Bank and Credit

Institutions in
Emerging Markets
CONTENTS 1 Introduction

Recent Trends in
2 Bank Credits

Pace of Structural
Change

Evolution of Mana
gement Risks Faci
4 ng Bank
 Banking crises in emerging markets in the 1990s were associ
ated with major macroeconomic disruptions: sharp increase
s in interest rates, large currency depreciations, output colla
pses and lasting declines in the supply of credit. Bank credit
has since recovered in a number of countries, and there hav
PART e been significant changes in banking structure, performanc
e and risk management capacity.
1
Drawing on contributions by senior central bank officials fro
m emerging market economies and staff of the Bank for Int
ernational Settlements, the volume seeks to shed light on re
cent developments by addressing five broad topics.
Recent Trends in
Bank Credits

After peaking in the second half of the 1990s, bank credit

to the private sector has recently risen in a number of em
erging market economies, partly because of stronger de
mand for loans associated with robust growth and low in
terest rates, and partly because of greater supply of loan
s associated with improved bank balance sheets. The sha
re of bank credit to the business sector has nonetheless
declined in part because lagging investment spending ha
s curbed corporate loan demand, and also because of th
e availability of financing in bond and equity markets. In
some countries risk averse banks have held government
securities rather than lend to the corporate private sector.
Financial institutions have increased lending to househol
ds but this exposes them to new forms of risk, as illustrat
ed by difficulties in the credit sector in Korea earlier in thi
s decade. One concern is that banks in some countries ha
ve transferred a significant amount of interest rate or exc
hange rate risk to households through floating rate credi
t or loans denominated in foreign currency.
Banking systems in emerging economies have been transformed by privatis
ation, consolidation and foreign bank entry. Bank efficiency and performan
ce have improved, apparently in response to a more competitive climate.
More recently, reforms appear to have slowed, in part because the easy w
ork had been done and because of alternative approaches to reform. For e
xample, rather than engaging in full scale privatisation, countries like China
and India are only gradually transferring ownership of major state-owned b
anks to the private sector. As for bank consolidation, it has been market-dri
ven and foreign banks have played an important role in central and eastern
Europe and Mexico, while the state has played a larger role in Asia. Increas
ed concentration was not seen as a threat to competition and access to ba
nk financing had improved with the growing presence of foreign banks. Ho
wever foreign banks raised political concerns because of perceived high pr Pace of Structu
ofits and were also difficult to supervise because parent banks' global goals
and information flows did not always coincide with the needs of host count ral Change
ry supervisors.
Evolution of Mana
gement Risks Faci
ng Bank

Macroeconomic vulnerabilities (particularly to external shocks) a

ppear to have declined, reflecting a mix of favourable temporary
conditions as well as improved policies (higher foreign reserves,
more flexible exchange rates, domestic debt market developme
nt and improved fiscal policies). However, some central banks w
ere still concerned about vulnerability to certain shocks (eg to do
mestic demand, to increases in oil prices or interest rates or decli
nes in property prices), particularly given the exposure of banks t
o interest rate or exchange rate risk and the need in some count
ries for further fiscal consolidation.
Banks increasingly relied on systematic risk assessment proced
ures and quantitative risk management techniques, with lendin
g being influenced less by government direction or special ban
k relationships with borrowers. However, challenges still arose
from lack of data on loan histories for estimating default proba
bilities, and risks related to liquidity and credit risk transfer. Re
garding liquidity risk, there is a need to ensure that banks rely
on the interbank markets, rather than the central bank for liqui
dity. Regarding credit risk transfer, notwithstanding significant
benefits associated with the growing use of credit risk transfer
instruments, their rapid spread might in some cases outpace th
e capacity of financial institutions to assess and price risks.
 P r e v e n t i n g s y s t e m i c b a n k i n g c r i s e s
One indicator of stronger banking systems is that the volatility of output and inf
lation has fallen in emerging market economies while their capital ratios have ri
s e n s i g n i f i c a n t l y . T h i s r e f l e c t s

(i) policies desi (ii) regulatory me (iii) the evolution i

gned to impro asures to dilute ri n supervisory stra
ve bank govern sk concentration, tegy from "ratio
ance and infor limit connected l watching" (checki
mation disclos ending, establish ng bank positions
ure that enhan realistic provision against predeter
ces market disc ing rules and to i mined prudential
i p l i n e mprove inspectio ratios) to examini
n p r o c e s s ng the bank's risk
management
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