Bank lending and the business cycle: Does ownership matter in ASEAN countries?

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Abstract

We analyze the lending cyclicality of 213 ASEAN commercial banks over the period 2001–2015. The findings indicate that lending by private banks is procyclical while lending by state banks is countercyclical. Long-term liabilities also move countercyclically for state banks whereas funding for non-state banks in the form of deposit and long-term liabilities is procyclical. Greater lending cyclicality is observed for both private and state banks in Cambodia, Myanmar, Laos, and Vietnam (CMLV) compared to Indonesia, Malaysia, the Philippines, Thailand, and Singapore (ASEAN-5). Lending of non-ASEAN based foreign banks shows greater procyclicality than that of domestic banks for the ASEAN-5 countries, although not for the CMLV countries. During the global financial crisis, lending by non-ASEAN based foreign banks contracted sharply even as lending by ASEAN based foreign banks was unaffected. Overall, our results confirm that bank ownership influences lending and funding sensitivity to economic fluctuations.

Introduction

Developments that have taken place in Asia over the last two decades have changed the ownership structure of banks in the region. The Asian financial crisis had a very damaging effect on the banking sector. Measures taken to strengthen the banking sector involved privatisation along with mergers and acquisitions. As a result, the share of assets held by state banks in Asia fell from 23 percent in 1995 to 13 percent by 2008. At the same time, the share of assets held by foreign banks rose from 8 percent to 30 percent due to liberalization in Asia and financial globalisation (Cull, Soledad, Peria, & Verrier, 2017).

Within the Association of Southeast Asian Nations (ASEAN), steady growth in cross-border trade has stimulated cross border financial services among member countries. The banking sector has been a major beneficiary of this development as cross-border banking expansion has been significant. Nevertheless, financial sector integration in the region has progressed more slowly than trade integration. In view of this, an effort is being made to better integrate the ASEAN financial system by 2020 under the ASEAN Banking Integration Framework.1

As of 2015, we find that bank ownership structure varies greatly among ASEAN countries, as shown in Table 1.2 State ownership is important in Indonesia and Myanmar even as it is minimal in other countries. Foreign ownership has become common in all countries but Laos and Myanmar. Meanwhile, more banks, particularly from Singapore and Malaysia, have expanded their operations into other ASEAN countries.

Bank ownership structure may influence aggregate lending activity over the course of the business cycle. The literature establishes that bank ownership type has a bearing on how banks react to business cycle fluctuations (Albertazzi & Bottero, 2014; Brei & Schclarek, 2013; Cull & Martínez Pería, 2013; Fungáčová, Herrala, & Weill, 2013; Meriläinen, 2016, and Allen, Jackowicz, Kowalewski, & Kozłowski, 2017). In particular, state owned banks have been found to stabilize credit over the business cycle, and especially during a crisis. An active role of state owned banks in the credit market has been explained by the “political view” and the “development view”. The political view asserts that government uses its influence in the banking sector to pursue its own interest in maintaining power by lending to political supporters and state owned enterprises (Andrianova & Shortland, 2012). The development view maintains that state owned banks stimulate the growth of strategic sectors in the economy by funding socially beneficial investments.

As for the role of foreign banks in stabilizing credit, the thinking has been divided. On the one hand, foreign banks may lend countercyclically as they are able to obtain stable funding from their parent institutions during local economic downturns. On the other hand, foreign bank lending may be more procyclical compared to domestic banks since they are at an informational disadvantage due to lack of access to “soft” information in evaluating credit (Cull et al., 2017). In addition, foreign banks may reduce lending more than others during a local downturn because they lack loyalty to domestic well-being (Fungáčová et al., 2013). Whether a crisis occurs in the host country or the home country is also a factor (Fungáčová et al., 2013).

Commercial bank lending in ASEAN countries increased strongly after the Asian financial crisis. In 2001, the average rate of lending growth in ASEAN countries was 20.89 percent.3 Fig. 1 shows that bank lending in the CLMV (Cambodia, Laos, Myanmar, and Vietnam) group was higher than in the ASEAN-5 group (Indonesia, Malaysia, the Philippines, Thailand, and Singapore). The gap in lending growth between the two groups was large before the onset of the global financial crisis but closed after the crisis. Even though gross domestic production (GDP) growth recovered to the pre-crisis level by 2010, loan growth remained lower for both groups of countries than before the crisis. A factor in the changing reaction of bank lending to business cycle fluctuations in ASEAN countries may have been changes in bank ownership structure.

The existing literature on bank ownership in ASEAN has focused on its effect on bank efficiency (Laeven, 1999; Williams & Nguyen, 2005), risk taking (Laeven, 1999; Riewsathirathorn, Jumroenvong, & Jiraporn, 2011), and governance (Fan & Wiwatanakantang, 2005). Not much is known about how bank ownership influences lending behavior over the business cycle and during a crisis period. This paper fills the gap in the literature by analysing the relationship between bank ownership and lending behavior for 213 commercial banks in nine ASEAN countries over the period 2001 to 2015. More specifically, we want to find out if state owned banks played an active role in stabilising credit given that privatisation has reduced the number of state owned banks in the ASEAN region. Apart from this, we want to identify what impact foreign banks had on credit stabilisation in the region. We also want to investigate whether moves encouraging more ASEAN based foreign banks have been beneficial for stabilisation. Privatisation of banks, greater foreign participation, and the increasing presence of ASEAN based foreign banks in the region have substantially changed the banking environment in ASEAN with ramifications that need to be better understood.

To sum up, we find that lending by domestic private banks is generally procyclical but that by state banks is countercyclical. In the CMLV countries, responsiveness of both private and state banks to economic fluctuations is greater than in the ASEAN-5 countries. In the ASEAN-5, lending by foreign banks is most sensitive to economic fluctuations. Although state banks showed countercyclical lending broadly speaking, they did not stabilize credit during the global financial crisis. Lending during the crisis was reduced only by non-ASEAN based foreign banks.

The remainder of this paper is organized as follows. Section 2 presents the literature related to the topic. Section 3 discusses the data including our bank ownership classification system and the econometric methodology. Section 4 presents the empirical results. Section 5 concludes.

Section snippets

Literature review

Empirical studies that compare the lending pattern of domestic and state owned banks have yielded inconclusive results. A worldwide analysis of bank lending during 1995–2002 by Micco and Panizza (2006) confirmed the stabilizing effect of state owned banks. This study further found that lending of state owned banks in developing countries was not more countercyclical than lending of state owned banks in industrial countries. Brei and Schclarek (2013) found that for 50 countries in Europe and

Data

The empirical analysis is based on a sample of 213 commercial banks from nine ASEAN countries for the period 2001–2015. The sample is limited to banks with at least five years of data available. Annual bank-level data are sourced from unconsolidated balance sheet and income statements available from BankScope, a financial database maintained by Bureau van Dijk. Macroeconomic data are obtained from the International Financial Statistics database of the International Monetary Fund. Bank ownership

State banks

Results of the estimation for loan growth of state bank relative to that of non-state banks are reported in Table 4. Column 1 presents results for all nine ASEAN countries considered. The coefficient estimate on the growth rate of GDP pertains to the loan growth cyclicality of non-state banks while the coefficient estimate on the interaction of GDP growth and the state bank dummy variable pertains to the loan growth cyclicality of state banks. The regressions pass the AR (2) and Hansen

Conclusion

Our analysis of bank lending and funding for nine ASEAN countries (Brunei excluded) in relation to the business cycle shows significant differences among state, domestic private, and foreign banks, with yet further differences between ASEAN based foreign banks and non-ASEAN based foreign banks. Loan growth of state banks is found to move countercyclically whereas that of non-state banks moves procyclically. The countercyclical action of state banks is especially pronounced for the less

Acknowledgements

This work was supported by Universiti Sains Malaysia and Malaysia short-term grant No. 304/PJJAUH/6315001. This is the revised version of a paper presented at the 12th Bulletin of Monetary Economics and Banking International Conference hosted by Bank Indonesia and the Asia-Pacific Applied Economics Association, held in Bali, Indonesia, 30-31 August 2018. I would like thank conference participants and two anonymous reviewers for their feedback in improving the paper.

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