Developments in the banking sector of three countries with different financial regimes

The intertwinement of the exchange rate regime, consequently the degree of monetary independence, and supply of bank loans is for the most part studied from the macroeconomic perspective and in connection to foreign capital inflows. Mendoza and Terrones (2008), Magudin et al. (2012) document that credit booms are of higher frequency and more pronounced under less flexible exchange rate regimes. Based on the experience of new European Union (EU) members during 2000s, also Bakker and Gulde (2010) find evidence that it is more difficult to contain credit booms in the countries with fixed exchange rate regime. Following the discussion above our aim is to determine whether: (1) there are differences in determinants of the supply of bank loans to firms and household depending on the country and consequently on the exchange rate regime in different periods (boom, bust and recovery period), (2) there are country-specific determinants of the supply of bank loans to firms and households which can be explained with reference to central bank policies and regulation?

Empirical research is conducted based on banks’ financial data (balance sheet and income statement data) from the Bankscope database which are augmented with data from the banks’ annual reports and macroeconomic variables such as capital inflows or growth of prices of new dwellings. Three Balkan countries are studied; Croatia with the highest degree of monetary independence, followed by Montenegro and Slovenia with the lowest degree. In order to implicitly model demand for bank loans, we form three panels in line with three periods; boom (2007-2008), bust (2009-2010) and recovery (2011-2013). Using the three panels, we estimate the influence of selected variables on the supply of bank loans to firms and households.

The preliminary results indicate that in the boom period the supply of bank loans to firms and households is driven by macro-variables (e.g. growth of claims of BIS-reporting banks, growth of housing prices). In the bust and recovery period deposits become an important determinant of supply of bank loans to firms attributable to limited access to other sources of funds. Taking into consideration country-specific effects, significant and negative effects are registered in the bust and recovery period in the case of Slovenia which has the lowest degree of monetary independence.