Bank Asset Quality in Emerging Markets: Determinants and Spillovers

March 1, 2012

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Format: Chicago

Reinout De Bock, and Alexander Demyanets. Bank Asset Quality in Emerging Markets: Determinants and Spillovers, (USA: International Monetary Fund, 2012) accessed November 23, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper assesses the vulnerability of emerging markets and their banks to aggregate shocks. We find significant links between banks' asset quality, credit and macroeconomic aggregates. Lower economic growth, an exchange rate depreciation, weaker terms of trade and a fall in debt-creating capital inflows reduce credit growth while loan quality deteriorates. Particularly noteworthy is the sharp deterioration of balance sheets following a reversal of portfolio inflows. We also find evidence of feedback effects from the financial sector on the wider economy. GDP growth falls after shocks that drive non-performing loans higher or generate a contraction in credit. This analysis was used in chapter 1 of the Global Financial Stability Report (September 2011) to help evaluate the sensitivity of banks' capital adequacy ratios to macroeconomic and funding cost shocks.

Subject: Balance of payments, Capital flows, Credit, Exchange rates, Financial institutions, Foreign exchange, International trade, Money, Nonperforming loans, Terms of trade

Keywords: Africa, Asset quality, Banks, Capital flow, Capital flows, Central and Eastern Europe, Credit, Credit growth, Emerging markets, Exchange rate, Exchange rates, Financial stability, Global, Macro-financial linkages, Nominal exchange rate, Nonperforming loans, Panel regressions, Quality problem, Real GDP, Terms of trade, Terms of trade shock, Time series, WP

Publication Details

Pages:

27
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2012/071
Stock No:

WPIEA2012071
ISBN:

9781475502237
ISSN:

1018-5941

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