Bank Asset Quality in Emerging Markets: Determinants and Spillovers

Reinout De Bock and Alexander Demyanets

No 2012/071, IMF Working Papers from International Monetary Fund

Abstract: 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.

Keywords: WP; nominal exchange rate; real GDP; Macro-financial linkages; Emerging markets; Banks; Nonperforming loans; Capital flows; Exchange rate; Terms of trade; Financial stability; Panel regressions; Time series; asset quality; credit growth; terms of trade shock; capital flow; quality problem; Credit; Exchange rates; Central and Eastern Europe; Global; Africa (search for similar items in EconPapers)
Pages: 27
Date: 2012-03-01
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Citations: View citations in EconPapers (86)

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