The Impact of Funding Models and Foreign Bank Ownership on Bank Credit Growth: Is Central and Eastern Europe Different?

59 Pages Posted: 20 Apr 2016

See all articles by Erik Feyen

Erik Feyen

World Bank - Finance & Markets Global Practice; Ahead Analytics Inc

Raquel Letelier

World Bank

Inessa Love

World Bank - Development Economics Data Group (DECDG)

Samuel Munzele Maimbo

WORLD BANK GROUP; University of Manchester

Roberto de Rezende Rocha

World Bank - Middle East & North Africa Region; National Bureau of Economic Research (NBER)

Date Written: February 1, 2014

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.

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

Suggested Citation

Feyen, Erik H. B. and Letelier, Raquel and Love, Inessa and Maimbo, Samuel Munzele and Rocha, Roberto de Rezende, The Impact of Funding Models and Foreign Bank Ownership on Bank Credit Growth: Is Central and Eastern Europe Different? (February 1, 2014). World Bank Policy Research Working Paper No. 6783. Available at SSRN: https://ssrn.com/abstract=2398153

Erik H. B. Feyen (Contact Author)

World Bank - Finance & Markets Global Practice ( email )

1818 H Street, N.W.
Washington, DC 20433
United States
+1 (202) 458 2038 (Phone)
+1 (202) 522 3184 (Fax)

Ahead Analytics Inc ( email )

Washington, DC
United States

HOME PAGE: http://www.aheadanalytics.com

Raquel Letelier

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Inessa Love

World Bank - Development Economics Data Group (DECDG) ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

HOME PAGE: http://econ.worldbank.org/staff/ilove

Samuel Munzele Maimbo

WORLD BANK GROUP ( email )

1818 H Street
Washington, DC D.C 20433
United States

University of Manchester ( email )

Manchester
Manchester
United Kingdom

Roberto de Rezende Rocha

World Bank - Middle East & North Africa Region ( email )

1818 H Street N.W
Washington, DC 20433
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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