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Credit Euroization in CESEE: The „Foreign Funds“ Channel at Work

17th Dubrovnik Economic Conference June 28-July 2, 2011, Dubrovnik, Croatia Organized by the Croatian National Bank. Credit Euroization in CESEE: The „Foreign Funds“ Channel at Work. Peter R. Haiss and Wolfgang Rainer. V ienna University of Economics and Business

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Credit Euroization in CESEE: The „Foreign Funds“ Channel at Work

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  1. 17th Dubrovnik Economic Conference June 28-July 2, 2011, Dubrovnik, Croatia Organized by the Croatian National Bank Credit Euroization in CESEE: The „Foreign Funds“ Channel at Work Peter R. Haiss and Wolfgang Rainer Vienna University of Economics and Business Department of Global Business and Trade The opinions expressed are the authors‘ personal views

  2. AGENDA • Stylized facts on foreign currency (FX) lending • Motivation • Literature review • Model, method and data • Results • Conclusions & policy recommendations

  3. Stylized facts on foreign currency (FX) lending • Rapid credit growth & rising FX-lending are specific features of the CESEE convergence pathSupported economic growth & transition at cost ofhigher volatility FX lending not uniform (share, sectors, FX, timing, regulation)role of FX asymmetric for loans & deposits

  4. Total loans (to non-banks) as % of GDP Source: Raiffeisen RESEARCH, 2010

  5. FX lending share (2010) in private sector in CESEE Source: Hake, Cuaresma and Fidrmuc (2011) Percentage of total loans

  6. FX loans as a share of total loans, 2009 Source: Author‘s own calculations, data from local central banks; Note: Due to data restraints, the figures do not include FX indexed loans for Croatia and Macedonia.

  7. Currency denomination of FX-loans in selected CESEE countries, 2009 Source: Author‘s own calculations, data from local central banks; Note: Share of FX-loans in total private sector loans according to currency denomination; Macedonia: banking sector assets in foreign currency; For Hungary and Serbia other currencies consist mostly of CHF.

  8. Dynamic development Source: Author‘s own calculations, data from local central banks

  9. High level Source: Author‘s own calculations, data from local central banks

  10. Low level MKO-Projektseminar Planung SoSe 2010 Source: Author‘s own calculations, data from local central banks

  11. Motivation for the paper • Rise of FX lending as regional featureMaterialization of risksReasons? Findings controversial, funding underrepresented

  12. Motivation • Rise of FX lending across most of the region • depreciation  Increased interest & redemption payments for unhegded borrowers (though leverage rather low) • Household loans mainly for mortgage/real estate  double exposure (though uneven across region) • Materialization of risks • Significant depreciation of CESEE currencies against EUR and CHF 2007-2009 in HU, PL, RO, AL, SR, UA • Banks had to increase provisions for impairment losses by ~100%-200% (2008/2009) • FX loans still attractive, >60% of FX borrowers say “did well” (Beckmann, Scheiber and Stix, 2011) • Findings controversial, funding underrepresented

  13. Literature review • Qualitative surveys vs econometric investigationsForeign banks vs foreign funds channel

  14. Surveys • ECB (2006) • Interest rate advantage • Fixed exchange rate regime • Expectation to join the Euro Area soon • Lack of risk awareness • Herd behaviour • Appreciation trend of the local currency • OeNB (Dvorsky et al 2008, Fidrmuc et al 2011) • FX loan is cheaper • My bank advised me to take out an FX loan • More stable interest rate in FX • Plan for more FX loans

  15. Econometric models I • Interest rate differential: Rosenberg and Tirpák 2008 (+), Basso et al 2011 (+), Brown et al 2011 (~/+), Zettelmeyer et al 2010 (+), Epstein & Tzanninis 2005 (+), Arteta 2005 (~), Bednarik 2007 (-) • Foreign currency deposits: EBRD 2010 (+), Luca and Petrova 2008 (+), Arteta 2005 (+), Barajas 2003 (+), Calvo 2001 (+) • Loan to deposit ratio: Rosenberg and Tirpák 2008 (+) • Openness of the economy: Luca and Petrova 2008 (+), Rosenberg and Tirpák 2008 (+), Basso et al 2007 (+ for corporates), Keloharjy and Niskanen 2001 (+) • Inflation (expectations): Zettelmeyer et al 2020 (+), Honig 2009 (high past inflation +, time series variable -), Brown et al 2008 (~), Arteta 2005 (max. hist. inflation +)

  16. Econometric models II • Exchange rate regime: Arteta 2005 (~), Honig 2009 (~) • Exchange rate: Brzoza-Brzezina 2007 (appreciation +), Luca and Petrova 2007 (~depreciation -), Epstein and Tzaninis 2005 (~) • Economic development: Honig 2009 (~), Rosenberg and Tirpák 2008 (~), Brzoza-Brzezina 2007 (GDP +) • Government quality: Honig 2009 (-) • Foreign banks: Steiner 2011 (~/+), Brown and De Haas 2010 (~/+), Backer and Gulde 2010 (+), Haiss et al 2009 (~), Brown et al 2008 (+/~), Rosenberg and Tirpak 2008 (~)

  17. Do foreign banks drive FX lending?

  18. Foreign bank channel • Rationale • European Commission (2004): Cross-ownership in the banking sector contributes to the high level of FX (Euro) loans in the new Member States • Calvo (2002): Foreign banks have better access to FX (refinancing) via parent bank • Empirical evidence • Asset share of foreign banks (market share) correlated with credit euroization? • Backer and Gulde, 2010: large part of FX loans funded by foreign banks • Haiss et al (2009), Rosenberg and Tirpák (2008): not significant; Steiner (2011, households): not significant • Brown et al (2011): scarce evidence of positive correlation using (SME) firm-level data (EME, not CESEE); Brown and De Haas (2010): corporate borrowers (~/+), households (~)

  19. Foreign funds channel Foreign funds channel = Degree to which FX loans are financed from abroad (and not with FX deposits from residents) Proxied by FX loan to FX deposit ratio FXLFXDR

  20. Model, Method and DataResults and Conclusions

  21. Model • Model I – private non-financial sector • Model II – non-financial corporations • Model III - households

  22. Method & Data • Method • Panel data estimations • Heteroscedasticity  robust standard errors • Strong autocorrelation  First difference estimations • Data • 13 countries (AL, BG, HR, CZ, EE, HU, LV, LT, MD, PL, RO, RU, SK) • 1999-2007

  23. Results

  24. Conclusions • No direct relationship between the asset share of foreign banks and FX lending • Foreign funds channel appears to be a main source of supply with foreign capital and a driver of credit euroization • Credit euroization of corporate lending seems to be, at least partly, driven by the desire of firms to hedge foreign currency inflows arising from export activities • Banks appear to fund FX loans to households to a greater extent with FX deposits, while FX loans to corporations appear to be financed to a higher degree from abroad (i.e. direct cross-border lending)

  25. Policy Recommendations • Policy makers should educate the public about the risks of FX lending • In some situations, central banks might decide to take restrictive measures to curb FX loan growth • Policy makers would be advised to increase people’s trust in the domestic economy, currency and capital markets in order to decrease loan and deposit euroization • Neither CESEE nor CIS are homogenous regions – the countries should be treated separately

  26. Dr.Habil Peter R. Haiss WU Vienna University of Economics and Business Department of Global Business and Trade Althanstrassd 51 A-1090 Wien Austria / European Union Peter.haiss@wu.ac.at http://ssrn.com/author=115752 Wolfgang Rainer WU Vienna University of Economics and Business EuropeInstitute Althanstrasse 39-45 A-1090 Wien Austria / European Union Wolfgang-rainer@gmx.at

  27. Details & Back-up

  28. FX-Lending Relevance (2010) Source: UniCredit (2011), CEE Banking Aoutlook Jan 2011, 20

  29. FX usagelending & deposits asymmetric Source: Backer and Gulde (2010), IMF WP 10/130

  30. FX loan fundingforeign banks vs. domestic deposits Source: Backer and Gulde (2010), IMF WP 10/130

  31. FX loans still attractive Source: OeNB Euro Survey as reported in Beckmann, Scheiber & Stix (2011)

  32. Market share of foreign banks

  33. Market concentration MKO-Projektseminar Planung SoSe 2010

  34. Total banking assets MKO-Projektseminar Planung SoSe 2010

  35. Total loans MKO-Projektseminar Planung SoSe 2010

  36. Nonperforming loans MKO-Projektseminar Planung SoSe 2010

  37. Loan to Deposit Ratio MKO-Projektseminar Planung SoSe 2010

  38. Loan to deposit ratio for households MKO-Projektseminar Planung SoSe 2010

  39. Results Model I MKO-Projektseminar Planung SoSe 2010

  40. Results Model II MKO-Projektseminar Planung SoSe 2010

  41. Results Moel III MKO-Projektseminar Planung SoSe 2010

  42. Descriptive statistics I

  43. Descriptive statistics

  44. CESEE exchange rate developments against EUR and CHF 06/2008 – 04/2009 Source: Author’s own calculation, data from EIU Country Data

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