Depreciation shocks and the bank lending activities in the EU countries

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1 Depreciation shocks and the bank lending activities in the EU countries Svatopluk Kapounek and Jarko Fidrmuc Mendel University in Brno, Czech Republic Zeppelin University in Friedrichshafen, Germany Slovak Economic Association Meeting, Ko²ice, Slovakia, October 23, 2015

2 Motivation the fall down of the lending activities was observed particularly during and after the nancial crisis in 2007 and 2008 as a result of macroeconomic shocks (especially a decrease in investment demand and economic activity) the traditional transmission channels changed after the nancial crisis o traditional bank lending channel, where shocks aecting banks' balance sheets have eects on the cost and availability of credit which go beyond the traditional eect through interest rates o bank capital channel, where a reduction in bank capital increases the cost of funds faced by banks and, in turn, the cost of funds faced by borrowers o bank capital aects lending stems from regulatory capital requirements

3 the European economies have been hit particularly hard by the nancial crisis this is generally viewed as a result of vulnerabilities that have accumulated during the pre-crisis period o heterogeneity between the member countries o excessive consumption growth o lending boom during the nancial crisis this development was negatively aected by: o debt crisis o growth forecasts and especially for private consumption were signicantly revised downward o depreciation of the currencies in CEECs (to improve competitiveness and deal with capital ight) forex interventions belong to unconventional monetary policy tools after the nancial crisis in the Czech Republic, Japan, Denmark, Switzerland, New Zealand, Poland and Israel depreciation shocks were identied in Romania, Latvia, Hungary, Poland, Slovenia, UK and (currently) in the Czech Republic

4 Brief Literature Overview large literature on the global transmission of the past nancial crisis which mostly nds strong evidence for the transmission of global shocks to liquidity and global capital ows (e.g. Brunnermeier 2009; Brunnermeier and Pedersen, 2009; Calvo 2009 or Kalemli-Ozcan, Papaioannou and Perri, 2010); Luca and Petrova (2008) and Basso, Calvo-Gonzales and Jurgilas (2011) argue that foreign banks used the easier access to international capital markets and foreign funds from their home countries for credits in CEECs; exchange rate depreciations increased the risk of foreign currency loans (Beckmann, Fidrmuc and Stix, 2012); currency mismatch on banks' balance sheets, aggregate renancing problems of banks, the threat of sudden (Fernandéz-Arias, 2006; Levy Yeyati, 2006).

5 The Impact of Macroeconomic Shocks depreciations reduced the foreign currency value of credits provided in Eastern European currencies, thus imposing signicant losses on foreign banks exchange rate depreciation, output decline and ination shocks were of dierent intensity in dierent CEECs diversied economies are more likely to be harmed by exchange rate depreciation (OCA theory) the impact of institutional factors o creditor protection is associated with more developed nancial systems (Ostrom, 1998, Djankov, McLiesh and Shleifer, 2007) o property rights and enforcement rules are especially important for transition economies where new institutions were created (Raiser, Rousso, Steves and Teksoz, 2008, Ranciere, Tornell and Vamvakidis, 2010)

6 Contribution recently, there are two main approaches o theoretical models provided by Basso, Calvo-Gonzales and Jurgilas (2007), Brown and De Haas (2010) - the role of banks' funding in a foreign currency o macroeconomic impact of foreign lending on nancial stability (e.g. Levy Yeyati, 2006) the previous literature was based mainly on aggregate data for individual countries or sectors the micro-econometric approach provides important insights into the determinants of foreign lending we combined macroeconomic and microeconomic data o the main focus is put on the impact of exchange rate depreciations, which were applied by countries with exible exchange rate regimes we dier between locally-owned and foreign banks

7 Data panel datasets including 5176 commercial banks in EU27 provided by the Bureau van Dijk (Bankscope database) in the years o gross loans and selected banking controls (ROE decomposition) o ownership structure (dummies dier between locally-owned and foreign banks) selected macroeconomic shocks o economic activity indicators (GDP, unemployment, consumption and gross capital formation), ination (HICP), policy interest rates (marginal lending facility), market liquidity (central bank asset) o depreciation shocks over 10% o Eurostat, ECB and World Bank databases

8 Data institutional variables o 21 institutional determinants sourced from the Database for Institutional Comparisons in Europe (CESifo Group Munich) data at levels were transformed by logs outliers were removed between the 5% and 95% percentile

9 Empirical Approach the baseline regression includes bank controls s, macroeconomic shocks s and institutional determinants j interacted with foreign ownership for bank i in country c and time t loan ict = γ s B ics shockct s + β j B icj instct+ j s=d,f + b=d,f j=d,f δ b B icb bcontr b ict + µ i + θ t + ε ict we consider selected macroeconomic and policy shocks: GDP, policy rate, central bank assets, ination, and exchange rate foreign bank is dened as a bank with foreign ownership above a given threshold (10%, 50%, 75%, 100%) and ultimate ownership we include rm xed eects, µ, time eects θ, and estimate robust standard errors

10 Robust OLS, xed eects

11 Robust OLS, xed eects

12 Robust OLS, xed eects

13 Conclusions the presented results are still only preliminary foreign banks behave signicantly dierently from the domestic banks: o they respond strongly to exchange rate depreciation o they are not inuenced by the central bank policy o the impact of domestic demand is slightly lower surprisingly the impact does not change with the size of the ownership

14 Thank you for your attention... Svatopluk Kapounek Jarko Fidrmuc

Lending Conditions in EU: The Role of Credit Demand and Supply

Arbeitsbereich Ökonomie IOS Working Papers No. 362 January 2017 Lending Conditions in EU: The Role of Credit Demand and Supply Svatopluk Kapounek *, Zuzana Kučerová **, and Jarko Fidrmuc *** * Mendel University