Haverford College Haverford Scholarship Faculty Publications Economics 2015 Reinvigorating Credit Growth in Central, Eastern, and Southern European Economies Bosjan Jazbec Cristopher Towe Marco Pinon Biswajit Banerjee Haverford College Follow this and additional works at: https://scholarship.haverford.edu/economics_facpubs Repository Citation Bostjan Jazbec, Christopher M. Towe, Marco Pinon, and Biswajit Banerjee, Eds. Reinvigorating Credit Growth in Central, Eastern, and Southern European Economies: Proceedings of a Conference Jointly Organized by the Bank of Slovenia and the International Monetary Fund. Washington, D.C.: International Monetary Fund, Publication Services, 2015. This Conference Proceeding is brought to you for free and open access by the Economics at Haverford Scholarship. It has been accepted for inclusion in Faculty Publications by an authorized administrator of Haverford Scholarship. For more information, please contact [email protected]. In Central, Eastern, and Southern European Economies In Central,Eastern,andSouthernEuropean Reinvigorating CreditGrowth REINVIGORATING CREDIT GROWTH In Central, Eastern, and Southern European Economies Edited by Boštjan Jazbec, Christopher M. Towe, Marco Piñón, and Biswajit Banerjee Marco Piñón, and Biswajit Banerjee Marco Piñón,andBiswajit ChristopherM.Towe, Edited byBoštjanJazbec, Reinvigorating Credit Growth Proceedings of a conference jointly organized In Central, Eastern, and Southern European Economies RCGMCMEA by the Bank of Slovenia and the International Monetary Fund Reinvigorating Credit Growth In Central, Eastern, and Southern European Economies Edited by Boštjan Jazbec, Christopher M. Towe, Marco Piñón, and Biswajit Banerjee Proceedings of a conference jointly organized by the Bank of Slovenia and the International Monetary Fund © 2015 International Monetary Fund and Bank of Slovenia Cover design: Catherine Cho, IMF Multimedia Creative Services Disclaimer: The views expressed in this book are those of the authors and do not necessarily represent the views of either the Bank of Slovenia or the International Monetary Fund (IMF), its Executive Board, or IMF management. Cataloging-in-Publication (CIP) Data National and University Library in Ljubljana 336.77(4)(082) REINVIGORATING credit growth: in Central, Eastern, and Southern European economies: proceedings of a conference jointly organized by the Bank of Slovenia and the International Monetary Fund / edited by Boštjan Jazbec, Christopher Towe, Marco Piñón, and Biswajit Banerjee. – Washington, D.C.: International Monetary Fund, Publication Services; Ljubljana: Bank of Slovenia, 2015. Available on: http://www.imfbookstore.org/ ISBN 978-961-6960-04-5 (Banka Slovenije) 1. Jazbec, Boštjan . 278986496 1. Credit growth —. 2. CESEE economies —. 3. Boštjan Jazbec —. 3. Christopher Towe —. 4. Marco Piñón —. 5. Biswajit Banerjee —. 2 ACKNOWLEDGEMENTS We would like to thank the following people for their role in organizing the conference and helping in the preparation of the book: Ksenija Berdnik, Polona Flerin, Vanja Kobe, Eva Ribič, and Vida Šeme-Hočevar (all Bank of Slovenia); as well as Pavel Lukyantsau, Jessica Allison, Christie Chea, Sabine Tuzik, and Melissa Wills-Dudich (all IMF staff). We also thank Charles Enoch (IMF), who was involved in the early stages of the organization of the conference. 3 TABLE OF CONTENTS ACKNOWLEDGEMENTS ___________________________________ 2 FOREWORD______________________________________________ 10 I. EXECUTIVE SUMMARY _________________________________ 11 II. OPENING REMARKS ___________________________________ 19 A. Boštjan Jazbec, Governor, Bank of Slovenia ________________ 19 B. Christopher Towe, Deputy Director, Monetary and Capital Markets Department, IMF ______________________________ 23 III. WHAT IS DRIVING CREDIT DEVELOPMENTS? CAN SOMETHING BE DONE?___________________________________ 26 A. Lead: Marco Piñón, Advisor, Monetary and Capital Markets Department, IMF _____________________________________ 26 Figure 1. Real Bank Credit Growth, by Region ________ 28 Figure 2. Average Credit Growth, by Region __________ 29 Figure 3. Approaches to Identify Credit Constraints ____ 30 Figure 4. Bank-Level Panel Analysis ________________ 30 Figure 5. Credit Growth Decomposition, 2001–2007 ___ 33 Figure 6. EMBI Spread Europe ____________________ 35 Figure 7. Nonperforming Loan Ratio, by Region _______ 35 Figure 8. Factors Constraining Credit Supply _________ 37 Figure 9. Outlook of Credit Supply and Demand Conditions ___________________________________ 37 Figure 10. Taking Stock of Credit Policies Implemented _ 38 Figure 11. Policies Enhancing Credit Supply _________ 39 Figure 12. Policies Supporting Credit Demand ________ 39 Figure 13. Credit Demand Policies Implemented Since 2007 ___________________________________ 40 Figure 14. Credit Supply Policies Implemented Since 2007 ___________________________________ 41 Figure 15. Policy Considerations ___________________ 42 Figure 16. Findings _____________________________ 43 Figure 17. Further Findings _______________________ 44 IV. PANEL 1: REPAIRING BALANCE SHEETS AND OTHER CHALLENGES ____________________________________________ 45 A. Summary ___________________________________________ 45 B. Presentations by Members of the Panel ____________________ 46 Lead: Jan Švejnar, Columbia University and Vilem Semerak (CERGE EI) _____________________________________ 46 Figure 1. Bank Nonperforming Loans _______________ 48 4 Figure 2. External Disequilibria of CESEE Countries, Current Account Balances, and Balances of Goods and Services __________________________________ 49 Figure 3. Fiscal Disequilibrium, Cash Surplus/Deficit in 2012 ______________________________________ 49 Figure 4. Change in the Share of NPLs, 2007–12 ______ 52 Figure 5. Change in the Share of NPLs, 2012–13 ______ 52 Panelist 1: Josef Bonnici, Governor, Central Bank of Malta __ 53 Panelist 2: Boris Vujčić, Governor, Croatian National Bank __ 56 Figure 1. Corporate and Household Indebtedness ______ 57 Figure 2. Household Indebtedness in the EU __________ 60 Figure 3. Observed and Modeled Level of Indebtedness for Croatia ___________________________________ 61 Figure 4. Return on Equity (ROE) and Return on Assets (ROA) for the Corporate Sector __________________ 62 Figure 5. EBITDA over Interest on Financial Debt and EBT over EBIT ________________________________ 63 Figure 6. Capital-to-Asset Ratio/Return on Assets ______ 64 Figure 7. Structure of Banks’ Clients in Pre-Bankruptcy Settlements ___________________________________ 65 Figure 8. Progress in Pre-Bankruptcy Settlements—All Companies vs. Bank Clients _____________________ 66 Figure 9. Nonperforming Loans Ratio _______________ 68 Panelist 3: José Ramalho, Vice Governor, Banco de Portugal _ 70 Panelist 4: Stanislava Zadravec Caprirolo, Vice Governor, Bank of Slovenia _________________________________ 74 C. Discussions __________________________________________ 78 V. PANEL 2: PROSPECTS FOR CREDIT GROWTH AND FOR FOREIGN BANK ENGAGEMENT IN THE REGION ___________ 82 A. Summary ___________________________________________ 82 B. Presentations by Members of the Panel ____________________ 85 Lead: Christopher Towe, Deputy Director, Monetary and Capital Markets Department, IMF ____________________ 85 Panelist 1: Boštjan Jazbec, Governor, Bank of Slovenia _____ 95 Panelist 2: Ewald Nowotny, Governor, OeNB _____________ 96 Panelist 3: Jan Tóth, Deputy Governor, National Bank of Slovakia _______________________________________ 100 Figure 1. Differences in Behavior of Domestic and Foreign Banks _______________________________ 105 Figure 2. Prevailing Foreign Ownership ____________ 106 Figure 3. Dominant Role of Clients’ Deposits ________ 107 Figure 4. Overall Loan to Deposit _________________ 107 Figure 5. International Comparisons of Returns ______ 108 Figure 6. International Comparisons of the Tier 1 Capital Ratios _______________________________ 109 Figure 7. International Comparisons of Returns ______ 109 5 Panelist 4: Andrzej Raczko, Member of the Management Board, National Bank of Poland ____________________ 110 Figure 1. Ownership Structure in Terms of: Assets, Loans, and Equity ____________________________ 112 Figure 2. External Positions of BIS-Reporting Banks vis-à-vis All Sectors, 2013:Q1–2014:Q1 ___________ 114 Figure 3. Selected Profitability and Capital Ratios, as of H1 2014 ________________________________ 114 Figure 4. Balance Sheet Structure of Domestic- and Foreign-Owned Banks _________________________ 116 Figure 5. NPL Ratios of Domestic- and Foreign-Owned Banks for Different Client Groups ________________ 117 Figure 6. Cumulated Changes in Credit Standards ____ 117 Panelist 5: László Baranyay, Vice President, EIB _________ 120 C. Discussions _________________________________________ 123 VI. PANEL 3: MEASURES TO REVIVE CREDIT MARKETS: BEST PRACTICES AND PITFALLS ________________________ 127 A. Summary __________________________________________ 127 B. Presentations by Members of the Panel ___________________ 130 Lead: Fabrizio Coricelli, Paris School of Economics and CEPR _________________________________________ 130 Table 1: Creditless Recoveries ____________________ 130 Figure 1. Patterns of Post-Recession GDP Dynamics __ 132 How to revive credit to the economy in Europe ___________ 133 Figure 2. GDP Dynamics Post Crisis—United States vs. Eurozone _________________________________ 134 Figure 3. Debt Levels in the Eurozone ______________ 134 Panelist 1: Erdem Başçi Governor, Central Bank of the Republic of Turkey ______________________________