Bank Asset Quality in Emerging Markets : Determinants and Spillovers

Author/Editor:

Reinout De Bock ; Alexander Demyanets

Publication Date:

March 1, 2012

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

This paper assesses the vulnerability of emerging markets and their banks to aggregate shocks. We find significant links between banks' asset quality, credit and macroeconomic aggregates. Lower economic growth, an exchange rate depreciation, weaker terms of trade and a fall in debt-creating capital inflows reduce credit growth while loan quality deteriorates. Particularly noteworthy is the sharp deterioration of balance sheets following a reversal of portfolio inflows. We also find evidence of feedback effects from the financial sector on the wider economy. GDP growth falls after shocks that drive non-performing loans higher or generate a contraction in credit. This analysis was used in chapter 1 of the Global Financial Stability Report (September 2011) to help evaluate the sensitivity of banks' capital adequacy ratios to macroeconomic and funding cost shocks.

Series:

Working Paper No. 12/71

Subject:

Banks Capital flows Capital markets Emerging markets External shocks Financial stability Spillovers Terms of trade Time series

English

Publication Date:

March 1, 2012

ISBN/ISSN:

9781475502237/1018-5941

Stock No:

WPIEA2012071

Format:

Paper

Pages:

27

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