided by households and other economic entities to banks. The reason is that banks face serious moral hazard problems, especially those with capital. Banks that are low and fail to fully internalize the risk of default on loans. Low interest rates lure banks to pursue returns (ie invest in high-yield, high-risk securities products) and may seed the next credit and asset price bubbles.
Taking the real estate bubble under monetary expansion as an example, banks buy assets at a price above the fundamental level, and these investments are financed by short-term high leverage, so the bank actually conducts a negative net present value investment, but The risk transfer effect is rational for bank shareholders because it generates positive expected returns for shareholders, at the expense of bank depositors and creditors (or even taxpayers).
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The reduction of risk-free interest rates reduces the cost of financing. For banks operating under a limited liability system, the reduction in financing costs will obviously increase leverage, and the increase in leverage further enhances agent issues and moral hazard. For financial intermediaries with rigid debts on the balance sheet, such as pension funds, low interest rates are more likely to increase their risk exposure and chase high profits.
Some scholars have found that lower interest rates increase the value of legacy assets held by financial intermediaries, the so-called "secret capital restructuring," and the increase in net worth causes these financial intermediaries to neglect prudent risk transfer.
Another perspective is that the clear willingness of the central bank to loosen monetary policy after the crisis may lead to more banks' excessive risk of ex ante risks. The liquidity intervention of the central bank afterwards brought a hint that the penalties for banks with high leverage and low liquidity were lighter. If banks expect central banks to lower interest rates when they are under pressure in the financial markets, they will borrow heavily or issue more high-risk, low-liquidity loans, thereby increasing the likelihood of a crisis.
At this point, the central bank should change the risk motive of the bank by changing the monetary policy, and should not create the expectation that the real interest rate will remain low for a long time, so as to prevent the bank's risk behavior from forcing the central bank to continue to maintain low interest rates. In short, the central bank needs to establish the necessary credibility in enhancing financial stability, which is also necessary for the effectiveness of monetary policy.
These findings all indicate the existence of monetary policy risk-taking channels. The size of the risk-bearing channel depends on the degree of substitutability of risk assets and the sensitivity of leverage and financing costs to interest rate changes. It is particularly noteworthy that lower short-term interest rates may lead to an increase in bank risk exposure, which leads to an increase in leverage and the formation of credit and asset price bubbles. Therefore, the central bank needs to raise the policy interest rate in an orderly manner after the economic recovery situation is clear, so as to curb the leveraged behavior and asset bubbles and prevent and control systemic financial risks.
Post-event management of monetary policy for systemic financial crisis
In essence, a systemic crisis refers to a concentrated outbreak of systemic risk within the financial sector and from the negative externalities of the financial sector to the physical sector. In the negative externalities within the financial system, risk contagion and lack of liquidity may be the most important reasons.
In the negative externalities of the financial to physical sector, the reduction in credit supply for businesses and households may be the main reason.
By implementing monetary policy (interest rate policy, open market operations and unconventional measures), and in particular strengthening their own lender status, the central bank can play an important role in reducing these two externalities.
During the boom period, financial intermediaries were motivated to invest in high-yield illiquid assets (such as over-the-counter derivatives and mortgage-backed securities). During the financial crisis, financial intermediaries were forced to sell these assets, and the two trends of market price plunging and market liquidity depletion helped each other, causing many financial intermediaries to lose financing liquidity. In view of the externalities of the financial system, the policy logic of the central bank is to provide liquidity to financial markets and institutions. If the externalities within the financial sector can be controlled, the liquidity and solvency of financial intermediaries will be reduced. In principle, financial The externalities of the real economy will also decrease.
In this crisis, the liquidity provided by central banks in major developed countries has successfully avoided the strong externalities of financial intermediaries and markets. The central bank provided liquidity to banks, other financial institutions and sovereign states through interest rate policies, final lender functions and unconventional monetary policy measures, thereby alleviating liquidity shortages and repayment problems, effectively restoring the functions of financial institutions and markets.
However, there are some efficiency issues and political and economic issues in the post-correction of monetary policy.
First of all, it may be difficult to identify the problem of insufficient liquidity and insolvency in time, and as a result, the “zombie institution†that should have closed down has been saved, and the financial institutions outside the supervision are “free ridersâ€.
Second, aiding financial institutions through monetary policy interventions will increase their expectations for future aid, which will increase moral hazard, especially when monetary policy is financed by government affiliates or sovereigns. Some scholars believe that the implementation of valuation discounts in the bank discount window and the restrictions on the direct purchase of government bonds can alleviate these problems to some extent.
The problem of capital and liquidity of financial intermediaries spilling over into the real economy, coupled with the weak balance sheet and debt of households and businesses, has led to a sharp decline in the credit-capacity of households and businesses, resulting in a reduction in total output, employment and welfare. It constitutes the second negative externality of the systemic crisis.
Compared to financial institutions, the crisis has a greater impact on non-financial institution borrowers because their financial contracts are less liquid, sensitive to information, and more difficult to finance in financial markets.
After this financial crisis, we noticed that many credit eclectic credit policy tools introduced by the monetary authorities in developed economies have introduced incentive compatibility mechanisms to stimulate banks to provide credit support during the economic downturn, especially Introduce bank credit funds into the real economy sector. Such as the Fed's Reversed Operations (TWIST), the ECB's Directed Long-Term Refinancing (TLTRO), the Bank of Japan's Stimulated Bank Credit Facility (SBLF) and the Bank of England's Financing for Loan Program (FLS), which effectively replaced operational failures. The interbank borrowing market relaxed the terms of the loan and ultimately eased the credit restrictions caused by bank liquidity problems.
However, the credit crunch of households and enterprises in some economies comes from the deterioration of net asset value and the decline in aggregate demand, that is, the non-financial institution's balance sheet channel of monetary policy. At this time, the role of monetary policy in bank credit channels is not obvious. There is also a need to complement complementary public policy measures, especially those aimed at reducing the external financing premiums and credit rationing of small businesses.
In addition, it should be mentioned that the rescue of the financial sector and the economic recession have caused a reduction in government revenues. In the financial crisis, the issuance of government bonds may increase substantially. Therefore, monetary policy may play a role through unconventional measures to avoid the crowding-out effect of high national debt on private investment, which is also a policy logic to slow the financial crisis to the real economy.
Central bank position in monetary policy and macroprudential policy framework
The most popular view ten years ago was that monetary policy was most suitable for preventing inflation rather than controlling financial imbalances in the economy. The low inflation during the Great Moderation period further deepened the inherent concept of people.
However, the high economic costs of systemic risks and crises make it possible to include whether monetary policy objectives should include financial stability, monetary policy and macroprudential policies, how macroprudential policies and monetary policies should be coordinated in organizational form, and how the central bank should play. Issues such as roles have become important topics in policy debates in recent years.
Macroprudential policies can be a useful complement to monetary policy. Monetary policy tools, whether quantitative or price-based, have a price mechanism that works. The premise of the price mechanism is that the "demand law" is established, that is, the demand curve is inclined downward, and the price is increasing, and the demand is smaller. However, many financial markets are prone to procyclical behaviors, and the phenomenon of “buy up and not buy down†occurs, which makes it difficult for price adjustment mechanisms such as interest rates to function effectively, and it is prone to price overshoot and systemic financial risks.
And the financial market (the real estate market has more financial market attributes) is more prone to procyclical behavior than the commodity market. An important reason is that the financial market is easy to add leverage and thus change the demand quantity, causing the demand curve to tilt upwards. A macro-prudential policy is needed to adjust the leverage level counter-cyclically. It can be seen that the macro-prudential policy can alleviate the burden of monetary policy and make up for the shortcomings of monetary policy in coping with the procyclical behavior of financial markets.
By counter-cyclical adjustment of the leverage level, it affects the asset price and income level, which in turn affects the behavior of the financial system, changes the efficiency, strength and results of monetary policy transmission, thus supporting the role of monetary policy. When an asset bubble occurs, just raising interest rates is not enough to respond, and it needs to be supplemented with a macro-prudential policy that is moderately tightened. The orderly coordination of the two is conducive to promoting the conduction effect and strengthening the policy effect.
The macro-prudential policy has the function of counter-cyclical adjustment in the vertical direction and the function of preventing risk-contagion in the horizontal direction. However, the main function of the macro-prudential policy is still reflected in the counter-cyclical adjustment. This counter-cyclical adjustment can not only control the leverage ratio, but also prevent systemic financial risks. It can also influence the transmission of monetary policy and promote the realization of monetary policy objectives. Therefore, monetary policy and macro-prudential policy are both independent and inseparable, and together constitute the "double pillar" of the financial macro-control system.
The traditional view is that independent monetary and macroprudential policies by separate institutions often do not lead to optimal solutions:
First, macro-prudential policies are often highly targeted. The central bank may influence the neutrality of monetary policy in order to protect the interests of commercial banks;
Second, monetary policy has clear objectives, while macroprudential policies have multiple objectives (credit growth, leverage and asset price growth, etc.). The combination of monetary policy and regulation may make the central bank's tasks more complicated and difficult to evaluate performance;
Third, under the dual mission, the independence of the central bank may be more difficult to achieve politically.
However, Blanchard, the former chief economist of the International Monetary Fund (IMF), also pointed out that the above problems can be solved by improving the transparency of central bank policies and improving governance. As with the analysis of the new monetary policy and systemic risk earlier in this paper, the close relationship between monetary policy and financial stability determines that the central bank must play an important role in the macro-prudential management framework.
This is first and foremost because the effectiveness of macroprudential policies depends on whether the executives have a deep understanding of the macro economy, financial markets and payment systems, and the central bank has an indisputable advantage in these areas.
Second, the central bank is the only institution that can inject a lot of liquidity into the financial system in a short period of time. Its "final lender" status is indispensable in the disposal of all systemic crises;
Third, the information, expertise and authority obtained from financial stability supervision are also the premise and basis for the central bank to deal with risks, fulfill the duties of the lender and maintain financial stability.
Therefore, it is a realistic choice for the central bank to establish and improve the macro-prudential policy framework.
From the perspective of China's practice, the PBC's exploration of macro-prudential policies was inextricably linked to monetary policy from the outset. In recent years, the People's Bank of China has also added more negative feedback factors in the design of monetary policy tools to avoid adverse effects on economic development in the short term.
The PBC's innovative credit policy supports monetary policy instruments such as refinancing and mortgage replenishment loans with the countercyclical adjustment function of “Funding for Lendingâ€, which actually functions as a macro-prudential policy tool; The Credit Easing tool for the economy to cope with crisis innovation is also widely used in China's practice.
At the same time, the People's Bank of China improved the macro-prudential policy framework. In 2015, it upgraded the differential reserve dynamic adjustment system to a macro-prudential assessment system (MPA), from capital and leverage, asset and liability, liquidity, pricing behavior, asset quality, and cross-border financing risks. Seven aspects, such as the implementation of credit policies, guide banking financial institutions to strengthen self-discipline and self-discipline management, and explore the scope of macro-prudential management in financial institutions' asset expansion behavior, financial markets, foreign exchange and short-term capital flow management.
It can be said that MPA is not only a monetary policy tool, but also can guide the smooth growth of general credit and promote the balance of aggregate demand. It is also a macro-prudential policy tool to prevent systemic financial risks and prevent financial stability by restraining credit expansion.
Therefore, the prevention and control of financial risks is inseparable from the coordination of monetary policy and macro-prudential policies, and requires the central bank to better play the role of the “monetary policy + macro-prudential policy†dual-pillar policy framework (end).
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