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Do Foreign Banks Raise the Risk of Foreign Currency Lending in CEE?

Do Foreign Banks Raise the Risk of Foreign Currency Lending in CEE?. P. Haiss, A. Paulhart, W. Rainer* Europe Institute, Vienna University of Economics and Business http://www.wu-wien.ac.at/europainstitut/forschung/nexus. 23 rd Workshop of the Austrian Working Group on Banking and Finance

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Do Foreign Banks Raise the Risk of Foreign Currency Lending in CEE?

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  1. Do Foreign Banks Raise the Risk of Foreign Currency Lending in CEE? P. Haiss, A. Paulhart, W. Rainer* Europe Institute, Vienna University of Economics and Business http://www.wu-wien.ac.at/europainstitut/forschung/nexus 23rd Workshop of the Austrian Working Group on Banking and Finance December 12-13, 2008, Vienna * ... The opinions expressed are the authors‘ personal views

  2. MONETARY INTEGRATION, GROWTH AND COUNTRY RISK - Nexus Team Manager: Peter Haiss Current and previous team members: Johannes Bolzano, David Blum, Timea Edelenyi, Markus Eller, Klaus Federmair, BettinaHagmayr, Sirma Hristoforova, Dagmar Inzinger, Magdalena Kamecka, Elisabeth Kichler, Herwig Kirchner, Bernhard Mahlberg, H.C. Mantler, Marie-Therese Marek, Stefan Marin, Sindhu Olimalayil, Nikolai Pantel, Ina Paripovic, Andreas Paulhart, Andreas Pichler, Wolfgang Rainer, Petra Roessl, Bernhard Sammer, MilenaStaeva, Katharina Steiner, Kjell Suemegi, Ulrike Moser, Mina von Varendorff, Nastja Vogl, Goran Vukšić, Jennifer Weidinger, Andrea Ziegler NEXUS WebPage: http://www.wu-wien.ac.at/europainstitut/forschung/nexus Haiss, P., Paulhart, A., Rainer, W.

  3. Agenda • Trends in Fx-lending & FSFDI • Motivation for the Paper • Method and Data • Selected Results • References FX = foreign currency; FSFDI = financial sector foreign direct investment Haiss, P., Paulhart, A., Rainer, W.

  4. Development of FSFDI • Asset share of foreign banks (over 50% foreign ownership) • Source: Own calculations, data from RZB Group 2004, 2005, 2006, 2007, 2008 Haiss, P., Paulhart, A., Rainer, W.

  5. Development of Foreign Currency Lending • Foreign currency loans as % of total loans • Source: Own calculations, data from RZB Group 2004, 2005, 2006, 2007, 2008 Haiss, P., Paulhart, A., Rainer, W.

  6. Motivation I - Case of Hungary High indebtedness Reliance on external funding Fx-borrowing in Hungary: 2008: almost 90% of loans to private sector in foreign currency Over 50% of total credits to households denominated in fx In the wake of financial crisis: Forint came under pressure  surging repayment obligations Downgrading of Hungary‘s creditworthiness IMF, EU & World Bank: €21 billion rescue package Banks imposed restrictions on fx-lending or suspended it right away Exposure to tightened financial markets Haiss, P., Paulhart, A., Rainer, W.

  7. Motivation II: European Commission (2004): Cross-ownership in the banking sector might contribute to high levels of fx-lending in the new member states Farnoux/ Lanteri/ Schmidt (2004, 21): Poland: foreign banks tend to issue fx-loans more often than domestic institutions • High share of FSFDI in Central & South-Eastern Europe • Growing level of foreign currency lending in many CEE countries Credit to the private sector in % of GDP FX National currency Source: Rosenberg & Tirpak (2008) Haiss, P., Paulhart, A., Rainer, W. 7

  8. Motivation III • Sorsa, Backer, Duenwald, Maechler & Tiffin (2007):“The drive of (foreign) banks to complement limited earnings oppor-tunities at home with high profits from emerging Europe may have led to risk under-pricing …... this under-pricing may be compounded by limited data on creditworthiness and weak institutions” • Luca and Petrova (2007) and Basso, Calvo-Gonzalez and Jurgilas (2007): Foreign banks want currency-matched portfolios  may prefer fx-lending • OeNB (2007, 43) and IMF (Tieman, 2007; IMF, 2008): Austrian banks may foster fx-lending in CEE because of their experience with fx-loan issues at home Haiss, P., Paulhart, A., Rainer, W.

  9. Conceptual Framework Haiss, P., Paulhart, A., Rainer, W.

  10. Method & Data I Method • Linear regression model • Level of fx-credit as dependent variable, diverse explanatory variables • ANOVA  check influence of qualitative features Data • Data on 16 transition countries for the period 1999-2006 • RZB Group 2004, 2005, 2006, 2007 • Erste 2008 • EBRD Banking Data Haiss, P., Paulhart, A., Rainer, W.

  11. Method & Data II • General regression model • Introduction 20% threshold on asset share of foreign banks • Waschiczek (2002): herding behavior contributes topopularity of fx-loans in Austria • Tzanninis (2005): herding and spreading through word of mouth Haiss, P., Paulhart, A., Rainer, W.

  12. Overview Results Significant & negative (95%) ~not significant Significant & positive (95%) Haiss, P., Paulhart, A., Rainer, W.

  13. Results I – Asset Share of Foreign Banks • Relationship not significant • With 20% threshold: increased significance • Negative relationship for “PEG” countries Haiss, P., Paulhart, A., Rainer, W.

  14. Results II – Fx-Deposits • Positive relationship between fx-deposits and fx-lending • FLOAT countries: strongest relationship confirming the theory that banks seek to limit theirexposure to currency fluctuations Haiss, P., Paulhart, A., Rainer, W.

  15. Results III – Fx-Deposits • Adjusted R²= 0.466 • Beta = 0.691 • Significance = 0.000 Haiss, P., Paulhart, A., Rainer, W.

  16. Results IV – Export Orientation • Contrary to theory significant negative relationship • FLOAT and PEG: significant negative relationship • ERM II: insignificant • However, no distinction between household and corporate fx-lending! Haiss, P., Paulhart, A., Rainer, W.

  17. Results V – Market Concentration • Significant positive relationship confirming the theory that fx-lending is a function of the size of banks • FLOAT & ERM II: significant positive relationship • PEG: significant negative relationship Haiss, P., Paulhart, A., Rainer, W.

  18. Results VI – Real Exchange Rate Change • General model: significant negative relationship • FLOAT & ERM II: significant negative relationship • PEG : insignificant Haiss, P., Paulhart, A., Rainer, W.

  19. Distinguishing household from corporate fx-borrowing Apply multivariate approach (panel regressions) instead of bivariate regressions Add new variables:workers‘ remittances, GDP, dummy for bank crisis Introduction of dynamics (time lags) Investigate impact of mode of market entry & possible herd behavior Next Steps… Haiss, P., Paulhart, A., Rainer, W.

  20. References I Arteta, Carlos Óscar (2002), Exchange Rate Regimes and Financial Dollarization: Does Flexibility Reduce Bank Currency Mismatches?, CIDER Working Paper No. C02-123. Backé, Peter, Ritzberger-Grünwald, Doris, and Stix, Helmut (2007), The Euro on the Road East, Monetary Policy and the Economy Q1/07, 114-127, OeNB. Basso, Henrique, Calvo-Gonzalez, Oscar and Jugilas, Marius (2007), Financial Dollarization: The Role of Banks and Interest Rates, ECB Working Paper No. 748, May 2007, http://www.ecb.eu/pub/pdf/scpwps/ecbwp748.pdf (6.4.2008). Boissay, Frederic, Calvo-Gonzalez, Oscar and Kozluk, Tomasz (2006), Is Lending in Central and Eastern Europe developing too fast? Preliminary draft, paper presented on the Conference on European Economic Integration, 14-15th November 2005, Vienna, http://www.eu-financial-system.org/fileadmin/content/Dokumente_Events/second_conference/Boissay_Calvo-Gonzales_Kozluk.pdf (9.4.2008). Bokor, László and Pellényi, Gábor (2005), Foreign Currency Denominated Borrowing in Central Europe: Trends, Factors and Consequences, ICEG EC Opinion Nr. 5, February 205, International Center for Econmic Growth – European Center Breuss, Fritz, Fink, Gerhard, and Haiss, Peter (2004), How well prepared are the New Member States for the European Monetary Union? Journal of Policy Modeling 26, 769-791 Catao, L, and Terrones, M. (2000), Determinants of Dollarization: The Banking Side, IMF Working Papers WP/00/146, http://www.imf.org/external/pubs/ft/wp/2000/wp00146.pdf (8.4.2008). Delgado, F. L., Kanda, D. S., Casselle, G. M. and R.A. Morales (2002), Domestic Lending In Foreign Currency in Building Strong Banks through Surveillance and Resolution, Enoch, C., Marston, D. and M. Taylor (eds.), International Monetary Fund, Washington D.C., 40-61. Haiss, P., Paulhart, A., Rainer, W.

  21. References II EBRD (2005), Transition Report 2005, European Bank for Reconstruction and Development, London. ECB (2005b), Lending Booms in the New EU Member States: Will Euro Adoption matter? ECB Working Paper No. 543, http://www.ecb.int/pub/pdf/scpwps/ecbwp543.pdf (9.4.2008). ECB (2006a), Macroeconomic and Financial Stability Challenges for Acceding and Candidate Countries, ECB Occasional Paper series, No. 48, http://www.ecb.int/pub/pdf/scpops/ecbocp48.pdf (9.4.2008). ECB (2006b), EU Banking Sector Stability, November 2006, www.ecb.int/pub/pdf/other/eubankingsectorstability2006en.pdf (9.4.2008). EIU Economist Intelligence Unit (2008) EIU Country Data, https://eiu.bvdep.com/version-2008226/cgi/template.dll?product=101 (1.3.2008). Eller, Markus, Haiss, Peter, and Steiner, Katharina (2006), Foreign direct investment in the financial sector and economic growth in Central and Eastern Europe: The crucial role of the efficiency channel, Emerging Markets Review 7, 300-319. Égert, Balázs (2007), Central Bank Interventions, Communication and Interest Rate Policy in Emerging European Economies, OeNB Working Paper Nr. 134, http://www.oenb.at/de/img/wp134_tcm14-51029.pdf (6.4.2008). Erste Bank (2008), SEE Banks Boom or bust? CEE Equity Research Sector Report, February 19, 2008. European Commission (2004), Financial Market Integration and the Use of the Euro in the New Member States, Quarterly Note on the Euro-Denominated Bond Markets, No. 75, September 2004, http://ec.europa.eu/economy_finance/publications/bond_markets/2004/bondq0304_en.pdf (7.12.2007). Farnoux, Marc, Lanteri, Marc, and Schmidt, Jerome (2004), Foreign direct investment in the polish financial sector, Case study prepared for the CGFS Working Group on Financial Sector FDI, http://www.bis.org/publ/cgfs22bdf.pdf (9.4.2008). Haiss, P., Paulhart, A., Rainer, W.

  22. References III Fink, Gerhard, Haiss, Peter, and von Varendorff, Mina (2007), Serbia´s Banking Sector Reform: Implications for Economic Growth and Financial Development, Southeastern European and Black Sea Studies 7(4), 609-636. Got, Xavier and Ross, Alise (2006), The Foreign Currency Gamble – Rising Risks For Banks In Central And Southeast Europe, Standard & Poor’s Ratingsdirect, Aug. 23, 2006. Guidotti, P. and C. Rodriguez (1992), Dollarization in Latin America: Gresham’s Law in Reverse?, International Monetary Fund Staff Papers, 39(3), 518-544. Herzberg, Valerie and Watson, Max (2007), Growth, risks and governance: The role of the financial sector in southeastern Europe, European Economy Occasional Paper No. 29, April 2007, European Commission Directorate-General for Economic and Financial Affairs, Brussels. IMF (2006) De Facto Classification of Exchange Rate Regimes and Monetary Policy Framework. http://www.imf.org/external/np/mfd/er/2006/eng/0706.htm (9.4.2008). IMF (2008), Austria-2008 Article IV Consultation, Preliminary Conclusions of the Mission, March 17, 2008, http://www.imf.org/external/np/ms/2008031708.htm (18.3.2008). Ize, A. and E. Parrado (2002) Dollarization, Monetary Policy and the Pass-Through, IMF Working Paper, No.188. Karmin, Craig and Perry, Jiellen (2007), Homeowners Abroad Take Currency Gamble in Loans, The Wall Street Journal, May 29, 2007 Levy Yeyati, Eduardo (2006), Financial dollarization: evaluating the consequences, Economic Policy, Jan. 2006, 61-118. Luca, Alina and Petrova, Iva (2007), What drives credit dollarization in transition economies?, Journal of Banking and Finance, doi: 10.1016/j.jbankfin.2007.06.003. Haiss, P., Paulhart, A., Rainer, W.

  23. References IV Tieman, Alexander (2007), Cross-Border Banking Issues for the Austrian Banks and Their Supervisors, in IMF (ed.): Austria: Selected Issues, IMF Country Report No. 07/143, April 2007, 30-43. Martens, Jul (2003), Statistische Datenanalyse mit SPSS für Windows, 2. Auflage, München und Wien, Oldenbourg. OeNB (2007), Austrian Financial Intermediaries Benefit from the Benign Economic Climate, Financial Stability Report 13, 37-65, http://www.oenb.at/en/img/fsr_13_tcm16-57616.pdf (9.4.2008). Rosenberg, Christoph and Tirpak, Marcel (2008): Determinants of Foreign Currency Borrowing in the New Member States of the EU, IMF Working Paper No. 08/173, http://www.imf.org RZB Group (2004, 2005, 2006, 2007), CEE Banking Sector Report, Raiffeisen Research, October of the respective years Sorsa, P., Bakker, B., Duenwald, C., Maechler, A. and Tiffin, A. (2007): Vulnerabilities in Emerging Southeastern Europe – How Much Cause for Concern? IMF Working Paper No. 07/236 Tzanninis, Dimitri (2005), What Explains the Surge of Foreign Currency Loans to Austrian Households? In Epstein, Natan and Tzanninis, Dimitri (eds).: Austria: Selected Issues, IMF Country Report No. 05/249: 3-37, http://www.imf.org/external/pubs/ft/scr/2005/cr05249.pdf (6.4.2008). Uzun, Arzu (2005), Financial Dollarization, Monetary Policy Stance and Institutional Structure: The Experience of Latin America and Turkey, Thesis submitted to the Graduate School of Social Sciences of Middle East Technical University, http://etd.lib.metu.edu.tr/upload/12606739/index.pdf (5.4.2008). Waschiczek, Walter (2002), Foreign Currency Loans in Austria - Efficiency and Risk Considerations, in: OeNB, Financial Stability Report 4, Wien, 83-99, http://www.oenb.at/en/img/fsr_04_tcm16-8061.pdf (9.4.2008). Wieser, Thomas (2008): An Austrian perspective”, presented a the EBRD 2008 Conference on the liquidity crisis in CEE, Dec. 4 2008,  http://www.ebrd.com/country/sector/fi/conference/present.htm World Bank (2007), World Bank EU 8+2 Regular Economic Report, Part II: Special Topic January 2007, http://siteresources.worldbank.org/INTECA/Resources/EU8+2_SpecialTopic.pdf (30.3.2008). Haiss, P., Paulhart, A., Rainer, W.

  24. Contact Peter Haiss Vienna University of Economics and Business Administration peter.haiss@wu-wien.ac.at Andreas Paulhart Vienna University of Economics and Business Administration andreas.paulhart@cemsmail.org Wolfgang Rainer Vienna University of Economics and Business Administration wolfgang-rainer@gmx.at For more of our research, see: http://www.wu-wien.ac.at/europainstitut/forschung/nexus Haiss, P., Paulhart, A., Rainer, W.

  25. Back-up

  26. FX-loan-levels in CEE - much higher than in other emerging markets Source: Rosenberg & Tirpak (2008)

  27. Regulatory measures - to slow down FX borrowing Source: Rosenberg & Tirpak (2008)

  28. Results – Asset Share of Austrian Banks • No significant relationship in the general model • FLOAT countries: significant positive relationship • PEG and ERM II: significant negative relationship Haiss, P., Paulhart, A., Rainer, W.

  29. Results – Interest Rate Differential • No significant relationship in the general model • PEG: significant positive relationship • ERM II: significant negative relationship Haiss, P., Paulhart, A., Rainer, W.

  30. Results – Inflation Differential • General model: not significant • PEG: significant positive relationship • ERM II significant negative relationship Haiss, P., Paulhart, A., Rainer, W.

  31. Results – Exchange Rate Regime • Error bar showing the means of fx-loans for FLOAT, PEG and ERM II countries • FLOAT 39.9% • PEG 35.0% • ERM II 44.9% Haiss, P., Paulhart, A., Rainer, W.

  32. Results – Market Concentration II • Adjusted R²= 0.171 • Beta = 0.422 • Significance = 0.000 Haiss, P., Paulhart, A., Rainer, W.

  33. Financial Globalization- impact is subject to thresholds Kose, M., Prasad, E., Rogoff, K. & Wei, SJ (2007): Financial Globalization: Beyond the Blame Game, Finance & Development 44(1), http://www.imf.org/external/pubs/ft/fandd/2007/03/kose.htm

  34. High Inflow of FSFDI to CEE-10 % of GDP CEE-10: BG, HR, CZ, EE, HU, LV, LT, PL, Sl, SK Source: Eller, Haiss and Steiner 2007

  35. Foreign banks dominate CEE-NMS Source: RZB (2008): CEE Banking Sector Report, Sept. 2008

  36. Austrian bank´s exposure to CEE • Austrian banks are significant players in CESEE countries • Market share about 22% (without RF) • Austrian exposure in CESEE: • 1/3 of overall Austrian exposure • 2/3 of GDP (BIZ-data without BA, HGAA => about 100% of GDP if these banks are included!) • SESEE segment is highly profitable for major Austrian banks Source: Wieser, Thomas (2008): An Austrian perspective”, presented a the EBRD 2008 Conference on the liquidity crisis in CEE, Dec. 4 2008,  http://www.ebrd.com/country/sector/fi/conference/present.htm

  37. Some foreign banks might not be able to fund growth as much as they did in the past Source: Revoltella, Debora (2008): Overview of banking sector funding under the current liquidity crisis, paper presented a the EBRD 2008 Conference on the liquidity crisis in CEE, Dec. 4 2008,http://www.ebrd.com/country/sector/fi/conference/present.htm

  38. Foreign Currency loans as CEE-specific risk However: HU, BG, RO, HR (less: PL) have high FX-loans Massive transfer of liquidity by foreign banks to support CEE units „cut and run“ is no option for foreign banks their business model is committed to the region Unlike Western European peers, CEE banks are not involved in sub-prime related investments and much smaller relative to GDP  no asset write-offs, no emergency capital increases Source: Wieser, Thomas (2008): An Austrian perspective”, presented a the EBRD 2008 Conference on the liquidity crisis in CEE, Dec. 4 2008,http://www.ebrd.com/country/sector/fi/conference/present.htm

  39. X-border exposures by foreign banks (SE, AT, IT, DE, FR) create new channels of contagion Source: Rosenberg, Christoph (2008): Foreign Currency Borrowing More Risky for Eastern Europe, IMF Survey Oct. 28, 2008, http://www.imf.org/external/pubs/ft/survey/so/2008/car102808a.htm

  40. References Eller, Markus / Haiss, Peter / Steiner, Katharina (2007): Auslandsdirektinvestitionen im Finanzsektor Osteuropas – Treiber für Wirtschaftswachstum, Effizienz und Unternehmensentwicklung? In Moser, Reinhard (ed.): Ausländische Direktinvestitionen, Gabler, Wiesbaden: 213-236 Kose, M., Prasad, E., Rogoff, K. & Wei, SJ (2007): Financial Globalization: Beyond the Blame Game, Finance & Development 44(1), http://www.imf.org/external/pubs/ft/fandd/2007/03/kose.htm Revoltella, Debora (2008): Overview of banking sector funding under the current liquidity crisis, paper presented a the EBRD 2008 Conference on the liquidity crisis in CEE, Dec. 4 2008,http://www.ebrd.com/country/sector/fi/conference/present.htm Rosenberg, Christoph (2008): Foreign Currency Borrowing More Risky for Eastern Europe, IMF Survey Oct. 28, 2008, http://www.imf.org/external/pubs/ft/survey/so/2008/car102808a.htm RZB (2008): CEE Banking Sector Report, Sept. 2008 Wieser, Thomas (2008): An Austrian perspective”, presented a the EBRD 2008 Conference on the liquidity crisis in CEE, Dec. 4 2008,http://www.ebrd.com/country/sector/fi/conference/present.htm

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