Bank Asset Quality in Emerging Markets: Determinants and Spillovers
IMF Working Papers, March 1, 2012
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- Bank Asset Quality in Emerging Markets: Determinants and Spillovers
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Bibliographic details
- Authors: Reinout De Bock, Alexander Demyanets
- Published: March 1, 2012
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781475502237.001
Summary and purpose
- Assesses the vulnerability of emerging markets and their banks to aggregate shocks.
- Evaluates links between banks' asset quality, credit, and macroeconomic aggregates.
- Analysis was used in chapter 1 of the Global Financial Stability Report (September 2011) to evaluate the sensitivity of banks' capital adequacy ratios to macroeconomic and funding cost shocks.
Key empirical findings
- Significant links exist between banks' asset quality, credit, and macroeconomic aggregates.
- Lower economic growth reduces credit growth and deteriorates loan quality.
- An exchange rate depreciation reduces credit growth and worsens loan quality.
- Weaker terms of trade reduce credit growth and deteriorate loan quality.
- A fall in debt-creating capital inflows reduces credit growth and deteriorates loan quality.
- Reversal of portfolio inflows is associated with a particularly sharp deterioration of banks' balance sheets.
- Evidence of feedback effects from the financial sector to the wider economy: GDP growth falls after shocks that drive non-performing loans higher or generate a contraction in credit.
Policy-relevant implications
- Monitoring and managing capital flow composition (including portfolio inflows) is critical due to outsized balance sheet effects following reversals.
- Macroeconomic policies aimed at stabilizing growth, the exchange rate, and terms of trade can help support credit growth and loan quality.
- Financial sector policies that limit amplification from rising non-performing loans to real GDP can mitigate macro-financial feedbacks.
- Stress-testing frameworks should incorporate shocks to economic growth, exchange rates, terms of trade, and capital inflows to assess banks' capital adequacy.
Subjects and keywords (topics covered)
- Subjects: Balance of payments, Capital flows, Credit, Exchange rates, Financial institutions, Foreign exchange, International trade, Money, Nonperforming loans, Terms of trade
- Keywords: Africa, asset quality, Banks, capital flow, Capital flows, Central and Eastern Europe, Credit, credit growth, Emerging markets, Exchange rate, Exchange rates, Financial stability, Global, Macro-financial linkages, nominal exchange rate, Nonperforming loans, Panel regressions, quality problem, real GDP, Terms of trade, terms of trade shock, Time series, WP