Market power in CEE banking sectors and the impact of the global financial crisis Discussion of Paper by Efthyvoulou and Yildirim CASE, Warsaw, February 15, 2013 Mark Allen Senior IMF Resident Representative for Central and Eastern Europe The views expressed in this Presentation are those of the author and do not necessarily represent those of the IMF or IMF policy. The Author appreciates the contribution of Krzysztof Krogulski and Jerome Vandenbussche
Efthyvoulou and Yildirim s main results Some convergence in market-level power until the 2008 crisis Banks with European and US parents have more market power During the crisis NPL levels hurt market power and capital levels increased it but only for domestically owned banks 2
Using Lerner Indices is standard but heroic Many proxies in estimating (P-MC)/P Output of banking sector hard to measure Cost of risk appears to be missing Hard to link the concept to observable developments Does not appear correlated with expected variables such as concentration How would we expect the 2008-9 crisis to affect market power? 3
Challenge is to make sense of the spaghetti Lerner index 4 60 50 40 30 20 10 0-10 -20-30 2002 2003 Albania 2004 Bosnia 2005 2006 Bulgaria 2007 2008 Belarus 2009 2010 Czech Rep. Croatia Hungary Latvia Moldova Montenegro Macedonia Poland Romania Serbia Slovenia Slovakia Ukraine
Not clearly related to share of foreign-owned banks Lerner index In red: countries with share of foreign ownership in 2009 above median (72.5%) 5 60 50 40 30 20 10 0-10 -20-30 2002 2003 Albania 2004 Bosnia 2005 2006 Bulgaria 2007 2008 Belarus 2009 2010 Czech Rep. Croatia Hungary Latvia Moldova Montenegro Macedonia Poland Romania Serbia Slovenia Slovakia Ukraine
nor to market concentration 6 Lerner index In red: countries with number of banks to reach 75 percent of banking assets below median (7) 60 50 40 30 20 10 0-10 -20-30 2002 2003 Albania 2004 Bosnia 2005 2006 Bulgaria 2007 2008 Belarus 2009 2010 Czech Rep. Croatia Hungary Latvia Moldova Montenegro Macedonia Poland Romania Serbia Slovenia Slovakia Ukraine
nor to foreign exchange lending. Lerner index In red: countries with share of FX lending above median (54 percent) 7 60 50 40 30 20 10 0-10 -20-30 2002 2003 Albania 2004 Bosnia 2005 2006 Bulgaria 2007 2008 Belarus 2009 2010 Czech Rep. Croatia Hungary Latvia Moldova Montenegro Macedonia Poland Romania Serbia Slovenia Slovakia Ukraine
Other estimates of Lerner indices differ substantially Lerner index 0.6 0.5 0.4 0.3 0.2 0.1 0 Czech Republic Řepková Efthyvoulou and Yildirim 0.6 0.5 0.4 0.3 0.2 0.1 0 Poland Pawłowska Efthyvoulou and Yildirim -0.1 2000 2002 2004 2006 2008 2010-0.1 2000 2002 2004 2006 2008 2010 Market Power in the Czech Banking Sector, Iveta Řepková, Journal of Competitiveness, Vol. 4, Issue 1, pp. 143-155, March 2012 8 Competition, concentration and foreign capital in the Polish banking sector (prior and during the financial crisis), Małgorzata Pawłowska, NBP Working Paper No. 130, 2012
The crisis has affected some more than others Efthyvoulou and Yildirim find that market power of domestically owned banks with high NPLs and low capital most affected. Consistent with story that these banks funding costs rose more But market by market hard to see effect of: Depth of crisis Exchange rate regime Share of foreign exchange assets IMF/EU support 9
No apparent pattern in impact of 2008-9 crisis Changes in the Lerner index, 2007-09 (percent points) 15 10 5 0-5 -10-15 -20 10
Regression explaining LI change 2007-9 Regression explaining Lerner index change in 2007-9: R 2 0.63 Adjusted R 2 0.44 Exchange rate depreciation -1.08** Change in policy interest rate (or equivalent) 2007-09 2.15 Concentration (number of banks to reach 75% of sector assets) -1.16* EU membership 11.5** Share of FX lending (2006) * Exchange rate depreciation 0.02* Rejected variables: Lerner index level in 2007 Share of foreign owned banks in sector assets 11 Note: ***, **, * coefficient significant at 1, 5 and 10 percent confidence level. Montenegro excluded.
Broader narrative concerning bank flows Growth of foreign bank ownership in 2000-05 12
Penetration of the market started in the late 1990s Asset share of foreign-owned banks (percent) 100 100 100 80 80 80 Source: EBRD Transition Reports 60 40 20 0 60 40 20 0 60 40 20 0 13 Estonia Latvia Poland Czech Hungary Lithuania Slovakia Croatia Albania Bulgaria Montenegro Slovenia BiH Macedonia Romania Belarus Moldova Russia Ukraine
Broader narrative concerning bank flows Growth of foreign bank ownership in 2000-05 Banks financed inflows to the region 14
Large bank-related inflows before crisis Capital flows to CESE (4-quarter moving average, percent of GDP) 12 Other Portfolio FDI 10 8 6 4 2 0-2 -4 15 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: IMF, IFS.
Broader narrative concerning bank flows Growth of foreign bank ownership in 2000-05 Banks financed inflows to the region leading to credit boom, especially in FX lending. 16
Credit growth only stopped by the crisis Real Credit Growth (percent, y/y) 70.0 60.0 50.0 40.0 CEE Baltics SEE EU SEE non-eu 30.0 20.0 10.0 0.0-10.0-20.0 2005 2006 2007 2008 2009 2010 2011 2012 17 Note: Bosnia included since 2007 and Bulgaria since 2008. Source: Haver; IMF, IFS
Broader narrative concerning bank flows Growth of foreign bank ownership in 2000-05 Banks financed inflows to the region leading to credit boom, especially in FX lending. Financial crisis struck region in 2008-9 18
IMF provided assistance to region 2008 EU countries: 2009 2008 2009 2009 2009 2010 2011 2010 2008 2010 EU member countries SBA program FCL program Non-EU countries: SBA program EFF program PCL program 19 Precautionary programs
Broader narrative concerning bank flows Growth of foreign bank ownership in 2000-05 Banks financed inflows to the region leading to credit boom, especially in FX lending. Financial crisis struck region in 2008-9 IMF/EU programs and Vienna Initiative helped foreign-owned banks to maintain exposure and capital 20
Deleveraging was controlled untill mid-2011 Emerging Europe Banks Foreign Liabilities, (USD billions, Jan-2008 Nov-2012) 300 Source: Vienna Initiative Deleveraging Monitor 250 200 150 IFS 1/ BIS 2/ Excl. Russia and Turkey Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 21 1/ Other depository institutions' liabilities to non-residents. 2/ BIS-reporting banks' claims on banks in emerging Europe (locational statistics, not exchange-rate adjusted).
Broader narrative concerning bank flows Growth of foreign bank ownership in 2000-05 Banks financed inflows to the region leading to credit boom, especially in FX lending. Financial crisis struck region in 2008-9 IMF/EU programs and Vienna Initiative helped foreignowned banks to maintain exposure and capital From 2011 Eurozone crisis linked to parent bank overleveraging 22
CESEE banks are less leveraged than parents Tier 1 capital to Risk Weighted Assets Banking system capitalization and leverage (2011): 18 17 16 15 14 13 12 11 10 9 8 23 4 6 8 10 Capital to Assets 12 14 16 Source: IMF, FSI; IMF, Article IV reports.
Broader narrative concerning bank flows Growth of foreign bank ownership in 2000-05 Banks financed inflows to the region leading to credit boom, especially in FX lending. Financial crisis struck region in 2008-9 IMF/EU programs and Vienna Initiative helped foreignowned banks to maintain exposure and capital From 2011 Eurozone crisis linked to parent bank overleveraging Parent banks reducing cross-border exposure 24
Deleveraging responds to parent bank conditions Decomposition of cross-border bank flows to Emerging Europe (Average de-meaned quarter-on-quarter changes, percent) 10 8 6 4 2 0-2 -4-6 -8-10 -12 Demand Country risk Other banks US banks Euro area banks Cross-border flows Host country factors Home country factors 2005 2006 2007 2008 2009 2010 2011 25 Source: Stefan Avdjiev, Zsolt Kuti and Előd Takáts, 2012, The euro area crisis and cross-border bank lending to emerging markets
Broader narrative concerning bank flows Growth of foreign bank ownership in 2000-05 Banks financed inflows to the region leading to credit boom, especially in FX lending. Financial crisis struck region in 2008-9 IMF/EU programs and Vienna Initiative helped foreignowned banks to maintain exposure and capital From 2011 Eurozone crisis linked to parent bank overleveraging Parent banks reducing cross-border exposure Domestically-owned banks more willing to lend 26
Source: Kawalec, Stefan and Marcin Gozdek, 2012, Optimal Structure of the Banking Sector in Poland in the Medium Term In Poland domestic banks have proved more responsive Real dynamics of corporate credit (percent) 40% 35% 30% 25% 20% 15% 10% 5% 0% -5% -10% -15% Locally-controlled commercial banks* Cooperative banks Foreign-controlled banks Total 2007 2008 2009 2010 2011 June 2012 27 */ PKO BP, GetinBank, Noble Bank, BGK, BOŚ, Alior, Invest-Bank, Bank Pocztowy Source: Authors calculations based on NBP, KNF, GUS, banks data and financial reports
Broader narrative concerning bank flows 28 Growth of foreign bank ownership in 2000-05 Banks financed inflows to the region leading to credit boom, especially in FX lending. Financial crisis struck region in 2008-9 IMF/EU programs and Vienna Initiative helped foreignowned banks to maintain exposure and capital From 2011 Eurozone crisis linked to parent bank overleveraging Parent banks reducing cross-border exposure Domestically-owned banks more willing to lend External funding is being replaced by domestic deposits
Loan-to-deposit ratios have improved... Loan-to-Deposit Ratios (percent) 220 200 180 2008 160 140 120 100 80 60 60 80 100 120 140 160 2012Q2 or latest available 29 Source: Country authorities; Raiffeisen Research; and IMF staff calculations.
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34 Thank you!