BANKING IN EMERGING AND TRANSITION ECONOMIES

Emerging and transition countriesCentral and Eastern Europe

Southern Europe and Central AsiaSouth Asia

East Asia and PacificLatin America and the Caribbean

Middle East and North AfricaSub-Saharan Africa

Table 17.2 Output growth and inflation

Real GDP Inflation

95-2003 2004 2010 2011 95-2003 2004 2010 2011

Asia 6.6 7.8 9.7 7.8 4.2 4.4 5.7 6.5

China 8.5 9.5 10.4 9.2 3.0 3.9 3.3 6.5

India 5.9 7.1 10.6 7.2 5.2 6.7 3.3 5.4

Latin America 2.0 5.9 6.2 4.5 11.2 6.6 6.0 6.6

Brazil 2.1 5.2 7.5 2.7 9.3 7.5 5.0 6.6

Mexico 2.5 4.4 5.5 4.0 16.6 5.2 4.2 3.4

Central Europe 3.7 4.8 4.5 5.3 10.2 3.9 5.3 5.3

Russia 2.4 7.1 4.3 4.3 49.5 10.2 6.9 8.5

Turkey 3.7 8.9 9.2 8.5 64.9 10.6 8.6 6.5

Middle East 4.1 5.5 4.9 3.5 9.2 8.3 6.9 9.6

Africa 3.7 5.1 5.3 5.1 15.6 7.7 7.4 8.2

DEREGULATION AND FINANCIAL LIBERALISATION

Banking in emerging markets ;--Government control--Restrictions on borrowing and lending rates

Financial repression Strong intervention of government in financial markets

- Maintaining the monopoly

- Restricting entry

- Strictly controlling

FİNANCİAL REPRESSİON INCLUDES;

- Control over interest rate - Controls over lending- Directed landing- High reserve requirements- Restrictions on entry of banks and other financial

intermediaries- Restrictions on entry of foreign financial intermediaries- Nationalisation of financial institutions

In 1990’s regulators forced by ;- Macroeceonomic pressures

- Fast technological developments

-Changes in global markets

Several changes have forced structural changes,

- Removal of ceilings on deposit rates - Removal of the prohibition on interest payments

Deregulation and financial liberalisation’ve long been considered a positive force ;

-increasing efficiency by imposing competition

-removing regulations that distort economic activity

Financial deregulation has certainly made it easier for intermediaries to cross industry and national boundaires.

It has also fostered technological progress.

Financial innovation includes the development of new instruments.

- Owing to the recent technological changes,emerging economies’ banking markets are in a position to skip a stage of financial development.

- Emerging markets see the development of new delivery channels as an important part of the development of their retail and commercial banking activities , both because of the growing avaibility of IT and telecommunication technologies and the relatively lower cost of delivery compared to bank branches.

PRİVATİSATİONS

- Transfer of government services or assets to the private sector. State-owned assets may be sold to private owners, or statutory restrictions on competition between privately and publicly owned enterprises may be lifted.

ADVANTAGES OF PRIVATISATION -Private enterprise is more responsive to customer complaints and

innovation.-Privatisation leads to lower prices and greater supply.-Competition in privatisation increases differentiation.DISADVANTAGES OF PRIVATISATION-Privatisation is expensive and genarates a lot of income in fees

for specialist advisers such as banks-The privatised businesses have sold of or closed down

unprofitable parts of business and so services eg transport in rural areas have got worse

-Wider share ownership did not really happen as many small

investors took their profits and didn’t buy anything else.

MERGERS AND ACQUİSİTİONS

- Merger is a financial tool that is used for enhancing long-term profitability by expanding their operations. Mergers occur when the merging companies have their mutual consent as different from acquisitions, which can take the form of a hostile takeover.

- Acquisitions or takeovers occur between the bidding and the target company. There may be either hostile or friendly takeovers. Reverse takeover occurs when the target firm is

- larger than the bidding firm.

FOREIGN BANKS

Foreign ownership of banks in selected emerging economies - BIS ( 2005 )

Country Assets owned by banks with 50 % or more foreign ownership ( as ½ of total banking sector assets )

Assets owned by banks with more than 10% but less than 50% foreign ownership ( as % of total banking sector assets )

1990

2000

2002 1900

2000

2002

Hong Kong 45.7 87.2 88.6 3.7 7.2 6.2

India 21.0 42.7 40.0 - 4.0 5.0

Korea n.a 32.7 32.3 n.a. 7.5 14.4

Malaysia 22.3 24.9 25.2 34.1 30.5 38.7

Singapore 89.4 75.5 76.0 n.a. n.a. n.a.

Thailand - 5.9 5.8 n.a 45.8 48.6

Argentina 17.0 48.1 41.6 n.a 13.4 12.7

Brazil n.a. 25.2 21.5 n.a 7.0 6.2

Chile 18.6 33.1 44.8 5.5 16.5 3.0

Colombia 3.7 18.0 16.4 6.6 13.7 13.6

Mexico 0.3 54.6 81.9 n.a. 0.3 0.6

Peru - 32.6 30.6 10.5 9.2 14.4

Venezuela n.a. 49.7 37.4 n.a. 7.7 0.8

Russia 7.2 9.5 8.1 5.5 3.1 2.3

Turkey 2.9 3.6 3.3 0.8 - -

Participation of state , private and foreign banks in selected Latin American banking systems

Country State banks

Private banks

Total EU USA Other

Single largestforeign country

Argentina

32.5 19.1 48.4 33.6 12.1 2.7Spain ( 17.9 %)

Brazil 46.0 27.0 27.0 15.7 5.3 6.1Spain ( 5.3 % )

Bolivia 18.2 56.5 25.3 10.4 4.5 10.4Spain ( 10.4 % )

Chile 12.9 45.5 41.6 32.4 5.5 3.8Spain ( 30.6 % )

Peru 10.8 43.2 46.0 34.8 5.6 5.6Spain ( 17.1 % )

Mexico - 17.7 82.3 53.7 23.7 4.8Spain ( 41.5 % )

A NUMBER OF CONCERNS- A large foreign banking presence can reduce the

information available to host country supervisors- A large foreign bank’s presence casn expose a

country to shocks due purely to external events affecting the parent bank

- The issue of foreign currency-denominated lending- Foreign banks ‘cherry pick’ the best firms, leaving

the domestic banking sector with a weakened lending purtfolio

- Foreign banks concentrate on large and more profitable firms , leaving small and meduim-sized enterprises for domestic banks

FOREİGN OWNERSHİP AND REGULATORY REFORM

FOREİGN İNVESTMENT İN CHİNESE BANKS

DİTRİBUTİON

BANKİNG CRİSES

NPLs was at least 10 percent of total assets

• Cost of rescue operations was > 2 percent of GDP

• Banking problems resulted in a large scale nationalization of banks

• Emergency measures, such as deposit freeze, prolonged bank holidays, generalized deposit guarantees were introduced

Some Stylized Facts on Banking Crisis

• Banking crises have become more frequent and

severe - Three

fourths of the IMF’s member countries, have

experienced

significant banking sector problems since the 1980s .

• Most of the recent financial crises had banking sector

weaknesses at the core:

Mexico (1994), Turkey (2000), Korea (1997) etc.

• Banking crises often preceded by financial liberalization.

• Banking crises are more severe in developing countries

• Severity depends on reversal of capital flows

• More of banking crises are Twin Crises

IDENTFIYING THE CAUSES OF BANKING CRISES

Several bank specific factors and macro-economic shocks micro-economic may cause a banking crisis:

– Bank specific characteristics • Inefficient management• Imprudent lending decisions

– Macroeconomic factors• Growth slowdown• Terms of trade• Currency Crises• Appreciation of the real exchange rate• Stock market and property prices crash• Capital outflows

-Microeconomic factors-poor banking practise-principal-agent incentive problems-overstaffing-restrictive labour practices

Five types of loan performance categories are recommended by the IMF for external reporting purposes and these include:

1) Standard.Credit is sound and payments current.

2) Watch.Subject to conditions that if uncorrected,could raise corcerns about full repayment.

3) Substandard.Full repayment is in doubt due to inadequate protection.Interest or principal overdue (90 days +).

4) Doubtful.Assets for which collection is considered improbable.Interest cipal overdue(180 days +).

5) Loss.Virtually uncollectible.Interest or principal overdue (1 year +).