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Tomislav Ridzak, Financial Stability Department Croatian National Bank

Lending activity and credit supply to firms during the crisis Evidence from the Croatian micro level data *. Tomislav Ridzak, Financial Stability Department Croatian National Bank

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Tomislav Ridzak, Financial Stability Department Croatian National Bank

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  1. Lending activity and credit supply to firms during the crisisEvidence from the Croatian micro level data * Tomislav Ridzak, Financial Stability Department Croatian National Bank *The views expressed in this article are those of theauthor and do not necessarily represent the views of, andshould not be attributed to the CNB

  2. Motivation • Crisis brought the need to rebalance the Croatian economy • Cutting the losses and transferring resources to more productive uses (depends on capitalization, legal framework, own interest of bank management). • Anecdotal evidence point to a lot of inertia in loan dynamics: • Loan prolongation / restructuring instead of cutting the losses.

  3. Introduction • This research aims to analyse the credit supply to individual enterprises in Croatia during the crisis and to detect possible credit misallocation • Steps: • get an overview on dynamics of the credit activity in Croatia using credit creation and destruction; • explore differences in lending patterns before and during the crisis and find possible evidence of loan misplacement (evergreening, zombie lending) using firm level data.

  4. International evidence on loan reallocation • 1st approach: reducing exposures to enterprises in distress and turning to new and promising projects: • US in each recession from 1979 to 2008 (Contessi and Francis, 2009). • 2nd approach: extending time limits for loan repayments (evergreening, zombie lending): • Mostly associated with the case of Japan - Peek and Rosengreen (2003) find that the banks increased loans to severely impaired firms in Japan because of corporate affiliations and government pressure. • Recent financial crisis exposed all the vulnerabilities of the banking systems in the US and Europe - Albetrazzi and Marchetti (2010) find evidence of evergreening in Italy.

  5. Credit creation and destruction

  6. Credit creation and destruction • The creation was calculated as the sum of all increases in total loan amounts to individual clients (relative to the balance at the end of the previous period) • The destruction was calculated as the sum of all decreases in total loan amounts to individual clients (relative to the balance at the end of the previous period) • The excess credit growth which measures the reallocation in excess of net credit change is defined as follows

  7. Credit creation and destruction (median of all banks)

  8. Credit reallocation: Excess credit growth

  9. Summary: crisis and pre-crisis

  10. Lending patterns

  11. Data • Bank × company panel dataset in two periods: • CRISIS: begins 30.9.2008, ends 31.12.2009 • PRE-CRISIS: begins 30.6.2007, ends 30.9.2008 • Dependent variable, corporate lending from bank b to company i, is introduced in a regression as the change in the loans deflated by firm’s average assets • Explanatory variables are: • banks’ performance and financial strength • firms’ financial indicators and other characteristics • interaction terms

  12. Explanatory variables • Bank variables: • Liquidity, profitability, capitalization and share of bad loans to firms in total loans • Bank size dummy • Biggest creditor dummy • Firm variables: • Z-Score dummy for companies riskier than median • Dummy for low productive companies (TFP below the median for the sector) • Small firm dummy • Interactions between bank and firm variables

  13. Estimation strategy, Lending patterns and evergreening • I use multiple lending and fixed effects to single out the effect of bank variables, i.e. credit supply on change in loans • Fixed effects will pick-up the unobservable part of the error term (ui) that does not vary among banks • As a result the obtained coefficients on the bank specific variables can be interpreted as drivers of supply

  14. Estimation results: credit supply • Two bank specific variables are significant determinant of credit supply to firms in the crisis period: • Capitalization • Non-performing loan ratio • Can this be interpreted as evidence of capitalization related credit crunch? • Yes, as only about 8 per cent of the decrease in loans from low capitalized banks is substituted by loans from high capitalized banks (5 per cent in the pre-crisis period) • Results are robust across specifications

  15. Estimation results: evergreening

  16. Conclusion • Bank capitalization was significant factor of loan supply in the crisis period • Less capitalized banks extended the loans to problematic enterprises (evergreening) • Small and medium sized banks are forced to deal with the clients that are financially less stable, because of the competition from the big banks • Bank-firm relationship in Croatia seems to be strong

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