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The Impact of Sudden Stops on Bank Lending:
Are there Cross-Sectional Differences?
Michael Brei1
This draft: July 20, 2007
Abstract:
Using annual financial statements of individual banks operating in 11 countries
in East Asia and Latin America, we investigate whether domestic bank regulation
and foreign bank entry can insulate emerging market economies from the effects of a
sudden stop in foreign capital inflows. We use measures for the banks’ size, asset liquidity, capitalization, currency mismatch and the origin of the majority shareholder
to identify the key determinants of domestic bank lending during sudden stops. To
account for the different natures of sudden stops, the investigation discriminates not
only between the two regions but also between sudden stops that are associated with
major and minor devaluations.
With regard to bank lending, we find evidence that in most cases sudden stops
are associated with reductions in the domestic lending volume. Moreover, on average
well-capitalized and foreign banks attenuate significantly more the adverse effects of
sudden stops on the domestic lending volume playing an important stabilizing role.
Keywords: Sudden stop, international capital markets
JEL Classification: F34, F36, G21
1
Bonn Graduate School of Economics, e-mail: [email protected]. I would like to thank
Joerg Breitung, Valeryia Dinger, Juergen von Hagen, Michael Schober, and the participants of the
8th Sir Arthur Lewis Institute of Social and Economic Studies Conference in Trinidad (2007) for
useful comments and suggestions. The remaining errors are mine.
The Impact of Sudden Stops on Bank Lending
I
Introduction
In a sudden stop episode, an economy that has been the recipient of capital inflows,
stops receiving such inflows, and instead faces unexpected withdrawals of foreign
investments and the demand for the repayment of foreign loans that are falling due.
Most of the considered episodes in this paper exhibited elements of a self-fulfilling
crisis, in which capital withdrawals by some key investors resulted in a financial
panic and unnecessarily deep recessions which most often affected particular regions
entirely. The panic on its part may have been ’rational’ from the perspective of
individual creditors, since each of them was trying to flee ahead of the others, even
though the collective result was in some cases disastrous and the panic unnecessary,
in the sense, that the countries’ fundamentals could have supported a much more
favorable development. The particular outcome of the reversal in capital flows can
be manifold ranging from outright default, to the rescheduling of debt payments, to
bank runs, or to a rescue by a lender who provides new loans.
Goldfajn (2001) states with regard to sudden stops:
’I define a sudden stop as a very large change in the supply of capital.
Of course, this sudden stop is always in the negative direction. There
are also problems with big booms of capital inflows in the sense that
you need to know what you are doing with the big influx. But the real
problem is when you get billions of dollars less from one year to the other
- on the order of 10 percent of gross domestic product (GDP) or so. And
most of the countries that had crises faced this challenge: Mexico, Asia,
Turkey, Brazil, all of them.’
The present paper investigates recent sudden stop episodes from the perspective
of individual banks that operate in the involved economies. Using information on
the annual financial statements of banks, we address the question whether and in
which way banks are affected. In particular, we explore a dataset comprising 945
1
The Impact of Sudden Stops on Bank Lending
banks in 11 Asian and Latin American countries during 1991-2004 and test for crosssectional differences in the responses of banks to a total of 14 sudden stop episodes.
To distinguish between banks with different financial positions and characteristics,
we use measures for bank size, asset liquidity, capitalization, currency mismatch and
the origin of the majority shareholder. The following sort of prediction is tested: a
sudden stop has a disproportionately large impact on the lending volume of small
domestic banks with vulnerable balance sheets.2
In emerging market economies, bank loans play an important role for firms,
because domestic stock and bond markets are underdeveloped. For this reason,
the banking sector plays a key role in determining the ability of an economy to
attenuate the negative impact of large-scale capital withdrawals. The banking sector
can cushion the impact, when it is in the position to grant additional loans to those
sectors that found their credits cut. When banks themselves are in trouble, they can
even be forced to liquidate outstanding loans and amplify the initial shock. With
the underlying dataset, we can address these open issues and identify the main
determinants of the banks’ vulnerability to external shocks.
In an earlier work, Bernanke et al. (1991) compare the loan growth of large and
well-capitalized banks with that of small and poorly-capitalized banks during the
U.S. recession in 1990 and find evidence that poorly-capitalized banks contracted
their lending volume by more than well-capitalized banks. Another strand of literature examines the impact of the rising foreign bank presence in emerging market
economies.3 Several authors analyze the effects on competition and efficiency in the
banking sector, see amongst others Claessens et al. (2001) and Martı́nez Perı́a et
al. (2004). Most related to our work are Arena et al. (2006), Dages et al. (2000),
Peek et al. (2000) and de Hass et al. (2002) who compare the lending behavior of
foreign and domestic banks during crises. Arena et al. (2006) find evidence that
2
A bank is vulnerable when it is highly leveraged, especially, when the bank finances a domesticcurrency denominated, illiquid asset portfolio with foreign-currency denominated, short term debt.
3
See Clarke et al. (2003) for a review of this literature.
2
The Impact of Sudden Stops on Bank Lending
the lending and deposit volume of foreign banks that operate in emerging market
economies is less affected by financial crises than their domestic competitors. Peek
et al. (2000) find that foreign banks in Latin America did not reduce their credit
supply during economic recessions in the host country. More precisely, they argue
that foreign banks view such situations as opportunities to expand by acquisition
or by increasing their funding of existing subsidiaries. De Haas et al. (2002) find
similar results for Central and Eastern European countries.
The present paper focuses on related issues, however, our specific contribution
is that we focus on bank lending in the context of a sudden stop, one of the most
important sources of instability in emerging market economies. In particular, we
find that the loan growth of well-capitalized banks is less affected by sudden stops,
especially, when the sudden stops are associated with a large devaluation. In the
case of foreign banks, we find similar results, but only during the sudden stops
that are associated with minor devaluations. These findings indicate that a strong
banking regulation, resulting in higher capitalization, and foreign bank entry are
important determinants that can insulate an economy from the adverse effects of a
sudden stop.
The remainder of the paper is organized as follows. In Section II, we present
a structural description of the adjustment mechanism within the banking sector in
response to a sudden stop. In Section III, we describe the underlying dataset and
present the empirical results on the impact of sudden stops on the banking sector.
The final section concludes.
3
The Impact of Sudden Stops on Bank Lending
II
Sudden stops and the banking sector
When foreign investors collectively refuse to roll-over existing debt and withdraw
their investments, both the private and the public sector may be affected but not
all parts in the same way. Initially, particular sectors face an unexpected reduction
in the foreign supply of capital, later, potential effects on aggregate demand, prices,
interest rates and the exchange rates affect the whole economy. As there are few
papers on the effects of a sudden stop on banks, we intend to contribute with a
structural description of the involved adjustment.4
Initial shocks Foreign creditors reduce their exposure to the economy and cut
down credits and investments. This translates for banks to a reduction in external
finance, in particular, in foreign funds (bonds, loans and deposits). At the same time,
the deterioration in the economic conditions leads to an increased credit default risk
from the part of the banks’ customers. In this sense, there a two adverse shocks,
one to the asset and the other to the liability side of the banks’ balance sheets.
Subsequent effects The impact on an individual bank depends strongly on its
initial portfolio structure as well as on its clientele. The restricted access to global
capital markets is likely to cause an overall increase in the costs of external finance,
since the affected banks or firms increase their demand for domestic funding. In
addition, the risky environment causes on average a higher risk premium on external
finance.
The increase in the costs of funding reduces, ceteris paribus, the banks’ equity
via losses and profits. An increase in non-performing loans has the same effect. In
particular cases, this can lead to a bank’s insolvency (liabilities exceed assets), or in
expectation of a bankruptcy to a bank run.
The sudden demand for the repayment of the foreign liabilities that are falling
4
A related theoretical investigation on a related issue, i.e. on aggregate liquidity shortages, is
that of Diamond et al. (2005). The only empirical paper that focuses on sudden stops and the
banking sector, however, from the macroeconomic perspective is that of Joyce et al. (2007).
4
The Impact of Sudden Stops on Bank Lending
due can result in severe liquidity problems, especially, when too much assets are
long-term and entail large costs in the case of liquidation (maturity mismatch). A
sudden stop also involves pressures on the exchange rate. In the case of a pronounced
depreciation, banks’ liabilities can rise extremely relative to assets (currency mismatch). In this case, the banks’ equity shrinks due to adverse stock effects of the
devaluation.
Domestic depositors may demand banks for the disbursement of their deposits.
In particular cases, this can result in severe liquidity problems and trigger substantial uncertainty about the solvency of a bank which can trigger a bank run.
Moreover, shifts of deposits towards banks with a sounder financial structure or a
better reputation can occur.
To underline the difficulties that a banking sector can face during a sudden stop,
we quote here the statement of the IMF (1998) with respect to the situation in
Indonesia:
’Following the closure of 16 insolvent banks in November last year,
customers concerned about the safety of private banks have been shifting sizeable amounts of deposits to state and foreign banks, while some
have been withdrawing funds from the banking system entirely... By mid
November, a large number of banks was facing growing liquidity shortages, and were unable to obtain sufficient funds in the interbank market
to cover this gap, even after paying interest rates ranging up to 75 percent. At the same time, another smaller group of banks [that is state
and foreign owned banks] were becoming increasingly liquid, and were
trading among themselves at a relatively low JIBOR (Jakarta Interbank
Offer Rate) of about 15 percent... the Bank Indonesia was compelled
to act. It provided banks in distress with liquidity support, while withdrawing funds from banks with excess liquidity...’.
Determinants of vulnerability The following factors play a key role in de5
The Impact of Sudden Stops on Bank Lending
termining the subsequent adjustment in the bank sector: the country-specific bank
regulation (reserve requirements, solvability and liquidity rules, and deposit insurance arrangements); the central bank (can regulate domestic reserve and refinancing
conditions, reallocate within the banking sector, and buy bonds issued from particular banks); and the banking sector’s average portfolio structure (currency and
maturity composition of the banks’ balance sheets, the degree of capitalization and
the amount of liquid assets).
Responses of affected banks Banks can sell liquid assets which is probably
the cheapest alternative to meet the demand for the repayment of foreign funds
and make up the potential increase in the cost of external finance. Likewise, banks
can securitize and sell parts of their outstanding loans. The third option is to call
outstanding loans, e.g. forcing borrowers to discontinue long-lasting projects, and
restructure them to harvest resources immediately. Alternatively, banks can attract
new depositors or issue additional non-deposit funding (on the bond and interbank
market, to the central bank). Here, the central bank plays an important role because
it may buy bonds from the affected banks and, moreover, reallocate resources within
the banking system. Foreign-owned banks can demand additional capital from their
parent banks. Finally, banks can do a recapitalization (i.e. issue additional stocks).
During sudden stops, however, only a few possibilities are a feasible option,
since in many cases banks have to deal with large amounts of non-performing loans,
deposit withdrawals and tense situations on capital and interbank markets.
Sudden stops and the lending volume The lending volume of banks can
be affected through several channels: an increase in the amount of non-performing
loans reduces the lending volume; a reduction in a bank’s equity may push the bank
below the limit of its minimal capital requirement and reduce the bank’s ability to
grant new loans; adverse shocks to external finance and the cost of external finance
have the same effect; and the conditions for central bank and interbank finance play
an important role.
6
The Impact of Sudden Stops on Bank Lending
Testable hypothesis The considerations above provide us several testable hypotheses which we will address in the following section. Unfortunately, we cannot
address all questions because our database does not provide all necessary information, i.e. we do not have information on borrower and lender types, and the maturity
and currency composition of assets and liabilities. The most important shortcoming
is that we do not know which banks had a large exposure to foreign funding. We
construct, however, a rough measure for the currency mismatch of the banks’ assets
and liabilities.
Our testable hypothesis is that the lending volume of large, well-capitalized and
foreign banks with liquid asset portfolios and balance sheets that are not subject to
a currency mismatch is less affected by a sudden stop than that of banks with the
opposed characteristics. There are several reasons for this presumption: this group
of banks is more reliable and may have a better reputation and, therewith, a more
stable deposit base; a binding capital constraint is less likely for well-capitalized
banks; liquid banks can build on a larger, better accessible stock of assets; foreign
parent banks can allocate additional capital to their subsidiaries; banks without a
currency mismatch are not subject to adverse stock effects on equity in the case
of a devaluation; and these banks are more likely to have better access to external
finance.
III
Empirical results
Description of the database
We use bank-level data from Bankscope and
macroeconomic data from the International Financial Statistics (IFS).5 The unbalanced, annual dataset covers the period 1991-2004 and 11 countries from Latin
America and East Asia.6 Overall, we have information on the annual financial state5
A more detailed description of the data is given in the Data Appendix.
Latin America includes Argentina, Bolivia, Chile, Mexico, Peru and Uruguay, while East Asia
includes Indonesia, South Korea, Malaysia, Thailand and the Philippines.
6
7
The Impact of Sudden Stops on Bank Lending
ments of 945 individual banks that add up to about 5500 annual bank observations,
distributed across time and countries as shown in Table 1.
The data from Bankscope provides for each bank 87 balance sheet (sub-) categories, however, in most cases only 38 categories are available. In addition, the
database provides information on the bank history, bank specialization, foreign
shareholders and a detailed decomposition of losses and profits.
In many cases, Bankscope reports consolidated and unconsolidated financial
statements, and we used unconsolidated figures to the extend possible to reduce
variations arising from changes in the subsidiaries’ ownership and to work with
comparable accounting data. The specific dates of the banks’ financial years vary
in some cases, however, for the majority of banks the financial year ends in December. To assign the macroeconomic variables to individual banks correctly, we use
annualized quarterly data to the extend possible (in cases where quarterly data is
not available, we use weighted averages of the variables of two subsequent years).
To remove nominal variations, the balance sheet positions of each bank were
transformed either to ratios over the bank’s total assets or expressed in real terms
by dividing the balance sheet positions with the country-specific consumer price
index. We excluded central banks and observations for which the real growth rate
of particular balance sheet positions (loans, securities, deposits, non-deposit funding,
equity, interest expenses, revenues and problem loans) exceeded 300% in absolute
terms since these observation have an extraordinary high influence on the point
estimates of the regressions.
Average balance sheet positions Summary statistics for the average balance sheet positions as a ratio of total assets for the East Asian and Latin American
economies are presented in Table 2. Latin American banks tend to have, on average,
higher equity to asset ratios, moreover, these banks rely relatively more on money
market funding (i.e. certificates of deposits and debt securities) than on other funding (convertible bonds and subordinated debt). On the asset side, East Asian banks
8
The Impact of Sudden Stops on Bank Lending
tend to have larger fractions of problem loans and total other earning assets (i.e.
bonds and deposits with banks).
Measures for different bank types To distinguish between different groups
of banks, we use measures for the bank size, asset liquidity, capitalization, currency
mismatch and foreign ownership. As a measure for the size of an individual bank
in a given year and country, we use the ratio of a bank’s total assets to the country
average of total assets in a given year. Asset liquidity is defined by the ratio of
the sum of marketable securities, government securities (including treasury bills)
and cash holdings to total assets. Capitalization is defined by the ratio of total
equity to total assets. For foreign banks, we include a dummy variable based on the
Bankscope information on the origin of the majority shareholders (i.e. those who
own at least 50% of the shares).
As mentioned, there is no direct measure for the currency composition of assets
and liabilities. We construct a rough measure for the degree of currency mismatch
as follows: a percentage change in the difference between post tax profits and the
change in equity that is similar to the periods’ devaluation indicates a currency
mismatch.7 To be more precise, we consider all periods with devaluations larger
than 10% and classify a bank as one with a currency mismatch when the percentage
change in the difference between profits and the change in equity is between 0.5 and
1.5 times the devaluation.
Identification of sudden stops To identify sudden stops, we follow Calvo et
al. (2004) who identify a sudden stop episode by the following three criteria: (1)
the episode includes at least one observation where the year-to-year fall in quarterly
(net) capital inflows lies at least two standard deviations below its sample mean;
7
Consider a simple example: a bank grants all loans L in domestic currency and finances them
with dollar debt D. Abstracting from other assets and external funds, the balance sheet can be
written as L = eD +E, where e denotes the exchange rate and E equity. The resource constraint is
given by L̇ = Π + eḊ, where Π denotes retained earnings and ẋ a change in x. Total differentiating
the balance sheet identity and using the resource contraint leads to ėD = Π − Ė, i.e. the adverse
stock effect due to a devaluation can be measured by the difference of retained earnings and the
change in equity.
9
The Impact of Sudden Stops on Bank Lending
(2) the sudden stop episode begins (ends) when the year-to-year fall (rise) in capital
inflows falls (rises above) one standard deviation below its sample mean; (3) there
is an associated output contraction. We calculated the first and second moments
of capital inflows using a rolling window including the 12 previous quarters of each
period to capture better the surprise element of sudden stops.
Figure 1 in the Appendix shows potential sudden stop periods (i.e. those that
satisfy the first criterion) of the 9 countries for which we were able to obtain quarterly
macroeconomic data. To detect the sudden stops of Malaysia and Uruguay, we used
annual information combined with quarterly information on the nominal exchange
rate, i.e. we first identified the year of the sudden stop using the criteria from above
and then identified the quarter in which a large nominal depreciation occurred.
The exact dates and durations of the sudden stop episodes are reported in Table
1. Moreover, Figure 2 shows that the sudden stops in the considered economies
bunch together, especially, in the East Asian region during the years 1997-98. The
majority of sudden stops in Latin America occurred thereafter. In all, the dataset
covers 14 episodes of sudden stops.
Construction of the sudden stop dummy For the empirical investigation,
we construct a bank-specific sudden stop dummy variable that equals to one during
a sudden stop period and zero elsewhere. The particular dates and durations of
sudden stops vary in most cases. We account for this fact as follows: we assign to
the dummy variable a value of one, if the sudden stop took at least two quarters
of the associated financial year, e.g. when a sudden stop occurred between Q2/97
and Q1/98, the dummy variable equals to one for those banks that published their
financial statements in Q3/97, Q4/97, Q1/98, Q2/98 and Q3/98. As a consequence,
the duration during which banks are affected by a sudden stop differs, i.e. in the
previous example, banks that balance their accounts in Q4/97 are affected during
3 quarters, while those that balance their accounts in Q1/98 are affected the whole
year. To account for this difference, we construct an additional dummy variable
10
The Impact of Sudden Stops on Bank Lending
that takes a value of one if two quarters of the financial year are affected, a value
of two if 3/4 of the year are affected, and a value of three in the case of the whole
year.8
Sudden stops and the lending volume
Preliminary investigation Figures 3 and 4 in the Appendix show the average
net annual capital inflows as a share of GDP and the dollar value of the average
lending and deposit volume of all banks for the Latin American (LA-6) and East
Asian (A-5) countries. Most of the major sudden stop periods, i.e. 1994-95 and
2001-02 in Latin America and 1997 in East Asia, are associated with contractions
in the average lending and deposit volume. In these cases, the lending volume lasts
about 3 years below its level prior to the sudden stop. An exception is the series
of sudden stops that occurred in Latin America in 1998. A similar pattern can be
observed in the case of the average deposit volume.
Figures 5 and 6 compare the dollar value of the average lending volume of all
banks with that of well-capitalized banks, i.e. banks with a equity to asset ratio
between 10% and 50%, and that of foreign banks. In Latin America, the lending
volume of well-capitalized banks is less affected during the sudden stops compared
to the average bank. Moreover, the lending volume of this group of banks increases
on average by more in the aftermath of the sudden stops. In the case of foreign
banks, the conclusions are less evident.
Econometric investigation To test for cross-sectional differences in the effect of sudden stops on the lending volume, we estimate the following fixed effects
regression
Li,c,t = αi +
p
X
βs xc,t−s + βus xt + γzi,c,t−1 + γf fi,c,t + δssi,c,t
(1)
s=0
+
p
X
βs∗ xc,t−s ssi,c,t + γ ∗ zi,c,t−1 ssi,c,t + γf∗ fi,c,t ssi,c,t + ui,c,t
s=0
8
The results using this dummy variable are not reported in this version of the paper and can
be obtained from the author upon request.
11
The Impact of Sudden Stops on Bank Lending
where i = 1, ..., N refers to individual banks, c = 1, ..., C to countries and
t = 1, ..., Ti to the time dimension. The dependent variable Li,c,t denotes the banks’
growth rate of real total loans (net of problem loans) and αi bank-level fixed effects.
The vector of country-specific variables xc,t−s controls for changes in the demand for
loans caused by changes in economic conditions (real GDP growth) and monetary
conditions (real money market rate). Moreover, we control for changes due to possible devaluations by including the change in the nominal exchange rate. The vector
of bank-specific variables zi,c,t−1 includes the measures for bank size, asset liquidity, currency mismatch and capitalization. Due to potential endogeneity problems
which would lead to inconsistent OLS estimates, these variables enter the regression
with one lag.9 The dummy variables that measure the degree of currency mismatch
and foreign ownership fi,c,t enter the regressions contemporaneously. In addition,
we include an international interest rate, xt , measured by the real federal funds rate.
The bank-specific sudden stop dummy variable is denoted by ssi,c,t .
To test for cross-sectional differences among our bank categories each bankspecific variable is interacted with the sudden stop dummy. Moreover, to account
for changes in loan demand particular for the sudden stops, we interact the control
variables with the sudden stop dummy. The key issue is interpreting the coefficients
γ ∗ and γf∗ associated with the interaction terms. In particular, our presumption
is that the lending volume of vulnerable banks declines by more in response to a
sudden stop. That is, we should find that γ ∗ and γf∗ are significantly larger than
zero.
Table 3 shows the results for Latin America and Table 4 for East Asia. To
check for the robustness of the parameter estimates, we estimate the model in three
specifications: first, the exchange rate and the measure on the currency mismatch
are excluded; second, only the measure on the currency mismatch is excluded; and,
9
To be more precise, with regard to the size category there is a possible joint determination
since a bank may become larger, precisely, because of a large loan growth. Similar problems arise
with capitalization and asset liquidity.
12
The Impact of Sudden Stops on Bank Lending
finally, the whole model is estimated.
For Latin American banks, we find strong evidence for cross-sectional differences
in the response of lending to sudden stops, however, only well-capitalized banks
have a significantly higher growth rate of loans compared to the other banks. A 1%
increase in capitalization implies a 0.76% higher growth rate of loans during sudden
stops. For East Asian banks, we reach the same conclusion in the case of foreign
banks, i.e. the growth rate of loans of foreign banks is 14% higher than that of
the other banks during sudden stops. Finally, we find no evidence that the growth
rate of loans of liquid and large banks and of those banks that are not subject to a
currency mismatch is significantly higher during sudden stops.
During tranquil times, the estimated coefficients on liquidity and capitalization
are significantly positive in both regions, i.e. their growth rate of total loans is higher
than that of the other banks. The coefficients associated with the size category are
in both cases significantly negative.
The same regressions are estimated for two distinct groups of sudden stops, i.e.
Table 5 shows the results for sudden stops that were accompanied with devaluations
larger than 30% and Table 6 shows the results for the other sudden stop episodes.10
Interestingly, we find in all specifications and cases that the loan growth of wellcapitalized banks is significantly larger than that of the other banks. The loan
growth of foreign banks is significantly higher only in the case of sudden stops that
are not associated with large devaluations.
Sudden stops and other balance sheet positions To get a broader impression of the impact of a sudden stop on banks, we conduct a similar investigation
using the other major balance sheet positions of banks, i.e. for the real growth rates
of deposits, equity, problem loans, interest expenses, revenues, non-deposit funding
and securities. The results for Latin America and East Asia are shown in Table 7.11
10
The sudden stops that were accompanied with devaluations larger than 30% are those of
Mexico, Thailand, Indonesia, Uruguay, Philippines, Malaysia and Korea.
11
Note that the previous results obtained for the loan growth are reproduced in the first column
of each Table.
13
The Impact of Sudden Stops on Bank Lending
For Latin America, an interesting finding is that foreign banks receive additional
deposits during a sudden stop suggesting that deposits were shifted towards these
banks during the sudden stops. With regard to East Asia, we find that foreign
banks have a significantly higher growth rate of revenues during the sudden stops
and a lower growth rate of problem loans. Banks with a liquid asset portfolio have a
significantly higher growth rate of interest expenses and non-deposit funding during
the sudden stops, and lower growth rates of securities and problem loans. These
findings might point to the fact that these banks used their buffer stock of liquid
assets and that they were able to issue additional non-deposit funding. Finally,
an interesting finding is that well-capitalized and foreign banks received additional
deposits during the sudden stops which might be an explanation of our finding with
regard to the higher loan growth of foreign banks.
IV
Conclusion
In the present paper, we test for cross-sectional differences in the response of bank
lending to sudden stops of capital inflows. As motivated in Section II, the lending
volume of large, well-capitalized and foreign banks and those with a liquid asset
portfolio and no currency mismatch between assets and liabilities should be less
affected by a sudden stop than that of banks with the opposite features.
Our empirical investigation reached a few results that are worth summarizing.
For the banking sectors as a whole, we find evidence that sudden stops are in many
cases associated with contractions in the aggregate lending and deposit volume.
Moreover, we find evidence that well-capitalized and foreign banks increase their
lending volume relative to the other banks even after controlling for changes in loan
demand and the exchange rate. In addition, we find evidence that this finding is
partly due to the fact that these banks had a more stable deposit base during sudden
stops than the other types of banks. There might be another possible explanation
14
The Impact of Sudden Stops on Bank Lending
for this finding: the other banks were unable to fulfill capital adequacy requirements,
in the sense, that insufficient equity capital is the restricting force behind the banks’
lending activity.
To answer this question, information on country-specific capital requirements
should be taken into consideration. We leave this issue to future work. Other
possible improvements could be: (i) construct additional variables for particular
bank characteristics (e.g. state-owned banks), (ii) include country dummy variables,
and (iii) take into account information on deposit insurance arrangements.
15
The Impact of Sudden Stops on Bank Lending
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The Impact of Sudden Stops on Bank Lending
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Insurance, and Liquidity’, The Journal of Political Economy, Vol. 91(3)
Diamond, Douglas W. and Raghuram G. Rajan (2005), ’Liquidity Shortages and Banking Crises’, The Journal of Finance, Vol. 60(2)
Galindo, Arturo and Fabio Schiantarelli (2002), ’Credit Constraints in
Latin America: An Overview of the Micro Evidence’, Working Paper, Inter-American
Development Bank
Goldfajn, Ilan (2001), ’Roundtable Comments on Monetary and Regulatory
Policy’, Domestic Finance and Global Capital in Latin America Conference, Federal
Reserve Bank of Atlanta
Guidotti Pablo E., Federico Sturzenegger and Agustin Villar (2004),
’On the Consequences of Sudden Stops’, Economia, Vol. 4(2)
International Monetary Fund (1998), ’Indonesia – Memorandum on Economic and Financial Policies’, Washington (January 15)
Jayaratne, Jith and Donald P. Morgan (2000), ’Capital Market Frictions
and Deposit Constraints at Banks’, Journal of Money, Credit, and Banking, Vol.
32(1)
Joyce, J. P. and M. Nabar (2007), ’Sudden Stops, Banking Crises and
Investment Collapses in Emerging Markets’, Wellesley College Working Paper
Kashyap, Anil K. and Jeremy C. Stein (1995), ’The Impact of Monetary
Policy on Bank Balance Sheets’, Carnegie-Rochester Conference Series on Public
Policy 42
17
The Impact of Sudden Stops on Bank Lending
Loutskina, Elena (2005), ’Does Securitization Affect Bank Lending? Evidence from Bank Responses to Funding Shocks’, Manuscript, Caroll School of Management
Martı́nez Perı́a, M. and A. Mody (2004), ’How foreign Participation and
Market Concentration Impact Banking Spreads: Evidence from Latin America’,
Journal of Money, Credit and Banking, Vol. 36(3)
Peek, Joe and Eric Rosengren (1995), ’The Capital Crunch: Neither a
Borrower Nor a Lender Be’, Journal of Money, Credit and Banking, Vol. 27(3)
—– (2000), ’Implications of the Globalization of the Banking Sector: The Latin
American Experience’, New England Economic Review, September/October
Radelet, Steven and Jeffrey D. Sachs (1998), ’The East Asian Financial
Crisis: Diagnostics, Remedies, Prospects’, Brookings Papers on Economic Activity,
Vol. 1998 (1)
Standard and Poors (2002a), ’Views on the Major Latin American Banking
Systems’, http://www.standardandpoors.com
—–
(2002b), ’ The Argentine Crisis: A Chronology of Events After The
Sovereign Default’, http://www.standardandpoors.com
18
The Impact of Sudden Stops on Bank Lending
VI
A
Appendix
Data
Bank-level data: Source – Fitch IBCA/Bureau van Dijk’s Bankscope database
from 2002 and 2004
Macroeconomic data: Source – International Financial Statistics 2006, International Monetary Fund
Included variables:
• GDP (series 99B)
• GDP deflator (series 99BIP)
• money market rate (series 60B)12
• financial (capital) account (series 78BJD)
• consumer price index (series 64ZF)
• federal funds rate (series 60B)
• market exchange rate (series RF)
12
For the countries Bolivia, Chile, Peru and Uruguay deposit rates (seires 60L) were used instead,
because of missing information on money market rates. Real interest rates were calculated by the
difference in nominal interest rates and CPI inflation.
19
The Impact of Sudden Stops on Bank Lending
B
Tables and Figures
Table 1: Overview of the dataset and sudden stop episodes per country13
Country
Bank
year
obs.
Number
of banks
Average
no. of obs.
per bank
Sudden stops
of capital inflows
Assoc. annual %
change in capital
inflows per GDP
Argentina
1080
161
7
9
7
8
5
Q4/94-Q1/95
Q2/98-Q3/99
Q4/00-Q3/01
Q2/99-Q3/99
Q4/02-Q3/03
Q1/98-Q4/98
Q4/94-Q1/95
Q3/97-Q1/98
Q2/02-Q3/03
-3.8
-1.5
-8.0
-5.1
-4.3
-6.0
-4.2
-6.4
-14.2
Bolivia
200
19
11
Chile
Mexico
Peru
Uruguay
452
530
270
188
50
75
32
38
Indonesia
Korea
Malaysia
Philippines
Thailand
860
482
747
468
241
120
76
98
62
64
7
6
8
8
4
Q3/97-Q1/98
Q3/97-Q1/98
Q3/97-Q1/98
Q3/97-Q3/98
Q2/96-Q4/97
-5.1
-6.2
-7.3
-5.8
-17.5
Sum/average∗
5518
945
5.84∗
13
14
-6.3∗
The sample period is 1991 to 2004. Sudden stops of capital inflows are defined as in Calvo et
al. (2004), see above.
20
The Impact of Sudden Stops on Bank Lending
Table 2: Average composition of the major bank balance sheet
positions per total assets in the period from 1991 to 2004
East Asia
Latin America
Customer Loans
Problem Loans
Loan Loss Reserves
61.1
10.3
5.3
59.7
8.1
5.2
Net Loans
55.8
54.5
Deposits with Banks
Securities
Equity Investments
12.1
16.7
3.4
8.4
17.1
2.4
Total Other Earning Assets
32.2
27.9
8.9
3.1
12.6
5.0
100.0
100.0
Total Deposits
Money Market Funding
Other Funding
Other Liabilities
66.2
7.5
9.1
4.1
63.2
13.4
3.5
2.4
Total Liabilities
86.9
82.5
Total Equity
13.1
17.5
100.0
100.0
2676
412
2400
376
assets
Total Non Earning Assets
Fixed Assets
Total Assets
liabilities
Total Equity+Total liabilities
No. of Observations
No. of Banks
Asset side: Customer Loans include Private, Corporate, Government, Bank Loans,
Mortgages and Leases; Problem Loans include Problem, Overdue, Restructured and
Other Non-Performing Loans; Securities include Investment and Trading (Government)
Securities; Total Other Earning Assets include Deposits with Banks, Securities, Equity Investments and Bonds; Total Non Earning Assets include Cash and Due from
Banks, Intangible Assets and Deferred Tax Receivables; Fixed Assets include Land and
Buildings and Other Tangible Assets.
Liability side: Total Deposits include Customer and Bank Deposits; Money Market Funding include Certificates of Deposits, Commercial Papers, Securities and Other
Negotiable Instruments; Other Funding include Bonds, Subordinated Debt, Hybrid Capital and Other Funding; Other Liabilities include Loan Loss and Non Equity Reserves;
and Total Equity include Retained Earnings, Other Equity Reserves, Preference and
Common Shares.
21
The Impact of Sudden Stops on Bank Lending
Table 3: Estimation results for Latin America14
Dependent Variable: Growth rate of real total loans
Method: Panel least squares, Sample: 1992 2004
White cross-section standard errors & covariance (d.f. corrected)
Cross-section fixed (dummy variables) effects specification
C
real GDP growth
real money market rate
real GDP growth(-1)
real money market rate(-1)
real US money market rate
devaluation
real GDP growth*SS
real money market rate*SS
real GDP growth(-1)*SS
real money market rate(-1)*SS
devaluation*SS
size(-1)
capitalization(-1)
liquidity(-1)
foreign
size(-1)*SS
capitalization(-1)*SS
liquidity(-1)*SS
foreign*SS
high $ debt
SS
Adjusted R2
Cross-sections
Observations
Model 1
-0.07
-0.14
-0.59∗∗
0.32
-0.39∗∗∗
5.12∗∗∗
-0.08∗∗∗
0.89∗∗∗
0.64∗∗∗
-0.17
0.00
0.49∗∗∗
-0.15
0.09
Model 2
-0.07
-0.23
-0.49∗
0.30
-0.38∗∗∗
4.74∗∗∗
-0.03
-0.30
0.53
1.66∗
-2.31∗∗
0.22
-0.08∗∗∗
0.88∗∗∗
0.64∗∗∗
-0.17
0.00
0.51∗∗∗
-0.14
0.09
–
–
-0.02
-0.01
Model 3
-0.10
-0.39
-0.69∗∗
0.38
-0.38∗∗
5.15∗∗∗
-0.02
-0.29
1.57∗∗
-1.02
-5.21∗∗
-0.03
-0.07∗∗∗
0.95∗∗∗
0.64∗∗∗
-0.15
0.00
0.76∗∗∗
-0.10
0.09
0.05
-0.05
0.11
355
2094
0.11
355
2094
0.12
209
1383
–
-0.22
0.85∗∗
-1.84∗∗
-2.22∗∗
–
14
SS indicates the sudden stop dummy variable, and (∗∗∗ ,∗∗ ,∗ ) indicate significance at the 1%,
5% and 10% level. The included countries are Argentina, Mexico, Peru, Uruguay, Bolivia and
Chile.
22
The Impact of Sudden Stops on Bank Lending
Table 4: Estimation results for East Asia15
Dependent Variable: Growth rate of real total loans
Method: Panel least squares, Sample: 1992 2004
White cross-section standard errors & covariance (d.f. corrected)
Cross-section fixed (dummy variables) effects specification
C
real GDP growth
money market rate
real GDP growth(-1)
money market rate(-1)
real US money market rate
devaluation
real GDP growth*SS
money market rate*SS
real GDP growth(-1)*SS
money market rate(-1)*SS
devaluation*SS
size(-1)
capitalization(-1)
liquidity(-1)
foreign
size(-1)*SS
capitalization(-1)*SS
liquidity(-1)*SS
foreign*SS
high $ debt
SS
Adjusted R2
Cross-sections
Observations
Model 1
-0.01
1.77∗∗∗
0.34
0.53∗∗∗
-2.24∗∗∗
2.53∗∗∗
-0.33
–
-0.27
Model 3
0.01
1.96∗∗∗
0.47
0.46∗∗∗
-1.85∗∗∗
2.41∗∗∗
-0.08
-0.86
1.38
3.03
-0.13
0.02
-0.09∗∗∗
0.57∗∗∗
0.33∗∗∗
0.06
0.00
-0.58
-0.09
0.14∗∗
0.05
-0.22
0.23
386
2202
0.23
386
2202
0.24
260
1773
–
-1.42
1.44∗
4.38
0.07
–
-0.07∗∗∗
0.63∗∗∗
0.37∗∗∗
0.06
0.00
-0.33
-0.06
0.17∗∗∗
–
15
Model 2
-0.01
1.83∗∗∗
0.42
0.53∗∗∗
-2.09∗∗∗
2.48∗∗∗
-0.05
-1.39
1.52
4.05
0.18
-0.01
-0.07∗∗∗
0.63∗∗∗
0.37∗∗∗
0.07
0.00
-0.38
-0.01
0.17∗∗∗
SS indicates the sudden stop dummy variable, and (∗∗∗ ,∗∗ ,∗ ) indicate significance at the 1%,
5% and 10% level. The included countries are Thailand, Indonesia, Philippines, Malaysia and
Korea.
23
The Impact of Sudden Stops on Bank Lending
Table 5: Estimation results for Sudden Stops coupled with high
devaluations 16
Dependent Variable: Growth rate of real total loans
Method: Panel least squares, Sample: 1992 2004
White cross-section standard errors & covariance (d.f. corrected)
Cross-section fixed (dummy variables) effects specification
C
real GDP growth
real money market rate
real GDP growth(-1)
real money market rate(-1)
real US money market rate
devaluation
real GDP growth*SS
real money market rate*SS
real GDP growth(-1)*SS
real money market rate(-1)*SS
devaluation*SS
size(-1)
capitalization(-1)
liquidity(-1)
foreign
size(-1)*SS
capitalization(-1)*SS
liquidity(-1)*SS
foreign*SS
high $ debt
SS
Adjusted R2
Cross-sections
Observations
Model 1
-0.03
1.48∗∗∗
1.35∗∗∗
-0.23∗
-0.46∗∗∗
0.79
-0.08∗∗∗
0.72∗∗∗
0.44∗∗∗
0.07
-0.01
0.54∗∗
0.02
0.08
Model 2
-0.04
1.56∗∗∗
1.57∗∗∗
-0.21
-0.38∗∗∗
0.96
-0.14∗∗∗
2.27∗∗
-1.39∗∗∗
-2.06
-0.87
0.19∗
-0.08∗∗∗
0.73∗∗∗
0.44∗∗∗
0.07
-0.01
0.55∗∗
0.03
0.08
–
–
0.15
0.10
Model 3
-0.03
1.61∗∗∗
1.60∗∗∗
-0.35∗∗
-0.39∗∗∗
1.15∗
-0.16∗∗∗
1.59
-1.26∗∗∗
0.18
-0.80
0.22∗
-0.09∗∗∗
0.75∗∗∗
0.42∗∗∗
0.04
0.01
0.47∗
0.17
0.09
0.02
-0.08
0.14
504
2786
0.15
504
2786
0.16
340
2227
–
2.63∗∗∗
-1.09∗∗∗
-2.38∗
-1.10
–
16
SS indicates the sudden stop dummy variable, and (∗∗∗ ,∗∗ ,∗ ) indicate significance at the 1%,
5% and 10% level. The included countries are Mexico, Thailand, Indonesia, Uruguay, Philippines,
Malaysia and Korea.
24
The Impact of Sudden Stops on Bank Lending
Table 6: Estimation results for Sudden stops coupled with minor
devaluations17
Dependent Variable: Growth rate of real total loans
Method: Panel least squares, Sample: 1991 2004
White cross-section standard errors & covariance (d.f. corrected)
Cross-section fixed (dummy variables) effects specification
C
real GDP growth
money market rate
real GDP growth(-1)
money market rate(-1)
real US money market rate
devaluation
real GDP growth*SS
money market rate*SS
real GDP growth(-1)*SS
money market rate(-1)*SS
devaluation*SS
size(-1)
capitalization(-1)
liquidity(-1)
foreign
size(-1)*SS
capitalization(-1)*SS
liquidity(-1)*SS
foreign*SS
high $ debt
SS
Adjusted R2
Cross-sections
Observations
Model 1
-0.07
0.17
-1.02∗∗∗
0.27
-0.54∗∗∗
5.90∗∗∗
-0.09
–
-0.27
Model 3
-0.05
0.19
-1.47∗∗∗
0.16
-1.03∗∗
7.09∗∗∗
0.09∗
-0.54
3.71∗∗∗
0.29
-6.64∗∗∗
-1.43
-0.09∗∗∗
0.73∗∗∗
0.56∗∗∗
-0.06
0.01
0.61∗∗∗
0.06
0.14∗
0.11
-0.16
0.13
237
1510
0.13
237
1510
0.15
129
929
–
-0.06
2.27∗∗∗
-1.01
-3.29∗∗∗
–
-0.09∗∗∗
0.81∗∗∗
0.59∗∗∗
-0.13
0.01
0.30∗
-0.14
0.17∗∗
–
17
Model 2
-0.08
0.34
-1.21∗∗∗
0.23
-0.64∗∗∗
6.59∗∗∗
0.05
-0.20
2.56∗∗∗
-1.07
-3.34∗∗∗
0.05
-0.09∗∗∗
0.80∗∗∗
0.60∗∗∗
-0.12
0.01
0.31∗
-0.14
0.17∗∗
SS indicates the sudden stop dummy variable, and (∗∗∗ ,∗∗ ,∗ ) indicate significance at the 1%,
5% and 10% level. The included countries are Argentina, Peru, Bolivia and Chile.
25
The Impact of Sudden Stops on Bank Lending
Table 7: Estimation results for the real growth rate of the major
balance sheet positions18
Latin America, Method: Panel Least Squares
coef.
size(-1)
cap(-1)
liq(-1)
foreign
size(-1)*SS
cap(-1)*SS
liq(-1)*SS
foreign*SS
SS
loans
-0.08∗∗
0.88∗∗∗
0.64∗∗∗
-0.17
0.00
0.51∗∗∗
-0.14
0.09
-0.04
deposits
-0.10∗∗∗
1.04∗∗
-0.08
-0.22
-0.01
-0.20
-0.12
0.15∗∗
-0.06
equity
-0.07∗∗∗
-0.20
0.02
-0.31∗
-0.01
-0.30∗∗
-0.25∗
0.11∗∗∗
0.04
PL
-0.04
0.40
-1.22∗∗
-0.54
-0.28∗∗∗
-0.83
2.96∗∗∗
-0.24
0.44∗∗
int. exp.
-0.05∗∗∗
0.44∗∗
-0.00
-0.26
-0.04∗∗
-0.59∗∗
0.17
0.25∗∗∗
0.12
reven.
-0.08∗∗∗
0.32
-0.03
-0.13
-0.04∗∗∗
-0.00
-0.11
0.21∗∗∗
-0.01
ND fund.
-0.15∗∗∗
2.87∗∗∗
-1.01∗∗∗
-0.02
0.01
-0.18
0.24
0.01
-0.12
secur.
-0.15∗∗∗
1.41∗∗∗
-2.14∗∗∗
-0.18
-0.02
0.25
-0.11
0.03
-0.20
R2
obs.
0.11
2094
0.11
2071
0.09
2131
0.17
888
0.18
357
0.15
2106
0.17
852
0.12
1729
East Asia, Method: Panel Least Squares
coef.
size(-1)
cap(-1)
liq(-1)
foreign
size(-1)*SS
cap(-1)*SS
liq(-1)*SS
foreign*SS
SS
loans
-0.07∗∗∗
0.63∗∗∗
0.37∗∗∗
0.07
0.00
-0.38
-0.01
0.17∗∗∗
-0.31∗
deposits
-0.05∗∗∗
0.50∗
-0.22∗
0.08
0.00
0.80∗∗∗
-0.16
0.20∗∗∗
-0.11∗
equity
-0.04
0.37
-0.16
0.06
-0.01
-0.85∗∗
-0.19
-0.05
-0.74∗∗∗
PL
-0.12
1.20
0.09
0.25∗∗∗
-27.6∗∗∗
-2.73∗∗
-0.60∗∗
3.90∗∗∗
int. exp.
-0.02
0.49∗∗∗
-0.58∗∗∗
0.18∗∗∗
0.01
0.60
1.02∗∗∗
0.00
1.20∗∗∗
reven.
-0.05∗∗
0.21∗
-0.27∗
0.04
0.00
0.01
-0.15
0.12∗∗
0.08
ND fund.
-0.07∗∗
0.50∗
-0.37
-0.06
0.02
1.69∗
3.42∗∗∗
-0.00
-0.39∗
secur.
-0.05
0.10
-2.01∗∗∗
-0.29∗
-0.03
-0.05
-1.90∗∗
-0.02
0.64∗
R2
obs.
0.23
2213
0.22
2216
0.18
2242
0.22
369
0.28
2190
0.25
2137
0.24
1255
0.23
2047
18
Only the coefficients associated with the bank-specific variables are reported in this Table. As
controls we use as before GDP growth, real interest rates and the devaluations. We did not yet
include the measure for the currency mismatch. SS indicates the sudden stop dummy variable,
and (∗∗∗ ,∗∗ ,∗ ) indicate significance at the 1%, 5% and 10% level. PL denotes problem loans, int.
exp. interest expenses, reven. revenues, ND funding non-deposit funding (sum of money market
and other funding), and secur. denotes securities.
26
Bolivia
1995
← SS
2000
← SS
← SS
−0.5
−1
2005
← SS
1995
← SS
← SS
2000
0
← SS
−20
2005
−40
Peru
← SS
0
←
←SS
SS
← SS
1995
2000
2005
1995
2000
−20
−40
2005
← SS
← SS
1995
2000
2005
Thailand
10
0
−5
2005
← SS
0
← SS
← SS
← SS
← SS
−10
← SS
−4
2000
← SS
5
−2
0
Philippines
2
← SS
← SS
1995
← SS← SS
Mexico
billion $
← UY,BO
2004
← BO
1995
← SS
20
20
billion $
billion $
0
−20
← SS
−2
−4
2005
40
−10
0
Korea
10
billion $
↓ AR
↑ UY
2002
↓ TH,KR,ID,PH,MY,PE
2000
← AR
↓ PH,CL
← AR,BO
1998
year
← TH
1996
↓ MX,AR
1994
Indonesia
2000
billion $
−20
← SS
0
2
billion $
billion $
billion $
← SS
← SS
billion $
8
7
6
5
4
3
2
1
0
1992
Sudden stops between 1992 and 2005
27
Potential sudden stops between 1992 and 2005
0
−10
Chile
0.5
1995
2000
2005
−20
1995
2000
2005
The Impact of Sudden Stops on Bank Lending
Figure 1:
Figure 2:
number of sudden stops
Argentina
10
The Impact of Sudden Stops on Bank Lending
−.05
0
KI/GDP
.05 .1
.15
million $
600 800 1000 1200 1400
Capital inflows to LA−6
1995
2000
2005
1990
1995
Average lending volume in A−5
1500
Capital inflows to A−5
million $
500
1000
KI/GDP
0
.05
0
1995
2000
2005
1990
1995
year
2000
2005
year
Capital flows and the average banks’ lending volume
Average deposit volume in LA−6
500
−.05
0
million $
1000 1500
KI/GDP
.05 .1
.15
2000
Capital inflows to LA−6
1995
2000
2005
1990
1995
2000
2005
year
Capital inflows to A−5
Average deposit volume in A−5
million $
500 1000 1500 2000
year
0
−.05
KI/GDP
0
.05
.1
1990
1990
1995
2000
2005
year
Figure 4:
2005
year
−.05
1990
Figure 3:
2000
year
.1
1990
Average lending volume in LA−6
1990
1995
2000
2005
year
Capital flows and the average banks’ deposit volume
28
All banks av. lending in LA−6
1995
2000
2005
1990
1995
2005
All banks av. lending in A−5
Capitalized banks’ av. lending in A−5
million $
100 200 300 400
year
0
0
1990
1995
2000
2005
1990
1995
year
2000
2005
year
1000
1995
2000
2005
1990
1995
2000
2005
year
All banks av. lending in A−5
Foreign banks’ av. lending in A−5
million $
0 200 400 600 800 1000
year
0
million $
500
1000
1500
1990
1990
1995
2000
2005
year
Figure 6:
Foreign banks’ av. lending in LA−6
million $
1500 2000
All banks av. lending in LA−6
2500
Average lending volume of well-capitaized banks vs. all banks
million $
600 800 1000 1200 1400
Figure 5:
2000
year
million $
500
1000
1500
1990
Capitalized banks’ av. lending in LA−6
million $
200 400 600 800 10001200
million $
600 800 1000 1200 1400
The Impact of Sudden Stops on Bank Lending
1990
1995
2000
2005
year
Average lending volume of foreign banks vs. all banks
29