The Priorities of Deleveraging in the Euro Area and Austria and Its Implications for CESEE
Financial Stability Report 27, Oesterreichische Nationalbank, 2014
14 Pages Posted: 18 Nov 2015
Date Written: June 1, 2014
Bank deleveraging is often used synonymously for a reduction in the supply of credit to the real economy which hampers economic growth. We investigate this hypothesis empirically. We define deleveraging as the increasing ratio of capital to total assets. This paper aims at identifying the priorities of deleveraging in the euro area and Austria and its implications for Central, Eastern and Southeastern Europe (CESEE). The data analysis utilizes ECB balance sheet data for monetary financial institutions (MFIs) for the euro area and Austria; reporting data of Austrian banks at the consolidated level and BIS locational statistics are employed to study the impact of deleveraging on credit to the real economy in CESEE. We focus on the postcrisis period from October 2008 to February 2014 (latest available data). In addition, we study the developments in the precrisis period from June 2003 to October 2008.
The data reveal that banks in the euro area and Austria did in fact deleverage. In the postcrisis period, the priorities of deleveraging are similar in the euro area and in Austria. The process was predominantly driven by the numerator (capital), which contributed 88% to deleveraging in the euro area and 73% in Austria.
The denominator of leverage (total assets) contributed the remaining shares. In both samples, the decrease in total assets was driven by reductions in interbank lending and external assets. Funding for the real economy increased in the euro area and in Austria.
As external asset reductions play a major role in deleveraging in both the euro area and Austria, we analyze the relevant developments in CESEE in detail. The priorities of Austrian banks’ deleveraging in CESEE are similar to that of banks in the euro area and Austria: They were driven by capital increases (99%). The small reduction of total assets in the sample was due to reductions of interbank lending, cash and central bank reserves; funding for households and nonfinancial corporations slightly increased. Similar to developments in the euro area and in Austria, banks’ sovereign exposure in CESEE increased, too. However, at the disaggregate level, Austrian banks reduced their activities in some countries during the past five years. But these reductions did not translate into decreasing funding for households and nonfinancial corporations.
We conclude that overall, the priorities of deleveraging of euro area and Austrian banks as well as their subsidiaries in CESEE since October 2008 are positive from a macroprudential perspective.
Keywords: deleveraging, excessive deleveraging, balance sheet growth, economic growth
JEL Classification: G21, F36
Suggested Citation: Suggested Citation