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Archive » May 2021 » Foreign vs local banks in Central and South East Europe: the impact of the funding structure on the credit channel

Foreign vs local banks in Central and South East Europe: the impact of the funding structure on the credit channel

Olta Manjani
May 2021 - n. 5
Keywords: Credit growth, capital structure, customer deposits, wholesale funding, Tier1, Tier2, foreign banks, domestic banks, Central and Southeastern Europe
Jel codes: G01, G21, G32

This paper tries to empirically assess the impact of the Funding structure of banks on the Credit channel in Central and Southeastern European region, examining the different behaviors between Foreign vs Domestic banks. We distinguish between various forms of funding: customer deposits, wholesale funding, Tier1 and Tier2 capital. From a policy market point of view, it is important to understand whether banks count more on high quality funding such as deposits or Tier1 capital, or supplementary capital, such as Tier2. We find that both Foreign and Domestic banks in the region rely on customer deposits and wholesale funding for credit growth, also due to the dominating business model, retail banking. Foreign banks use Tier1 capital as a buffer to increase their lending, while Domestic banks Tier1 shows a negative correlation with credit growth. In this case, rather than a buffer, Tier1 might serve as an incentive device to make banks more cautious about investing in risky activities, due to the difficulties these banks encounter in raising high quality capital, compared to their foreign counterparts.

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