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The impact of funding models and foreign bank ownership on bank credit growth : is Central and Eastern Europe different ?

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  • Feyen, Erik
  • Letelier, Raquel
  • Love, Inessa
  • Maimbo, Samuel Munzele
  • Rocha, Roberto

Abstract

This paper provides new evidence on the factors affecting protracted credit contraction in the wake of the global financial crisis. The paper applies panel vector autoregressions to a global panel that consists of quarterly data for 41 countries for the period 2000-2011 and documents that domestic private credit growth is highly sensitive to cross-border funding shocks around the world. This relationship is significantly stronger in Central and Eastern Europe, a region with considerably stronger foreign presence, higher cross-border funding, and elevated loan-to-deposit ratios compared with the rest of the world. The paper shows that high foreign ownership per se does not appear to explain credit response differences to foreign funding shocks. Rather, there is a stronger response in countries that exhibit high loan-to-deposit ratios and a high reliance on foreign funding relative to local deposits. The results suggest that funding model differences were at the heart of the post-crisis credit contraction in several Central and Eastern European countries. These findings have important regulatory and supervisory implications for emerging countries in Central and Eastern Europe as well as for other countries.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 6783.

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Date of creation: 01 Feb 2014
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Handle: RePEc:wbk:wbrwps:6783

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Keywords: Bankruptcy and Resolution of Financial Distress; Access to Finance; Banks&Banking Reform; Economic Theory&Research; Deposit Insurance;

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  1. Ralph de Haas & Neeltje van Horen, 2011. "Running for the Exit: International Banks and Crisis Transmission," DNB Working Papers 279, Netherlands Central Bank, Research Department.
  2. Claessens, Stijn & Van Horen, Neeltje, 2013. "Impact of Foreign Banks," Journal of Financial Perspectives, EY Global FS Institute, vol. 1(1), pages 29-42.
  3. Brown, M. & Ongena, S. & Popov, A. & Yesin, P., 2010. "Who Needs Credit and Who Gets Credit in Eastern Europe?," Discussion Paper 2010-50, Tilburg University, Center for Economic Research.
  4. Stijn Claessens & Neeltje Horen, 2014. "Foreign Banks: Trends and Impact," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 46(s1), pages 295-326, 02.
  5. Schoenmaker, Dirk, 2013. "Governance of International Banking: The Financial Trilemma," OUP Catalogue, Oxford University Press, number 9780199971596, Octomber.
  6. Frederic Mishkin, 2005. "Is Financial Globalization Beneficial?," NBER Working Papers 11891, National Bureau of Economic Research, Inc.
  7. Gregorio Impavido & Heinz Rudolph & Luigi Ruggerone, 2013. "Bank Funding in Central, Eastern and South Eastern Europe Post Lehman," IMF Working Papers 13/148, International Monetary Fund.
  8. Jonathan Fiechter & Inci Ötker & Anna Ilyina & Michael Hsu & Andre Santos & Jay Surti, 2011. "Subsidiaries or Branches," IMF Staff Discussion Notes 11/04, International Monetary Fund.
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