Global Banking Crises and Emerging Markets

Josef C. Brada,Paul Wachtel

• Éditeur: Palgrave Macmillan
• Année: 2015
• ISBN:
  9781137569059
• Sujet: Economics
• Sous-sujet: Econometrics

This timely reader of seminal papers published by Palgrave on behalf of Comparative Economic Studies, examines how and why foreign banks enter emerging markets and the positive benefits they bring to the host countries.

1

Introduction

Josef C. Brada¹ and Paul Wachtel²

¹Arizona State University, USA

²Leonard N. Stern School of Business, New York University, USA

The importance of finance for economic development is now well understood by both economic researchers and policy makers. Robust financial intermediaries that can efficiently allocate resources to the most productive uses are the foundation of a successful growth strategy. Interestingly, this has not always been the case. Mid-20th-century economic development discussions paid little attention to finance; its role only became clear in the last 25 years or so.

In ideal circumstances, a growing economy will have a wide range of intermediary institutions, including informal sources of financing, venture capital, banks and other depositories, institutional investors such as pension funds and capital markets including organized equity markets and stock exchanges. In practice, banks are the most important intermediary in emerging market economies, which typically do not have a venture capital industry or developed capital market institutions. The principal source of business financing and household borrowing, once informal sources such as friends and family are exhausted, is the banking system. Thus, growth and development can be stifled when banks are unable to provide financing for growing firms.

Often, domestic banks are not able to supply the necessary loans to the private sector due to low domestic savings, and what loans they do make are often directed in suboptimal ways due to the banks’ inability to screen borrowers effectively or to the ties they have to their traditional borrowers. As a result, emerging market countries have been a fertile field of activity for foreign banks that are able to establish new affiliates or to acquire local banks. These foreign-owned affiliates and branches increase competition in the banking sector and bring in the technology for new financial services and products such as mortgage instruments, household finance and formal models for risk evaluation. Though often opposed by entrenched local business interests, foreign-owned banks are now common in virtually all emerging markets and often have a dominant market share.

At the same time, foreign domination of the banking sector remains controversial for several reasons. The first is that, if the local affiliate uses its foreign owner as a source of funds, the funding can be retracted quickly and often for reasons not related to business conditions in the host country. To some extent, the recent financial crisis was transmitted to emerging markets through the contraction of this foreign funding channel. The currency mismatch between the funds provided by the foreign owner, which are denominated in foreign currency such as dollars or Euros, and the loans made by local affiliates to their clients, which are often in the local currency, are an additional source of risk. This mismatch creates additional risk for the foreign parent in case the host country’s currency depreciates, and it also leads to a tendency for local affiliates to make loans to domestic clients that are denominated in the currency of the parent bank, thus passing the risk, and potential instability, on to local borrowers. Extensive mortgage lending in Euros or Swiss Francs has been a source of political frictions when the domestic currency depreciates and borrowers look to the government to protect them. A second potentially negative consequence of foreign bank entry into emerging market countries is a growing concentration in the banking sector as local banks that are not taken over by foreign investors prove unable to compete with foreign-owned rivals. Thus, in some instances, foreign bank entry results in a decline in competition among banks that reduces the efficiency of financial intermediation as opposed to just the opposite instances where foreign entry brings competitive pressures to banking systems dominated by state-owned banks or banks controlled by powerful family business interests.

Third, large spreads between deposit rates in the owners’ home countries and lending rates in the host countries may make lending in emerging market economies particularly attractive, leading to the possibility that foreign parent banks will encourage their affiliates in emerging market economies to increase lending to levels that may be imprudent, resulting in dangerous credit booms and asset price bubbles. The final problem arises from the fact that banking is a regulated activity, but bank regulators in emerging markets may lack the necessary expertise or regulatory tools to effectively regulate foreign-owned banks. Moreover, any such regulation involves cooperation between regulators in the host country and those in the country where the parent bank is located. The international regulatory regime, Basel II, soon to be replaced by Basel III, emphasizes risk management tools for large complex banking institutions and takes little account of cross-border flows to emerging markets.

While these considerations apply to various degrees to all emerging market economies, they are most intensely evident in the countries of Central and East Europe (CEE) where foreign-owned banks now have a dominant market share in virtually every country. The CEE countries began transition in 1989 with relatively high levels of income and industrial development for emerging market economies, but their banking systems were rudimentary. Under central planning, most banking activities were carried out by a state-owned monobank whose lending activities were directed by economic plans and not by the financing needs or capacity to of repay borrowers. Thus, the creation of a market economy in CEE had as one of its most pressing needs the creation of a viable banking system. Typically the state-owned monobank was broken up into a number of commercial banks, at first state owned and later privatized, but these new banks were saddled with Communist-era loans to firms whose future was in doubt, and often they continued to extend loans to these firms. Faced with banking sector insolvency, governments adopted various strategies to clean up the banks’ bad loans and recapitalize the banks. From the mid-1990s on, the strategies involved the sale of banks to foreign owners. Thus, the financial sectors of most transition countries came to be dominated by foreign-owned banks. Although the banking sectors remained highly concentrated, foreign ownership was widely lauded as the best way to modernize the financial system and improve its efficiency.

In many CEE countries, lending increased rapidly, not only to the corporate sector but also to households and governments. However, with the coming of the global financial crisis in 2008, capital flows to CEE dried up, putting a crimp on bank lending and raising fears that foreign parents of banks in the CEE countries would withdraw funds from the region in order to shore up their balance sheets at home. Even though the region was hard hit by the crisis, the banking sectors of the CEE countries withstood these challenges. Nevertheless, regulators in CEE countries, as in many other emerging markets, have sought to develop ways of regulating their banks better in order to strengthen them against future crises.

The chapters in this book have been written by recognized experts on international banking and on transition economies. All the chapters were previously published in Comparative Economic Studies, an international journal devoted to the study of emerging and market economies. They cover, in greater depth, the issues summarized above.

Chapters 2 through 5 examine the way in which foreign banks came to dominate the financial sectors of the transition countries and the main changes in credit markets that occurred as a result. Chapter 2, by Ralph de Haas, demonstrates both the benefits reaped from the entry of foreign banks and how the presence of foreign banks altered the competitive structure of the banking sector and of lending and, as well, the potential vulnerability of these economies to international financial crises. There is no clear way of determining the optimal mix of local and foreign funding. Domestic funding may be more stable but will result in less, and more expensive, borrowing, while foreign funding exposes the economy to external shocks. It would appear that the best answer might be foreign funding and a regulatory structure that accounts for external risks. John P. Bonin, in Chapter 3, focuses on the more important transition economies where the banking systems are mostly foreign owned, with the notable exception of Russia where state-owned banks still dominate. Bonin stresses the effects on the banking sector of the ways in which foreign banks enter the market. He argues that what he calls hybrid banks, created by foreign banks’ takeovers of domestic banks, tend to be countercyclical in their lending behavior while banks created through greenfield investments tend to lend procyclically. Thus, the former should be more beneficial for the host economies. He identifies the key foreign banks involved in the acquisition of CEE banks and discusses the benefits and potential risks of the resulting banking sector structure. For example, the banking sectors in Hungary and Croatia are almost totally foreign owned and in both countries, two-thirds of bank loans in 2008 were denominated in foreign currencies.

Research in the next two chapters takes a detailed look at banking in the Czech Republic to address some important questions. In Chapter 4, Anca Pruteanu-Podpiera, Laurent Weill and Franziska Schobert examine the effect on bank efficiency that resulted from changes in the intensity of competition among banks in the Czech Republic. They find that the entry of foreign banks did not increase competition in the Czech banking sector, mainly because weak local banks disappeared and entry into the Czech banking sector was largely through the acquisition of local banks. Moreover they find that an increase in competition among banks reduces bank efficiency; thus the growing domination of Czech banking by foreign banks led to increases in the efficiency of bank operations. In Chapter 5, Adam Geršl and Petr Jakubík use bank and firm data to examine the extent of relationship banking in the Czech Republic. The term relationship banking refers to the use of soft or not publicly available information about firms that banks can accumulate from their long-term relationships with customers. Banks will be successful in their lending activities if they are able to obtain and to act on accurate information about their clients. Such knowledge is costly to obtain and thus banks and firms find it to their advantage to form long-term relationships that permit firms to build credibility and banks to acquire knowledge about the firms they lend to. Geršl and Jakubík find that most Czech firms have a more or less exclusive relationship with one bank, especially if the firms are new or in dynamic industries. Riskier firms, on the other hand, tend to maintain relationships with more than one bank, presumably to avoid the discipline of being dependent on one source of credit. They illustrate the importance of banking relationships even in a young banking system like the Czech Republic. Overall, the findings of Chapters 4 and 5 suggest that the entry of foreign banks has driven out less efficient domestic banks and provided borrowers with better access to credit and modern banking techniques.

The credit-to-GDP ratios in transition countries were low through the turmoil of the 1990s. The foregoing chapters demonstrated the expansion of credit in the region associated with the entry of foreign banks. The rapid credit expansion was greeted as a positive development because it indicated a general deepening of the financial sector and increased access to borrowing throughout the economy, and the credit-to-GDP ratios increased rapidly. A question that was only occasionally raised by regulators and policy makers was whether such credit expansion could be “too much of a good thing.” Growth-enhancing deepening of financial markets can also be associated with loose lending standards and increased risk in the banking system. The correct balance between financial deepening and credit boom can be hard to strike.

The next four chapters examine the dramatic expansion of credit to firms and to households that followed the modernization of banking in the CEE countries. Although the growth rates of lending by banks were inflated by the fact that lending started from very low levels, there were concerns that excessive lending posed risks for unsophisticated borrowers and for banks who were taking greater risks in order to maintain their position in the industry. In Chapter 6, Balázs Égert, Peter Backé and Tina Zumer estimate the equilibrium levels of credit-to-GDP in CEE countries based on the parameters obtained from a sample of emerging market and small open European economies. Although credit-to-GDP ratios have risen in most CEE countries, the authors’ international comparisons suggest that there is no evidence of pervasive excess lending in the region in a sample that ends several years prior to the financial crisis. Comforting as that finding may be, it is not only the volume of lending that creates risk but also its composition. Loans to households were one of the fastest growing segments of banks’ activities in nearly all CEE countries, and there was concern that households unaccustomed to borrowing might become overextended and unable to repay their loans. Moreover, credit expansion in the form of consumer lending is not likely to have the same growth-enhancing benefits as lending to business that finances the accumulation of productive capital. Foreign banks, in particular, will often concentrate on lending to consumers because they can rely on the parent bank’s computer technology for credit evaluation whereas building relationships with local enterprises and accumulating soft information is much more difficult. Thus, there is a tendency to emphasize consumer lending and concern about the risks of such credit expansion. In Chapter 7 Evan Kraft uses detailed data on consumer loans made by Croatian banks, and he finds that such loans are not excessively risky either for borrowers or for lenders. He suggests that the growth of household lending in Croatia is partially due to the lagging enterprise reform that makes business lending unattractive and also notes that there were policy steps taken in Croatia to avoid excessive risks. Kraft also compares the volume of household debt in CEE countries to that in comparable Western countries and finds that there are a few cases where CEE household debt appears to be excessive in international perspective. This suggests that there has not been a consumer-credit bubble in CEE and that there exists the potential for further expansion of credit to households without creating major risks for banks. The next two chapters provide cautionary notes to these comforting conclusions. In Chapter 8, Natalia Tamirisa and Deniz O. Igan point out that relatively weak, and often domestic, banks have been expanding their lending activities quite rapidly in some CEE countries, raising the possibility that, while aggregate lending may be at appropriate levels, some particularly vulnerable banks may be becoming overexposed to risky loans. The authors recommend strong regulatory oversight of such banks. Finally, Jane Bogoev, in Chapter 9, examines the question of CEE banks’ lending in both domestic and foreign currencies. Such loans shift foreign exchange risk from the banks, who often obtain a large fraction of their loanable funds from their foreign parents, to CEE borrowers who may be attracted by the lower interest rates on loans denominated in foreign currencies but who may not appreciate the risk they face if the domestic currency depreciates. Bogoev examines Macedonia, a country where Greek banks are the dominant owners of the banking industry. He documents the growing role of loans denominated in foreign currencies, mainly Euros, in the Macedonian economy and demonstrates how such loans severely limit the central bank’s ability to implement monetary policy. Thus, countries where such foreign currency lending is important face a double-edged sword: loans that carry exchange rate risks for borrowers combined with an inability to exercise monetary policy to maintain a stable value for their currency.

The global financial crisis proved to be a major test of the financial systems of the CEE countries and, indeed, of most emerging market economies. In Chapter 10, Ursula Vogel and Adalbert Winkler provide some evidence that the presence of foreign-owned banks in the CEE countries tended to stabilize cross-border flows of money between domestic and foreign banks. This result for CEE seems to be something of an anomaly in that the finding does not hold for many other emerging market economies. One reason why foreign banks chose not to drain money from their CEE affiliates is the actual or prospective EU membership of many CEE countries and the resulting desire of the parent banks to protect their long-term market positions in these new markets. Further there was a European agreement, the Vienna Initiative, to mitigate the effects of the crisis on transition economies. Although, cross-border flows remained stable during the crisis, bank lending was not countercyclical during the crisis; whether this is a supply-side or a demand-side driven phenomenon is unclear. Moreover, not only did foreign banks seem rather prudent in shielding their CEE operations from the worst of the global financial crisis, banks in CEE, whether domestic or foreign-owned, seemed to act prudently. Rainer Haselmann and Paul Wachtel, in Chapter 11, argue that there are no systematic differences in risk-taking by CEE banks of different size or ownership and that the region’s banks appear to have matched their risk-mitigation strategies to the riskiness of their loan portfolios. Haselmann and Wachtel also find that banks with riskier portfolios tended to hold higher levels of capital to offset the greater risk. Of course, both banks and regulators must determine whether risk should be mitigated by holding more capital or greater reserves. In Chapter 12, Sophie Claeys, Koen Schoors and Rudi Vandervennet examine this question in the context of the Russian banking industry. They conclude that attempting to mitigate risk by making banks hold higher reserves leads to greater risk-taking on their part; higher capital requirements, on the other hand may reduce or increase risk-taking depending on the cost of capital. One consequence of the global financial crisis was a concerted international effort to prevent such a crisis from occurring again. Given the global nature of capital markets, this requires that all countries adopt more or less the same regulatory framework for their bank sector. This regulatory framework is embodied in the so-called Basel accords. Since large developed countries have the largest banks and also the greatest regulatory expertise, it is not surprising that the most recent accord, Basel III, reflects the needs and concerns of these countries. Emerging market economies, including the CEE countries, often lack the sophisticated financial market structures including bond markets and ratings agencies that are needed for the full implementation of Basel III. In Chapter 13 Jan Frait and Vladimír Tomšík examine how Basel III will apply to small and emerging market economies. While they provide a generally positive assessment of Basel III, they do point out a number of problems that implementation will raise for emerging market economies.

2

The Dark and the Bright Side of Global Banking: A (Somewhat) Cautionary Tale from Emerging Europe

Ralph de Haas

EBRD, One Exchange Square, London, EC2A 2JN, UK

This paper reviews the literature on the benefits and risks of global banking, with a focus on emerging Europe. It argues that while the potential destabilising impact of global banks was well understood before the recent financial crisis, the sheer magnitu...

Table des matières

• Cover
• Title
• Copyright
• Contents
• List of Figures and Tables
• Notes on Editors
• 1 Introduction: Josef C. Brada and Paul Wachtel
• 2 The Dark and the Bright Side of Global Banking: A (Somewhat) Cautionary Tale from Emerging Europe: Ralph de Haas
• 3 From Reputation amidst Uncertainty to Commitment under Stress: More than a Decade of Foreign-Owned Banking in Transition Economies: John P Bonin
• 4 Banking Competition and Efficiency: A Micro-Data Analysis on the Czech Banking Industry: Anca Pruteanu-Podpiera, Laurent Weill and Franziska Schobert
• 5 Relationship Lending in Emerging Markets: Evidence from the Czech Republic: Adam Geršl and Petr Jakubík
• 6 Private-Sector Credit in Central and Eastern Europe: New (Over)Shooting Stars?: Balázs Égert, Peter Backé and Tina Zumer
• 7 The Boom in Household Lending in Transition Countries: A Croatian Case Study and a Cross-Country Analysis of Determinants: Evan Kraft
• 8 Are Weak Banks Leading Credit Booms? Evidence from Emerging Europe: Natalia T Tamirisa and Deniz O Igan
• 9 What Drives Bank Lending in Domestic and Foreign Currency Loans in a Small Open Transition Economy with Fixed Exchange Rate? The Case of Macedonia: Jane Bogoev
• 10 Do Foreign Banks Stabilize Cross-Border Bank Flows and Domestic Lending in Emerging Markets? Evidence from the Global Financial Crisis: Ursula Vogel and Adalbert Winkler
• 11 Risk Taking by Banks in the Transition Countries: Rainer Haselmann and Paul Wachtel
• 12 The Sequence of Bank Liberalisation: Financial Repression versus Capital Requirements in Russia: Sophie Claeys, Koen Schoors and Rudi Vandervennet
• 13 Impact and Implementation Challenges of the Basel Framework for Emerging, Developing and Small Economies: Jan Frait and Vladimír Tomšík
• Index