{
  "title": "Bank Asset Quality in Emerging Markets: Determinants and Spillovers",
  "publication": "IMF Working Papers, March 1, 2012",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2016/12/31/bank-asset-quality-in-emerging-markets-determinants-and-spillovers-25766",
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  "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.",
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    {
      "heading": "Summary and purpose",
      "content": "- Assesses the vulnerability of emerging markets and their banks to aggregate shocks.\n- Evaluates links between banks' asset quality, credit, and macroeconomic aggregates.\n- 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."
    },
    {
      "heading": "Key empirical findings",
      "content": "- Significant links exist between banks' asset quality, credit, and macroeconomic aggregates.\n- Lower economic growth reduces credit growth and deteriorates loan quality.\n- An exchange rate depreciation reduces credit growth and worsens loan quality.\n- Weaker terms of trade reduce credit growth and deteriorate loan quality.\n- A fall in debt-creating capital inflows reduces credit growth and deteriorates loan quality.\n- Reversal of portfolio inflows is associated with a particularly sharp deterioration of banks' balance sheets.\n- 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."
    },
    {
      "heading": "Policy-relevant implications",
      "content": "- Monitoring and managing capital flow composition (including portfolio inflows) is critical due to outsized balance sheet effects following reversals.\n- Macroeconomic policies aimed at stabilizing growth, the exchange rate, and terms of trade can help support credit growth and loan quality.\n- Financial sector policies that limit amplification from rising non-performing loans to real GDP can mitigate macro-financial feedbacks.\n- Stress-testing frameworks should incorporate shocks to economic growth, exchange rates, terms of trade, and capital inflows to assess banks' capital adequacy."
    },
    {
      "heading": "Subjects and keywords (topics covered)",
      "content": "- Subjects: Balance of payments, Capital flows, Credit, Exchange rates, Financial institutions, Foreign exchange, International trade, Money, Nonperforming loans, Terms of trade\n- 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\n\n---\n\n Content in this bundle\n\n- wp1271\n  - wp1271 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - wp1271 (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2016/12/31/bank-asset-quality-in-emerging-markets-determinants-and-spillovers-25766"
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    "Authors: Reinout De Bock, Alexander Demyanets",
    "Published: March 1, 2012",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781475502237.001",
    "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.",
    "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.",
    "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: 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",
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