Forty-one central banks raise rates 124 times in 2021

      The final week of 2021 ended with another central bank raising its interest rate, boosting the number of rate hikes to 124 - a sharp contrast to 2020s 13 rate hikes and 256 rate cuts - as central banks in 41 countries tightened monetary policy to ensure inflationary pressures, ignited by an economic recovery amidst bottlenecks in global supply chains, remain under control.

      The central bank of the Dominican Republic in the Caribbean took the honor as the final monetary authority to raise its rate in 2021, illustrating how universal the trend toward monetary tightening was.

      During 2021 central banks took 557 monetary policy decisions, with only 12 percent of all decisions that ended in a change to interest rates leading to a rate cut. (17 rate cuts)

      In contrast, 89 percent of all rate changes resulted in rate increases as central banks from Mozambique in Southern Africa to Norway and Iceland in Northern Europe began to unwind the monetary stimulus unleashed in 2020 during the initial waves of the COVID-19 pandemic.

      One of the distinguishing features of central banks' response to the pandemic was the use of a vast array of monetary tools - including asset purchases, reserve requirements or low cost loans in addition to rate cuts - to prevent financial and banking systems from freezing up.

      But with economies worldwide bouncing back, central banks are now gradually normalizing their monetary policy stance by rolling back these easing measures. But the process is slow and fraught as financial markets have become accustomed to easy monetary conditions.

      The global monetary policy rate, or the average interest rate of 104 central banks, ended the year at 5.51 percent, up 1.3 percentage point from end-2020, but remains below 5.69 percent at the end of 2019 and 6.42 percent at the end of 2018.

       Below is an overview of monetary policy changes, month-by month, in 2021 followed by changes to monetary policy as carried out by central banks in developed markets, emerging markets, frontier markets, and other markets:

MONETARY POLICY CHANGES BY MONTH:

      DECEMBER:

      EASING: China cuts reserve requirement, main interest rate and offers low-cost green loans, Taiwan rolls over special credit facility for banks by 6 months,Turkey cuts rate, ECB to increase monthly asset purchases in Q2 and Q3, 2022, Japan extends special Covid-19 financing 6 months, UAE extends several economic support measures and Saudi Arabia extends deferred payment program.

      TIGHTENING: Moldova, Georgia, Poland, Brazil, Ukraine, Poland, Pakistan, Armenia, Hungary, Chile, Costa Rica, Norway, United Kingdom, Mexico, Azerbaijan, Russia, Colombia, Jamaica, Paraguay, Czech Republic, Sierra Leone and Dominican Republic raise rates. 

      USA to reduce asset purchases by $30 billion a month, ECB to end pandemic asset purchases in March 2022 and Japan to end additional purchases of CP and corporate bonds end March, 2022, as scheduled.

      NOVEMBER:

      EASING: Turkey cuts rate.

      TIGHTENING: Australia discontinues yield target on 3-year government bond, the US begins to reduce monthly asset purchases by $15 billion, Hungary ceases using FX swaps to provide forint liquidity and to use new discount bills to help sterilize liquidity, and makes interest rate corridor asymmetric by raising overnight deposit, lending and one-week lending rates.

      The following 18 banks raise rates: Poland, Czech Republic, Romania, Mexico, Uruguay, Peru, Jamaica, Hungary, Iceland, South Africa, Pakistan, Ghana, Paraguay, Lesotho, New Zealand, Zambia, Dominican Republic, South Korea and Kyrgyzstan raise rates. 

      OCTOBER:

      EASING: Uganda lets credit relief measures expire but continues with interventions for those sectors that remain under lockdown and liquidity assistance maintained, and Turkey cuts rate.

      TIGHTENING: Romania, Moldova, Uruguay, New Zealand, Iceland, Poland, Peru, Chile, Hungary, Paraguay, Russia, Tajikistan, Kazakhstan, Brazil, Zimbabwe, Azerbaijan and Colombia raise rates. Serbia raises rate on reverse repo auctions and cancels repo auctions, Kuwait starts unwinding crises measures, Singapore raises slope of S$ policy band and Canada ends quantitative easing.

      SEPTEMBER:

      EASING: Australia extends weekly bond purchases of $4B by 3 months, Mozambique lowers reserve requirement, Saudi Arabia extends deferred payment program, and Turkey and Denmark cut rates.

      TIGHTENING: Moldova, Ukraine, Peru, Russia, Kazakhstan, Armenia, Azerbaijan, Pakistan, Hungary, Paraguay, Brazil, Norway, Czech Republic, Mexico, Jamaica and Colombia raise rates, ECB reduces asset purchases in Q4 moderately, UAE starts gradual and well-calibrated withdrawal of extraordinary stimulus measures, Iceland raises countercyclical capital buffer and caps debt service-to-income ratios and Dominican Republic starts normalization of monetary policy.

      AUGUST:

      EASING: Liberia

      TIGHTENING: Armenia, Georgia, Brazil, Czech Republic, Uruguay, Mexico, Peru, Sri Lanka, Paraguay, Hungary, Iceland, South Korea and Chile raise rates. Czech Republic also raises countercyclical capital buffer.

      JULY:

      EASING: China cuts required reserve ratio for all banks, Fiji increases size of disaster and rehabilitations containment facility and Seychelles cuts minimum reserve requirement.

      TIGHTENING: Angola, Chile, Belarus, Ukraine, Russia, Kazakhstan, Kyrgyzstan, Hungary, Tajikistan and Moldova raise rates, Israel ends business loan program, Australia trims weekly bond purchases from September, New Zealand ends asset purchases, and Canada trims weekly bond purchases.

      JUNE:

      EASING: ECB to purchase assets under PEPP at significantly higher pace in Q3 that in first months of year, Japan extends COVID-19 special financing program 6 months until end-March, 2022, Uganda, Democratic Republic of Congo and Seychelles cut rates, Saudi Arabia extends Covid-19 financing support program for micro, small and medium enterprises and Fiji lowers interest rate on disaster and rehabilitation containment facility.

      TIGHTENING: Russia, Armenia and Brazil raise rates, Ukraine phases out Covid-19 crises measures, Hungary raises rate and closes crises lending program Funding for Growth Go!, and Czech Republic and Mexico raise rates.

      MAY:

      EASING: India provides liquidity to health sector, including vaccine and oxygen producers, and launches a second round of government bond purchases in Q2 FY22 and Ghana cuts rate.

      TIGHTENING: Armenia, Brazil and Iceland raise rates, Kyrgyzstan reduces excess liquidity in banking system to limit inflationary pressures, Czech Republic raises countercyclical capital buffer, and US Fed winds down corporate bond portfolio.

      

      APRIL:

      EASING: Congo and UAE extends pandemic loan program, and Moldova cuts reserve requirements (twice)

      TIGHTENING: Belarus, Ukraine, Russia, Kyrgyzstan, Georgia and Tajikistan raise rates and Canada reduces asset purchases.

      MARCH:

      EASING: United States extends Paycheck Protection Program 3 months, Moldova cuts reserve requirement, Brazil extends temporary cut in reserve requirement, ECB to purchase assets under PEPP at significantly higher pace in Q2, Congo and North Macedonia cuts rates and Mongolia adds further longer-term refinancing.

      TIGHTENING: Ukraine raises key rate, Belarus suspends permanent liquidity facility to strengthen control of monetary base and money supply to limit inflation, Georgia raises key rate, United States to cease regular purchases of agency commercial mortgage-backed securities, Brazil raises rate, Turkey raises rate, Russia raises rate and Angola raises rate on liquidity absorption facility.

      FEBRUARY:

      EASING: Australia boosts purchases of government bonds $100 billion, Mexico cuts its key interest rate, Uganda extends credit relief and liquidity measures and Indonesia cuts its rate.

      TIGHTENING: Armenia raises policy rate, Tajikistan raises policy rate and reserve requirements that were cut temporarily last year from April 1 to Dec. 31, 2020, Zambia raises rate, Zimbabwe raises rate, Kyrgyz Republic raises rate and Turkey raises reserve requirement.

      JANUARY:

      EASING: Romania cut its key rate, Israel announced how much foreign exchange it would purchase in 2021 to deal with the rise in the shekel and thus support the economy while Costa Rica increased the size of its special medium-term lending facility.

      TIGHTENING: Mozambique raised its key interest rate due to rising inflation while Angola's central bank began to levy a fee on banks' excess liquidity as it begins to implement a more restrictive monetary policy.

                                                              ------

      MONETARY POLICY RATE CHANGES BY MARKETS:

      

     DEVELOPED MARKETS: Central banks in developed markets decided on monetary policy 84 times in 2021, with 4 banks raising rates 6 times: Denmark raised its rate in a technical adjustment while Norway (twice), New Zealand (twice) and United Kingdom raised rates to tighten policy stance. Australia discontinued its bond yield target.

      One bank, Denmark, also cuts its rate to defend the peg with the euro.

      The other 77 decisions have ended with unchanged rates. 

     EMERGING MARKETS: Central banks in emerging markets decided on monetary policy 181 times in 2021, with 53 decisions by 13 central banks ending in rate hikes: Turkey (four times) Brazil (seven), Russia (seven), Hungary (seven), Czech Republic (five), Mexico (five), Chile (four), Peru (five), South Korea (twice), Pakistan (three), Colombia (three), Poland (three) and South Africa.

     Seven decisions ended in rate cuts (Mexico, Indonesia, Turkey (four) and China), and 121 decisions ended in unchanged rates.

      FRONTIER MARKETS: Central banks in frontier markets decided on monetary policy 77 times in 2021, with 2 banks cutting rates (Romania and Ghana) and 5 banks raising rates 12 times: Ukraine (five times), Kazakhstan (three), Sri Lanka, Romania (twice) and Ghana.

      The other 63 decisions resulted in unchanged rates.

      

      OTHER MARKETS: Central banks in other markets decided on monetary policy 213 times in 2021, with 19 banks raising rates a total of 53 times: Mozambique, Angola, Armenia (six times),Tajikistan (four), Zambia (twice), Zimbabwe (twice), Kyrgyzstan (four), Belarus (twice), Georgia (four), Iceland (four), Moldova (four), Uruguay (three), Paraguay (five), Azerbaijan (three), Jamaica (three), Lesotho, Dominican Republic (twice), Costa Rica and Sierra Leone.

     Rates have been cut 7 times by 5 banks: Congo (three times), North Macedonia, Uganda, Seychelles, and Liberia.

     The other 153 decisions resulted in unchanged rates.

     

     www.CentralBankNews.info

       

Turkey tightens policy again by raising lira reserve ratio

     Turkey's central bank, which has already raised its key interest rates three times in the last six months, tightened its policy further by raising its reserve requirements for banks, saying the move aimed to improve the effectiveness of its transmission of monetary policy.

     The Central Bank of the Republic of Turkey (CBRT) raised the reserve requirement ratio for all Turkish lira deposits by 200 basis points and lowered the upper limit for how much foreign exchange banks can hold to 20 percent from 30 percent and the upper limit for gold to 15 percent from 20 percent.

     In addition, CRBT will raise its renumeration rate applied to bank's required reserves by 150 basis points to 13.50 percent.

     The changes are expected to increase lira-denominated reserves at the central bank by around 25 billion lira, while total required reserves in foreign exchange and gold are expected to decline by US$500 million if the reserve option utilization rate remains unchanged for remaining tranches, the bank said.

     Unlike most central banks, Turkey's central bank frequently uses reserve requirements as part of its box of monetary policy tools.

     The previous change came in November when CBRT not only raised its main interest rate but revised its reserve requirement regulation by scrapping a policy of linking the reserve requirement and renumeration with banks' loans so the same ratio was applied to all banks.

     According to its website, the ratio on lira demand deposits is now 8 percent, 6 percent on deposits of up to 6 months, 4 percent on deposits up to 1 year and 3 percent on 1 year or longer.

     The reserve ratio on foreign currency deposits ranges from 19 percent on demand deposits to 13 percent on deposits 1 year and longer, and for precious metals the ratio ranges from 22 percent for deposits on demand to 18 percent for deposits 1 year or longer.

     Turkey's central bank raised its policy interest rate by a total of 825 basis points from September through December to 17.0 percent and has pledged to maintain a tight monetary policy stance, and tighten further if needed, until inflation falls permanently.

     At the bank's last meeting on monetary policy on Feb. 18, the bank confirmed its commitment to tight monetary policy, saying the lagged effects of a fall in the lira's exchange rate and high inflation expectations were still having an adverse impact on prices.

     However, the central bank also noted that credit growth was starting to slow amid tighter financial conditions and the decelerating impact of the monetary tightening on credit and domestic demand was expected to become more significant.

     Earlier this month the central bank's governor, Naci Agbal, told Reuters that interest rates were unlikely to be cut for a long time this year given the pressures on inflation and he also wanted to rebuild the bank's depleted foreign exchange reserves.

     Despite a rebound in the lira's exchange rate in the last four months, Turkey's inflation rate shot up to 15 percent in January from 14.6 percent in December - three times the central bank's medium-term target of 5.0 percent inflation - due to higher prices of housing, fuels and food.

     In its latest inflation report from January, CBRT forecast inflation of 9.4 percent by the end of 2021 and then 7.0 percent by the end of 2022 before stabilizing around the 5 percent target in 2023.

ear.

     The combination of rate hikes and new economic leadership, including the arrival of Agbal in November last year has bolstered the confidence of investors.

     Last year the lira lost 30 percent of its value from the start of the year until early November when Turkey's strong-willed president, Tayyip Erdogan, installed Agbal at the central bank, followed by the resignation of Berat Albayrak, Erdogan's son-in-law, as finance minister.

     Since Nov. 8, when the lira hit a record low around 8.52 to the U.S. dollar, the lira has soared almost 19 percent - making it the world's top performer - to a rate of 7.17 today and is up 2.4 percent this year.

     After shrinking in the second quarter, Turkey's economy bounced back in the third quarter and grew an annual 6.7 percent from a fall of 9.9 percent. 

      Analysts estimate economic growth of up to 8.0 percent in the fourth quarter of 2020 for an annual expansion of 2.5 percent.

Crushing the States, Saving the Banks: The Fed’s Generous New Rules - guest column

    Following article was written by Ellen Brown, an attorney and founder of the Public Banking Institute. She is the author of twelve books, including the best-selling Web of Debt, and her latest book, The Public Bank Solution, which explores successful public banking models historically and globally.

    Central Bank News will occasionally carry articles by guest contributors if they are of interest to our readers.

By Ellen Brown

Congress seems to be at war with the states. Only $150 billion of its nearly $3 trillion coronavirus relief package – a mere 5% – has been allocated to the 50 states; and they are not allowed to use it where they need it most, to plug the holes in their budgets caused by the mandatory shutdown. On April 22, Senate Majority Leader Mitch McConnell said he was opposed to additional federal aid to the states, and that his preference was to allow states to go bankrupt. 

No such threat looms over the banks, which have made out extremely well in this crisis. The Federal Reserve has dropped interest rates to 0.25%, eliminated reserve requirements, and relaxed capital requirements. Banks can now borrow effectively for free, without restrictions on the money’s use. Following the playbook of the 2008-09 bailout, they can make the funds available to their Wall Street cronies to buy up distressed Main Street assets at fire sale prices, while continuing to lend to credit cardholders at 21%.  

The Fed protects gamblers at the expense of the economy

     Following article is written by Ellen Brown, author, attorney, activist and founder of the Public Banking Institute, for Central Bank News.
     Central Bank News will occasionally carry articles by guest contributors if they are of interest to our readers.

"Although the repo market is little known to most people, it is a $1-trillion-a-day credit machine, in which not just banks but hedge funds and other “shadow banks” borrow to finance their trades. Under the Federal Reserve Act, the central bank’s lending window is open only to licensed depository banks; but the Fed is now pouring billions of dollars into the repo (repurchase agreements) market, in effect making risk-free loans to speculators at less than 2%.

This does not serve the real economy, in which products, services and jobs are created. However, the Fed is trapped into this speculative monetary expansion to avoid a cascade of defaults of the sort it was facing with the long-term capital management crisis in 1998 and the Lehman crisis in 2008. The repo market is a fragile house of cards waiting for a strong wind to blow it down, propped up by misguided monetary policies that have forced central banks to underwrite its highly risky ventures.

Credit to non-bank financial firms continues to grow-BIS

     The rapid growth of credit to non-bank financial institutions (NBFIs) since the global financial crises continued in the fourth quarter of 2018 when total worldwide cross-border bank claims grew only 1.0 percent, according to the Bank for International Settlements (BIS).
      After growing in 2016, global cross-border lending was largely steady in the last 2 years as higher lending to borrowers from advanced economies in 2018 was offset by a decline in lending to borrowers from emerging and developing economies, and offshore centers, BIS said in its latest release of international banking statistics for the end of 2018.
      Total global cross-border claims grew by $134 billion, or 1.0 percent year-on-year, during the fourth quarter of last year to an outstanding amount of $29 trillion, propelled by an 8 percent rise in claims on NBFIs, short-hand for an vast number of firms that provide financial services but do not have a full banking license and do not accept customer deposits.
      One of the effects of the global financial crises was that banking regulators tightened their supervision of major banks, forcing them to retreat from some riskier financing operations.
     Into this breach, stepped non-bank financial firms, such as insurance companies, specialized lenders, or institutional investors such as pension funds and brokerage firms.
      Between end-2015 and end-2018 cross-border claims on NBFIs grew by an annual pace of 8 percent in stark contrast to 0 percent growth in lending to banks and only 2 percent growth in lending to non-financial borrowers.
     Another illustration of the shrinking role of banks is that cross-border claims on banks fell by an annual 1 percent by end-2018 while claims on non-banks was up by nearly 5 percent, data from BIS, know as the central banks' bank, showed.
    The bulk of credit to NBFIs, nearly 80 percent, is focused on a small number of jurisdictions, with nearly half of the total global stock of $6 trillion in claims against borrowers in the US (24 percent), the euro area (23 percent), the Cayman Islands (18 percent) and the UK (14 percent).
      After rising sharply in 2016 and 2017, lending to emerging and developing economies slowed last year, especially to borrowers in developing Europe, while lending to Latin American revived.
     Overall claims on emerging market and developing economies slowed from 9 percent growth at the end of 2017 to 3 percent by the end of 2018, with roughly half of the $30 billion in claims in the fourth quarter going to borrowers in developing Asia and Pacific.
     Claims on Asia and Pacific rose $15 billion in the fourth quarter, bringing annual growth to 5 percent, with claims on China up $9 billion, the Philippines by $4 billion, Indonesia by $3 billion and Thailand by $2 billion.
     In contrast, cross-border lending to Taiwan fell by $11 billion, Swiss-based BIS said.

     Click here to read BIS international banking statistics at end-December 2018

     www.CentralBankNews.info


   

Some financial market volatility is healthy, says BIS

       The return of some volatility to international stock markets should be welcomed as there are few things more insidious than the illusion of permanent calm because this can set the stage for some of the largest and most damaging losses, according to Claudio Borio, head of the Bank for International Settlements (BIS) monetary and economic department.
       Like a bolt from the blue, U.S. stock markets went into a tailspin on Feb. 2 amid a surge of volatility, triggered by the release of a strong figure for wage growth, pushing up yields on U.S. Treasuries, Borio said in remarks in connection with the release of the March 2018 edition of BIS' respected quarterly review.
        A few days later, on Feb. 5, internal market dynamics took over - in a way that was reminiscent of the role of program trading and portfolio insurance in the 1987 stock market crash - as exchange-traded products that bet on volatility were wrong-footed and forced to sell to cover losses.
      "But it is back, and some volatility is healthy," Borio said.
       Looking back at this burst of volatility, which was largely confined to equities, Borio said the wobble in financial markets hasn't change the overall economic and financial picture, with financial conditions still unusually accommodative.
       The U.S. dollar remains weak, a tell-tale sign of easy financial conditions, especially for emerging market economies.
       While the depreciation of the U.S. dollar has surprised many economists given the combination of tighter U.S. monetary policy and fiscal expansion, BIS finds this is not unprecedented and the dollar also fell in the 1990s and 2000s when the Federal Reserve tightened.
        The sudden shift in stock markets last month may also herald further wobbles, Borio said, as financial markets and the global economy are in unchartered waters. It was a reminder of how complicated the exit from years of accommodative monetary conditions could be.
       "Finally, all this underscores how delicate task central banks are facing," said Borio, adding treading this path will call for a great deal of skill, judgment and "a measure of good fortune.
      "But policymakers need not fear volatility as such. Along the normalization path, some volatility can be their friend," he said.
       In its quarterly review, BIS looks at the role of exchange-traded products, such as those allowing investors to trade volatility (VIX) for hedging or speculative purposes, can create and amplify market jumps even if the core players are relatively small.
       Drawing on BIS' international banking statistics going back to the 1980s, two BIS economists look at how the global leadership of U.S. banks from the perspective of emerging Asia gave way to Japanese banks in the 1980s and then European banks in the 1990s and 2000s.
        The banks became a conduit for the spread of financial distress, such as the Asian financial crises in 1997-1998, the Great Financial Crises of 2007-2009 and Europe's sovereign debt crises of 2010-2011.
        Today Japanese banks are once again the largest lenders to emerging Asia but Chinese banks now have a sizable and growing global footprint and likely to take their turn as important lenders.
       Included in BIS's quarterly review are six special features, with one showing that demand for cash has risen in many advanced countries despite the more frequent use of cards and contactless payments. This resurgence appears to be driven by the lower opportunity cost of holding cash at a time of very low interest rates.
       A second feature argues that the current low valuations of banks by financial markets are not out of line with historical patterns, casting some doubt on explanations that see regulation as a major source of the low valuations and suggesting that banks could improve the valuations through traditional drivers of profitability, such as tackling bad loans and controlling expenses.
      The third feature examines the risks posed by the rapid rise in debt issued by large property developers in several Asian economies as firms have shifted away from traditional bank loans toward issuing debt securities. Low profitability is has left them vulnerable to higher interest rates, falling property prices or local currency depreciations.
       The fourth feature argues that the shift toward passive investing through index mutual funds or exchange-traded-funds (ETFs) could lead to a higher correlation of returns and less security-specific price information. In recent episodes of stress in financial markets, passive mutual fund lows were fairly stable while active mutual funds showed persistent outflows and ETFs flows were volatile.
       A fifth feature finds a growing tension between traditional national account statistics and the global nature of today's economy in which companies and their ownership are global and their and activity is geographically dispersed and not limited by borders. Policymakers need to take a broader view when assessing risks to the financial system.
        The sixth feature expands BIS' well-established work on early warning indicators (EWIs) of systemic banking crises and concludes that household debt and international debt are useful in this regard, especially when combined with property prices.
        Within the indicators of household debt, household debt service ratio stands out and within international debt indicators, cross-border claims perform better than foreign currency debt.
        The feature finds that early warning indicators of stress in the banking systems of Canada, China, Hong Kong, Switzerland are blinking red, closely following by Russia and Turkey.
   
       Click to read BIS March 2018 Quarterly Review.

      www.CentralBankNews.info

Kenya holds rate, concerned over impact of rate cap

    Kenya's central bank left its Central Bank Rate (CBRF) at 10 percent, as expected, saying "overall inflation is expected to remain outside the Government target range in the near term due to the elevated food prices, even as demand pressures remain subdued."
    The Central Bank of Kenya (CBK), which cut its rate by 150 basis points last year, also said it remains concerned about current uncertainties, including the impact of the government-imposed cap on lending and deposit rates by commercial banks on the effectiveness of monetary policy.
    A preliminary analysis, which included a survey of commercial bank officers, showed the rate cap, which went into effect last September, would lead to an increase in demand for credit but actual credit granted would remain constant due to the tighter credit standards.
    Also, a market perception survey from this month showed private sector respondents expect a decline of growth this year due to the current drought and a slowdown in private sector credit growth.
    While growth of private sector credit has stabilized at 4.0 percent, the share of loans to corporates has risen relative to business and personal loans and the average maturity of loans has shifted to short-term lending.
     Loan approvals have declined by 6 percent between December and February this year while lending to micro, small and medium enterprises has declined in value due to reduced lending by large and medium banks, the CBK said.
    It added that banks were still adjusting their business models to ensure they remain competitive in the new environment in which lending and deposit rates have been capped at 4 percentage points above the CBK's key rate.
    Kenya's inflation rate rose to 9.04 percent in February from 7.0 percent in January, almost entirely due to higher food prices, with food inflation up to 16.5 percent from 12.5 percent due to drought.
    In contrast to 2014 and 2015, Kenya's shilling has remained stable in 2016 and this year, supported by a narrower current account deficit and resilient inflows from horticulture, tourism and remittances.
    The shilling was trading at 102.8 to the U.S. dollar, steady from 102.2 at the start of the year, with the central bank's foreign exchange reserves up to US$7.762 billion from $6.963 billion at the end of January for import cover of 5.1 months.
    The rise in reserves was largely to due inflows from government loans, which together with the $1.5 billion arrangement with the International Monetary Fund provides an "adequate" buffer against short-term economic shocks, the CBK said.

Global lending dips in Q4 as China and Russia hit - BIS

    Global cross-border lending dropped by $5 billion in the fourth quarter of 2014 as claims on borrowers in emerging markets, especially China and Russia, plunged by $80 billion while lending to advanced economies, such as the United Kingdom and the euro area, continued to recover, according to the Bank for International Settlements (BIS).
    Lending by major international banks to China contracted by $51 billion by the end of December 2014 from the end of September, but outstanding claims on Chinese residents totaled $1 trillion, far exceeding those of other emerging market borrowers such as Brazil, with total claims of $308 billion, India of $196 billion and Turkey of $194 billion.
    The surge in lending to China over the past few years has been driven primarily by short-term leading to banks - much of it in U.S. dollars - but authorities are now attempting to carry out a delicate balancing act of tightening credit conditions without disrupting economic growth.
    The contraction in lending to China in the fourth quarter of last year comes after an increase of almost 40 percent between the end of September 2013 and September 2014. But from the second to the third quarter of 2014 claims rose only by 3 percent.
    With the U.S. Federal Reserve likely to raise rates in coming months, there is concern that borrowers in emerging markets will face strains from higher debt repayments of loans in U.S dollars.
     Although the dollar share of cross-border lending has declined for China to 39 percent at the end of 2014 from 54 percent at the end of 2008, it remains very high for other countries. At the end of 2014, dollar-denominated loans amounted to 78 percent of cross-border claims to Brazil, 74 percent of claims on India, 68 percent for Indonesia and 70 percent for Taiwan.
    International lending to advanced economies continues to expand as their banking systems recover after the global financial crises, with claims on advanced economies up by $27 billion in the fourth quarter from the third quarter, helped by a 5 percent year-on-year rise in loans to the euro area and the U.K. and steady lending to the U.S.
    Within the euro area, there are marked differences as loans to France rose by 12 percent annually, claims on Germany rose 8 percent and claims to Italy were up by 6 percent. Meanwhile, claims on Cyprus fell 8 percent, while annual claims on Portugal and Spain fell 4 percent and loans to Greece contracted by 3 percent.
    Cross-border claims on Japan also continued to expand at a very rapid pace, growing at annual rate of 16 percent as of the end of 2014, with most of the growth in lending directed towards banks. The share of international claims on Japanese banks rose to 75 percent by the end of last year from 53 percent at the end of 2007.

    Click to read the BIS international banking statistics at end-December 2014.
   
    www.CentralBankNews.info

Bank lending again key vehicle to global liquidity - BIS

    International lending by major banks has resumed its role as a key vehicle for global liquidity as banking activity in advanced economies starts to revive while lending to emerging market economies, particularly Asia, continues to grow at a brisk, according to the influential Bank for International Settlements (BIS).
    The revival of international bank lending following the global financial crises is occurring alongside persistently high level of global bond market issuance, with some countries seeing rapid credit growth that is characteristic of the late stage of financial cycles, BIS said in its quarterly review for March 2015.
    Cross-border lending to all borrowers, i.e. banks and non-banks, in advanced economies grew 3 percent in the first nine months of 2014 while lending to emerging market economies grew by an annual rate of 11 percent.
    Outstanding international claims on advanced economies have thus reached $21.1 trillion in  September 2014, still below the $28.4 trillion reached in the first quarter of 2008.
    But claims on emerging markets have risen to $3.9 trillion by September, well above the pre-crises level of $2.7 trillion seen in the first quarter of 2008, BIS said.
    U.S. dollar lending to the non-financial sector outside the United States has also risen strongly in 2014, outpacing credit to non-residents through international debt securities, pointing to the ongoing revival of activity by globally active banks.
    Credit in U.S. dollars to non-financial borrowers outside the United States rose 9 percent to $7.3 trillion as of September 2014 while bank loans to non-U.S., non-financial borrowers rose 9.7 percent to $4.9 trillion credit in U.S. dollars and securities issued by these rose 8.6 percent to $2.4 trillion.

    The March 2015 quarterly review by the Bank for International Settlements can be accessed by clicking on this link.

    www.CentralBankNews.info

All major global banks now meet Basel III requirements

    The world's 224 major international banks now meet the risk-based capital requirements under the tougher Basel III banking regulations and have further narrowed the shortfall in capital required to meet targets for 2019, according to the Basel Committee on Banking Supervision (BCBS).
    The Basel Committee, which sets global standards for banking supervision, said the aggregate shortfall for the 98 largest internationally active banks relative to the 7 percent target for common equity (CET 1) in 2019 amounted to 3.9 billion euros as of June 30, 2014, down from a shortfall of 15.1 billion as of end-2013 and from a shortfall of 485.6 billion euros on June 30, 2011.
    In comparison, these 98 banks - known as Group 1 banks with Tier 1 capital in excess of 3 billion euros - had total after-tax profits prior to distributions of 210.1 billion euros in the six months ending June 30, 2014.
    The shortfall for the smaller Group 2 banks, which have Tier 1 capital below 3 billion euros, narrowed to a mere 0.1 billion euros relative to the minimum level of 4.5 percent and was 1.8 billion relative to the 7.0 percent target, down from shortfalls of 2.0 billion and 9.4 billion, respectively from the previous survey in September last year.
    The Basel Committee, which groups supervisory authorities from almost 30 jurisdictions, has published six previous reviews of how Basel III rules will impact banks and financial markets.
    Basel III was agreed by global leaders ion 2010 in an effort to strengthen the global financial system following the crises in 2008, and imposed higher capital charges on banks to ensure they had enough of a cushion to withstand the stress from a financial crises along with stricter supervision.

FSB adds China AgBank as systemically important bank

    The Agricultural Bank of China Ltd. (AGBank), China's third largest bank by assets, has been added to the list of global systemically important banks (G-SIBs) maintained by the Financial Stability Board (FSB), the Swiss-based body that coordinates global financial regulation.
    The addition of AGBank increases the overall number of G-SIBs on FSB's list to 30.
   Systemically important banks are defined as those whose distress or disorderly failure would cause significant disruption to the global financial system and economic activity due to their size, complexity and interconnectedness. These banks are often referred to as "too-big-to-fail."

    The FSB started identifying banks that are considered systemically important in 2011 following an endorsement by Group of 20 leaders in 2010. The FSB updates its list every November based on a methodology developed by the Basel Committee on Banking Supervision (BCBS) and the latest update is based on end-2013 financial data.

    Both the FSB and the Basel Committee are based at the Bank for International Settlements (BIS) in Basel, Switzerland.
    Banks on FSB's list of G-SIBs are subject to tougher financial regulation, including higher loss absorbency requirement that is being phased in from Jan. 1, 2016, resolution plans in the event of a collapse, and higher supervisory expectations for risk management functions, risk governance and internal controls.

    www.CentralBankNews.info

    
 

BIS warns of weakness in emerging markets' banks

    Banks from countries that are still enjoying financial booms may be weaker than they appear as reliable warning indicators are flashing red, said the Bank for International Settlements (BIS).
    BIS, known as the central banks' bank, said it was mainly concerned about financial institutions that are exposed to emerging markets, such as China, where economic growth is being fueled by unstable leverage based on a benign credit outlook and a potential for strong earnings.
    But BIS’ concern is not limited to emerging markets but extends to banks in some advanced economies, such as Switzerland and the Nordic countries where high market valuations “may be reflecting fast credit growth and frothy property prices,” BIS said in its latest annual report.
    Although several indicators, including non-performing-loan ratios (NPL), are signaling an upbeat message about banks in emerging Asia and Latin America, BIS cautioned that “such indicators failed to signal vulnerabilities in the past.”
    Because of their backward-looking nature, NPL ratios did not rise in advanced economies until 2008 when the financial crises was already under way, just as credit ratings and market valuations failed to warn of the imminent financial distress.

Cap on debt-to-income can control home prices - BIS

    Most countries that experienced an explosion in house prices ahead of the global financial crises have taken a variety of policy measures to avoid another real estate boom with evidence that a limit of the debt-service-to-income ratio is the best tool to slow housing credit growth, according to the Bank for International Settlements (BIS).
    But to slow down the actual growth of real estate prices, a BIS working paper found that higher housing- related taxes was the only tool that had any measurable impact.
    Measures specifically targeted at dampening a rise in real estate prices are now used by authorities worldwide as it has become clear that an increase in central bank interest rates that is large enough to dampen the rise in house prices would run the risk of triggering an overall recession.
    The working paper by Kenneth Kuttner, professor of economics at Williams College, and Ilhyock Shim, senior economist at BIS' Hong Kong office, systematically examines the efficacy of nine different measures taken by 60 countries since 1980 to control housing credit and house prices.
    Click to read: "Can non-interest rate policies stabilize housing markets? Evidence from a panel of 57 economies."

    www.CentralBankNews.info

FSB names China's ICBC as systemically important bank

    The Industrial and Commercial Bank of China Ltd. (ICBC) has been added to the list of globally systemically important banks (G-SIBs) by the Financial Stability Board (FSB), which means the Chinese bank faces stricter supervision and higher capital charges from January 2016.
    The Swiss-based FSB, which coordinates global financial regulation, updates its list of globally systemically important banks and financial institutions (G-SIFIs) every November. The latest update of the list is based on end-2012 data and the list has now risen to 29 from 28.
    In July the FSB also identified nine global systemically important insurers (G-SIIs), which together with the banks comprise the list of G-SIFIs. The update to the list of insurers takes place next November.
    In addition to including ICBC for the first time as a G-SIB, the FSB will impose slightly less additional loss absorbency on Citigroup, Deutsche Bank and Bank of New York Mellon while France's Group Credit Agricole faces a slightly higher charge.
   Systemically important banks are defined as those whose distress or disorderly failure would cause significant disruption to the global financial system and economic activity due to their size, complexity and interconnectedness. These banks are often referred to as "too-big-to-fail."

Global banks narrow Basel III shortfall to 2.2 bln euros

    The world's major banks continue to shore up their risk-based capital as they prepare to meet new stricter banking regulations, narrowing the total shortfall under Basel III's 4.5 percent minimum capital requirement to 2.2 billion euros as of end-2012, 1.5 billion less than as of June 30, 2012.
    In its latest review of the impact of the new, stricter global banking rules that are being phased in by 2019, the Basel Committee on Banking Supervision (BCBS) said the aggregate shortfall for the major banks under a 7.0 percent common equity Tier 1 (CET1) target - which includes surcharges for banks that are considered systemically-important - fell by 82.9 billion euros to 115.0 billion.
    This shortfall compares to combined net tax profit prior to distributions at the so-called Group 1 banks of 419.4 billion euros at the end of 2012, which means the shortfall accounts for just over one-quarter of the banks' total profit.
    The Basel Committee, which groups supervisory authorities from almost 30 jurisdictions, has conducted three previous reviews of the impact of Basel III on financial markets and the result is that banks are slowly but surely making progress in meeting the new rules that were agreed by global leaders in 2010 in an effort to strengthen the global financial system following the 2008 crises.

FSP issues shadow banking rules on securities, regulation

    Global plans to strengthen the regulatory oversight of shadow banking are nearing completion as the Financial Stability Board (FSB) released two new policy frameworks covering securities lending and supervision.

    The latest proposals are part of the international community’s efforts since the global financial crises to tackle the threat from shadow banking, the vast and largely unregulated world of hedge funds, money market funds and investment vehicles.

    The financial crises revealed that shadow banking - roughly half the size of the regulated banking sector - posed a severe threat to financial stability, not only because of its size and global reach but also because it is part of a complex chain of financial transactions with banks and insurance companies.

    “ Like banks, a leveraged and maturity-transforming shadow banking system can be vulnerable to “runs” and create contagion risk, thereby amplifying systemic risk,” said the FSB, the international body that monitors and coordinates global financial regulation on behalf of the Group of 20 (G20) leading economies.

    Over the last two years, the FSB has been developing a string of policies aimed at reducing the risk from shadow banking by creating a monitoring framework to track the sector and strengthen the oversight and regulation of the shadow banking system.

    "Most of these policy measures are now finalised and will be adopted by FSB members in an internationally-coordinated manner," said the FSB, adding that some of its latest proposals that cover minimum haircuts for securities financing transactions would be refined further to avoid any unintended consequences for the financial system.

     The challenge for the FSP, along with the Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO), has been to devise rules that limit the risks yet retain the benefits and don’t stymie future financial innovation.

     "When implemented, this integrated set of policies should mitigate financial stability risks emanating from shadow banking. They should also limit the incentives of risky activities to move to the unregulated sector as tighter regulations on banks and other traditional market participants come into effect," the FSB said.

    While off-balance sheet financial entities and various forms of securitization have been around for centuries, the current form of shadow banking first took off in the last decades as banks exploited regulatory gaps and used regulatory arbitrage to minimize cost.  

     Click to read the FSB’s latest policy recommendations for shadow banking.

    www.CentralBankNews.info 

New credit gauge warns of impending crises - BIS review

    A boom in credit usually foreshadows a financial crises but authorities failed to spot the build-up in total credit from the late 1990s through 2006 because they were looking the other way, according to an article in the latest quarterly review from the respected Bank of International Settlements (BIS).
    While authorities were busy looking at lending by domestic banks, which only rose slowly, credit created by foreign institutions and non-banks – the so-called shadow banking sector that includes pension funds, mutual funds, hedge funds, and insurance companies – exploded.
    “A new BIS database reveals, for example, that banks may provide as little as 30% of total credit to the private non-financial sector, as is currently the case in the United States,” said the article by senior BIS economist Mathias Drehmann.
    The database, which captures all sources of credit regardless of source or origin, provides more information than the traditional measurements of bank credit and is therefore useful as an early warning indicator for financial crises, Drehmann finds.
    That finding has very practical implications for banks as the Basel III global rules include countercyclical capital buffers that are based on a credit-to-GDP gap, but they don’t specify how national banking regulators should calculate that gap.

Models, supervision determine banks' risk weights - report

    Investors have a hard time comparing the riskiness of the major global banks because there are differences in how each bank calculates the potential danger of their assets, according to a report by the Basel Committee on Banking Supervision.
    Based on tests of how 15 major banks assign risks to a simple, hypothetical portfolio of financial instruments, the Basel Committee found differences, either due to supervisory decisions or due to the in-house models that banks use to calculate risk.
    “While some variation in risk weightings should be expected, excessive variation arising from bank modelling choices is undesirable when it does not reflect actual risk-taking,” said Stefan Ingves, Chairman of the Basel Committee and governor of Sveriges Riksbank.
    The Swiss-based Basel Committee, which includes banking supervisors from almost 30 countries, sets global standards and has been tightening its rules in recent years in an effort to prevent another global financial crises.
    The Committee’s analysis of how banks assess the risks from financial instruments is important because the global financial crises in 2007-2009 was largely triggered by major losses on banks’ investments in housing related securities that were held in their trading books.