Annex I. Macroprudential Policy Options to Address Corporate Vulnerabilities27
This Technical Note has been prepared by Umang Rawat, Economist from the Monetary and Capital Markets Department of the IMF.
Established in accordance with Article 136 of CRD.
Decisions regarding the publication of opinions and recommendations are taken by a simple majority rule of members present, with the Chairman holding the casting vote in case of a tie. However, there is a quorum, half of the members must be present for the meeting to take place.
Beyond these legal obligations, the HCSF uses its external communication (annual reports, press releases, public notes, consultation, website, etc.) to bolster its macroprudential policy, by providing the general public, the media and financial sector stakeholders with information and explanations on the measures it implements.
This includes decisions relative to the countercyclical buffer, the systemic risk buffer, the measures provided for in Article 458 of CRR, and credit standards as well as any insurance-targeted measures, should they be adopted.
While HCSF has broad powers to seek information from all entities, currently there isn’t a framework to penalize third parties that do not provide quality information. However, no such experience has been reported by the authorities so far.
AMF also has the power to use suspension of redemptions as a macroprudential tool. There is merit to keeping the ultimate trigger on such ex-post tools that lean towards crisis management with the institution closely monitoring the sector, i.e., AMF in this case. However, based on EU level discussions implementing ESRB recommendations on investment fund liquidity and leverage, ex-ante tools could be brought under the ambit of HCSF.
In particular, different provisions authorize the exchange of information with other French authorities: Article L 631 -1 of the CMF requires the BdF, the ACPR and the AMF to cooperate, and to provide to each other the necessary information to fulfill their respective mandates.
See Menfred et. al. (2012). CISS – a composite indicator of systemic stress in the financial system.
See Coudert and Idier (2017). An early warning system for macroprudential policy in France.
Made publicly available online: https://publications.banque-france.fr/en/liste-chronologique/assessment-risks-french-financial-system
See, for example Idier and Piquard (2017). Pandemic crises in financial systems: a simulation-model to complement stress testing frameworks.
See, for example Clerc et. al. (2015) Capital regulation in a macroeconomic model with three layers of default. (estimated for French data in Bennani et. al. (2017) An analytical framework to calibrate macroprudential policy.
See also reminder by the AMF and the Autorité des normes comptables (ANC) on their expectations for the valuation of real estate assets and reminder by the AMF and the ACPR on their expectations concerning the distribution of financial products that invest in real estate, both published on March 31, 2017.
See Benhami et. al. (2018). Interconnections between the French asset management sector and the rest of the French financial system.
Upon reviewing analytical and data challenges, Grillet-Aubert (2018) stresses the need for supervisors’ contribution to the development of these exercises.
Two measures are used to compute bank credit to GDP gap: (i) bank credit to GDP detrended by HP filter; and (ii) bank credit to GDP gap (moving average) calculated by subtracting 8 quarter moving average of bank credit to GDP ratio from the current value.
There is variation across banks’ capital ratios, with those more internationally active having lower CET1 ratio.
Banks have to comply with the new requirement starting July 1, 2019.
It is important to note that the distribution of assets matter and it is likely that those who have large real estate debt are not those who have large financial assets.
The release of the 2019 Household Finance and Consumption Survey will provide information in this respect.
Subtracting cash holdings from consolidated debt, aggregate net consolidated debt has barely increased during the crisis and stands at 64 percent of GDP, close to the euro area average, suggesting that, in the aggregate, French firms used part of the proceeds to accumulate liquid financial assets, which also account for a larger share of their assets. For further details, please see Almeida and Tressel (2019).
Some of these channels are discussed in Committee on International Economic Policy and Reform (2015).
Bruno and Shin (2017) show that nonfinancial corporations from outside the U.S. that issue U.S. dollar-denominated bonds tend to deposit a significant share of the resulting proceeds in local banks to accumulate financial assets. As a result, banks’ loss of funding from such liquidity withdrawals could be substantial.
The exposures are determined at the highest level of consolidation of the banking prudential perimeter of the institution concerned. An NFC is considered as large if these exposures are at least €300 million.
Defined as total financial debt less outstanding liquid assets over total equity.
Defined as earnings before interest and taxes/interest expenses.
The temporary suspension of redemptions can only be imposed for a maximum of six consecutive months.
The microprudential risk of liquidity mismatches can become a macroprudential risk in the presence of price externalities and market imperfections. Price externalities can become acute when asset returns are correlated across investment funds, or when liquidity of assets is low. Market imperfections include (i) herding behavior that can lead to correlated exposures to certain asset classes, including illiquid ones; and (ii) first mover advantages (which can create risks of a run) and the resulting fire sales that may have spillovers to the rest of the financial system.
IOSCO recommendations, which aim to provide a diversity of tools to asset managers for liquidity management, have been incorporated in France. The legislative changes clarify the conditions for implementation of introduction of (i) subscription and/or redemption notices, (ii) redemptions in kind, and (iii) partial or total closing of subscriptions.
For more details, see the ACPR methodological note on the webpage dedicated to systemic entities of the banking sector (https://acpr.banque-france.fr/en/prudential-supervision/banking-supervision/systemic-entities-banking-sector).
Prepared by Umang Rawat and Erlend Nier (Both MCMMP).
See Romania: Technical note on macroprudential policy framework and tools.
Other examples include Indonesia and China that have both introduced measures to mitigate risks associated with corporates’ external borrowing, including from non-banks. In the case of Indonesia, corporates with external debt have to fulfill certain minimum hedging, liquidity, and credit rating requirements, and in China corporations’ face a risk-weighted ceiling on the amount of cross-border funding they can attain, which is calculated based on the composition and degree of leverage of their external liabilities. As both prudential measures discriminate based on residency, they are classified as both capital flow management and macroprudential measures (i.e., CFM/MPMs).
An earning stripping rule is one where interest deductibility is based on interest-to-earning (in contrast with debt-to-equity in case of a fixed rule).
Debt shifting refers to multinational companies lending from low-tax countries to related entities in high-tax countries or by locating external borrowing in high-tax countries.
The rule in the BEPS Action 4 proposal recommends introducing carry forward of disallowed interest expense to mitigate this effect. Under the proposed French scheme, the unused deduction capacity may be used during the following five financial years. However, this will not eliminate the impact on liquidity.
Some of the countries where ACE is currently applied include Belgium, Cyprus, Italy, Portugal, and Turkey (IMF, 2016).