the impact of supply constraints on bank lending in the euro area crisis induced crunching?

Prague, Czech Republic. The papers are peer reviewed, but they are not edited or formatted by the editors. The views expressed in documents served by this site do not reflect the views of the IES or any other Charles University Department. They are the sole property of the respective

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 authors and are published to elicit comments and to further debate. The recent global financial turmoil raised questions about the stability of foreign banks‘ financing to emerging market countries. While foreign banks ‘ lending growth to most emerging market regions contracted sharply, lending to Latin America and the Caribbean (LAC) was significantly more resilient. Analyzing detailed BIS data on global banks ‘ lending to LAC countries—whether extended directly by their headquarters abroad or by their local affiliates in host countries—we show that the propagation of the global credit crunch was significantly more muted in countries where most of foreign banks ‘ lending was channeled in domestic currency. We also show that foreign banks ‘ involvement in LAC has differed in fundamental ways from that in other regions, with most of their lending to LAC conducted by their local subsidiaries, denominated in domestic currency and funded from a domestic deposit base. These characteristics help explain why LAC has not been struck as hard as other emerging markets by the global deleveraging and pullback in foreign banks ‘ lending.

The paper aims at understanding the main channels of macro-finance interaction that have featured in the US recent “Great Recession ” episode. Domestic interactions of macro and financial shocks are investigated within a global framework, allowing for spillover effects of the US crisis to other OECD countries, as well as to major emerging economies, and controlling for further feedback effects on the US economy. A total of 50 countries is investigated by means of a large-scale open economy macroeconometric model, set in the factor vector autoregressive (F-VAR) framework, over the period 1980:1-2009:1. The overall picture appears to be consistent with a boom-bust credit cycle mechanism, whereby financial factors are the triggering force of the downturn in real activity and worsened economic conditions feed back to asset prices, starting a cumulative process. An earlier draft of this paper was presented at the 29 th

United States, business cycle; SDR, global financial infrastructure; risk-taking channel, competition, concentration, bank soundness, European banking; EU fiscal framework, fiscal sustainability, government debt

p.; cm. – (World economic and financial surveys) “Stronger fundamentals pay off.” “May09.” Includes bibliographical references.

2009 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. This paper estimates the magnitude of key effects on the real economy from financial sector stress. We focus on the short-run feedback effect from market-based indicators of financial sector risk to the real economy through the credit channel, and estimate this effect on an economy-wide (macro) level, as well as on the level of individual large banks. Both estimates yield significant feedback effects of substantial magnitude. The estimates are consistent with other work in this area. Our results suggest that prudential supervision could be enhanced by taking into account the feedback effects of financial instability in the real economy. We also propose a way to integrate feedback effects into stress tests in order to improve realism and accuracy or macroeconomic stress scenarios, as well as a metric to interpret stress testing

This article examines procyclicality of the financial system. The introduction describes the natural and regulatory sources of procyclicality, focusing on the potential procyclical effect of the current Basel II regulatory framework for banks. It also mentions the regulatory tools for mitigating procyclical behaviour by financial institutions currently being discussed in international forums. Under certain conditions, procyclical behaviour of the banking sector can lead to a feedback effect whereby banks, in response to an economic downswing, reduce their lending to the economy in order to maintain the required capital adequacy ratio. This then further negatively affects economic output and impacts back on banks in the form of, for example, further growth in non-performing loans. In the main empirical section of the article, this effect was simulated on the example of the Czech banking sector using the current stress-testing system and a single adverse scenario. The simulation results suggest that under certain assumptions the feedback effect may play an important role. 1.