Dawid Żochowski

Housing Loans Growth, Foreign Currency Risk and Supervisory Response: The Polish Case

The spectacular growth of household loans in Poland and in other new member states, particularly in foreign currencies, has attracted particular attention of central banks and supervisors, because of its potential implications to the stability of the banking sector. In the paper, we assess the financial stability risks arising from these exposures using the micro-data form Polish households budget surveys. We define the financial-margin and stress-test every individual household against the financial shocks (interest rate and exchange rate shock) as well as shock on the labour market. We conclude that, in spite of rapid credit growth in the period of 1998-2006 and continuous easing of lending policies by the banks at least since 2003, the ability of the household sector to repay debts did not deteriorate. We find also that the financial margin (and thus ability to repay debt) is considerably higher among households repaying mortgage loans, however, at the same time, these households are much more vulnerable to financial shocks than other borrowers. We compare also the implications of different types of shock of the comparable magnitude and find that the impact of fx or interest shocks on the ability of households to repay debts is considerably lower than in the case of labour market shock, although among households that repay mortgage loans the differences between vulnerabilities to these shocks are much smaller. Using the survey data, we analyse also the implication of the new prudential regulations on bank’s behaviour and find evidence of regulatory arbitrage. We conclude that the credit risk rather than financial risks is a major indirect risk to the banking sector arising from exposures to household loans and possibly the next downturn in the credit cycle could be a challenging period for banks.

Modelling Inflation Using Markov Switching Models: Case of Poland, 1992-2005

We investigate inflation in Poland in the period of economic transition by examining the potential application of Markov Switching Models to model the inflation generating process in Poland. The time horizon of analysis was limited to the period between March 1992 and October 2005 defined as the process of disinflation, i.e. the process of continued decrease in inflation rates following the economic transition period in early 1990s which was accompanied by a high level of inflation. According to the Ball-Friedman hypothesis, variation of inflation during periods of high inflation can be unstable. Indeed, the results show that non-linear models significantly improve the description of inflation generating process in Poland. Apart from univariate Markov Models, we also use a model that incorporates inflation expectations measured by Future Inflation Indicator (FII). We find that the model, where lagged values of FII are included as exogenous variables is significantly better in modelling inflation than simple univariate Markov Model.

The risk premium channel and long-term growth

We study a quantitative DSGE model linking a state of the art asset pricing framework a la Kung and Schmid (2015) with a constraint on leverage as in Gertler and Kiyotaki a (2010). We show that a mere increase in the probability of firms being financially constrained leads to an increase in risk premia. Even for a small adverse shock to productivity a drop in asset valuation restrains firms from outside financing and by that induces a persistent low growth environment. In our framework a constraint on leverage induces countercyclical risk premia in equity markets even when it does not bind. JEL Classification: D53, G01, G12