Abstract
Although the performance and privatisation of transition banks have been widely studied already, little is known about their risk-taking and risk management activities. We use a new European Bank for Reconstruction and Development (EBRD) survey data set of banks to examine risk taking by banks in the transition countries. We find no indication of excessive risk taking by specific ownership or size categories of banks. Also, we find no connections between risk taking and the quality of the institutional environment although an unsound environment is associated with higher levels of capital.
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Notes
The Banking Environment and Performance Survey (BEPS) was a random sampling of banks in 20 transition countries with a common questionnaire that was translated into each local language and presented to a senior bank officer in an interview (EBRD, Transition Report, 2006, Chapter 4).
The BankScope data generally only include aggregate balance sheet items.
Successful bankers in the advanced transition countries might have been less inclined to set aside the time for an EBRD interview than others. In the tense environment in Russia and the Ukraine, bankers might have had other reasons to avoid responding.
The BankScope data were checked for anomalies. Several corrections were made using information provided by the banks in the survey and one bank in Serbia was eliminated. The BankScope data set was prepared with the help of Dr. Anita Taci of the EBRD.
In most countries, the average asset level and the return on assets are about the same for responding and non-responding banks. The correlation of the average country ROAs from full sample and from the survey respondents is 0.97 and the rank correlation is 0.76.
The survey design included all banks in the country, which might include some institutions that are not picked up by BankScope. There were 17 respondent banks excluded because there were not adequate BankScope data for 2004 in Moldova, three in Macedonia, three in Belarus, two in Slovakia and one in each of Bosnia, Bulgaria, Poland, Serbia, and Ukraine. One additional Serbian bank is eliminated because of inconsistencies in the BankScope data.
Only 8% of the banks were government owned at the time of the survey. The privatisation process was largely completed and even banks that reverted to government ownership during banking crises in the late 1990s (eg in Romania and Croatia) had been privatised when the survey was conducted in 2005. Fully 54% of the respondent banks are foreign and that number proportion would be much higher if the FSU were excluded. The foreign banks include both greenfield banks and banks acquired by mergers and acquisitions.
The BEPS respondents are about evenly divided among the regions (29% are from the FSU and about 35% from each of the other regions). The countries in each region are: EU: Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia and Slovenia; FSU: Belarus, Kazakhstan, Moldova, Russia and Ukraine; SEE: Albania, Bosnia, Bulgaria, Croatia, Macedonia, Romania and Serbia.
Domestic credit (IMF IFS line 32) includes credit from non-bank sources as well; so small shares are expected even when we know that banking is highly concentrated. Further, no domestic credit measure was available for Serbia; so Serbian banks are excluded from market share analyses, as are banks that did not report assets to BankScope.
Our intention is to develop a simple DPM that can be used for out of sample forecasts rather than fully investigate the specification of such models.
There are in total 631 bank year observations of which 36 represent banks in default. For a detailed description of the underlying data set, see Haselmann (2006).
The main advantage of logit models over other methods is that no strict assumptions are imposed on the estimation. Furthermore, the results can be directly interpreted as default probabilities.
For different specifications of DPMs with accounting measures and other data, see for example Claeys and Schoors (2007) who use Russian data.
The familiar Basle measure is the ratio of capital to risk-adjusted assets. The well-known minimum capital requirement is that the ratio of Tier I capital to risk-adjusted assets should be at least 8%. The Basle criterion is our credit risk measure (assets to risk-adjusted assets) multiplied by the capital asset ratio. The credit risk ratio can be constructed for all respondent banks because it does not rely on BankScope data. Further many additional banks do not provide data on capital in BankScope.
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Acknowledgements
The authors appreciate financial support for this work from the Japan Europe Cooperation Fund and the European Bank for Reconstruction and Development. Rainer Haselmann was a visiting scholar at the Columbia University Business School when the paper was written. Yves Metzner provided excellent research assistance. Comments from the Dubrovnik Economic Conference discussant, Randy Filer, and the referees are appreciated.
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Haselmann, R., Wachtel, P. Risk Taking by Banks in the Transition Countries. Comp Econ Stud 49, 411–429 (2007). https://doi.org/10.1057/palgrave.ces.8100214
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DOI: https://doi.org/10.1057/palgrave.ces.8100214