Scrigroup - Documente si articole

Username / Parola inexistente      

Home Documente Upload Resurse Alte limbi doc  

BulgaraCeha slovacaCroataEnglezaEstonaFinlandezaFranceza


Banking in transition


+ Font mai mare | - Font mai mic


Trimite pe Messenger
Banking in transition
Financial Statements, Cash Flow, and Taxes
Banking and sustainable development

TERMENI importanti pentru acest document

Banking in transition

The banking sector across the transition region has made remarkable progress since the early 1990s, with important changes in ownership structure and the institutional environment. The most significant progress has been in central eastern Europe and the Baltic states, where banks have reached an advanced level of development. In some countries in south-eastern Europe and the Commonwealth of Independent States, however, modern banking is still in its infancy.

Foreign banking groups have made significant inroads into the region, leading to unprecedented integration between the banking systems of developed (mainly western European) countries and those in the transition region. In central eastern Europe and the Baltic states (CEB) and parts of south-eastern Europe (SEE), foreign banks dominate the market, and their local affiliates are the main source of external finance for many households and firms. The transition from centrally planned to market economies has also gradually, yet substantially, changed the working environment for banks. Most important in this respect is the improvement in the legal protection for banks as creditors, the enforcement of legislation through the courts, and more effective supervision and regulation of the banking industry.

Changes in ownership structure and the institutional environment have influenced banks’ activities, their performance and, in turn, their role in financing business activity.[1] While it has been possible to track the growth of loans in transition countries, little is known about the composition of bank lending – whether foreign banks differ from domestic banks in the composition of their loan portfolio, for example if they allocate a higher or lower proportion of their customer portfolio to small and medium-sized enterprises (SMEs) or to subsidiaries of foreign firms. Also, has the banking sector increased the range of services that it provides to clients? And what is the effect of a changing legal environment on banks? Is a bank’s loan portfolio influenced by the quality of creditor protection and does a better institutional environment prompt banks to diversify into fee and commission-generating activities?

The following analysis seeks to answer these questions, drawing on a new EBRD survey covering bank activities and the influence of the institutional environment. The Banking Environment and Performance Survey (BEPS) was conducted in 2005 with a random sample of 220 banks in 20 transition countries.[2] In each case the questionnaire was answered by a senior bank officer during an interview. The survey covered the bank’s credit and deposit activities and other business activities. In addition, the bank officer was asked about risk management techniques, the security rights of lenders, bankruptcy law and the effectiveness of regulatory policy.

1 The legacy of central planning

Since the end of central planning, when the financial sector was almost entirely controlled by the state, transition banking has evolved in four stages.[3] The first involved the establishment of banks in the early 1990s. The second witnessed bank failures and systemic crises that affected almost all transition countries in the mid-1990s. The third stage involved lengthy restructuring through privatisation and the entry of foreign banks. By the end of the century, most banks were privately owned, and foreign banks dominated the sector in many transition countries. In the fourth and current stage, banks in most transition countries have established sound balance sheets, and the industry has become well regulated and broadly competitive. By 2004 the foreign bank asset share was over 50 per cent in most CEB and SEE countries (with the exception of Albania, Latvia, the Former Yugoslav Republic of Macedonia, Serbia and Montenegro and Slovenia).

Changes have often been dramatic – for example, foreign ownership in Croatia and the Slovak Republic has risen from about 10 per cent of assets to more than 90 per cent. The bank ownership structure in the Commonwealth of Independent States (CIS) is rather different. While there is substantial foreign ownership in Armenia, Georgia and the Kyrgyz Republic, state ownership is still considerable in Azerbaijan, Belarus, Turkmenistan and Uzbekistan. Elsewhere in the CIS, domestic private banks prevail. In the larger economies of Kazakhstan, Russia and Ukraine, foreign ownership is about 10 per cent of assets. In many CIS countries, an uncertain economic environment and the threat of asset appropriation continue to pose significant risks to foreign banks.

Parent banks may influence the operations of their foreign subsidiaries in several respects. Many parent banks have, for example, introduced advanced risk management techniques, information technology systems, screening methods and monitoring systems in their subsidiaries. Whereas many newly created foreign subsidiaries have been equipped with relatively sophisticated technology from the outset, subsidiaries resulting from take-overs have had to go through a restructuring process during which the new ownership updated the technology. New technology has also gradually been adopted by domestically-owned banks.

Parent banks have helped to set growth targets for their subsidiaries and have provided financial support where necessary. Evidence suggests that the entry of foreign banks has had a positive influence on the efficiency and stability of the banking systems in transition. Nevertheless, concerns have been raised in many countries about the potential negative effect of large-scale foreign bank entry on the availability of bank loans to local SMEs.

2 Bank performance

Banking in most transition countries is highly concentrated. In 2002–04 the five largest banks in all but three transition countries accounted for more than 50 per cent of total bank assets. The exceptions were Russia (at 4x per cent), Ukraine (3x per cent) and Serbia and Montenegro (4x per cent). In Albania, Belarus, Estonia, Lithuania, Turkmenistan and Uzbekistan, the ratio was over 80 per cent.

Bank profitability has been strong. Since the late 1990s, standard accounting measures – such as return on assets (ROA), the ratio of profit before tax to total assets, and the return on equity (ROE) have allowed comparison across countries. Across the transition region, ROA and ROE have increased or remained at a relatively high level since the Russian financial crisis of 1998. They are well above the average level prevailing in three benchmark EU countries (Greece, Portugal and Spain ─ see Chart 4.1).

Banks operating in countries with lower income per capita enjoy higher ROA. In the CIS countries, for instance, ROA has been consistently higher than in other transition countries. This may reflect higher interest rates associated with unstable macroeconomic conditions. Nevertheless, in CEB, where inflation rates have fallen substantially, banks have still gradually increased their ROA.

<< Chart 1 about here >>

Non-performing loans (NPL) were a hallmark of the early transition banking systems. However, as Chart 2 shows, the ratio of NPL to total loans has declined substantially in CEB and SEE. In CEB the ratio is approaching the eurozone average of X per cent. In SEE the decline has been particularly dramatic since 1999. In the CIS non-performing loans still accounted for about 15 per cent of total loans in 200

<< Chart 2 about here>>

Aggregate data on national banking systems mask within-country differences in bank performance. Some banks perform better than others due to the quality of the bank manager, the size of the institution or its ownership structure. BEPS distinguishes between four bank ownership categories: private banks with majority domestic ownership, newly created foreign banks, privatised banks with majority foreign ownership and state-owned banks. In general, bank ownership does not have a strong influence on a bank’s performance. Return on assets and net interest margins are, for instance, largely similar across the ownership categories. The exception to this finding is that newly created foreign banks have significantly lower cost-to-asset ratios than domestic private and other banks. This is probably because they have more efficient technologies and risk management techniques.

Bank size seems to have a more important effect on performance, as smaller banks have significantly higher net interest margins compared with larger banks. Several factors may account for this. First, smaller banks generally serve smaller companies, since they are likely to have a comparative advantage from understanding the local business sector (see section 4). Also, SMEs have limited access to external finance compared with larger firms. With less competition in the SME lending sector, small banks can charge higher interest rates.

Secondly, equity and inter-bank deposits constitute the main source of funds for smaller banks. While the ratio of customer deposits to total assets is lower for smaller banks compared with larger banks, their share of inter-bank deposits as a percentage of total assets is greater. Smaller banks also appear to be more solvent as they have larger equity-to-asset ratios. With relatively expensive sources of funding, smaller banks may try to compensate by charging higher interest rates. Lastly, higher margins may also reflect greater risk taking by smaller banks. Indeed, smaller banks have a higher percentage of non-performing loans compared with larger banks.

Besides bank ownership and size, the institutional environment is likely to play an important part in influencing a bank’s performance. Significant factors include the protection of banks through legislation and the court system, the regulatory framework and banking supervision. For example, an institutional framework that is effective in securing creditor rights can affect the asset composition of banks and the services that they offer. The institutional environment may also affect banking costs, particularly those associated with risk management and the evaluation of credit information. In addition, effective protection of creditor rights can strengthen competition among banks and increase access to finance.[8] The BEPS provides measures of the quality of the institutional environment, as perceived by banks (see Appendix 1).

In order to take a closer look at performance differences among banks and the influence of the institutional environment, regression analysis has been performed (see Appendix 2). The BEPS measures of bankers’ perceptions of the quality of the institutional environment are used to explain bank performance. Bank size – in terms of scale of operations and market position – needs to be taken into account as one of the determinants of bank performance. Larger banks that dominate the local deposit market may use their market position to introduce higher interest margins while economies of scale may reduce their costs. The economic development of the country, measured as income per capita, also needs to be taken into account.

The regression analysis reveals that the institutional environment has not significantly affected the profitability of banks, as measured by the return on assets. However, the institutional environment has had a negative effect on banks’ cost-to-asset ratios. Costs associated with risk management and the evaluation of credit information may be higher due to greater uncertainty and risk. Banks operating in lower-income countries have enjoyed higher returns on assets, higher interest rates associated with unstable macroeconomic conditions being an important source of profit for banks.

In summary, the performance of banks is influenced by ownership structure, bank size and the institutional environment. However, the institutional environment and ownership have only affected the cost efficiency of banks. In countries with a weak institutional framework, banks have incurred more costs when providing services to clients. Regarding ownership, the greater cost efficiency of newly created foreign banks is connected with their higher level of skills and technology. Privatised and domestic banks have had to upgrade their technologies, resulting in higher costs.

Nevertheless, the superior cost performance of newly created foreign banks has not allowed them to attain a significantly higher profitability. This may be due to the lower interest margins for banks operating in more developed countries and/or because newly created foreign banks have a more conservative provisioning policy. Only bank size and the level of economic development of the country appear to affect the profitability of banks. Small banks are able to generate higher net interest margins, probably because they target more profitable and riskier markets. Lastly, banks operating in poorer countries have enjoyed higher returns on assets.

3 Financial intermediation

As discussed in Chapter 3, financial intermediation by banks can be broadly defined as the ratio of domestic credit to the private sector in relation to GDP. This has been rising slowly in most CEB countries but remains under 50 per cent across the region overall (which is low by international standards). The ratio for the three EU benchmark countries – Greece, Portugal and Spain – in 2004 was almost 100 per cent. More rapid financial deepening has occurred in some CEB countries, notably Hungary. In the CIS countries the ratios average only 10 per cent. They are increasing, particularly in Russia and Kazakhstan, but even in Russia the ratio had only reached 25 per cent of GDP by 2004. The only SEE country with a wider availability of bank finance is Croatia, which has a ratio of X per cent. The average ratio in the rest of SEE in 2004 was around 15 per cent.

Much of the financial deepening that has taken place is in the form of household credit. The share of loans to households as opposed to enterprises has increased particularly sharply in CEB and SEE(see Chart 3). By 2004 it accounted for between 35 and 40 per cent of total credit to the private sector in these regions compared with 10 to 15 per cent in 1996. Moreover, in many countries much of this has been mortgage lending.

<< Chart 3 around here>>

While financial deepening has been modest at the national level, it might, however, be the case that certain types of banks have expanded their lending more rapidly than others. Analysis of the BEPS data shows that loan growth was strongest in newly created foreign banks, independent of their size. These banks appear to have the skills and financial resources to respond to customer demand more rapidly than other types of banks. Loans have also increased in smaller banks as they have sought to expand and increase market share. Loan growth was weakest in state-owned banks.

Although growth in bank lending is desirable in a transition context, there is a danger that it may lead to greater risk-taking by banks. It is appropriate to ask whether banks that grow faster employ better risk management techniques and practices and whether the quality of their portfolio is better or worse than other banks. To this end, the ratio of loan loss provisions to net interest revenue has been used as a measure of loan quality, since it captures the ability of the bank to recover its loan loss provisions from net interest revenue. A higher ratio indicates a lower loan quality. Chart 4 shows that smaller banks have on average a worse loan quality than larger banks while foreign banks tend to have better loan quality than other types of banks. Although both small banks and newly created foreign banks have been growing relatively fast, only foreign banks have been able to do so without a deterioration in their asset quality.

<< Chart 4 around here >>

The BEPS indicates that larger banks and newly created foreign banks tend to have more experience in risk management practices, as measured by the number of years that a separate risk management department and an internal rating based approach for credit risk have been in place. This suggests that there is scope for smaller, domestic banks to strengthen their risk management practices.

Loan growth is highest in the countries with least economic development. However, it is from a very low base and is merely a sign that they are beginning to catch up with more developed countries. This growth is also associated with high rates of inflation in many of the lower-income transition countries. There has been no significant difference, therefore, between the rates of real growth in loans in countries with different levels of development. Moreover, the institutional environment, as perceived by banks, does not seem to have played a significant role on average real loan growth in 2003–0

4 The composition of bank lending

The size and ownership of a bank are likely to affect not only the growth of its portfolio but also its loan composition. The banking environment may also have an impact. The BEPS is the first source of detailed data on both bank-client relationships and the composition of loan portfolios in transition countries. It identifies the types of banks that are lending to particular groups of customers and their reasons for lending.

Bank size and ownership

The ownership structure and size of a bank partly determine its ability and its willingness to lend to particular types of customers. Foreign banks with a limited knowledge of local markets may prefer to limit credit to companies (such as large and foreign-owned firms) that they consider to be the most transparent and least risky. Domestic banks, on the other hand, can base their credit decisions on a deeper knowledge of their local business sector using the more ‘soft’ information that is available on local and smaller firms. Nevertheless, such differences may have receded over the years as many foreign banks have merged with domestic banks. The size of a bank may also influence its customer profile. Larger banks may prefer to lend to larger clients in order to exploit economies of scale in evaluating the ‘hard’ information that tends to be available on such customers. On the other hand, because of size limitations, smaller banks may not be able to lend to larger companies and may instead have a comparative advantage in serving SMEs.

Table 4.1 illustrates the relationship between bank type and portfolio composition in 200 Foreign banks were more actively involved than domestic banks in lending to households (comprising on average 30 and 18 per cent respectively of the loan portfolio). SMEs were the most important customer category for almost all types of banks. Dealings between private banks and state-owned enterprises were very limited (only 3 per cent on average) while state-owned banks allocated a considerable share of their loan portfolios to state-owned enterprises (14 per cent) and other state agencies (27 per cent).

<<Table 1 around here>>

Large banks lent more to large companies, state-owned enterprises and governments and devoted markedly less to small businesses and household lending not involving mortgages. Small banks lent on average 57 per cent of their portfolio to SMEs whereas the largest banks allocated only 28 per cent. Differences between regions are also quite substantial. In CEB, mortgage financing constituted 45 per cent of all lending to households compared with 32 and 13 per cent in SEE and the CIS respectively.

Regression analysis has been used to explore the association between loan portfolio composition and bank types in more depth (Table 2). The analysis shows that household lending forms a much higher share of the loan portfolio for foreign banks than it does for domestic banks. Large banks tend to finance fewer SMEs and more large enterprises while loans to state-owned enterprises are provided by government-owned banks more than private banks.

<< Table 2 around here >>

The BEPS shows that both foreign and domestic banks denominated about 37 per cent of all household lending in foreign currencies. Foreign-currency household lending was more prevalent in the CIS (45 per cent) than in SEE (37 per cent) and CEB (30 per cent). Foreign banks tended to denominate a larger proportion (48 per cent) of such lending in foreign currencies than domestic banks (38 per cent). The share of foreign-currency denominated corporate lending was similar across all three regions (at about 43 per cent).

Foreign currency lending is increasing because borrowers are attracted by the lower interest rates on these loans and by the expectation that local currencies may appreciate. To the extent that corporate borrowers and households earn their income in local currencies, foreign currency lending may lead to significant currency mismatches in these areas of the private sector. Even if banks adequately match the currency exposures on their own balance sheets, they are still exposed to credit risks associated with unhedged customers who may not be able to service their foreign currency debt in the event of unfavourable exchange rate movements. Such indirect risks appear to vary between regions. In CEB 45 per cent of all foreign currency lending went to corporate customers with some hedging against currency risk – for example, to companies with revenue in foreign currency or to enterprises (such as hotels and other forms of tourism) that link their prices to the foreign exchange value of the local currency. In contrast, the percentage of hedged corporate customers in both SEE and CIS was much lower at 28 per cent.

The banking environment

Table 4.2 shows how bank lending is influenced by the institutional environment, as perceived by banks. A better institutional environment generally encourages banks to move from lending to large enterprises and subsidiaries of foreign companies to lending to SMEs and households. The relative importance of credit to foreign subsidiaries further declines as income per capita increases. In richer and institutionally more developed countries, banks no longer target only large and foreign companies but are able to shift their activities partly towards SMEs and households.

Table 2 shows that improvements in the quality of the legal system and in banking regulation lead to a smaller share of credit being allocated to large and foreign firms. When pledge and mortgage law improve and courts become more effective, households receive a larger proportion of all bank loans. Because mortgage lending is intrinsically related to the use of collateral, an adequate legal framework is a necessary condition for banks to shift towards this type of business. On average, households received 33 per cent of bank lending in CEB, 26 per cent in SEE and only 15 per cent in the CIS. A better legal environment also encourages more lending to SMEs.

In contrast, improved bank regulation does not increase household lending but increases the proportion of bank lending to SMEs. This may be because banking regulation focuses on reducing connected lending and limiting large exposures. In sum, the BEPS data indicate that an improved institutional environment tends to allow domestic and foreign banks to focus less on large and foreign-owned corporations and to start lending more to households and SMEs.

Changes in lending patterns

The BEPS asked banks to what extent they had altered the share of lending to each customer category from 2001 to 2004. More than three-quarters of banks increased household lending over this period (see Table 3). Most banks – in particular, domestic private banks and newly created foreign banks ─ also increased lending to SMEs. To the extent that foreign banks have been lending less to SMEs during the earlier transition years, any such differences seem to have disappeared over time. Consequently, by 2004, no difference was found between bank-ownership categories as regards the proportion of lending to SMEs.

<< Table 3 around here >>

The BEPS indicates a declining focus on large enterprises. Most private domestic banks and newly created foreign banks have either maintained or decreased the proportion of their lending to large corporate customers. Partly due to the increasing attractiveness of lending to households and SMEs, this development also reflects greater competition – and therefore lower interest rate margins – in lending to large, foreign-owned firms. Moreover, many foreign firms have gradually gained access to alternative credit sources, including finance from banks in their own country, international financial markets and funding from the parent company.

5 Collateral use and constraints to bank lending

The BEPS provides information on the extent of collateral use by lenders, the reasons why banks reject loan applications, and the factors that constrain bank lending. This information contributes to a more complete understanding of the supply response of banks to the growing demand for bank loans.

Collateral use

Chart 5 summarises the use of collateral by type of bank ownership. In all instances the use of collateral increased between 2001 and 200 However, privatised foreign banks used financial assets more frequently than other banks to secure a loan. This may be simply because this type of bank has a substantial number of foreign clients that are able to supply such collateral.

<< Chart 5 around here >>

The regression analysis shows that collateral in the form of land and buildings (immovables), vehicles, business equipment and inventory (movables) and guarantees tends to be used mostly by larger banks to secure a loan. Banks operating in lower-income countries use movables and financial assets more frequently as collateral than banks in more developed countries. How banks perceive the institutional environment also has a significant influence on the ability and willingness of banks to accept collateral for securing a loan.[10]

A better institutional environment encourages banks to use a wider range of collateral to secure a loan due to, for example, the existence of property and land registries and reliable financial statements. The existence of this institutional framework and the quality of court procedures make it easier for banks to recover collateral in the event of default.

Rejecting loan applications

All types of banks reported that the main reason for rejecting a loan application was lack of cash flow or profitability of the borrower. Lack of acceptable collateral and an inadequate credit history were the second and third most important reasons given. More detailed analysis shows that foreign privatised banks reject fewer loans than other banks on the grounds of a borrower’s lack of collateral, cash flow or inadequate credit history. Large banks tend to reject more applications than smaller banks for lack of cash flow and for credit history reasons. This is because large banks operate more standardised loan approval processes, whereas smaller banks rely more on the analysis of ‘soft’ information.

Banks operating in a relatively good institutional environment, with better creditor protection rights, are more likely to reject a loan application on collateral grounds. In a poor environment, a borrower’s collateral will be unreliable anyway and so less important. Lack of an adequate credit history is a more frequent reason for rejecting a loan for a bank operating in a less developed country. This may be related to the lack of a credit registry in such countries.

The institutional environment, as viewed by banks, determines to a great extent their response to the demand for loans. It influences the range of collateral accepted by banks to secure a loan and consequently affects the number of loan applications that they reject. Larger banks demand collateral for making loans more frequently than smaller banks, which have adapted to institutional constraints. Also, smaller banks reject fewer loan applications for cash flow or credit history reasons, enabling them to expand their loan portfolios relatively fast.

Constraints to making loans

BEPS respondents were asked to rate the major constraints on their ability to make loans. These included lack of creditworthy customers, low loan and deposit interest rate margins, bank officers not having the necessary skills to evaluate loans, insufficient information to evaluate loan risks, lack of bank liquidity and lack of bank equity.

The survey results were used to explore the relationship between banks’ perceived constraints to making loans and their perception of the institutional environment. It transpired that there were no significant differences among different types of banks regarding the major constraints to making loans. However, the way banks judge the quality of their institutional environment significantly affects which type of lending constraint they perceive as most binding.

Banks operating in a poor institutional environment and larger banks saw the lack of creditworthy borrowers as a major constraint. This indicates that larger banks in particular tend to be more cautious about lending in an environment where creditor protection rights are not secured. In better institutional environments, banks viewed low interest margins as a bigger constraint to making loans. Moreover, where competition has driven down interest margins, smaller banks tend to find it more difficult to make loans. Due in part to their funding structure, smaller banks also find lack of liquidity to be a significant constraint. Privatised foreign banks and state-owned banks saw lack of bank equity as a less significant constraint than other types of banks.

Diversification of bank activities

Although deposit taking and lending remain their principal activities, many banks in the transition countries have also started to provide other services. Some fee and income-generating activities, such as payment and settlement, are directly related to more traditional banking tasks. Others, such as corporate finance, asset management and the trading and sales of securities, constitute new ventures.

<< Table 4 around here >>

Table 4 shows that banks’ fee and commission income still derives to a large extent from traditional retail and commercial banking and from payment and settlement. More than 80 per cent of all banks reported that they earned some fee and commission income through these activities. The number of banks receiving income from retail brokerage, asset management and custody services was considerably lower. The most important activities comprised payment and settlement (28 per cent) and services directly related to commercial banking (22 per cent) and retail banking (22 per cent). A much lower proportion of all fee and commission income was earned through asset management (3 per cent), agency services and custody (2 per cent) and retail brokerage (1 per cent). Smaller banks and state-owned banks had a relatively high ratio of net commission income to total assets.

Further analysis of the data shows that banks’ fee and commission activities were affected by the institutional environment. In a better environment, fee and commission income increased in relation to retail banking and to payment and settlements but decreased in relation to commercial banking, reflecting a shift away from serving large and foreign companies.


Banks in the transition countries have significantly improved their performance, particularly since the Russian financial crisis of 1998. They have also diversified their activities so that a significant part of their income now comes from fees and commissions. However, the improvements in performance stand in contrast with the relatively slow growth in financial intermediation. Credit-to-asset ratios are still well below levels in comparable non-transition countries (as discussed in Chapter 3). Given that banks are performing well, why is deepening not occurring more rapidly?

The BEPS results show that loan growth was fastest among newly created foreign banks and smaller banks. For smaller banks, this has led to some deterioration in the quality of their loan portfolios. Small banks also tend to allocate a substantially higher share of lending to SMEs. More generally, banks have reduced their emphasis on serving large and/or foreign-owned enterprises and have started to lend more to retail clients. Much of the loan growth by foreign banks was in the form of greater household lending.

The quality of the institutional environment as perceived by banks also affects bank behaviour. Although it does not affect performance measures such as net interest margins or return on assets, the legal environment does have an impact on bank costs. A weak environment leads to higher costs, which tend to inhibit credit expansion. More importantly, a better environment is associated with greater lending to households and SMEs. When the institutional framework improves, banks are no longer confined to lending to large, mainly foreign companies, and can diversify their customer base.

In a better environment with protection from the legal system, banks can focus more on SMEs and retail customers. For example, once a legal framework for mortgage lending is in place, collateralised mortgage loans become more attractive to banks. A better institutional environment also broadens the range of collateral that can be accepted by banks.

Banks in transition countries are gradually reaching the levels of their counterparts elsewhere and this process of convergence is expected to continue in the future. They are increasing their lending to households and SMEs, although larger banks are still more likely to lend to large firms. The low level of financial expansion, however, suggests that there is considerable scope for further growth.

The analysis also suggests that there are existing barriers to growth. The institutional environment plays a big part in determining lending decisions. The quality of banking regulation and credit protection remains a major constraint to the expansion of bank activities. Since banks’ views of their institutional environment affect their choices, this framework needs to be improved. Properly managed institutional change can have a significant impact on banking evolution.


E. Berglöf and P. Bolton (2002), “The great divide and beyond – Financial

architecture in transition”, Journal of Economic Perspectives, Vol. 16, pp. 77-100.

J. Bonin, I. Hasan and P. Wachtel (2005), “Bank performance, efficiency and

ownership in transition countries”, Journal of Banking and Finance, Vol. 29, pp. 31-53.

J. Bonin and P. Wachtel (2005), “Dealing with financial fragility in transition economies”, Systemic Financial Crises: Resolving Large Bank Insolvencies, Douglas Evanoff and George Kaufman (eds), World Scientific Publishing Company, Singapore.

R. De Haas, D. Ferreira, A. Taci and P. Wachtel (2006), “Bank ownership, the institutional environment and bank lending in transition countries”, EBRD Working Paper, forthcoming.

R. De Haas and I. Naaborg (2006), “Foreign banks in transition countries: To whom do they lend and how are they financed?”, Financial Markets, Institutions & Instruments, Vol. 116, pp. 159-99.

S. Fries and A. Taci (2005), “Cost efficiency of banks in transition: Evidence from

289 banks in 15 post communist countries”, Journal of Banking and Finance, Vol. 29, pp. 55-81.

S. Fries, D. Neven, P. Seabright and A. Taci (2006), “Market entry, privatisation and bank performance in transition” Economics of Transition, forthcoming.

S. Fries and A. Taci 2002, “Banking reform and development in transition countries”, EBRD Working Paper No. 71.

C. Hainz (2003),   “Bank competition and credit markets in transition countries”,

Journal of Comparative Economics, Vol. 31, pp. 223-45.

R. Haselmann. and P. Wachtel (2006a), “Are the banks in the transition countries banks?”. Paper prepared for the 12th Dubrovnik Economic Conference, 28-30 June 2006.

R. Haselmann. and P. Wachtel (2006b), ”The legal environment and the composition of bank loan portfolios: Evidence from the transition countries”, mimeo.

R. La Porta, F. Lopez-de-Silanes, A. Shleifer and R. Vishny (1997), “Legal determinants of external finance”, Journal of Finance, Vol. 52, No. 3, pp. 1131-50.

Appendix 4.1 Measuring how banks view the legal environment

BEPS respondents were asked about their view of the legal environment. Answers to questions on the protection of creditor rights and bank regulation were graded on a six-point scale (with a higher number reflecting a positive view). Three indices were subsequently created.

The legal system index is an average of three indices, which measure banks’ views of pledge laws, mortgage laws and the quality of the court system. For pledge laws and mortgage laws, respondents were asked to rate from 1 (strongly disagree) to 6 (strongly agree) – whether these laws:

provide adequate scope for security

enable efficient creation and perfection of security rights

enable efficient enforcement of security rights

adequately protect secured creditor rights.

The index for the assessment of the court system measures banks’ views of the courts’ ability to resolve business disputes. Bankers were asked how often from 1 (seldom) to 6 (always) – they associate the court system with being:

fair and impartial

honest and uncorrupted

quick and efficient


able to enforce its decisions.

The banking regulation index is an average of indexes on the views of regulation laws and banking regulators. For the laws index, respondents were asked:

whether information on the banking laws and regulations were easy to obtain in 2001–04

if interpretations of the laws and regulations were consistent and predictable.

For the regulators index, respondents were asked whether the banking regulator is:

fair and impartial

honest and uncorrupted

quick and efficient

able to enforce its decisions.

Finally, an overall index was created as an average of the two main indices.

Responses, broken down by ownership, size and region, are given in Table A 1.

Appendix Table 4.1

Banks’ perception of the quality of their institutional environment

Appendix 4.2 Detailed regression analysis

In order to analyse the various determinants of banks’ performance, banks’ portfolio composition, lending behaviour and collateral use, a two-stage regression methodology (2SLS) was employed throughout this chapter. This procedure was chosen because banks’ perception of the institutional environment may be affected by their performance and, consequently, simultaneity may exist. Instrumental variables were used to avoid this pitfall.

In the first stage, the dependent variable was one of three indicators measuring banks’ perceptions about the quality of their institutional environment, as taken from the BEPS survey. The explanatory variables in this stage (the instruments) included a country-level legal indicator as well as country dummies. The country-level legal indicator was either the World Bank Doing Business indicator on ‘depth of credit information’ or the EBRD legal indicator on the enforcement of charged assets. The regression results do not depend on the choice of the instrument.

In the second stage, regressions were estimated for a number of dependent variables, including performance measures and variables that measure banks’ portfolio composition. In each case, the explanatory variables included three ownership dummies (for newly created foreign banks, privatised foreign banks and state-owned domestic banks, with the control group consisting of private domestic banks), bank size (log of bank assets), GDP per capita and a set of country dummies. In addition, one of three institutional measures – the fitted values of the first-stage regression – was included. More details about the regression results can be found in De Haas et al. (2006).

Tables and charts

Chart 1 Return on assets

NB - change Euro area to eurozone in above chart?

Chart 2 Non-performing loans to total loans

NB - Greece mispelt in above chart / change Euro area to eurozone?
Chart 3 Share of household credit in total domestic credit to private sector

Chart 4 Loan growth and loan quality (average 2003-2004, fitted values)

Chart 5 Collateral accepted by ownership and size of banks

Table 1 Portfolio composition by bank type (in per cent of total lending)

Greenfield foreign banks

Privatised foreign banks

Private domestic banks

State-owned domestic banks

Small banks

Large banks



Other consumer lending



Large enterprises

State-owned enterprises





Source: BEPS

Table 2 Impact of bank ownership and institutions on composition of bank lending

Ownership dummy variables


all lending

Households mortgage lending


Large enterprises

Foreign subsidiaries


Greenfield foreign banks

Privatised foreign banks

Government-owned banks

Bank size

GDP per capita

(I) Perceived institutional quality

(II) Perceived legal quality

(III) Perceived quality banking regulation

Source: BEPS, BankScope. Country dummies not shown. + or – indicate a positive or negative effect and ** and * show that the regression coefficient is significant at the 5 and 10 per cent level, respectively. For each dependent variable (proportion of particular customer type in total bank lending) three regressions were run, including institutional measures I, II or III. Since the sign of coefficients for the other variables did not change, the results of all three are reported in one table, with the last three lines showing the results for the three different institutional determinants.

Table 3 Changes in lending patterns (2001-2004): proportion of banks reporting an increase in lending share

Greenfield foreign banks

Privatised foreign banks

Private domestic banks

State-owned domestic banks

Large banks

Small banks



Large enterprises

State owned enterprises




Source: BEPS

Table 4.4

Percentage of fee and commission income from particular activities banks to total fee and commission income (2004)

Greenfield foreign banks

Privatised foreign banks

Private domestic banks

State-owned domestic banks

Small banks

Large banks




Corporate finance

Retail brokerage

Asset management


Trading and sales

Retail banking



Commercial banking

Payment and settlement


Agency services and custody

Net commission income  to total assets




Source: BEPS

See La Porta et al.

The sample does not include banks in Armenia, Azerbaijan, Georgia, the Kyrgyz Republic, Tajikistan, Turkmenistan and Uzbekistan.

For more detail, see Bonin and Wachtel (2005).

See Berglof and Bolton (2002).

See De Haas and Naaborg (2006).


Bonin et al. (2005) and Fries and Taci (2005) find that foreign-owned banks tend to be more cost-efficient than domestic banks. Fries et al. (2006) show that foreign-owned banks maintained their lower marginal costs whereas state banks persistently underperformed in controlling costs. See also Box 2.1 in Chapter 2 of this Transition Report on the macroeconomic implications of foreign bank entry.

See Hainz (2003).

For a similar analysis, see Haselmann and Wachtel (2006a).

Larger banks are more willing to take both movable and immovable assets as collateral. Type of bank ownership is not particularly important, except that state-owned banks are less willing to accept immovable assets than other banks, which probably reflects the fact that they have not entered the mortgage business. Importantly, objective measures of the quality of the legal environment in the country and the bankers’ own perceptions of collateral law have statistically significant effects on the probability of accepting collateral. See also Haselmann and Wachtel (2006b).

Politica de confidentialitate



Vizualizari: 1396
Importanta: rank

Comenteaza documentul:

Te rugam sa te autentifici sau sa iti faci cont pentru a putea comenta

Creaza cont nou

Termeni si conditii de utilizare | Contact
© SCRIGROUP 2022 . All rights reserved

Distribuie URL

Adauga cod HTML in site