Credit Growth and Bank Soundness in the New Member States
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Transcript Credit Growth and Bank Soundness in the New Member States
Credit Growth and
Bank Soundness in
Emerging Europe
Natalia Tamirisa
Deniz Igan
International Monetary Fund
The 13th Dubrovnik Economic Conference
June 29, 2007
Rapid credit growth in the region...
60
50
Real Credit to the Private
Sector, 2006
(annual percentage change)
55
50
45
45
40
40
35
35
30
25
25
20
20
15
15
10
10
5
5
0
0
-5
-5
Germany
Austria
Malta
Italy
France
Finland
Portugal
Luxembo
Hungary
Czech
Cyprus
Belgium
Bulgaria
Greece
Ireland
Slovak
Spain
Slovenia
Poland
Romania
Lithuania
Latvia
Estonia
30
Sources: Eurostat; IFS, National Statistical
Offices; and IMF staff estimates.
10
Current account deficit, 2002-06
55
60
5
0
-5
-10
-15
0
10000
20000
30000
4
...increasingly funded through capital
inflows
NMS: Net Capital Flows, 1999-2006
(In percent of GDP)
Baltics
12.0
CEECs
12.0
12.0
10.0
10.0
10.0
8.0
8.0
8.0
6.0
6.0
4.0
12.0 12.0
Portfolio
Investment
Other
Investment
FDI
10.0 10.0
8.0
8.0
6.0
6.0
6.0
4.0
4.0
4.0
4.0
2.0
2.0
2.0
2.0
2.0
0.0
0.0
0.0
0.0
0.0
-2.0
-2.0
-2.0
-2.0
-2.0
1999 2001 2003 2005
1999 2001 2003 2005
Source: IMF, World Economic Outlook.
1999 2001 2003 2005
...concentrated in the household sector
80
70
Household Loans
(In percent of total outstanding loans
to the private sector)
2001
2005
60
50
40
30
20
10
th
ua
ni
a
Li
tv
ia
La
Es
to
ni
a
ni
a
Sl
ov
e
d
ep
ub
lic
R
k
ry
H
un
ga
Po
la
n
Sl
ov
a
C
ze
c
h
Re
p
ub
lic
0
Rising euroisation of domestic credit
90
80
Foreign Currency Loans
(In percent of total outstanding loans
to the private sector)
2001
2005
70
60
50
40
30
20
10
th
ua
ni
a
Li
tv
ia
La
ry
H
un
ga
Po
Sl
la
ov
nd
ak
R
ep
ub
lic
Sl
ov
en
ia
Es
to
ni
a
C
ze
c
h
Re
p
ub
lic
0
Rapid credit growth reflects
financial deepening...
Financial Deepening in Selected Countries, 2001-05
Difference between Private Sector Credit Growth and GDP
Growth (In percent)
40
35
Lithuania
Latvia
30
Estonia
25
20
15
Mexico
Hungary
10
Slovenia
Australia
New Zealand
5
Czech Rep.
Slovak Rep.
0
Thailand
Chile
Poland
Rep. of Korea
Euro area
Japan
Malaysia
-5
-10
0
20
40
60
80
100
120
Private Sector Credit (In percent of GDP)
Sources: National Banks, International Financial Statistics, and IMF staff estimates.
140
160
180
...and rising financial integration
600
External Assets and Liabilities
(In percent of GDP)
500
Western
Europe
400
300
Emerging
Markets
200
Emerging
Europe
100
Source: Lane and Milesi-Ferretti (2006).
20
03
20
01
19
99
19
97
19
95
19
93
19
91
19
89
19
87
19
85
0
NMS: Macroeconomic Environment and Credit to the Private Sector, 1994-2005
(Annual percent change, unless indicated otherwise)
Baltics
CEECs
60
60
Real Credit Growth
50
50
40
40
30
30
20
20
10
10
0
0
-10
-10
-20
-20
-30
-30
1994
1995
1996
1997
1998
12
1999
12
Real GDP Growth
10
6
6
4
4
2
2
0
0
-2
-2
-4
1996
1998
2000
2002
10
8
8
6
6
4
4
2
2
0
0
-2
-2
-4
-4
-6
1994
1996
1998
2000
2002
2004
2005
40
40
30
30
20
20
10
10
0
0
1996
1998
2000
2002
2004
130
• Disinflation
• Improved economic
prospects
• EU accession
130
Real Effective Exchange Rate 1/
12
10
-6
2004
50
1994
14
Real Lending Rate
(In percent per annum)
12
2003
50
2004
14
2002
10
8
1994
2001
Consumer Price Index
8
-4
2000
Macroeconomic
and financial
conditions have
been
supportive...
120
120
110
110
100
100
90
90
80
80
70
70
1994
Sources: IMF International Financial Statistics, and staff estimates.
1/ CPI-based index with 2000 as base year.
1996
1998
2000
2002
2004
• Pent-up demand for
credit
• Easy global monetary
conditions
• Ample global liquidity
via
...as are supply-side factors
120
Share of Foreign-Owned Banks
(In percent of total assets)
• Privatization
100
• Entry of foreign banks
80
• Strategic expansion
60
• High profitability
40
20
0
Lithuania
Czech
Hungary
Republic
Poland
Slovak Slovenia
Republic
Estonia
Latvia
Lithuania
+ subsidies and tax
policies
Literature
Financial deepening but “excesses,” credit booms are a
risk
Credit growth improves bank soundness, unless it is
“excessive”
Maechler, Mitra, and Worrell (2006)
FSIs are favorable, but backward looking
Schadler et al (2004); Cottarelli et al (2005); Egert (2007); ECB (2007)
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 macroeconomic and
prudential risks...
...and “not to kill the goose that lays the
golden eggs”?
Focus of This Study
How significant are prudential risks in the NMS?
Has credit growth affected bank soundness?
Are weaker banks expanding faster?
Do prudential risks differ across...?
Countries
Banks (foreign/domestically owned)
Purpose of credit (household/corporate)
Currency of denomination/indexation (foreign/ domestic)
Bank-level Analysis
Bank balance sheet data (Bankscope)
Ugo Panizza’s (IDB) data set, updated
217 banks during 1995-2004 in 8 NMS
7 observations per bank, on average
Unconsolidated data, where available
Commercial banks and leasing companies
Breakdowns of loans by currency and
purpose (supervisory data)
6 NMS (except Hungary and Latvia)
The sample covers most NMS banks...
Number of Banks
Total
Bankscope
Czech Republic
Hungary
Poland
Slovak Republic
Slovenia
Estonia
Latvia
Lithuania
35
36
60
21
22
6
22
13
26
23
33
20
18
5
21
9
Proportion of Banks Included in the Sample 1/
Number
Assets
74.3
63.9
55.0
95.2
81.8
83.3
95.5
69.2
Sources: European Central Bank; Bankscope; and IMF staff estimates.
1/ In percent of the total number of banks and total bank assets, respectively.
97.6
81.7
85.6
83.1
79.9
94.1
93.2
93.7
Average Number of
Observations per Bank
7.2
8.3
7.6
7.1
7.8
7.9
8.0
6.2
Distance to default—a proxy for
insolvency risk
The number of STD a return realization has to fall for
equity to be exhausted~probability of default
DD ≡(equity capital+average return)/STD of return,
Bank account data
STD deviation for the entire sample period
Robustness to alternative ways of measuring volatility of
returns; NPL ratios; loan loss reserves
Uniformly higher credit growth;
stronger, but more heterogeneous Baltic banks
1995-2000
CEECs
Variable
Bank credit growth
Distance to default
Net interest margin
Cost-to-income ratio
Liquidity ratio
Bank size
Real GDP growth
GDP per capita
Real interest rate
Real depreciation
Foreign ownership
Public ownership
Baltics
Mean
Standard
deviation
17.9
14.0
4.5
67.4
17.4
6.4
2.9
58.1
3.2
0.2
36.2
15.3
40.1
12.5
2.6
99.7
16.1
1.3
2.4
23.5
3.5
0.3
44.4
33.7
Source: IMF staff estimates.
2001-2004
CEECs
Mean
Standard
deviation
28.7
7.7
6.1
95.5
11.2
4.8
5.3
30.9
-0.5
-0.1
31.1
12.5
56.6
9.2
2.5
107.8
9.8
1.3
3.5
3.9
4.5
0.8
39.7
29.2
Baltics
Mean
Standard
deviation
Mean
Standard
deviation
27.3
14.8
3.6
71.9
17.2
7.0
3.3
70.1
2.5
-0.4
52.2
6.1
32.7
13.0
3.1
31.8
18.0
1.3
1.9
25.7
3.7
0.3
46.3
21.5
46.8
12.5
3.3
69.6
17.1
5.8
8.1
45.8
0.5
-0.5
41.1
3.7
43.8
15.3
1.3
19.2
18.0
1.3
1.2
10.6
1.9
0.7
42.8
15.0
Baseline empirical specification controls for
macroeconomic and bank-specific variables...
Equation 1: Bank Credit Growth
BankCreditGrowthijt f ( BankCreditGrowthij,t 1 , GDPperCapita j ,t 1 , GDPgrowth j ,t 1 , RIR j ,t 1 , RER j ,t 1 ,
DistanceTo Default ij,t 1 , CostToIncomeij,t 1 , InterestMargin ij,t 1 , Liquidity ij,t 1 ,
Size ij,t 1 , Foreignijt , Public ijt ),
Equation 2: Distance to Default
DistanceTo Default ijt f ( BankCreditGrowthij,t 1 , GDPperCapita j ,t 1 , GDPgrowthj ,t 1 , RIR j ,t 1 , RER j ,t 1 ,
DistanceTo Defaultij,t 1 , CostToIncomeij,t 1 , InterestMargin ij,t 1 , Liquidity ij,t 1 ,
Sizeij,t 1 , Foreignijt , Public ijt ),
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 Squares
Commonly used technique
Advantages vis-à-vis Arellano-Bond
Efficiency gains
Unbiased in models with lagged dependent variables
No apparent specification problems
Two-equation estimation
Subsample analysis
Advantages vis-à-vis 2SLS
Linear models using panel data
A relatively short time dimension
Lags of dependent variables
Unit roots rejected
Hausman specification tests inconclusive
Residual analysis validates inclusion of lagged dependent variable
No multicollinearity
Robustness to single-equation estimation
Baseline Specification: Bank Credit Growth Equation
Bank credit growth (lagged)
Distance to default (lagged)
Real GDP growth (lagged)
GDP per capita (lagged)
Net interest margin (lagged)
Cost-to-income ratio (lagged)
Real interest rate (lagged)
Real depreciation (lagged)
Public ownership
Constant
R -squared
Observations
1995-2004
1995-2000
2001-2004
0.096***
[5.83]
0.229**
[2.16]
2.646***
[5.53]
-0.116**
[1.99]
0.689
[1.47]
-0.017
[1.13]
-0.558*
[1.65]
-4.911*
[1.95]
-0.178***
[3.73]
16.366***
[3.37]
0.100***
[3.89]
0.350*
[1.94]
2.415***
[2.92]
-0.301***
[3.19]
1.757**
[2.25]
-0.037**
[1.96]
-0.864
[1.58]
14.750**
[2.45]
-0.153**
[2.39]
15.992**
[2.17]
0.095***
[4.71]
0.147
[1.20]
2.475***
[4.38]
-0.057
[0.73]
1.200**
[2.00]
0.046
[1.49]
-0.999**
[2.24]
-7.414***
[2.65]
-0.067
[0.89]
12.721*
[1.87]
0.13
881
0.16
424
0.15
457
Source: IMF staff estimates.
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.
Credit growth in the NMS has been
largely demand-driven...
NMS: Decomposition of Predicted Credit Growth, 1997-2004
(In percent per year)
50
50
2001-2004
Lit
hu
ani
a
Distance to default
GDP per capita
Cost-to-income ratio
Real depreciation
Explained
a
c
Cz
ech
Re
pu
bli
hu
ani
a
Lit
a
La
tvi
ven
i
Es
ton
ia
vak
R
Slo
Slo
epu
bli
lan
d
Po
Cz
ech
Re
pu
bli
Source: IMF staff estimates.
a
-30
c
-30
Hu
ng
ary
-20
c
-20
Bank credit growth
Real GDP growth
Net interest margin
Real interest rate
Public ownership
Actual
tvi
-10
La
-10
Es
to n
ia
0
a
0
ven
i
10
Slo
10
c
20
Re
pu
bli
20
vak
30
lan
d
30
Slo
40
Po
40
Hu
ng
ary
1997-2000
Baseline Specification: Distance to Default Equation
Bank credit growth (lagged)
Distance to default (lagged)
GDP per capita (lagged)
Liquidity ratio (lagged)
Bank size (lagged)
Foreign ownership
Constant
R -squared
Observations
1995-2004
1995-2000
2001-2004
-0.002
[1.14]
0.896***
[85.84]
0.017***
[2.83]
0.020***
[2.67]
0.311***
[3.33]
0.008***
[2.80]
-2.668***
[4.10]
-0.002
[0.76]
0.854***
[59.85]
0.029***
[3.90]
0.013
[1.17]
0.240**
[2.07]
0.012***
[3.28]
-2.660***
[3.18]
-0.001
[0.54]
0.927***
[62.15]
0.007
[0.77]
0.027**
[2.55]
0.324**
[2.22]
0.003
[0.69]
-2.252**
[2.25]
0.91
881
0.92
424
0.90
457
Source: IMF staff estimates.
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 half full?
No evidence that credit growth has weakened
banks
Consistent with FSI analysis
Not surprising in an upward stage of the credit cycle
During 2001-04 weaker banks started to expand
just as fast as sounder banks
New result, not detectable in aggregate data
Some weaker banks are weak in the absolute sense
These results are robust to...
Including additional macro and bank-level variables
Controlling for year- and country-specific factors
Using alternative measures of bank ownership
Using alternative measures of bank soundness
Controlling for nonlinear effects
Assuming faster feedback effects
Single equation estimation
Robustness Analysis: Using a Narrower Measure of Bank Soundness—Nonperforming Loan Ratio
Bank credit growth (lagged)
Nonperforming loans (lagged)
Real GDP growth (lagged)
GDP per capita (lagged)
Net interest margin (lagged)
Cost-to-income ratio (lagged)
Real interest rate (lagged)
Real depreciation (lagged)
Public ownership
Constant
R -squared
Observations
1995-2004
1995-2000
2001-2004
0.075
[1.43]
-0.006
[0.14]
2.625***
[2.58]
-0.280**
[2.16]
2.097*
[1.82]
-0.085***
[3.22]
-1.332**
[2.33]
3.792
[0.68]
-0.204***
[2.63]
28.265**
[2.55]
0.089
[1.28]
-0.025
[0.47]
3.129**
[2.15]
-0.386**
[2.02]
2.506
[1.59]
-0.099***
[3.09]
-1.674**
[2.00]
13.587
[1.52]
-0.198*
[1.92]
28.711*
[1.73]
-0.011
[0.17]
0.262***
[2.75]
2.109**
[2.23]
-0.219*
[1.86]
5.397***
[3.04]
0.099
[1.48]
-1.245*
[1.84]
-10.722**
[2.26]
-0.119
[1.12]
0.711
[0.05]
0.23
221
0.24
145
0.46
76
Source: IMF staff estimates.
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
Robustness Analysis: Using a Narrower Measure of Bank Soundness—Loan Loss Reserves
Bank credit growth (lagged)
Loan loss reserves (lagged)
Real GDP growth (lagged)
GDP per capita (lagged)
Net interest margin (lagged)
Cost-to-income ratio (lagged)
Liquidity ratio (lagged)
Bank size (lagged)
Real interest rate (lagged)
Constant
R -squared
Observations
1995-2004
1995-2000
2001-2004
0.086***
[4.04]
11.592***
[4.12]
2.808***
[4.86]
-0.085
[1.22]
0.417
[0.58]
-0.041**
[2.11]
-0.744*
[1.65]
-2.961
[1.02]
-0.230***
[4.15]
21.241***
[3.32]
0.085***
[2.70]
11.837***
[3.83]
1.970**
[2.07]
-0.235**
[2.20]
2.607***
[2.62]
-0.059***
[2.71]
-0.984
[1.49]
14.165**
[2.15]
-0.177**
[2.40]
16.696*
[1.84]
0.100***
[3.66]
59.944*
[1.76]
2.299***
[3.28]
-0.002
[0.03]
0.242
[0.19]
0.192**
[2.25]
-0.839
[1.35]
-2.938
[1.01]
-0.158*
[1.85]
5.478
[0.51]
0.15
585
0.18
301
0.17
284
Source: IMF staff estimates.
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 expanding
faster than other banks...
Bank credit growth (lagged)
Distance to default (lagged)
Distance to default of Baltic banks (lagged)
Real GDP growth (lagged)
GDP per capita (lagged)
Net interest margin (lagged)
Cost-to-income ratio (lagged)
Real interest rate (lagged)
Real depreciation (lagged)
Public ownership
Baltic banks
Constant
R -squared
Observations
1995-2004
1995-2000
2001-2004
0.096***
[5.84]
0.313***
[2.59]
-0.346
[1.43]
2.522***
[4.43]
-0.118*
[1.74]
0.703
[1.50]
-0.018
[1.17]
-0.477
[1.30]
-5.078**
[1.99]
-0.178***
[3.74]
5.086
[0.96]
15.241***
[2.91]
0.095***
[3.64]
0.241
[1.23]
0.684
[1.46]
2.514***
[2.85]
-0.293***
[2.84]
1.758**
[2.25]
-0.035*
[1.87]
-0.944
[1.53]
15.087**
[2.49]
-0.155**
[2.42]
-6.839
[0.81]
17.060**
[2.15]
0.094***
[4.70]
0.433***
[3.01]
-0.961***
[3.72]
1.790**
[2.35]
-0.05
[0.56]
1.467**
[2.47]
0.054*
[1.78]
-0.817*
[1.82]
-8.315***
[3.01]
-0.076
[1.03]
18.209***
[2.77]
7.321
[1.04]
0.13
881
0.16
424
0.17
457
Source: IMF staff estimates.
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 explanations
Real credit growth in the Baltics is several times
higher than in the CEECs
Higher degree of foreign participation in the
Baltics
Ensuring sound lending decisions and risk management is
much more difficult
Additional comfort that the banking system can withstand
shocks
More foreign affiliates are branches
Supervision is more challenging
Foreign banks are taking greater risks than domestic
banks...
Bank credit growth (lagged)
Distance to default (lagged)
Distance to default of foreign-owned banks (lagged)
Real GDP growth (lagged)
GDP per capita (lagged)
Net interest margin (lagged)
Cost-to-income ratio (lagged)
Real interest rate (lagged)
Real depreciation (lagged)
Foreign ownership
Public ownership
Constant
R -squared
Observations
1995-2004
1995-2000
2001-2004
0.097***
[5.91]
0.429***
[3.10]
-0.448**
[2.12]
2.665***
[5.54]
-0.134**
[2.18]
0.652
[1.36]
-0.016
[1.01]
-0.539
[1.60]
-5.123**
[2.02]
8.069**
[2.09]
-12.897***
[2.75]
12.857**
[2.31]
0.104***
[4.03]
0.456**
[2.15]
-0.380
[0.96]
2.436***
[2.89]
-0.293***
[2.88]
1.874**
[2.27]
-0.036*
[1.88]
-0.900
[1.64]
15.275**
[2.52]
8.709
[1.31]
-9.254
[1.43]
10.782
[1.19]
0.096***
[4.75]
0.398**
[2.26]
-0.466**
[1.96]
2.485***
[4.42]
-0.094
[1.17]
1.158*
[1.94]
0.048
[1.57]
-0.947**
[2.13]
-7.924***
[2.82]
5.85
[1.29]
-5.129
[0.72]
11.156
[1.51]
0.14
881
0.16
424
0.16
457
Source: IMF staff estimates.
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 seems
the least related to bank soundness
Summary of Country-Specific Results for Different Foreign Bank Owners, 2001-04 1/
Are Banks with Weaker Parents Expanding
More Rapidly?
(1)
Has Rapid Credit Growth Weakened
Banks?
(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.
Weaker banks with large foreign currency
exposures are expanding faster
Bank credit growth (lagged)
Distance to default (lagged)
Distance to default of banks exposed to foreign exchange risk (lagged)
Real GDP growth (lagged)
GDP per capita (lagged)
Net interest margin (lagged)
Cost-to-income ratio (lagged)
Real interest rate (lagged)
Real depreciation (lagged)
Public ownership
Banks exposed to foreign exchange risk
Constant
R -squared
Observations
1995-2004
1995-2000
2001-2004
0.105***
[4.40]
0.346***
[2.70]
-0.680*
[1.66]
2.681***
[4.46]
-0.123*
[1.96]
0.881
[1.28]
0.011
[0.49]
-0.638
[1.55]
-3.919
[1.54]
-0.160***
[3.16]
33.429***
[3.69]
9.808*
[1.78]
0.157***
[4.25]
0.422**
[2.44]
0.006
[0.01]
3.497***
[3.91]
-0.225***
[2.77]
3.754***
[4.54]
0.007
[0.36]
-0.133
[0.23]
26.407***
[4.98]
-0.075
[1.28]
23.238
[1.48]
-20.243***
[2.85]
0.073**
[2.51]
0.279*
[1.68]
-0.794*
[1.74]
3.495***
[4.27]
-0.118
[1.32]
1.242
[1.00]
-0.037
[0.52]
-1.015*
[1.94]
-4.679
[1.51]
-0.079
[0.96]
29.541***
[2.80]
18.981*
[1.90]
0.21
455
0.41
197
0.22
258
Source: IMF staff estimates.
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 higherthan-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 household exposures
are expanding faster
Bank credit growth (lagged)
Distance to default (lagged)
Distance to default of banks exposed to households (lagged)
Real GDP growth (lagged)
GDP per capita (lagged)
Net interest margin (lagged)
Cost-to-income ratio (lagged)
Real interest rate (lagged)
Real depreciation (lagged)
Public ownership
Banks exposed to households
Constant
R -squared
Observations
1995-2004
1995-2000
2001-2004
0.127***
[6.42]
0.417***
[3.36]
-0.791**
[2.28]
2.483***
[4.31]
-0.154***
[2.59]
0.955
[1.62]
0.023
[1.20]
-0.725*
[1.84]
-2.586
[1.06]
-0.172***
[3.49]
33.672***
[4.22]
10.593**
[2.02]
0.180***
[5.45]
0.613***
[3.33]
-0.886**
[2.16]
3.991***
[4.49]
-0.375***
[4.68]
2.318***
[3.00]
0.006
[0.30]
-0.447
[0.76]
26.291***
[5.04]
-0.103*
[1.76]
50.436***
[4.35]
-8.001
[1.16]
0.086***
[3.80]
0.355**
[2.38]
-1.889***
[2.86]
3.585***
[4.64]
-0.065
[0.79]
1.830**
[2.05]
0.03
[1.01]
-0.766
[1.57]
-4.706
[1.61]
-0.059
[0.76]
28.312***
[2.68]
7.025
[0.93]
0.24
500
0.45
215
0.24
285
Source: IMF staff estimates.
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 bank
soundness and credit growth is the highest in
household credit
NMS: Effect of Bank Soundness on Credit Growth, 2001-04 1/
(In percent per year)
1.5
1.0
Local
currency
loans
CEEC
0.5
Dom.
owned
banks
Corporate loans
0.0
Foreignowned
banks
-0.5
Baltics
-1.0
Foreign
currency
loans
-1.5
Household loans
-2.0
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.
Regional Policy Implications
Weaker banks in the NMS have recently started to
expand at least as fast as sounder banks (but credit
growth per se has not weakened banks)
Weaker banks’ expansion is most pronounced in
household and foreign currency lending
Forward-looking and risk-based supervision
Supportive market infrastructure (credit bureaus)
Sufficient disclosure of information
Financial sector surveillance and analysis
Closer monitoring of risk exposures and lending practices in these
markets
Foreign banks are taking on greater risks, consistent
with parent banks’ strength
Effective cross-border cooperation between supervisors
Calibrating Policy Response to
Country-Specific Circumstances
In the Baltics, weaker banks are expanding faster (Latvia, Lithuania)
or credit growth has weakened banks (Estonia)
In the Czech Republic, Hungary, and Slovenia, weaker banks are
expanding as fast as sounder banks
In Poland and the Slovak Republic, stronger institutions are growing
faster
Different intensity of risk-based policy instruments (Hilbers et al, 2005)
Country-specific regulatory framework (e.g., supply-side measures)
Basel II, EU Capital Requirements Directive, IFRS
Concluding Remarks
Probabilistic conclusions
Quality of banks’ lending decisions and risk management
Macroeconomic conditions
Cross-country econometric analysis using publicly
available data
Not a substitute for country-specific stress tests using
supervisory data
A complement because it draws on a regional set of
information in a systematic manner