Foreign Banks and the Vienna Initiative Turning Sinners into Saints?

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1 Foreign Banks and the Vienna Initiative Turning Sinners into Saints? Ralph De Haas (EBRD) Yevgeniya Korniyenko (Bank of England) Elena Loukoianova (IMF) Alexander Pivovarsky (EBRD) Banks and Government in Globalized Markets OeNB, Vienna, September 12 th -13 th 2013

2 Introduction Emerging Europe: exceptional level of international banking integration Before 2008, foreign banks contributed to efficient and stable banking More competition, efficiency, know-how transfer, and access to credit (Fries and Taci 2005; Havrylchyk and Jurzyk 2011, Giannetti and Ongena 2012) Stable credit source during host country crises (De Haas and Van Lelyveld 2006) The shock originated in foreign banks home countries and led to a sharp deleveraging both at home and abroad (Cetorelli and Goldberg 2011; Giannetti and Laeven 2012; De Haas and Van Horen 2013)

3 Introduction Funding constraints and potentially biased government interventions raised concerns about foreign banks commitment to emerging Europe Lack of coordination could cause a run on the region Large exchange-rate fluctuations and BoP problems Sharp decline in lending with dire consequences for firms and households Vienna Initiative (VI): 1. Ad hoc coordination mechanism to overcome collective action problems 2. Guarantee macroeconomic stability in Emerging Europe by closing external financing gaps through bail-outs and bail-ins 3. Support banking groups to prevent a credit crunch

4 The Vienna Initiative in a nutshell September 2008: Collapse Lehman Brothers Autumn 2008: Initial talks between Austrian and Italian banks and Austrian supervisors. EC, host and home supervisors, IFIs (EBRD, EIB, WB), IMF, and 17 bank groups join to expand private-public coordination February 2009: Joint IFI Action Plan billion support to 17 banking groups March 2009: Emergency Summit EU leaders: National support packages should not lead to restrictions on lending by subsidiaries in Emerging Europe 2009: IMF-EU BoP support: Bosnia, Hungary, Latvia, Romania, Serbia ( bail out ) Bail in : foreign banks sign commitment letters to pledge support for subsidiaries in specific countries and to roll over debt (e.g. Swedish banks pledge to roll over 80 per cent of exposures to Latvia) Worries about negative spill-over effects to other Emerging European countries

5 Aim of this paper Contribute to the evaluation of the impact of the VI No uncoordinated withdrawal of banks from the region VI was successful stricto sensu at the macro level although we do not know the counterfactual No bank-level evidence yet on the impact of the Vienna Initiative on credit growth 5

6 Research questions 1. Were foreign banks relatively stable lenders during this crisis? 2. Were foreign banks that were part of the VI more stable lenders than those that remained outside the VI 3. Within the same country, were foreign banks that signed a commitment letter more stable lenders than banks that did not? 4. Did commitment letters lead to negative spillovers to other countries? 6

7 Contribution to the literature 1. Multinational banks as conduits of foreign shocks and absorbers of local shocks (Morgan, Rime and Strahan 2004; Peek and Rosengren 1997, 2000) 2. Can government intervention dampen or exacerbate intrabank shock transmission? Negative: financial protectionism (Rose and Wieladek 2012) Positive: Vienna Initiative? 3. Catalytic effect of IMF funding. Limited IMF funding can convince private creditors to roll over their commitments, thus filling external funding gaps Empirical evidence sobering (Corsetti and Roubini 2004) Korea (1997) and Brazil (1999) relatively successful: roll-overs were neither fully voluntary nor uncoordinated

8 Data Bank-level dataset with detailed information on about 500 banks across Emerging Europe Annual balance sheet and income statement data for (BankScope) We add: Dynamic ownership info: state, foreign, and private domestic banks Information on banks participation in Vienna Initiative and on government support Macroeconomic covariates (IFS-IMF)

9 Data BOSNIA-HERZEGOVINA HUNGARY LATVIA ROMANIA SERBIA Support Support Bank name Bank name Bank name Bank name Bank name Support Support Support Parent participates in VI Parent does not participate in V Raiffeisen Bank Y UniCredit Bank Y DnB Nord Bank N Alpha Bank Romania Y Société Générale Bank Serbia Y Intesa SanPaolo Bank Y Raiffeisen Bank Y SEB Bank N Banc Post Y UniCredit Bank Y UniCredit Bank Y Erste Bank Hungary Y Swedbank N Banca Romaneasca Y Piraeus Bank Beograd Y HypoAlpe-Adria-Bank Y K&H Bank Y Piraeus Bank Romania Y Eurobank EFG Y ZepterKomercBank BanjaLuka Y CIB Bank Y Volksbank Romania Y Volksbank Serbia Y Volksbank BH Y Magyar Takarekszövetkezeti Bank Y Banca Comerciala Romana Y Alpha Bank Serbia Y NLB Bank N UniCredit Tiriac Bank Y Vojvodjanska Bank Y BRD - Groupe Societe Generale Y Banca Intesa Y Raiffeisen Bank Y HypoAple-Adria Bank Y Raiffeisen Bank Y Turkish Ziraat Bank Bosnia N KDB Bank N HVB Bank Latvia Y Egnatia Bank N NLB Bank N ProCredit Bank N Volksbank Y ProCredit Bank N ProCredit Bank N Bosna Bank International N Commerzbank Y ABN Amro Bank Y Erste Bank Y Banco Popolare Y OTP Bank N OTP Bank N Deutsche Bank N San Paolo IMI Bank Y Marfin Bank N Fundamenta-Lakaskassza N Banca de Creditsi Dezvoltare Romexterra N Moskovska Bank N Allianz Bank N Emporiki Bank N Credit Agricole Y Budapest Hitel-ésFejleszési Bank Y Findomestic Bank Y KBC Bank Y

10 Data Bank ownership Avg. No. Banks (1) (2) (3) (4) (5) (6) Vienna countries Domestic state Domestic private Foreign Table 1 Credit growth across emerging Europe Vienna Non-Vienna Total 99 Non-Vienna countries Domestic state Domestic private Foreign Total 167 Average annual credit growth

11 Empirical strategy Panel regressions: focus on annual gross credit growth rate of individual banks before and during the crisis Impact of: Ownership structure VI variables: Vienna country, Vienna parent, Parent signed here, Parent signed elsewhere Control for standard time-varying bank and country characteristics Include bank and year FE Lijt = 1 + γ 1Ownijt + γ 2Crisist + γ 3Ownijt Crisist + γ 4 α X + µ + η + ε ijt t ij ijt

12 Empirical strategy Cross-sectional regressions for foreign banks in VI countries only Zoom in on Vienna Initiative and role commitment letters Only countries that borrow from various multinational banks Use country dummies to control for credit demand L α γ L γ VI γ X + η + ε ij = + ij + ij + 1 1, ij, 2007 j ij Diff-in-diff regressions

13 Empirical strategy Upfront: This is not a controlled trial with a randomized treatment... Mitigate concerns about selection bias through: 1. Quantification of omitted variables bias 2. Instrumental variables approach 3. Propensity score matching exercise

14 Panel results: bank ownership Overall common trends: credit growth started to slow in 2008, temporarily halted in 2009, but continued to decline in Foreign banks reduced credit growth more in when compared to domestic banks Table 2 Bank ownership and credit growth during the crisis All Private Domestic State Foreign (1) (2) (3) (4) Year ** ** *** (0.024) (0.011) (0.132) (0.006) Year (0.526) (0.237) (0.705) (0.260) Year *** ** *** *** (0.009) (0.018) (0.001) (0.000) Year ** ** *** *** (0.019) (0.032) (0.003) (0.003) State * Year (0.843) State * Year * (0.066) State * Year (0.981) State * Year (0.841) Foreign * Year (0.107) Foreign * Year *** (0.007) Foreign * Year *** (0.001) Foreign * Year (0.153)

15 Panel results: the VI Regressions for foreign bank subsidiaries only (incl. year and bank FE as well as subsidiary, parent and macro covariates) Subsidiaries of VI parents outperform non-vi subsidiaries, even in non-vi countries: if anything, positive spill-overs from signing elsewhere In VI countries, subsidiaries of signing parents had a 10.1% higher credit growth in 2009 relative to subsidiaries of non-participating parents Role unobservable time-varying factors in VI participation decision? Quantification omitted variables bias cf. Altonji et al. 2005; Bellow and Miguel 2008 Table 3 The Vienna Initiative and credit growth All countries Non- Vienna countries Vienna countries (1) (2) (3a) (3b) Vienna parent* (0.122) (0.547) (0.166) Vienna parent* *** ** * (0.008) (0.014) (0.057) Vienna parent* *** ** ** (0.004) (0.025) (0.046) Vienna parent* ** ** (0.018) (0.046) (0.428) Parent signed here* (0.838) Parent signed here* ** (0.035) Parent signed here* (0.148) Parent signed here* (0.246) Parent signed elsewhere* * (0.078) Parent signed elsewhere* (0.276) Parent signed elsewhere* (0.183) Parent signed elsewhere* (0.912) No. observations R-squared Year FE Yes Yes Yes Yes Bank FE Yes Yes Yes Yes R=β F /(β R- β F )

16 Table 4 Robustness tests Base 7+ years GMM PCSE Asset Net loans growth growth (1) (2) (3) (4) (5) (6) Parent signed here* (0.838) (0.954) (0.361) (0.816) (0.947) Parent signed here* ** 7.909* * ** ** 9.025** (0.035) (0.059) (0.084) (0.016) (0.015) Parent signed here* * * (0.148) (0.411) (0.060) 0.09 (0.526) (0.171) Parent signed here* (0.246) (0.433) (0.137) (0.831) (0.180) Parent signed elsewhere* * * *** *** * (0.078) (0.083) (0.328) (0.007) (0.078) Parent signed elsewhere* (0.276) (0.288) (0.445) (0.915) (0.404) Parent signed elsewhere* (0.183) (0.239) (0.443) (0.986) (0.196) Parent signed elsewhere* (0.912) (0.726) (0.764) (0.775) (0.891) No. observations No. banks R-squared Bank controls Yes Yes Yes Yes Yes Yes Parent controls Yes Yes Yes Yes Yes Yes M acroeconomic controls Yes Yes Yes Yes Yes Yes Year FE Yes Yes Yes No Yes Yes Bank FE Yes Yes No No Yes Yes

17 Cross-sectional results Table 5 The Vienna Initiative, commitment letters and bank lending Credit growth (1) (2) (3) (4) (5) (6) (7) (8) Vienna parent * * ** * (0.079) (0.061) (0.014) (0.596) (0.344) (0.077) (0.439) (0.872) Parent signed here * ** ** 0.574* ** ** ** (0.056) (0.029) (0.018) (0.100) (0.016) (0.043) (0.037) (0.516) Pre-crisis average annual credit (asset) growth ** *** *** ** ** ** * (0.013) (0.000) (0.006) (0.020) (0.265) (0.017) (0.045) (0.080) Support (0.335) (0.212) (0.314) (0.396) (0.682) (0.729) (0.174) (0.644) No. of observations R-squared M odel OLS OLS OLS LPM OLS OLS OLS LPM M odel period F-test (p-values) (0.129) (0.090) (0.019) (0.189) (0.032) (0.112) (0.067) (0.787) Subsidiary Controls Yes Yes Yes Yes Yes Yes Yes Yes Parent Controls Yes Yes Yes Yes Yes Yes Yes Yes Country FE Yes Yes Yes Yes Yes Yes Yes Yes First S tage Results for Instrumental Variables Regressions M arket Share other Vienna Letter - f 0.091* 0.087* (0.054) (0.093) M arket Share other Vienna Letter - f ^ ** ** (0.026) (0.044) F-statistics for instrument relevance F-test (p-value) (0.016) (0.023) Hansen test (p-value) (0.745) (0.578) Asset growth

18 Diff-in-diff results Difference-in-Difference Results All banks in emerging Europe Foreign banks in non-vi countries Foreign banks in VI countries [1] [2] [3] [4] Crisis *** *** *** *** (0.000) (0.000) (0.000) (0.000) Foreign bank (0.531) Crisis*Foreign bank ** (0.050) Vienna Parent (0.336) (0.981) Crisis*Vienna Parent ** (0.846) (0.040) Parent signed here (0.509) Crisis*Parent signed here * (0.092) R N

19 Propensity-score matching Table 6 - Propensity Score Matching - Second Stage Results Vienna Parent CEB & S EE Vienna Parent non-vienna countries Method (1) (2) Nearest Neighbor M atching (n=1) *** ** t-value (3.159) (2.552) N Nearest Neighbor M atching (n=1) ** * Bootstrap z-value (2.321) (1.793) N Nearest Neighbor M atching (n=2) *** *** t-value (2.693) (2.708) N Nearest Neighbor M atching (n=2) * * Bootstrap z-value (1.823) (1.711) N Kernel M atching Epanechnikov * * Bootstrap z-statistic (1.836) (1.912) N Kernel M atching Normal * * Bootstrap z-statistic (1.709) (1.916) N

20 Summary 1. Foreign banks transmitted crisis via their subsidiaries in 2009 Unlike in earlier, host-country crises, foreign banks were now a less stable source of credit Banking integration cuts both ways: a source of strength in case of internal shocks but also imports external shocks 2. VI foreign banks were relatively stable sources of credit, in particular in countries where they signed commitment letters 3. No evidence for negative spill-overs due to VI commitment letters

21 Policy implications Bail in-bail out approach with semi-voluntary and monitored rollover commitments and central coordination can help resolve collective action problems during a crisis Prevention: Host-home coordination between supervisors is key More centralised supervision of international banking groups? Nordic-Baltic supervisory agreement may set example Centralised supervisory authority for large banking groups?

22 Thank you