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Three essays on the credit growth and banking structure of Central and Eastern European countries
THREE ESSAYS ON THE CREDIT GROWTH AND BANKING STRUCTURE OF CENTRAL AND EASTERN EUROPEAN COUNTRIES by Burcu Aydin A Dissertation Presented to the FACULTY OF THE GRADUATE SCHOOL UNIVERSTIY OF SOUTHERN CALIFORNIA In Partial Fulfillment of the Requirements for the Degree DOCTOR OF PHILOSOPHY (ECONOMICS) August 2007 Copyright 2007 Burcu Aydin UMI Number: 3278377 3278377 2007 UMI Microform Copyright All rights reserved. This microform edition is protected against unauthorized copying under Title 17, United States Code. ProQuest Information and Learning Company 300 North Zeeb Road P.O. Box 1346 Ann Arbor, MI 48106-1346 by ProQuest Information and Learning Company. i Dedication To My parents Nesibe and Husamettin And my brother Mirkan ii Acknowledgments I would like to thank my advisors; Robert Dekle, John Ham, and Cheng Hsiao for making valuable comments and suggestions. They regularly provided me with encouragement and guidance for my research. Also, I would like to thank Selahattin Imrohoroglu for accepting the role of outside member of my dissertation committee, and for providing his valuable comments throughout the writing of this dissertation. I am greatly indebted to Wim Fonteyne from the International Monetary Fund. It would not have been possible to write my thesis without his support, guidance, and precious comments. I would like to thank the participants in the seminars held at the International Monetary Fund, Europe Department in July 2006, and the University of Southern California in September 2006. Last, I am grateful to my family for always supporting me. It would not have been possible to complete this work, or any of my achievements, without feeling their love and their faith in me. iii Table of Contents Dedication i Acknowledgments ii List of Tables v List of Figures vii Abbreviations viii Abstract x Chapter 1: Introduction 1 Chapter 2: Literature Review 12 Chapter 3: The Impact of Foreign Bank Ownership on Credit Growth in Central and Eastern European Countries 15 3.1 Stylized facts about Eastern European Countries 19 3.2 Data 23 3.3 Empirical Model 31 3.3.1 Concerns about Endogeneity of the Foreign Ownership Variable 36 3.3.1 Concerns about Multicollinearity 40 3.4 Results 42 3.4.1 Impact of Microeconomic Shocks 48 3.4.2 Impact of Macroeconomic Shocks 54 3.6 Conclusion 57 Chapter 4: The Managerial Impact of Parent Banks on their Affiliated Banks Operating in Foreign Countries: A Case Study for the Central and Eastern European Countries 59 4.1 Data 65 4.2 Empirical Model 73 4.2.1 Concerns about Multicollinearity 77 4.2.2 Do Parent Banks have different Managerial Strategies? 79 4.3 Results 83 iv 4.4.1 Impact of Microeconomic Shocks 93 4.4.2 Impact of Macroeconomic Shocks 97 4.4 Conclusion 100 Chapter 5: The Lessons from the EMU Countries 101 5.1 Are there any similarities between the CEE and the EMU-5 Countries? 105 5.2 Data 108 5.3 Econometric Model 113 5.3.1 Concerns about Multicollinearity 115 5.4 Results from the EMU-5 Banking Structure 117 5.4.1 Impact of Microeconomic Shocks 121 5.4.2 Impact of Macroeconomic Shocks 122 5.5 Conclusion 123 Bibliography 125 v List of Tables Table 1: Market Share of Foreign-Owned Banks in CEE Countries 20 Table 2: Summary Statistics for the CEE Countries 27 Table 3: Pairwise Correlation Coefficients between Credit Growth and its Lagged Value for the CEE Banks 32 Table 4: Panel Data Probit Estimation Results for Foreign Ownership Variable 37 Table 5: Hausman Specification Test for Foreign Ownership Dummy 39 Table 6: Correlation Coefficient across Regressors for the CEE Countries 41 Table 7: Fixed Effect Estimator Results for the CEE Countries 43 Table 8: Fixed Effect Estimator Results for the CEE Countries 44 Table 9: Fixed Effect Estimator Results for the CEE Countries 45 Table 10: Cross-Ownership Varying FE Estimators for the CEE Countries 46 Table 11 : Cross-Ownership Varying FE Estimators for the CEE Countries 47 Table 12: List of Parent Banks and their Affiliated Companies 67 Table 13: Summary Statistics for Parent Banks and their CEE Subsidiaries 70 Table 14: Pairwise Correlation Coefficient between Credit Growth and its Lagged Value for Each CEE Subsidiary 74 Table 15: Correlation Coefficients across Variables of Interest 78 Table 16: FE regression results for cross-sectional varying coefficients 81 Table 17: Test of Different Coefficient Estimates across Affiliated Banks 82 vi Table 18: FE Estimator for Credit Growth in the CEE Subsidiaries 85 Table 19: FE Estimator for Credit Growth in the CEE Subsidiaries 86 Table 20: FE Estimator for Credit Growth in the CEE Subsidiaries 87 Table 21: FE Estimator for Credit Growth in the CEE Subsidiaries 88 Table 22: FE Estimator for Credit Growth in the CEE Subsidiaries 89 Table 23: FE Estimator for Credit Growth in the CEE Subsidiaries 90 Table 24: FE Estimator for Credit Growth in the CEE Subsidiaries 91 Table 25: FE Estimator for Credit Growth in the CEE Subsidiaries 92 Table 26: Summary Statistics for EMU-5 109 Table 27: Pairwise Correlation Coefficient between Credit Growth 114 Table 28: Correlation Coefficient across Regressors for the EMU-5 Countries 116 Table 29: Fixed Effect Estimator Results for EMU-5 119 Table 30: Fixed Effect Estimator Results for EMU-5 120 vii List of Figures Figure 1: Credit as a Percentage of GDP 22 Figure 2: Number of Banks per Ownership Category 26 Figure 3: Credit Growth across Bank Ownership Types in CEE Countries 49 Figure 4: Comparison of the transition indicators between the CEE and EMU-5 Countries 107 Figure 5: Mean and Standard Deviation of Banking Variables across Years in EMU Countries 110 viii Abbreviations AIC Akaike Information Criteria AR(2) Second-order Autoregressive Process BIC Bayesian Information Criteria CEE Central and Eastern Europe ECB European Central Bank EMU Economic and Monetary Union EMU-5 Greece, Ireland, Italy, Portugal and Spain EU European Union FE Fixed Effects GAAP Generally Accepted Accounting Principles GDP Gross Domestic Product IFRS International Financial Reporting Standards IV Instrumental Variable M3 A Measure of Money Supply MIGA Multilateral Investment Guarantee Agency n.a. Data not available NIM Net Interest Margin OLS Ordinary Least Squares r Real Interest Rate [...]... parent bank and/ or the macroeconomic conditions in the home country worsens On the other hand, the financial diversification theory suggests that the profitability of the subsidiary or the growth prospects in the CEE countries are more important for the multinational bank’s decision whether or not to extend the credit line in the CEE countries The profitability of the subsidiary will motivate the parent... integration of the CEE countries towards the Economic and Monetary Union (EMU) the spread between domestic and Euro area interest rates lose importance over time and the economic integration of the CEE countries increases the importance of EMU on the CEE macroeconomic indicators The EMU monetary policy affects the credit growth in the CEE country and this impact is sounder in the 2000s A monetary expansion... chapter 4, and it draws projections on the EMU membership of the CEE countries based on the experiences of the five current member states of the EMU; Greece, Ireland, Italy, Spain, and Portugal (EMU-5) The post transition period, the 2000s, was marked by the EU membership of the CEE countries The next transition for the CEE countries will be their membership to the monetary union On the way to their next... bank lending and borrowing rate, and the spread between the domestic and Euro area interest rate, is influential in the credit growth of the CEE countries This chapter of the thesis has the following structure The following section provides the characteristics of the transition in the CEE countries, and the implications of such a transition to the CEE banking system Section 3.2 Data provides the data analysis... information on the market share of foreign-owned banks in eight of the ten CEE countries for the most recent years8 Looking at this table, one 7 The central banks established during the transition period of the CEE countries had a similar structure as that of the central banks in developed countries The CEE central banks were responsible of pursuing the monetary policy, and supervising and monitoring the banking. .. Section 3.3 Empirical Model outlines the panel data 18 estimation model Further, this section discusses the peculiarities of the microeconomic dataset, and the problems which may arise regarding the endogenieity and multicollinearity issues The results of the regression analysis regarding the impact of the microeconomic and macroeconomic variables on the credit growth pattern of the CEE counties, and the. .. acquired the banks in central Europe, and Scandinavian banks owned the banks operating in Baltic countries This high degree of foreign bank ownership in the CEE banking system motivates this investigation of the impact of the parent banks on the credit growth pattern of the CEE countries The interest for the fourth chapter of this thesis is based on the following factors First, the credit growth pattern... joining the monetary union6 Even though the economic growth slowed down in these countries, the credit crunch did not cause any systematic risks to the banking sector Considering the possibility that the CEE countries may experience a similar stagnation in the macroeconomic environment, this chapter draws projections for the CEE countries from the credit growth pattern of the EMU-5 countries before and. .. and after their transition to the monetary union Even though the banking structure in the EMU-5 and CEE markets have differences, a road map for the CEE countries can potentially be prepared by drawing lessons from the past experiences of the EMU-5 countries and the transition in their banking system This chapter uses a panel data from the banking and macroeonomic data of the EMU-5 countries The dataset... the influence of the managerial impact on credit growth and the third one draws projections for the future EMU membership of the CEE countries from the past experiences of the five current EMU states The first essay studies the impact of foreign bank ownership on credit growth for the CEE countries The analysis is based on an unbalanced panel for the 72 largest banks from these countries The results . essays on the credit growth and banking structure of the Central and Eastern European Countries (CEE). The first essay studies the importance of bank ownership on this growth, the second explores. investigation of the impact of the parent banks on the credit growth pattern of the CEE countries. The interest for the fourth chapter of this thesis is based on the following factors. First, the credit. Impact of Foreign Bank Ownership on Credit Growth in Central and Eastern European Countries, studies the importance of bank ownership structure for the growth of credit in the CEE countries. The