The Role of Financial System in Promoting Growth in Emerging Economies

Transcription

1 The Role of Financial System in Promoting Growth in Emerging Economies Vladimir Tomsik International Conference of Banking Supervisors September 25, 2014, Tianjin, China

2 Contents Size of the financial sector and economic growth Contribution of financial sector to economic growth and convergence process Regulation and economic growth Ownership structure in emerging economies FX loans in emerging economies Conclusions 2

3 Role of the Financial Sector for Economic Growth Too small financial sector hampers real growth Too large brings about fragility and/or misallocations Equilibrium size of financial sector exists but we do not know it and we do not know how it develops in time No strong theory on the optimal size As compared to other sectors, financial sector can deviate for a long time from its equilibrium size existence of a financial cycle The equilibrium size is probably influenced by many factors but income per capita seems to be the strongest 3

4 Size of the Financial Sector Domestic credit in % of GDP JPN ESP US CHN EU LUX 100 IND FIN y = 0,0032x + 42,553 R² = 0, CZE Per capita GDP in PPP (2012) Source: World Bank Note: Domestic credit to private sector (net of government debt) granted by broad range of financial institutions 4

5 Deepening of Financial Intermediation Financial sector grows faster than GDP intermediation deepens in the economy Possible consequence of capital accumulation and division of labour (neo-classical growth model) Other factors: improvements of legal environment, demography, pension system development, higher demand for diversification under higher income etc. Consequences for emerging economies: DO NOT CURB GROWTH OF FINANCIAL SECTOR Consequences for regulatory policies and interaction with Basel III: EMERGING ECONOMIES HAVE THEIR SPECIFICATIONS, DO NOT APPLY REGULATION MECHANICALLY 5

6 Example: Is the Czech Banking Sector Too Big or Too Small? Domestic credit in % of GDP Financial sector in the Czech Republic Domestic credit in the Czech Republic now surpasses average, moving average, equilibrium estimated by HP filter etc Average Trend line for the last decade The trend may also look at first sight as growing unsustainably fast BUT: given the income level, the Czech financial sector is small and the recent trend only compensates banking crisis in When applying regulatory measures concerning the size or rate of growth of the sector, specific features and the financial history of the economy must be taken into account! Source: World Bank and CNB 6

7 Contribution of Financial Sector to Economic Growth Schumpeterian view: financial sector directs capital to profitable projects (ideally, investment projects yielding the highest returns are undertaken first), growth and economic convergence is accelerated Spread between deposit and lending rates reduces number of funded projects; if the spread is substantial, the allocation function of the financial sector is reduced 7

8 Will Higher Capital Requirements Hamper the Allocation Function? Theory: higher capital requirements lead to higher spreads; estimates of increases in spreads differ up to 130 b.p. in the short run and about b.p. in the long run BUT: (1) With higher capital the banks will be less risky - rate of return for the owners can be lower - increase of spreads will be smaller (i.e. endogeneity of the rate of profit) (2) Even if spreads increase, the number of funded projects can remain the same if the additional costs are imposed mostly on depositors 8

9 Regulation and Growth Do we need more regulation to safeguard sustainable growth? Finance for Growth? No, existing regulatory initiatives and rules are sufficient to ensure both the financial stability and economic growth Focus on consistent implementation, but not mechanical application Do not soften prudential or accounting rules Ensure the same level playing field Firstly, we should implement all new regulatory measures, see all intended and unintended benefits and costs of the reforms, see cumulative burden for banks and for real economy. What about declaring moratorium on new regulation? 9

10 Specific features of EMEs (1): Ownership structure In many emerging economies, foreign owned banks and MFIs have high importance. Prior to the crisis many host regulators in emerging economies thought branches were more convenient for know-how and technology transfer (e.g. Mihaljek in BIS 2010) After the crisis, financial stability issues more important, clear preference of host regulators for subsidiaries Subsidiaries - more in line with Soros oil tanker analogy but no ring-fencing can be perfect 100% 80% 60% 40% Other (credit unions etc.) State owned Foreign owned banks Private domestic banks 20% Source: Mihaljek in BIS (2010) 0% Asia Latin America CEE Other EMEs 10

11 Specific issues in EMEs (2): FX loans FX loans reach in some emerging economies unprecedented levels Volume of FX loans cannot be explained by natural hedge Transfer of FX risk from specialists (banks, MFIs) to non-specialists (households, SME) Formally, the banks have relatively small open positions BUT in reality they face systemic risk if an FX shock takes place as their borrowers are unhedged 80 % FX Loans in Total Loans 2011 (%) Croatia Serbia Hungary Bulgaria Romania Poland Czech Republic Slovenia Slovakia Source: CHF Lending Monitor, Yesin (2013): Foreign Currency Loans and Systemic Risk in Europe, FRB St. Louis Review, May/June 2013, p

12 Conclusions Regulators in emerging economies must bear in mind that the size of the financial sector can increase relatively to GDP if convergence is to take place Increased capital/liquidity requirements will not hamper allocation in measurable way We do not need more regulation to ensure both the financial stability and economic growth Emerging economies can have different priorities in their regulatory agenda e.g. branch vs. subsidiary, FX loans etc. 12

13 Thank you for your attention.