High Credit Growth Research Articles

Portfolio flows and household portfolios

In this paper, we show that cross-border portfolio flows around the peak of the European Crisis induced households to rebalance their portfolios towards housing. Estimating difference-in-differences regressions around Draghi’s “Whatever It Takes” speech in July 2012 with household data from the ECB’s Household Finance and Consumption Survey, we find that portfolio inflows induce households with larger ex-ante bond and equity shares to rebalance more strongly towards housing. The effect is not driven by higher pre-treatment access to credit or higher credit growth during the treatment period and is stronger for wealthier and less risk-averse households.

Quantile Policy Effects: An Application to US Macroprudential Policy

To assess the dynamic distributional impacts of macroeconomic policy, we propose quantile policy effects to quantify disparities between the quantiles of potential outcomes under different policies. We first identify quantile policy effects under the unconfoundedness assumption and propose an inverse probability weighting estimator. We then examine the asymptotic behavior of the proposed estimator in a time series framework and suggest a blockwise bootstrap method for inference. Applying this method, we investigate the effectiveness of US macroprudential actions on bank credit growth from 1948 to 2019. Empirically, we find that the effects of macroprudential policy on credit growth are asymmetric and depend on the quantiles of credit growth. The tightening of macroprudential actions fails to rein in high credit growth, whereas easing policies do not effectively stimulate bank credit growth during low-growth periods. These findings suggest that US macroprudential policies might not sufficiently address the challenges of soaring bank credit or ensure overarching financial stability.

The transmission of targeted monetary policy to bank credit supply

In this paper I estimate the impact of Targeted Longer-Term Refinancing Operations (TLTRO) on the evolution of lending amounts and rates in Slovenia, with a specific focus on distinct effects of TLTRO-I and II. I use a combination of difference-in-differences and instrumental variable approach, which together with detail credit register data enable the identification of supply side effects of the TLTRO policy. The results show a supporting impact of targeted operations on bank loan supply, resulting in higher credit growth and lower rates. I find that the TLTRO-I was supportive through both the quantity and price channels, whereas the TLTRO-II only shows a significant impact on the credit amount. Further, I find the transmission of TLTRO-I was higher through better capitalized banks, whereas both policy waves supported lending to safe and stable firms with higher credit ratings.

Does credit growth mitigate emission intensity in ASEAN countries?

AbstractIn empirical studies, the disparity between financial development and environmental quality has prompted us to examine the impact of credit growth on environmental quality in ASEAN countries. These countries have experienced phenomenal credit growth over the past three decades due to their adoption of financial liberalisation, integration and innovation. In this study, we investigated the role of credit growth on environmental quality while controlling for several macroeconomic variables, including regulatory quality, natural resources, foreign direct investment, globalisation and per capita gross domestic product growth. Using static models (ordinary least square [OLS], random effect model, Panel Corrected Standard Error and partial spatial cross correlation) and dynamic models (dynamic OLS, dynamic random effect and two‐step system generalised methods of moments (GMM) on data spanning from 1984 to 2019, we observed a nonlinear association between credit growth and environmental quality. The findings suggest that credit growth may simultaneously have favourable and detrimental effects on environmental quality. High credit growth can lead to increased emissions and environmental degradation through the promotion of fossil fuel‐driven energy consumption, production and distribution of economic resources. However, if the government promotes regulatory quality and encourages lenders to invest more in green technologies and renewable and sustainable energy sources, credit growth may contribute to improved environmental quality. These results carry important policy implications.

Determinants of Non-Performing Loans(NPLs):

The study was conducted to explore the determining factors of non-performing loans of the private commercial banks in Bangladesh. A panel dataset, along with a fixed effect model, was used. Consistent with empirical evidence, it has been found that an increase in GDP exerts a substantial adverse outcome on NPLs, indicating that it generally transforms into more revenue which in turn contributes to lesser NPLs. This research shows a significant negative relationship between the bank’s size and the state of NPLs. We have also found that large banks are not necessarily more efficient in scrutinizing loan customers compared to smaller banks. The empirical results show that higher-term loans stimulate higher NPLs. This article denotes a significant negative relationship between credit growth and NPLs, indicating the conservative lending procedure adopted by private commercial banks. Therefore, commercial banks with higher credit growth are likely to have lower non-performing loans. However, our evidence does not support the positive correlation between NPLs and the ratio of loans to an asset that apprehends the adversity of banks

Determinants of Non-Performing Loans(NPLs):

The study was conducted to explore the determining factors of non-performing loans of the private commercial banks in Bangladesh. A panel dataset, along with a fixed effect model, was used. Consistent with empirical evidence, it has been found that an increase in GDP exerts a substantial adverse outcome on NPLs, indicating that it generally transforms into more revenue which in turn contributes to lesser NPLs. This research shows a significant negative relationship between the bank’s size and the state of NPLs. We have also found that large banks are not necessarily more efficient in scrutinizing loan customers compared to smaller banks. The empirical results show that higher-term loans stimulate higher NPLs. This article denotes a significant negative relationship between credit growth and NPLs, indicating the conservative lending procedure adopted by private commercial banks. Therefore, commercial banks with higher credit growth are likely to have lower non-performing loans. However, our evidence does not support the positive correlation between NPLs and the ratio of loans to an asset that apprehends the adversity of banks

Pre-crisis conditions and financial crisis duration

This paper examines how pre-crisis conditions affect the duration of different types of financial crises using a data sample of 244 financial crises in 89 countries over the period 1985-2017. Results from our parametric survival analysis show that the duration of any type of financial crisis is longer for countries having higher levels of public debt prior to financial crises, whereas it is shorter for countries characterised by higher pre-crisis levels of (i) current account balance, (ii) international reserves, and (iii) institutional quality. Similarly, while pegged exchange rate regimes are associated with a longer duration of financial crises, majority governments help countries emerge faster from crises. Moreover, banking and currency crises tend to be more prolonged when preceded by higher credit growth. We also find a positive effect of pre-crisis fiscal balance on the probability of crisis ending, and it is noteworthy that this effect is strengthened under majority governments and a stronger institutional environment. Finally, our duration dependence analysis suggests that banking, currency, and twin and triple crises are more likely to end when they grow older.

IMPLICATIONS OF CAPITAL FLOWS FOR DOMESTIC CREDIT GROWTH: EVIDENCE FROM PANEL DATA ANALYSIS

Following the 2007-2009 global crisis, high credit growth became an issue of concern with an emphasis on its relationship with capital flows. It is argued that large and volatile international capital flows lead to credit expansion, which in turn, may cause economic and financial instabilities when it reaches excessive levels, particularly in developing countries. This paper aims to investigate the association between credit growth and capital inflows in the context of developing countries by using panel data analysis. The methodology employed in the study offers a number advantages by allowing for heterogeneity and cross-sectional dependence in the panel, while also considering the endogeneity issue. The overall results of the study provides evidence for the impact of capital inflows, more particularly other capital inflows, on credit growth in the sample. This finding suggests a more direct relationship between capital inflows and credit creation as other inflows mostly comprise international banking and trade credits. It is not surprising given the fact that banking sector has a critical role in the financial systems of developing countries. The significance of international dimension for credit creation through other capital inflows and the intermediary role of the banking system should have monetary policy implications, in the macroprudential or more conventional fashion.

Essay on Finance-Growth Nexus

Abstract There is a long tradition in literature that banks can play a special role in the propagation of economic fluctuations. Theory suggests many channels through which financial system affects, and is affected by, economic growth. One of the most important empirical studies on this topic shows a strong positive relation between financial development and economic growth. However, the hypothesis that credit expansion is the main development instrument was challenged in the Asian crisis in the second half of the 1990s, and then even more strongly in the crisis after 2008 which was followed by almost a decade of economic stagnation. Development of the banking sector in Southeast European countries in the pre-crisis period was characterized by relatively high credit growth rates and, consequently, with an increase of the credit-to-GDP ratio. Some authors argue that the marginal effect of financial depth on economic growth becomes negative when credit to the private sector reaches about 100% of GDP. Taking into account relatively low level of credit-to-GDP ratio, we may assume that there is still enough room for finance to contribute to economic growth in Southeast European countries.

Financial Volatility and Economic Growth

We investigate the causal impact of financial risk on economic growth, using a panel spanning 150 years and 74 countries. Persistent low risk encourages risky investments that ultimately augment growth but at the cost of building up of vulnerabilities in the economy and thus has a boom-to-bust effect on growth: an initial increase followed by a reversal in two years. Persistent global low risk has a more pronounced effect on growth than local risk, highlighting the relative importance of the global risk environment. While the U.S. financial markets are important, their effects on risk appetite globally are still limited. The impact of low risk is the strongest after the Bretton Woods era, for developing countries, and for countries experiencing high credit growth. Finally, long-lasting low volatility affects growth amid its notable impact on capital flows, investment, and lending quality.

Non-performing loans in the banking systems of Serbia, Croatia and Macedonia: Comparative analysis

The aim of this paper is to evaluate the level of NPL loans in banking systems of the three sample Balkan countries. The special attention is dedicated to the level of NPL loans and their ratio compare to total loans. The quality of credit portfolio is important determinant in future bank strategies, thereby it's important for the economic development of the whole country. The NPL loans affect the economic development through the credit activity which influence on the consumption and the capital adequacy ratio which constrain the possibility of growth. Thus creating a spiral and higher NPL ratio create low economic growth and low growth creates further NPL portfolio. In this paper analysis will be focused to compare the data of quality of credit portfolio in Macedonia, Serbia and Croatia. The comparative analysis will outline the differences in the quality of the portfolios in sample countries as well as the reasons for the differences. The reasons for higher resilience of some banking systems portfolios compared to others can be used as a valuable tool for enhancing the stability of the banking systems. These three countries are chosen because they had high credit growth in the past until the financial crises, they were affected by the crisis in the same time and their banking systems are dominantly owned by foreign banks.

Bank Ownership and Credit Growth in Emerging Markets During and after the 2008–09 Financial Crisis - A Cross-Regional Comparison

This paper examines bank credit growth in emerging markets before, during, and after the 2008-09 financial crisis using bank-level data, focusing on the role of bank ownership. Credit growth by foreign banks lagged behind that of domestic banks in 2009 in Asia, and in 2010 in Latin America and emerging Europe. State-owned banks instead played a counter-cyclical role during the crisis in particular in Latin America and emerging Europe, and credit by stateowned banks also grew faster than that of private banks after the crisis in Latin America. Expansionary monetary policy on average led to higher credit growth. Banks in Latin America and Asia that relied more on retail funding had higher credit growth, in particular during the crisis. Better-capitalized banks and banks with more liquid assets also had faster credit growth. Finally, banks in countries with stronger banking regulation had higher credit growth during the crisis.

Determinants of Credit Risk: A Comparative Analysis between Islamic and Conventional Banks

Using GMM estimation techniques, this paper investigates the determinants of credit risk between Islamic and conventional banks in Bangladesh banking sector for the period from 2001 to 2011. This paper uses three separate proxies of credit risk namely NPL ratio, financial stability Z score and Merton`s probability of default to investigate the determinants of credit risk. Furthermore, this study examines five important bank specific hypotheses, which are adverse selection, moral hazard, efficiency, competition and regulatory requirement along with the three macro-economic factors to investigate the difference on the factors affecting credit risk between Islamic and conventional banks. Findings of this study have several policy implications. First, empirical results show that both banking system face adverse selection and moral hazard problem which indicates the high presence of asymmetric information problem. Banks should have enough skill to minimize asymmetric information problem. Especially high credit growth is positively affecting the credit risk for both banking systems which means banks are not able to extract the diversification benefits. Second important implication is that, Islamic banks are still unable to manage the cost efficiently where conventional banks because of their long experience manage it productively. Finally, based on these empirical results, it can be inferred that Islamic banks do not require separate regulatory requirement other than the regulation of conventional banks.

What Makes High Credit Growth Harmful? Evidence from Banking Crises

Rapid credit growth seems to precede many episodes of banking crises in both advanced and emerging market economies including the recent global financial crisis of 2007-09. All episodes of high credit growth are not followed by crisis, however. We argue that credit growth is more likely to lead to a banking crisis if the financial system is characterized by fragility caused by distortions or imbalances in the system. The indicators of potential fragility we point to in this paper are high leverage, financial liberalization, a high rate of capital inflows (e.g. bank loans) from abroad, surges in asset prices, the existence of explicit or implicit protection of banks’ creditors, and weak supervision of banks’ risk-taking. We test the hypotheses that these factors interact with high credit growth to increase the likelihood of a banking crisis. The empirical work is based on data for 77 countries for the period 1973-2009. The results show that in advanced economies relatively high credit growth over several years increases the likelihood of a banking crisis and that this effect is strengthened by high leverage, weak capital regulation and supervision, and cumulative asset price inflation. These results are robust with respect to inclusion of the recent crisis period. The other financial fragility indicators have independent effects on the likelihood of banking crisis but the significance of effects vary across specifications, types of countries and time period.

The Determinants of Banking Crises: The Case of the 2008 Worldwide Financial Crisis

This paper models the causes of the 2008 global financial crisis. We focus on the causes of the crisis mainly country intrinsic factors that contribute to banking crisis. Thus, we use a variety of macro, financial, institutional and regulatory variables to estimate a logit econometric model for a large sample of developed and developing countries. We found that high rate of appreciation of the exchange rate, deterioration of the terms of trade, high ratio of bank liquidity, high real credit growth, less developed financial markets, higher access to capital markets and lower openness to international trade are all correlated with an increased risk of banking sector problems. The outcome suggests that restrictions on securities activities, tighter capital regulation and powerful supervisory agencies are positively correlated with bank fragility. Our findings also stress that regulatory and supervisory practices that empower private sector corporate control of banks promote bank stability. Our result stresses the role of microeconomic and bank regulatory variables in explaining the 2008 banking crisis.

Capital Controls and Foreign Exchange Policy

The empirical analysis of the paper suggests that an FX policy objective and concerns about an overheating of the domestic economy have been the two main motives for the (re-)introduction and persistence of capital controls over the past decade. Capital controls are strongly associated with countries having significantly undervalued exchange rates. Capital controls also appear to be less motivated by worries about financial market volatility or fickle capital flows per se, but rather by concerns about capital inflows triggering an overheating of the economy – in the form of high credit growth, rising inflation and output volatility. Moreover, countries with a high level of capital controls, and those actively implementing controls, tend to be those that have fixed exchange rate regimes, a non-IT monetary policy regime and shallow financial markets. This evidence is consistent with capital controls being used, at least in part, to compensate for the absence of autonomous macroeconomic and prudential policies and effective adjustment mechanisms for dealing with capital flows.

Managing the Impossible Trinity: Volatile Capital Flows and Indian Monetary Policy

Large capital inflows are often followed by credit and investment booms, inflation, real exchange rate misalignments, current account imbalances and financial sector weaknesses culminating in financial crisis and long-term output losses. While India has received large capital flows since 1993-94, macroeconomic price and financial stability has been maintained in a high growth environment. What explains this desirable outcome? This paper assesses external sector and monetary management policies and finds the outcome can be attributed to judicious use of a menu of options such as management of the capital account; restrictions on access of financial intermediaries to external borrowings vis-a-vis non-financial corporate entities; flexibility in exchange rate movements with capacity to intervene in times of excessive volatility; building up of reserves; strengthening of the financial sector; pre-emptive tightening of norms in sectors with high credit growth; and refinements in the institutional framework for monetary policy. As a result of this approach, growth in monetary/credit aggregates was contained amid growth in the real economy, structural transformation and financial deepening. Inflation was contained even as growth accelerated; financial stability was maintained even as the global economic environment experienced a series of financial crises. The impossible trinity was achieved by maintaining an open but managed capital account and a flexible exchange rate with management of volatility. Rather than relying on a single instrument, many instruments were used in coordination since the Reserve Bank’s jurisdiction over both monetary policy and the regulation of financial institutions permitted the use of various policy instruments. Key lessons from the Indian experience are that monetary policy needs to move away from price stability/inflation targeting objective, central banks need multiple instruments and capital account management has to be countercyclical.

Causes of banking crises revisited

We examine to what extent there exists heterogeneity in the causes of a banking crisis. For this purpose, we use a random coefficient logit model including 110 countries between 1970 and 2007. We conclude that there exists significant heterogeneity in the causes of a banking crisis. We find that a high credit growth, a negative GDP growth and a high real interest rate are on average the most important causes of a banking crisis. However, none of the variables has a significant impact in more than 60 percent of the banking crises. Besides we find that the impact of the determinants differ between systemic and non-systemic crises and across stages of economic development.

Financial distress and banking regulation: what is different about Spain?

We examine whether the restrictive prudential reregulation has reached its goal in terms of the banking sector’s soundness in Spain. The analysis shows the ability of the central bank to foresee the risks of the lending boom. Two main instruments, used during “good times” (2000-2007), distinguish the Spanish regulatory framework from most of its peers. (1) The capital adequacy ratios and the consolidation accounting rules related to off-balance sheet securitization have been stricter than in other countries. Unlike in U.S.A., using securitization for arbitrary purposes and reckless credit origination has been largely deterred. (2) Besides specific loan loss allowances, banks were required to make dynamic provisions on the basis of the business cycle average. By raising the reserves cushion against loans losses during the phase of high liquidity and fast credit growth, dynamic provisioning has acted as a countercyclical “insurance policy”. These measures can explain the absence of major bank bailouts, up to June 2010.JEL codes: E65, G21, G28

Private-Sector Credit in Central and Eastern Europe: New (Over)Shooting Stars?

This paper analyses the equilibrium level of private credit to GDP in 11 Central and Eastern European countries in order to see whether the high credit growth recently observed in some of these countries led to above equilibrium private credit-to-GDP levels. We use estimation results obtained for a panel of small open OECD economies (out-of-sample sample) to derive the equilibrium credit level for a panel of transition economies (in-sample panel). We opt for this (out-of-sample) approach because the coefficient estimates for transition economies are fairly unstable. We show that there is a large amount of uncertainty to determine the equilibrium level of private credit. Yet our results indicate that a number of countries are very close or even above the estimated equilibrium levels, whereas others are still well below the equilibrium level.