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Credit Growth and Credit Growth and Bank Soundness in Bank Soundness in Emerging EuropeEmerging Europe
Natalia TamirisaNatalia TamirisaDeniz IganDeniz Igan
International Monetary FundInternational Monetary Fund
The 13th Dubrovnik Economic Conference
June 29, 2007
Rapid credit growth in the Rapid credit growth in the region...region...
Sources: Eurostat; IFS, National Statistical Offices; and IMF staff estimates.
-5
0
5
10
15
20
25
30
35
40
45
50
55
60
Ger
man
yA
ustr
iaM
alta
Ital
yF
ranc
eF
inla
ndP
ortu
gal
Luxe
mbo
Hun
gary
Cze
chC
ypru
sB
elgi
umB
ulga
riaG
reec
eIr
elan
dS
lova
kS
pain
Slo
veni
aP
olan
dR
oman
iaLi
thua
nia
Latv
iaE
ston
ia
-5
0
5
10
15
20
25
30
35
40
45
50
55
60
Real Credit to the Private Sector, 2006(annual percentage change)
GDP per Capita and Current Account Deficit
Austria
Belgium
Finland
France
Germany
Greece
IrelandItaly
Portugal
Slovenia
Spain
Bulgaria
CyprusCzech
Republic
Estonia
Hungary
Latvia
Lithuania
Malta
Poland
Romania
Slovak Republic
-15
-10
-5
0
5
10
0 10000 20000 30000 40000 50000
GDP per Capita, PPP-based 2006
Cur
rent
acc
oun
t def
icit,
200
2-06
-15
-10
-5
0
5
10
...increasingly funded through ...increasingly funded through capital inflowscapital inflows
NMS: Net Capital Flows, 1999-2006(In percent of GDP)
Baltics
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
1999 2001 2003 2005
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0CEECs
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
1999 2001 2003 2005
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0PortfolioInvestmentOtherInvestmentFDI
Bulgaria and Romania
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
1999 2001 2003 2005
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
Source: IMF, World Economic Outlook.
...concentrated in the ...concentrated in the household sectorhousehold sector
0
10
20
30
40
50
60
70
80
2001
2005
Household Loans(In percent of total outstanding loansto the private sector)
Rising euroisation of Rising euroisation of domestic creditdomestic credit
0
10
20
30
40
50
60
70
80
902001
2005
Foreign Currency Loans(In percent of total outstanding loansto the private sector)
Rapid credit growth reflects financial
deepening...Financial Deepening in Selected Countries, 2001-05
Latvia
Estonia
Lithuania
Australia New Zealand
Mexico
Chile Thailand
Malaysia
Rep. of Korea
Japan
Euro area Slovak Rep.
Slovenia
Czech Rep.
Poland
Hungary
-10
-5
0
5
10
15
20
25
30
35
40
0 20 40 60 80 100 120 140 160 180
Private Sector Credit (In percent of GDP)
Dif
fere
nce
betw
een
Pri
vate
Sec
tor
Cre
dit G
row
th a
nd G
DP
G
row
th (
In p
erce
nt)
Sources: National Banks, International Financial Statistics, and IMF staff estimates.
...and rising financial ...and rising financial integrationintegration
External Assets and Liabilities(In percent of GDP)
0
100
200
300
400
500
600
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
Source: Lane and Milesi-Ferretti (2006).
Western Europe
Emerging Europe
Emerging Markets
NMS: Macroeconomic Environment and Credit to the Private Sector, 1994-2005(Annual percent change, unless indicated otherwise)
Sources: IMF International Financial Statistics, and staff estimates.1/ CPI-based index with 2000 as base year.
Real Credit Growth
-30
-20
-10
0
10
20
30
40
50
60
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
-30
-20
-10
0
10
20
30
40
50
60
Baltics CEECs
Real GDP Growth
-4
-2
0
2
4
6
8
10
12
1994 1996 1998 2000 2002 2004
-4
-2
0
2
4
6
8
10
12
Consumer Price Index
0
10
20
30
40
50
1994 1996 1998 2000 2002 2004
0
10
20
30
40
50
Real Lending Rate(In percent per annum)
-6
-4
-2
0
2
4
6
8
10
12
14
1994 1996 1998 2000 2002 2004
-6
-4
-2
0
2
4
6
8
10
12
14
Real Effective Exchange Rate 1/
70
80
90
100
110
120
130
1994 1996 1998 2000 2002 2004
70
80
90
100
110
120
130
Macroeconomic and financial conditions have been supportive...• Disinflation
• Improved economic prospects
• EU accession
• Pent-up demand for credit
• Easy global monetary conditions
• Ample global liquidity
...as are supply-side ...as are supply-side factorsfactors
Sources: European Central Bank; and IMF staff estimates.
Share of Five Largest Credit Institutions(In percent of total assets)
0
20
40
60
80
100
120
CzechRepublic
Hungary Poland SlovakRepublic
Slovenia Estonia Latvia Lithuania
Share of Foreign-Owned Banks(In percent of total assets)
0
20
40
60
80
100
120
CzechRepublic
Hungary Poland SlovakRepublic
Slovenia Estonia Latvia Lithuania
• Privatization
• Entry of foreign banks
• Strategic expansion
• High profitability
+ subsidies and tax + subsidies and tax policiespolicies
LiteratureLiterature Financial deepening but “excesses,” credit Financial deepening but “excesses,” credit
booms are a riskbooms are a risk Schadler et al (2004); Cottarelli et al (2005); Egert Schadler et al (2004); Cottarelli et al (2005); Egert
(2007); ECB (2007)(2007); ECB (2007)
Credit growth improves bank soundness, Credit growth improves bank soundness, unless it is “excessive” unless it is “excessive”
Maechler, Mitra, and Worrell (2006) Maechler, Mitra, and Worrell (2006)
FSIs are favorable, but backward lookingFSIs are favorable, but backward looking Hilbers et al (2005); Iossifov and Khamis (2006)Hilbers et al (2005); Iossifov and Khamis (2006)
Foreign banks are more efficient, but loan growth is similar
Aydin (2006); de Haas and van Lelyveld (2005)
Policy Debate
How to manage How to manage macroeconomic and prudential macroeconomic and prudential risks...risks...
...and “not to kill the goose that ...and “not to kill the goose that
lays the golden eggs”?lays the golden eggs”?
Focus of This StudyFocus of This Study
How significant are prudential risks in How significant are prudential risks in the NMS?the NMS?
Has credit growth affected bank soundness? Has credit growth affected bank soundness? Are weaker banks expanding faster? Are weaker banks expanding faster?
Do prudential risks differ across...?Do prudential risks differ across...? CountriesCountries Banks (foreign/domestically owned)Banks (foreign/domestically owned) Purpose of credit (household/corporate)Purpose of credit (household/corporate) Currency of denomination/indexation (foreign/ Currency of denomination/indexation (foreign/
domestic)domestic)
Bank-level AnalysisBank-level Analysis
Bank balance sheet data (Bankscope)Bank balance sheet data (Bankscope) Ugo Panizza’s (IDB) data set, updated Ugo Panizza’s (IDB) data set, updated 217 banks during 1995-2004 in 8 NMS217 banks during 1995-2004 in 8 NMS 7 observations per bank, on average7 observations per bank, on average Unconsolidated data, where availableUnconsolidated data, where available Commercial banks and leasing companiesCommercial banks and leasing companies
Breakdowns of loans by currency and Breakdowns of loans by currency and purpose (supervisory data)purpose (supervisory data)
6 NMS (except Hungary and Latvia)6 NMS (except Hungary and Latvia)
The sample covers most NMS The sample covers most NMS banks...banks...
Total Bankscope Number Assets
Czech Republic 35 26 74.3 97.6Hungary 36 23 63.9 81.7Poland 60 33 55.0 85.6Slovak Republic 21 20 95.2 83.1Slovenia 22 18 81.8 79.9Estonia 6 5 83.3 94.1Latvia 22 21 95.5 93.2Lithuania 13 9 69.2 93.7
Sources: European Central Bank; Bankscope; and IMF staff estimates.1/ In percent of the total number of banks and total bank assets, respectively.
7.87.98.06.2
7.28.37.67.1
Average Number of Observations per Bank
Proportion of Banks Included in the Sample 1/Number of Banks
Distance to default—a proxy Distance to default—a proxy for insolvency risk for insolvency risk
The number of STD a return realization has to fall The number of STD a return realization has to fall for equity to be exhausted~probability of defaultfor equity to be exhausted~probability of default
DD DD ≡(equity capital+average return)/STD of ≡(equity capital+average return)/STD of return, return,
Bank account dataBank account data
STD deviation for the entire sample periodSTD deviation for the entire sample period
Robustness to alternative ways of measuring Robustness to alternative ways of measuring volatility of returns; NPL ratios; loan loss volatility of returns; NPL ratios; loan loss reservesreserves
Uniformly higher credit growth; Uniformly higher credit growth; stronger, but more heterogeneous stronger, but more heterogeneous
Baltic banksBaltic banks
Variable MeanStandard deviation Mean
Standard deviation Mean
Standard deviation Mean
Standard deviation
Bank credit growth 17.9 40.1 28.7 56.6 27.3 32.7 46.8 43.8Distance to default 14.0 12.5 7.7 9.2 14.8 13.0 12.5 15.3Net interest margin 4.5 2.6 6.1 2.5 3.6 3.1 3.3 1.3Cost-to-income ratio 67.4 99.7 95.5 107.8 71.9 31.8 69.6 19.2Liquidity ratio 17.4 16.1 11.2 9.8 17.2 18.0 17.1 18.0Bank size 6.4 1.3 4.8 1.3 7.0 1.3 5.8 1.3Real GDP growth 2.9 2.4 5.3 3.5 3.3 1.9 8.1 1.2GDP per capita 58.1 23.5 30.9 3.9 70.1 25.7 45.8 10.6Real interest rate 3.2 3.5 -0.5 4.5 2.5 3.7 0.5 1.9Real depreciation 0.2 0.3 -0.1 0.8 -0.4 0.3 -0.5 0.7Foreign ownership 36.2 44.4 31.1 39.7 52.2 46.3 41.1 42.8Public ownership 15.3 33.7 12.5 29.2 6.1 21.5 3.7 15.0
Source: IMF staff estimates.
1995-2000 2001-2004
CEECs BalticsCEECs Baltics
Baseline empirical specification controls Baseline empirical specification controls for macroeconomic and bank-specific for macroeconomic and bank-specific
variables...variables...Equation 1: Bank Credit Growth
),,,
,,,,
,,,,,(
1,
1,1,1,1,
1,1,1,1,1,
ijtijttij
tijtijtijtij
tjtjtjtjtijijt
PublicForeignSize
Liquidity MargintInteresmeCostToIncoefaultDDistanceTo
RERRIRGDPgrowthtaGDPperCapiGrowthBankCreditfGrowthBankCredit
Equation 2: Distance to Default
),,,
,,,,
,,,,,(
1,
1,1,1,1,
1,1,1,1,1,
ijtijttij
tijtijtijtij
tjtjtjtjtijijt
PublicForeignSize
Liquidity rginInterestMameCostToIncoefaultDDistanceTo
RERRIRGDPgrowthtaGDPperCapiGrowthBankCreditfDefaultDistanceTo
where i denotes individual banks, j denotes countries, and t is the year index. BankCreditGrowth is the annual percent change in real bank credit to the private sector. RIR is the real interest rate and ΔRER is the annual percent change in the real exchange rate. CostToIncome and InterestMargin stand for the cost-to-income ratio and the net interest margin. Public and Foreign are measures of public and foreign ownership.
Three-stage Least Three-stage Least SquaresSquares
Commonly used techniqueCommonly used technique Linear models using panel dataLinear models using panel data A relatively short time dimension A relatively short time dimension Lags of dependent variablesLags of dependent variables
Advantages vis-à-vis Arellano-BondAdvantages vis-à-vis Arellano-Bond Two-equation estimationTwo-equation estimation Subsample analysisSubsample analysis
Advantages vis-à-vis 2SLSAdvantages vis-à-vis 2SLS Efficiency gainsEfficiency gains Unbiased in models with lagged dependent variablesUnbiased in models with lagged dependent variables
No apparent specification problemsNo apparent specification problems Unit roots rejectedUnit roots rejected Hausman specification tests inconclusiveHausman specification tests inconclusive Residual analysis validates inclusion of lagged dependent Residual analysis validates inclusion of lagged dependent
variablevariable No multicollinearityNo multicollinearity
Robustness to single-equation estimationRobustness to single-equation estimation
Bank credit growth (lagged) 0.096*** 0.100*** 0.095***[5.83] [3.89] [4.71]
Distance to default (lagged) 0.229** 0.350* 0.147[2.16] [1.94] [1.20]
Real GDP growth (lagged) 2.646*** 2.415*** 2.475***[5.53] [2.92] [4.38]
GDP per capita (lagged) -0.116** -0.301*** -0.057[1.99] [3.19] [0.73]
Net interest margin (lagged) 0.689 1.757** 1.200**[1.47] [2.25] [2.00]
Cost-to-income ratio (lagged) -0.017 -0.037** 0.046[1.13] [1.96] [1.49]
Real interest rate (lagged) -0.558* -0.864 -0.999**[1.65] [1.58] [2.24]
Real depreciation (lagged) -4.911* 14.750** -7.414***[1.95] [2.45] [2.65]
Public ownership -0.178*** -0.153** -0.067[3.73] [2.39] [0.89]
Constant 16.366*** 15.992** 12.721*[3.37] [2.17] [1.87]
R -squared 0.13 0.16 0.15Observations 881 424 457
Source: IMF staff estimates.
Baseline Specification: Bank Credit Growth Equation
1995-2004 1995-2000 2001-2004
Notes: Absolute value of z statistics in brackets; * significant at 10 percent; ** significant at 5 percent; *** significant at 1 percent. The dependent variable in the first (reported) equation is annual percent change in outstanding loans. In the second (unreported) equation, the dependent variable is distance to default.
NMS: Decomposition of Predicted Credit Growth, 1997-2004(In percent per year)
Source: IMF staff estimates.
1997-2000
-30
-20
-10
0
10
20
30
40
502001-2004
-30
-20
-10
0
10
20
30
40
50
Bank credit growth Distance to default Real GDP growth GDP per capitaNet interest margin Cost-to-income ratio Real interest rate Real depreciation Public ownership ExplainedActual
Credit growth in the NMS has Credit growth in the NMS has been largely demand-driven...been largely demand-driven...
Bank credit growth (lagged) -0.002 -0.002 -0.001[1.14] [0.76] [0.54]
Distance to default (lagged) 0.896*** 0.854*** 0.927***[85.84] [59.85] [62.15]
GDP per capita (lagged) 0.017*** 0.029*** 0.007[2.83] [3.90] [0.77]
Liquidity ratio (lagged) 0.020*** 0.013 0.027**[2.67] [1.17] [2.55]
Bank size (lagged) 0.311*** 0.240** 0.324**[3.33] [2.07] [2.22]
Foreign ownership 0.008*** 0.012*** 0.003[2.80] [3.28] [0.69]
Constant -2.668*** -2.660*** -2.252**[4.10] [3.18] [2.25]
R -squared 0.91 0.92 0.90Observations 881 424 457
Source: IMF staff estimates.
Baseline Specification: Distance to Default Equation
1995-2004 1995-2000 2001-2004
Notes: Absolute value of zstatistics in brackets; * significant at 10 percent; ** significant at 5 percent; *** significant at 1 percent. The dependent variable in the first (unreported) equation is annual percent change in outstanding loans. In the second (reported) equation, the dependent variable is distance to default.
Is the glass half empty or Is the glass half empty or half full?half full?
No evidence that credit growth has No evidence that credit growth has weakened banksweakened banks
Consistent with FSI analysisConsistent with FSI analysis Not surprising in an upward stage of the credit Not surprising in an upward stage of the credit
cyclecycle
During 2001-04 weaker banks started to During 2001-04 weaker banks started to expand just as fast as sounder banksexpand just as fast as sounder banks
New result, not detectable in aggregate dataNew result, not detectable in aggregate data Some weaker banks are weak in the absolute Some weaker banks are weak in the absolute
sensesense
These results are robust These results are robust to...to...
Including additional macro and bank-level Including additional macro and bank-level variablesvariables
Controlling for year- and country-specific Controlling for year- and country-specific factorsfactors
Using alternative measures of bank Using alternative measures of bank ownershipownership
Using alternative measures of bank Using alternative measures of bank soundness soundness
Controlling for nonlinear effectsControlling for nonlinear effects Assuming faster feedback effectsAssuming faster feedback effects Single equation estimationSingle equation estimation
Bank credit growth (lagged) 0.075 0.089 -0.011[1.43] [1.28] [0.17]
Nonperforming loans (lagged) -0.006 -0.025 0.262***[0.14] [0.47] [2.75]
Real GDP growth (lagged) 2.625*** 3.129** 2.109**[2.58] [2.15] [2.23]
GDP per capita (lagged) -0.280** -0.386** -0.219*[2.16] [2.02] [1.86]
Net interest margin (lagged) 2.097* 2.506 5.397***[1.82] [1.59] [3.04]
Cost-to-income ratio (lagged) -0.085*** -0.099*** 0.099[3.22] [3.09] [1.48]
Real interest rate (lagged) -1.332** -1.674** -1.245*[2.33] [2.00] [1.84]
Real depreciation (lagged) 3.792 13.587 -10.722**[0.68] [1.52] [2.26]
Public ownership -0.204*** -0.198* -0.119[2.63] [1.92] [1.12]
Constant 28.265** 28.711* 0.711[2.55] [1.73] [0.05]
R -squared 0.23 0.24 0.46Observations 221 145 76
Source: IMF staff estimates.
Robustness Analysis: Using a Narrower Measure of Bank Soundness—Nonperforming Loan Ratio
1995-2004 1995-2000 2001-2004
Notes: Absolute value of z statistics in brackets; * significant at 10 percent; ** significant at 5 percent; *** significant at 1 percent. The dependent variable in the first (reported) equation is annual percent change in outstanding loans. In the second (unreported) equation, the dependent variable is the ratio of nonperforming loans to total loans.
Bank credit growth (lagged) 0.086*** 0.085*** 0.100***[4.04] [2.70] [3.66]
Loan loss reserves (lagged) 11.592*** 11.837*** 59.944*[4.12] [3.83] [1.76]
Real GDP growth (lagged) 2.808*** 1.970** 2.299***[4.86] [2.07] [3.28]
GDP per capita (lagged) -0.085 -0.235** -0.002[1.22] [2.20] [0.03]
Net interest margin (lagged) 0.417 2.607*** 0.242[0.58] [2.62] [0.19]
Cost-to-income ratio (lagged) -0.041** -0.059*** 0.192**[2.11] [2.71] [2.25]
Liquidity ratio (lagged) -0.744* -0.984 -0.839[1.65] [1.49] [1.35]
Bank size (lagged) -2.961 14.165** -2.938[1.02] [2.15] [1.01]
Real interest rate (lagged) -0.230*** -0.177** -0.158*[4.15] [2.40] [1.85]
Constant 21.241*** 16.696* 5.478[3.32] [1.84] [0.51]
R -squared 0.15 0.18 0.17Observations 585 301 284
Source: IMF staff estimates.
Robustness Analysis: Using a Narrower Measure of Bank Soundness—Loan Loss Reserves
1995-2004 1995-2000 2001-2004
Notes: Absolute value of z statistics in brackets; * significant at 10 percent; ** significant at 5 percent; *** significant at 1 percent. The dependent variable in the first (reported) equation is annual percent change in outstanding loans. In the second (unreported) equation, the dependent variable is loan loss reserves as a proportion of total loans.
Weaker Baltic banks are Weaker Baltic banks are expanding faster than other expanding faster than other
banks...banks...Bank credit growth (lagged) 0.096*** 0.095*** 0.094***
[5.84] [3.64] [4.70]Distance to default (lagged) 0.313*** 0.241 0.433***
[2.59] [1.23] [3.01]Distance to default of Baltic banks (lagged) -0.346 0.684 -0.961***
[1.43] [1.46] [3.72]Real GDP growth (lagged) 2.522*** 2.514*** 1.790**
[4.43] [2.85] [2.35]GDP per capita (lagged) -0.118* -0.293*** -0.05
[1.74] [2.84] [0.56]Net interest margin (lagged) 0.703 1.758** 1.467**
[1.50] [2.25] [2.47]Cost-to-income ratio (lagged) -0.018 -0.035* 0.054*
[1.17] [1.87] [1.78]Real interest rate (lagged) -0.477 -0.944 -0.817*
[1.30] [1.53] [1.82]Real depreciation (lagged) -5.078** 15.087** -8.315***
[1.99] [2.49] [3.01]Public ownership -0.178*** -0.155** -0.076
[3.74] [2.42] [1.03]Baltic banks 5.086 -6.839 18.209***
[0.96] [0.81] [2.77]Constant 15.241*** 17.060** 7.321
[2.91] [2.15] [1.04]
R -squared 0.13 0.16 0.17Observations 881 424 457
Source: IMF staff estimates.
1995-2004 1995-2000 2001-2004
Notes: Absolute value of z statistics in brackets; * significant at 10 percent; ** significant at 5 percent; *** significant at 1 percent. The dependent variable in the first (reported) equation is annual percent change in outstanding loans. In the second (unreported) equation, the dependent variable is distance to default.
Possible explanationsPossible explanations
Real credit growth in the Baltics is Real credit growth in the Baltics is several times higher than in the several times higher than in the CEECsCEECs
Ensuring sound lending decisions and risk Ensuring sound lending decisions and risk management is much more difficultmanagement is much more difficult
Higher degree of foreign participation Higher degree of foreign participation in the Balticsin the Baltics
Additional comfort that the banking system Additional comfort that the banking system can withstand shockscan withstand shocks
More foreign affiliates are branchesMore foreign affiliates are branches Supervision is more challengingSupervision is more challenging
Foreign banks are taking greater risks Foreign banks are taking greater risks than domestic banks...than domestic banks...
Bank credit growth (lagged) 0.097*** 0.104*** 0.096***[5.91] [4.03] [4.75]
Distance to default (lagged) 0.429*** 0.456** 0.398**[3.10] [2.15] [2.26]
Distance to default of foreign-owned banks (lagged) -0.448** -0.380 -0.466**[2.12] [0.96] [1.96]
Real GDP growth (lagged) 2.665*** 2.436*** 2.485***[5.54] [2.89] [4.42]
GDP per capita (lagged) -0.134** -0.293*** -0.094[2.18] [2.88] [1.17]
Net interest margin (lagged) 0.652 1.874** 1.158*[1.36] [2.27] [1.94]
Cost-to-income ratio (lagged) -0.016 -0.036* 0.048[1.01] [1.88] [1.57]
Real interest rate (lagged) -0.539 -0.900 -0.947**[1.60] [1.64] [2.13]
Real depreciation (lagged) -5.123** 15.275** -7.924***[2.02] [2.52] [2.82]
Foreign ownership 8.069** 8.709 5.85[2.09] [1.31] [1.29]
Public ownership -12.897*** -9.254 -5.129[2.75] [1.43] [0.72]
Constant 12.857** 10.782 11.156[2.31] [1.19] [1.51]
R -squared 0.14 0.16 0.16Observations 881 424 457
Source: IMF staff estimates.
1995-2004 1995-2000 2001-2004
Notes: Absolute value of zstatistics in brackets; * significant at 10 percent; ** significant at 5 percent; *** significant at 1 percent. The dependent variable in the first (reported) equation is annual percent change in outstanding loans. In the second (unreported) equation, the dependent variable is distance to default.
...but commensurate with the strength of parent banks
Lending through Nordic banks Lending through Nordic banks seems the least related to bank seems the least related to bank
soundnesssoundness
Are Banks with Weaker Parents Expanding More Rapidly?
Has Rapid Credit Growth Weakened Banks?
(1) (2)
Austria Yes? No?
Germany No? Yes?
France Yes? Yes?
Nordic countries Yes Yes?
United States Yes? No?
Italy Yes? Yes?
Belgium Yes? No?
Netherlands No? Yes?
Source: IMF staff estimates.1/ "Yes (?)" indicates a negative and statistically significant (insignificant) coefficient; "No (?)" indicates a positive and statistically significant (insignificant) coefficient. The coefficients correspond to the interaction terms of the parent bank's distance to default and country dummies and measure the marginal effect of bank soundness of parent banks from a given country vis-à-vis the average effect for all other banks. In other respects, the models used for the analysis of the country-specific effects pertaining to parent banks follow the baseline specification.
Summary of Country-Specific Results for Different Foreign Bank Owners, 2001-04 1/
Weaker banks with large foreign Weaker banks with large foreign currency exposures are expanding currency exposures are expanding
fasterfasterBank credit growth (lagged) 0.105*** 0.157*** 0.073**
[4.40] [4.25] [2.51]Distance to default (lagged) 0.346*** 0.422** 0.279*
[2.70] [2.44] [1.68]Distance to default of banks exposed to foreign exchange risk (lagged) -0.680* 0.006 -0.794*
[1.66] [0.01] [1.74]Real GDP growth (lagged) 2.681*** 3.497*** 3.495***
[4.46] [3.91] [4.27]GDP per capita (lagged) -0.123* -0.225*** -0.118
[1.96] [2.77] [1.32]Net interest margin (lagged) 0.881 3.754*** 1.242
[1.28] [4.54] [1.00]Cost-to-income ratio (lagged) 0.011 0.007 -0.037
[0.49] [0.36] [0.52]Real interest rate (lagged) -0.638 -0.133 -1.015*
[1.55] [0.23] [1.94]Real depreciation (lagged) -3.919 26.407*** -4.679
[1.54] [4.98] [1.51]Public ownership -0.160*** -0.075 -0.079
[3.16] [1.28] [0.96]Banks exposed to foreign exchange risk 33.429*** 23.238 29.541***
[3.69] [1.48] [2.80]Constant 9.808* -20.243*** 18.981*
[1.78] [2.85] [1.90]
R -squared 0.21 0.41 0.22Observations 455 197 258
Source: IMF staff estimates.
1995-2004 1995-2000 2001-2004
Notes: Absolute value of z statistics in brackets; * significant at 10 percent; ** significant at 5 percent; *** significant at 1 percent. The dependent variable in the reported equation is annual percent change in outstanding loans. Banks that are exposed to foreign exchange risk are defined as those with higher-than-average proportion of foreign-currency-denominated loans and higher-than-average rate of growth in the proportion of foreign-currency-denominated loans. The sample is composed of Czech, Estonian, Lithuanian, Polish, Slovak, and Slovenian banks.
Weaker banks with large Weaker banks with large household exposures are household exposures are
expanding fasterexpanding fasterBank credit growth (lagged) 0.127*** 0.180*** 0.086***
[6.42] [5.45] [3.80]Distance to default (lagged) 0.417*** 0.613*** 0.355**
[3.36] [3.33] [2.38]Distance to default of banks exposed to households (lagged) -0.791** -0.886** -1.889***
[2.28] [2.16] [2.86]Real GDP growth (lagged) 2.483*** 3.991*** 3.585***
[4.31] [4.49] [4.64]GDP per capita (lagged) -0.154*** -0.375*** -0.065
[2.59] [4.68] [0.79]Net interest margin (lagged) 0.955 2.318*** 1.830**
[1.62] [3.00] [2.05]Cost-to-income ratio (lagged) 0.023 0.006 0.03
[1.20] [0.30] [1.01]Real interest rate (lagged) -0.725* -0.447 -0.766
[1.84] [0.76] [1.57]Real depreciation (lagged) -2.586 26.291*** -4.706
[1.06] [5.04] [1.61]Public ownership -0.172*** -0.103* -0.059
[3.49] [1.76] [0.76]Banks exposed to households 33.672*** 50.436*** 28.312***
[4.22] [4.35] [2.68]Constant 10.593** -8.001 7.025
[2.02] [1.16] [0.93]
R -squared 0.24 0.45 0.24Observations 500 215 285
Source: IMF staff estimates.
1995-2004 1995-2000 2001-2004
Notes: Absolute value of z statistics in brackets; * significant at 10 percent; ** significant at 5 percent; *** significant at 1 percent. The dependent variable in the reported equation is annual percent change in outstanding loans. Banks that are exposed to households are defined as those with higher-than-average proportion of loans to households and higher-than-average rate of growth in the proportion of loans to households. The sample is composed of Czech, Estonian, Lithuanian, Polish, Slovak, and Slovenian banks.
The negative correlation between The negative correlation between bank soundness and credit growth bank soundness and credit growth is the highest in household creditis the highest in household credit
NMS: Effect of Bank Soundness on Credit Growth, 2001-04 1/(In percent per year)
Baltics
CEEC
Household loans
Corporate loans
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
Source: IMF staff estimates.1/ The effect of a one-unit increase in distance to default on bank credit growth, corresponding to the coefficient on distance to default in the credit growth equation. Distance to default is measured by the number of standard deviations a return realization would have to fall for equity to be depleted.
Foreign-ownedbanks
Dom. ownedbanks
Local currency
loans
Foreign currency
loans
Regional Policy Regional Policy ImplicationsImplications
Weaker banks in the NMS have recently Weaker banks in the NMS have recently started to expand at least as fast as sounder started to expand at least as fast as sounder banks (but credit growth per se has not banks (but credit growth per se has not weakened banks)weakened banks)
Forward-looking and risk-based supervisionForward-looking and risk-based supervision Supportive market infrastructure (credit bureaus)Supportive market infrastructure (credit bureaus) Sufficient disclosure of informationSufficient disclosure of information Financial sector surveillance and analysisFinancial sector surveillance and analysis
Weaker banks’ expansion is most pronounced Weaker banks’ expansion is most pronounced in household and foreign currency lendingin household and foreign currency lending
Closer monitoring of risk exposures and lending practices Closer monitoring of risk exposures and lending practices in these marketsin these markets
Foreign banks are taking on greater risks, Foreign banks are taking on greater risks, consistent with parent banks’ strengthconsistent with parent banks’ strength
Effective cross-border cooperation between supervisorsEffective cross-border cooperation between supervisors
Calibrating Policy Response to Calibrating Policy Response to Country-Specific CircumstancesCountry-Specific Circumstances
In the Baltics, weaker banks are expanding faster In the Baltics, weaker banks are expanding faster ((Latvia, LithuaniaLatvia, Lithuania) or credit growth has weakened ) or credit growth has weakened banks (banks (EstoniaEstonia))
In In the Czech Republic, Hungarythe Czech Republic, Hungary, and , and SloveniaSlovenia, , weaker banks are expanding as fast as sounder banksweaker banks are expanding as fast as sounder banks
In In PolandPoland and and the the Slovak RepublicSlovak Republic, stronger , stronger institutions are growing fasterinstitutions are growing faster
Different intensity of risk-based policy instruments (Hilbers et al, Different intensity of risk-based policy instruments (Hilbers et al, 2005)2005)
Country-specific regulatory framework (e.g., supply-side Country-specific regulatory framework (e.g., supply-side measures)measures)
Basel II, EU Capital Requirements Directive, IFRSBasel II, EU Capital Requirements Directive, IFRS
Concluding RemarksConcluding Remarks
Probabilistic conclusionsProbabilistic conclusions Quality of banks’ lending decisions and risk Quality of banks’ lending decisions and risk
managementmanagement Macroeconomic conditionsMacroeconomic conditions
Cross-country econometric analysis Cross-country econometric analysis using publicly available datausing publicly available data
Not a substitute for country-specific stress Not a substitute for country-specific stress tests using supervisory datatests using supervisory data
A complement because it draws on a A complement because it draws on a regional set of information in a systematic regional set of information in a systematic mannermanner
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