Growth of bank credit in central and eastern Europe: housing by 7Vl7vc

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									Growth of bank credit in central and eastern Europe:
housing markets and the role of foreign-owned banks


 Dubravko Mihaljek
 Senior Economist
 Bank for International Settlements

 Presentation at the 12th Dubrovnik Economic Conference


 Dubrovnik, 29-30 June 2006

 The views expressed are those of the author and not necessarily those of the BIS.



                                                                               1
Outline


1. Common trends in credit growth
2. Housing markets
3. Foreign-owned banks
4. Policy challenges




                                    2
Rapid growth of bank credit to the private sector

                                       Bank credit to the private sector, 2002-05
700                                                                                                                     50

600                   38         38       40
           38              35                                                                                           40
                                               34
500              33
                                                                                                                        30
400                                                               20
                                                     17     17
                                                                                15                                      20
                                                                         13           14
300
                                                                                                    6      6            10
200                                                                                          3                   4


100                                                                                                                     0


  0                                                                                                                     -10
      SCG ROM LAT          BUL   ALB     LIT   EST TUR HUN BIH          SVN HRV MAK         SKA CZE POL EUR
          Nominal growth (cumulative, in percent) (lhs)          Real growth (% per year, compound rate) (rhs)
Note: ALB=Albania, BIH=Bosnia-Herzegovina, BUL=Bulgaria, CZE=Czech Republic; EST=Estonia, EUR=Euro area; HRV=Croatia,
HUN=Hungary, LAT=Latvia, LIT=Lithuania, MAK=Macedonia, POL=Poland, ROM=Romania, SCG=Serbia-Montenegro, SVK=Slovakia,
SVN=Slovenia, TUR=Turkey.
Sources: IMF, International Financial Statistics; national data; author's estimates.

                                                                                                                        3
Determinants of rapid credit growth in CEE

 GDP and income growth, greater macro stability
 Financial deepening
 Global and regional factors (EU accession,
  institutional reforms)
 Competition among banks
 Property markets in CEE/SEE started to develop




                                                   4
            Macroeconomic setting (1)
            5-6% growth on average since 2004
            Main contribution from domestic demand (incl. investment)



Table 1                         Real GDP growth in central and eastern Europe1
                                    2003               2004               2005               2006
Average                               4.7                6.2                5.7                5.6
 New EU members                       5.2                5.9                6.3                6.1
 Non-EU countries                     4.2                6.5                5.1                5.0
Memo: Euro area                       0.7                2.0                1.3                2.1
1
 Annual percentage changes.
Sources: European Commission, Economic Forecasts, Spring 2006; IMF, World Economic Outlook, April 2006.




                                                                                                     5
            Macroeconomic setting (2)
            Inflation declining but still relatively high on average; overall, greater
            price stability



Table 2                    Consumer price inflation in central and eastern Europe1
                                    2003               2004               2005    2006
Average                               5.0                4.9                4.7    3.8
 New EU members                       2.9                4.3                3.3    3.2
 Non-EU countries                     7.2                5.5                6.0    4.5
Memo: Euro area                       2.1                2.1                2.2    2.2
1
 Annual percentage changes.
Sources: European Commission, Economic Forecasts, Spring 2006; national data.




                                                                                         6
           Macroeconomic setting (3)
           Narrowing fiscal deficits (though still large in few countries); less
           crowding out of the private sector



Table 3                          Fiscal balances in central and eastern Europe1
                                    2003               2004               2005    2006
Average                             –3.3                –2.1               –1.5    –1.5
 New EU members                     –3.0                –2.3               –1.8    –2.5
 Non-EU countries                   –3.7                –1.9               –1.3    –0.5
Memo: Euro area                     –3.0                –2.8               –2.4    –2.4
1
 Percent of GDP.
Sources: European Commission, Economic Forecasts, Spring 2006; national data.




                                                                                          7
Determinants of credit growth: financial deepening                                                                              (1)

Although increasing, levels of financial intermediation are still low,
including in the new member states …

                                      Bank credit as a percent of GDP
 100
                            Claims on central government                 Credit to the private sector
  80


  60
                  50
  40    72
                                 47             46                                 55        31
                                      34                       45                                           28
                       26                                                     42                  26
  20                                                                                                                       26
                  25                                 14             24                       21                  13
                       10        11   11        12                                 9              10        11
         6                                                                                                        4        5
   0
       1999 2004 1999 2004 1999 2004 1999 2004 1999 2004 1999 2004 1999 2004 1999 2004

             CZ             HU             SI             LV             EE             SK             PL             LT

Sources: IMF; national data; author's estimates.
                                                                                                                                 8
Financial deepening (2)
… and even more so in south-eastern Europe (except for Croatia)

                                           Bank credit as a percent of GDP
                         Claims on central government                            Credit to the private sector
 80


 60


 40            57                                                                21
                                                                                             20                                   4           10
       37
                        46      45                 37
 20                                                                                                 27
                                                                          24     30          26                                   31          28
                                           12                 21                                           19
                                                                                                                  8
       11      10                                                                                                        10
                                            5          6                                            4             5
  0
        1999

                 2004

                        1999

                                    2004

                                           1999

                                                       2004

                                                              1999

                                                                          2004

                                                                                 1999

                                                                                             2004

                                                                                                    1999

                                                                                                           2004

                                                                                                                  1999

                                                                                                                           2004

                                                                                                                                  1999

                                                                                                                                              2004
            HR                 BH                 BG                 MK                 TR            SCG             RO                 AL

Sources: IMF; national data; author's estimates.
                                                                                                                                                     9
Global and regional factors
Rapid convergence of interest rates to euro area levels




                                                          10
Competition among banks
Narrowing of intermediation margins
                                         Representative commercial bank interest rates
                                  Lending rate               Deposit rate           Interbank lending rate

                           End -2000 1    End -2005 1   End -2000 1   End -2005 1   End -2000 1   End -2005 1
 Czech Republic                  6.9             5.6        3.2             1.1         5.4           2.2
 Hungary                        12.7             8.0        9.5             5.5        12.3           6.5
 Poland                         20.9             6.2       15.0             2.5        19.4           4.6
 Slovakia                       13.4             6.7        6.9             2.3         8.1           3.1
 Slovenia                       15.8             7.7       10.1             3.1        12.2           4.0

 Estonia                         7.1             4.8        4.2             2.1         6.1           2.6
 Latvia                         13.2             5.5        4.4             2.5         8.7           2.5
 Lithuania                      11.3             5.8        3.4             1.5         5.4           3.1

 Bulgaria                       11.6          7.1           3.1           3.0           2.7           2.1
 Croatia                        10.8         11.1           3.5           1.7           4.5           4.4
 Romania                        53.2         15.7          32.4           4.2          49.1           5.2
 Turkey                           …            …           68.2          20.5          65.0          13.9
 Average                        16.1             7.7       13.7             4.2        16.6           4.5
 Memo: Austria                   4.4             3.6        2.2             2.2         4.9           2.5
 1
     Or the latest period available.
 Sources: IMF; national data ; author’s estimates .



                                                                                                                11
Housing markets in CEE


 Housing supply limited in many regions
 Housing demand rising
   • Domestic factors (income growth, housing
     finance, demographics)
   • External demand for second homes in SEE
     (EU demographics, low interest rates)
   • Investment demand (commercial property)

 Risks of strong growth in property prices exist;
  policies to focus on the supply side
                                                     12
Development of property markets
Key contribution of housing loans to credit growth
 Table 2                         Housing loans and private sector credit growth, 2003–05
                                                              1
 Countries                Growth of private sector credit                Contribution to growth of private
                                                                                                2
                                                                                  sector credit
                                             Household                                        Household
                     Corporate                              Con-      Corporate                              Con-
                                     Total     Housing                                Total    Housing
                                                           sumer                                            sumer
 Bulgaria                 28.7       63.3      114.8        51.5          50.5        49.5       17.3       32.1
 Croatia                   8.4       16.7       23.3        13.7          22.4        62.7       24.9       37.9
 Czech Republic           11.1       32.3       39.6        23.3          10.7        89.3       69.9       19.4
 Estonia                  40.7       56.8       64.2        34.2          45.4        54.6       47.5        7.0
 Hungary                  12.3       28.5       26.1        44.2          40.8        59.2       43.9       15.8
 Latvia                   16.4       53.2       60.0        42.4          43.0        57.0       35.5        6.4
 Lithuania                27.6       67.1       68.9         3.3          59.0        41.0       40.7        0.3
 Romania                  30.8       64.8       67.8        42.9          50.7        49.3       46.1        3.2
 Serbia                   25.2       61.4         …           …           48.4        51.6         …          …
 Slovakia                  3.7       35.4       34.9        15.6          27.0        73.0       51.7       15.2
 Slovenia                 40.0      105.0         …           …           78.0        22.0         …          …
     Average              22.3       53.1        55.5       30.1          43.3        55.4       41.9       15.3
 1
  Annual growth rate of private sector credit (excluding credit to financial intermediaries), 2003–05; in percent.
                                                      2
 Data for 2005 are for the latest month available.      Percentage contribution to the annual growth rate of private
 sector credit; average for 2003–05 (for Slovakia, 2004–05). Based on monthly data.
 Sources: Central banks; author’s estimates.



                                                                                                                       13
Is rapid increase in property prices a concern?
Growth of housing loans and house prices closely correlated

                               House prices and housing loans, 1997-05 1
                                       (annual percentage changes)
                         50


                         40
                                                                                    y = 0.14x + 3.5
                         30                                                            R2 = 0.20
    House prices




                         20

                         10


                          0
                   -20         30                    80                       130                     180
                         -10


                         -20
                                                 Housing loans
1
 Annual percentage changes; data for Croatia, the Czech Republic, Estonia, Hungary, Lithuania and Poland.
Sources: National data; author's estimates.


                                                                                                            14
House price increases: is there a bubble?

                                                                   House prices1
                                 2001                2002                 2003       2004   2005
Czech Republic                   14.7                 22.0                19.4       –2.5     …
Hungary                             …                  4.8                10.9        9.2    0.9
Poland                           –1.6                 –9.5                12.3         …      …
Croatia                          –4.4                  0.7                  2.4      13.2   22.5
Estonia                          34.0                 30.7                14.0       28.0   21.3
Lithuania                        24.0                 10.1                18.3       10.1   45.3
1
    Annual percentage changes. Data refer mainly to house prices in urban centres.
Sources: Central banks; real estate firms; author’s estimates.




                                                                                                   15
Role of foreign-owned banks in credit expansion


 Impact on credit expansion – not as obvious as it seems
 Impact on credit allocation and bank efficiency – on the
   whole positive
 Macroeconomic effects – some undesirable consequences
    • Credit expansion funded by external borrowing
    • Foreign currency lending
    • Risk of overheating
    • Rising household indebtedness and widening external
      imbalances



                                                             16
Impact of foreign-owned banks on credit expansion

Not as obvious as it seems
                                              Foreign-owned banks and credit growth in CEE, 1997, 2000 and 2004
                                     70
 Private sector credit as % of GDP




                                     60

                                     50

                                     40

                                     30
                                                                                                       y = 0.075x + 25.02
                                     20                                                                    R2 = 0.023

                                     10

                                     0
                                          0    10      20       30      40       50      60       70      80        90      100
                                               Market share of foreign-owned banks (% of total banking sector assets)
 Sources: Bank Austria - Creditanstalt; author's estimates.


                                                                                                                                  17
Impact of foreign-owned banks on credit allocation

Composition of bank lending has improved
                                          Composition of commercial bank lending1
                                           2
                           Government                           Corporate                              Household
                      1999       2003      2004        1999        2003        2004        1999          2003      2004
 Bulgaria                 21          8        –3          65           67          70          14          25         33
 Croatia                  21          8         8          65           68          42          14          25         50
 Czech Rep.                6         31        25          83           45          45          12          25         30
 Estonia                   3          6         4          71           52          50          26          43         45
 Hungary                  43         13         9          49           57          57            8         30         32
 Latvia                   11         10         9          76           63          59          13          28         32
 Lithuania                29         20         4          62           63          70            8         17         26
 Poland                    5          6         7          62           53          46          33          31         46
 Romania                  35          9         5          62           68          68            3         23         27
 Slovakia                 29         49        49          64           37          34            7         14         17
 Slovenia                 22         22        22          52           57          55          26          21         23
 Turkey                    3          4         4          86           76          71          11          20         25
    Average               19         16        12          66           59          56          15          25         32
 Euro area                …          11        11          …            41          41           ...        48         49
 1
   In percent of total credit, excluding interbank credit and credit to non-bank financial institutions. End of period or
                                      2
 for 2004, latest available period. Net claims on government for most countries.
 Sources: Central banks; IMF; author’s estimates.


                                                                                                                            18
Impact of foreign-owned banks on bank efficiency (1)

Prudential indicators have strengthened


                                                     Prudential indicators
                                                            (in percent)
     Countries           Non-             Capital            Loan-loss          Return on         Return on
                      performing         adequacy3          provisions4          equity            assets
                        loans2
                      1999       2004    1999     2004      2000     2004       1999    2004      1999     2004
 Average              16.5        6.8    20.3      16.9     58.5         63.6   –0.7     14.7     –0.1       1.4
  High share of
                      14.9        3.8    22.2      14.2     59.9         56.8    8.6     17.8      1.1       1.5
  foreign banks7
  Lower share of
                      17.9        9.5    18.7      19.4     56.8         69.4   13.7     14.5      1.4       1.6
  foreign banks8
 Memo: Austria         1.7        1.5    13.9      14.7       …           …      6.9      9.3      0.3       1.5
 2                           3                                       4
  As percent of total loans.    Risk-weighted capital-asset ratios.   Ratio of bank provisions for loan losses to
                             7
 non-performing loans.         Average for the countries with a share of foreign bank ownership higher than or
                                                      8
 equal to 70% of total banking sector assets.           Average for the countries with a share of foreign bank
 ownership lower than 70% of total banking sector assets.
 Sources: Central banks; IMF; author’s estimates.




                                                                                                                    19
Impact of foreign-owned banks on bank efficiency (2)

Less interest income, more fee income




                                                       20
Impact of foreign-owned banks on bank efficiency (3)

Lower operating costs




                                                       21
Macroeconomic effects (1)
Clear role of cross-border loan flows in credit expansion
But household indebtedness generally low




                                                            22
Macroeconomic effects (2)
Foreign currency lending – risk of currency mismatches

                           Foreign currency deposits and loans, 2005
                               Shere in total private sector deposits/loans, in percent


 90                                                  FX deposits
                          82
                                77                   FX loans
 80
                                                               72                              72
 70                                                       65

 60
                                                52                                                  52
         48 48                             49                             48
 50

 40
                                                                                          31
                                                                                                         28
 30

 20                                                                            15

 10

  0
          BG               HR               RO             SCG              BH             AL        MK
 Source: Central banks.

                                                                                                              23
Macroeconomic effects – risk of overheating?
GDP growth rates not far from potential
Investment rates at or below long-term averages

                                      Actual and potential growth rates in CEE

    New member           Potential       Actual      EU candidates and        Potential    Actual
       states             growth        growth           aspirants             growth     growth
                           rate           rate                                  rate        rate
                                        2001-05                                           2001-05
 Czech Republic              3.6           3.6      Bulgaria                      4.9       4.9
 Hungary                     3.4           4.0      Croatia                       4.9       4.4
 Poland                      3.9           3.0      Romania                       5.3       5.7
 Slovakia                    5.0           4.9      Turkey                        6.7       4.5
 Slovenia                    3.5           3.4
                                                    Albania                       6.2       5.4
 Estonia                     7.2           7.6      Bosnia-Herzegovina            5.4       5.0
 Latvia                      8.1           8.1      Macedonia                     3.4       1.4
 Lithuania                   6.5           7.6      Serbia-Montenegro             4.7       5.1
 Sources: European Commission (2006); IMF, WEO, April 2006; author’s estimates.



                                                                                                    24
Is the widening of external deficits a concern?


 CA deficits in CEE due to factors characteristic for the
   stage of development (income level, high capital building)
 During 2000-03, the increase in deficits could be entirely
   explained by higher investment
 But during 2004-05, ¼ of the increase in CA deficits was
   due to higher consumption (especially SK and RO)




                                                                25
           CA deficits for the most part due to higher investment


Table 5               Changes in external balances, investment and saving, 2004–051
                                 Current          Gross fixed
                                                                      Domestic             Budget
                                 account             capital
                                                                       saving              balance
                                 balance           formation
Average                             –0.6                1.4                0.8                 1.8
    Countries with
                                    –3.1                2.4              –0.7                  2.1
    wider CA deficit2
    Countries with
                                     1.3                0.6                1.9                 1.5
    narrower CA deficit3
1
  Cumulative changes during 2004 and 2005, in percentage points of GDP.
2
  Bulgaria, Latvia, Lithuania, Romania, Slovakia, Slovenia, Turkey.
3
  Albania, Bosnia and Herzegovina, Croatia, Czech Republic, Estonia, Hungary, Macedonia, Poland, Serbia
and Montenegro.
Sources: European Commission, Economic Forecasts, Spring 2006; IMF, WEO, April 2006; author’s estimates.



                                                                                                           26
Other mitigating factors

 Evidence of quick reversal of CA deficits without major
   growth slowdown (AL, BG, HR 2003-04; MK; SK 2002-03)
 Consumer credit booms tend to be self-correcting (build-up
   of the stock of consumer durables tends to level off)
 Purchasing power gains associated with RER appreciation
   were only used for additional consumption once the gains
   actually occurred, not in anticipation thereof
   (Deutsche Bundesbank DP 32/2005)




                                                              27
Composition of capital flows is changing (2)

                                 Composition of net capital flows
                        (In percent of total net flows, average of country groups)
  80
                61
                                    New member states                    55     51
  60                                                             48                               48
          43              41        South-eastern Europe           43
        34         37
  40                                                                                 31
                            22                              21             20                    18
  20                                                 11   12                                14
                                    2 5   6 5
   0

 -20                                             -14                                      -14

 -40
        2003    2004      2005    2003    2004   2005 2003       2004   2005    2003      2004   2005

                 FDI                  Equity flows         Bond issuance        Cross-border bank
                                                                                      loans

Sources: IMF; author's estimates.


                                                                                                        28
Policy challenges

 Maintaining financial stability
 Avoiding risk of overheating
 Preventing property price bubbles
 Containing current account deficits




                                        29
Factors complicating policy responses in CEE


 Very small, very open economies
 Rapidly catching up with the EU (Balassa-Samuelson effect,
   RER appreciation)
 Banking systems mostly foreign-owned

 Strong capital inflows, easy global financing conditions




                                                             30
Policy responses so far

 Raise interest rates – Romania, Slovakia
 Tighten prudential regulations – Baltics, Croatia
 Strengthen banking supervision – Baltics, Hungary, Slovakia,
   Slovenia
 Moral suasion – Baltics, Croatia, Hungary
 Administrative measures (credit ceilings) – Bulgaria




                                                           31
Policy responses under consideration

 Raise interest rates – there are limits to domestic interest rate
   policy with low global interest rates, fixed ERs, free capital
   flows, but global rates are now rising
 Retain some capital controls (non-EU countries only)
 Allow capital outflows
 Clarify existing policies:
    • focus on disinflation
    • allow nominal ER to appreciate (managed and floating
      regimes)
 Tighten fiscal policy (already tight in many countries)



                                                                    32

								
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