Jian Wang is an analyst in the banking team of the CFA Guosen Securities Economic Research Institute
The difference between the whole and the individual is a phenomenon that we often encounter when studying a specific problem. For example, in the past, when macroeconomic control and monetary tightening, many enterprises defaulted due to tight funds, and some voices began to question macroeconomic control. But when we get to know those failed companies from a micro perspective and look at their previous debt levels, we can't help but feel that there is really nothing wrong with this collapse.
And every time a major financial crisis occurs, people will be surprised to find that in the crazy moment before the crisis, the operating indicators and regulatory indicators of most financial institutions still meet the regulatory requirements, and it is not that they have done anything illegal to cause the financial crisis.
These are the two problems that have always existed in financial regulation: micro-prudential and macro-prudential.
1. What is macro-prudential?
The whole is not a simple sum of individuals.
Every soldier in a company is in good physical condition and meets the operational requirements, but it is difficult to say whether the company, which is the sum, meets the operational requirements.
For another example, a large number of tourists go to a scenic spot to see the scenery, and everyone buys a ticket to enter normally, but they may unknowingly exceed the carrying capacity of the scenic spot.
These superficial perceptions in life are similar when applied to the financial system. From the previous financial crises, people have gradually realized that the sound operation of each micro-operating institution (such as meeting all micro-regulatory indicators and not doing bad things) does not necessarily represent the safety and soundness of the entire financial system. Many financial crises were preceded by varying degrees of over-credit. The word "excessive" measures that the credit provided by all financial institutions has far exceeded the normal financing needs of the economy, so that the excess funds have blown up the bubble. But the problem is that each individual financial institution may not be able to pay attention to the affairs of the whole industry, it only cares about completing its business performance under the premise of legal compliance.
As a result, this "excess" can only be cared for by a national competent authority, which can intervene in a timely manner. Otherwise, the sum of many microscopic subjects will inevitably bring greater pro-cyclicality, that is, boost cyclicality.
For example, when the economy is good, companies themselves are overly optimistic about the future (of course, most of them don't realize that they are overly optimistic), there is a strong demand for loans, banks lend a lot, and even lower lending standards in order to compete for customers (because the governors feel that the economy is so good that they don't need collateral). The bank is profitable, and a large amount of profits are converted into capital (when the economy is good, investors do not want you to pay dividends, but use the money they earn to continue to make money), so the capital becomes abundant, and the future lending ability is further improved. As a result, the economy was pushed further to overheat. In the economic downturn, on the contrary, the economy is worse when companies are not doing well and banks are afraid to lend.
In the whole process, the bank's behavior not only meets all regulatory standards, but also conforms to the principles of commercialization and marketization, so it is also rational and prudent. However, what they show as a whole is the effect of "boosting the rise and killing the fall" on the macroeconomy.
The pro-cyclical nature of the financial sector is a point of much doubt and a root cause of previous financial crises. The task of macro-prudential is to solve this problem, which was first discussed in the late 1970s, and has been repeatedly emphasized after the Asian financial crisis in 1997 and the subprime mortgage crisis in the United States in 2007, and finally became a priority for a country's monetary authorities. In most countries, microprudential supervision and consumer protection of specific financial institutions are now implemented by financial regulators (i.e., "twin peaks"), while monetary authorities implement monetary policy and macroprudential supervision (i.e., "twin pillars").
Therefore, it is very normal for banks to use excess funds for bond investment when there is a significant margin (deposit growth significantly exceeds loan growth). It can even be said that if the management does not do this, it is irresponsible to the shareholders. However, if a large number of banks do this together, they will encounter the macro-prudential problems mentioned above, which will increase the cyclical nature of the bond market.
Second, how to manage macro-prudential
Since in the process of macro risk accumulation, the vast majority of micro financial institutions operate legally and compliantly, and they have not violated anything, so it is difficult to issue a regulation that does not allow them to do these businesses.
Therefore, the main method for policy authorities to implement macro-prudential supervision is to give it the power to adjust the parameters within a certain range of some regulatory indicators implemented on a daily basis.
For example, capital management in banks is a major source of pro-cyclical behavior. When the economy is good, the banks are profitable, the profits retain capital, and the capital is larger, so they can put more credit and ultimately add fuel to the already good macroeconomic fire. At this point, the policy authority can set an "add-on" (commonly known as countercyclical capital surcharge) on capital adequacy ratio management, and the required capital adequacy ratio level is the minimum ratio set by the financial regulator plus this surcharge. When the economy is good enough, this added value can be increased, so the capital adequacy ratio of banks is required to be higher in order to curb their ability to lend in the future and prevent the economy from overheating. Again, in times of economic distress, this surcharge can be reduced.
Again, other regulatory metrics can be set with reference. For example, another cyclical indicator is the non-performing ratio: when the economy is bad, the asset quality of banks deteriorates and the non-performing ratio increases, so banks are less afraid to lend, and the economy is even worse. The feasible way is for the relevant departments to weaken the assessment when the bank employees' asset quality is poor, and improve the tolerance of non-performance.
Of course, there has been a simpler and more crude way of regulating in the past: consensual lines of credit. When the economy is overheated, the policy authorities directly set a loan ceiling for each bank, which is not allowed to exceed (no surcharge, direct payment...... ）。
Therefore, when banks have obvious deposit gaps and a large amount of funds are used to allocate bonds, similar countercyclical surcharges can be set on some liquidity regulatory indicators. Of course, if all businesses are added in detail, then all regulatory indicators will be too complex, dazzling, and the regulatory costs are too high, so some detailed businesses are generally handled flexibly through window guidance.
Of course, the implementation of this management tool should give the policy authorities a certain amount of "subjective discretion", that is, to what extent does the economy or market heat up and have to intervene and adjust which addition? Modern central banking theory believes that relatively independent subjective discretion generally needs to be matched by transparency, that is, the state has given it this power, and it also needs to fully explain what its considerations are for doing so through market communication or information disclosure.
3. Digression: Why should financial management break the rigid exchange?
Another typical example of the difference between the individual and the whole is the problem of rigid redemption of wealth management products. Similarly, because the overall system and the microscopic subject are felt from different angles, some people have been puzzled and asked such a question:
Banks are willing to issue just-redeemed wealth management products, and are willing to give the people a 4% rate of return to increase residents' property income, why not allow them to do so?
If you answer this question from a micro perspective, it is difficult to answer. This can only be understood from a more macro perspective.
As we all know, bank deposits are just redeemed, as long as the bank does not fail, depositors deposit money in the bank, the bank will use it for loans, even if the loan fails, then the bank will still repay the deposit according to the agreed principal and interest. In other words, if there is a problem with the loan, the loss is borne by the bank, not the depositor.
However, the bank must bear the intermediate losses on the premise that it can afford it. And if you prove that you can afford it? Contribution of capital. Therefore, with capital management, for every 100 yuan loan, bank shareholders must contribute 8 yuan of capital (the earliest capital adequacy ratio requirement is 8%), so if the bank loan is lost, as long as the loss does not exceed 8% (the situation is not common for regulators), then the bank capital can cover the loss, and the deposit is worry-free.
However, the issuance of wealth management products by banks is different from on-balance sheet business, there is no capital management requirement, and if the wealth management investment is lost, the bank has no way to guarantee that it will be able to make up for the loss and pay the principal and profit to the customer as agreed. Therefore, at this time, banks are not allowed to promise returns to wealth management customers, and investment profits and losses are borne by the customers. This is the breaking of the rigid exchange, and the customer bears his own risk.
But if there is a loss in the wealth management investment, the bank is willing to cover it with its own capital? At this time, it will face such a regulatory problem: if a bank has a loan of 100 yuan, 20 yuan of wealth management, and has 8 yuan of capital to deal with the possible risks of the loan, and now the 8 yuan capital still needs to deal with the possible risks of 10 yuan of financial management, then it does not meet the 8% regulatory requirements. Then you have to press the asset reserve of 120 yuan, which is 9.6 yuan. That is to say, if you really don't want to break the just exchange, you have to "return to the financial table".
Source: Wang Jian's angle
