Pinar Yesin

Who Needs Credit and Who Gets Credit in Eastern Europe

Based on survey data covering 8,387 firms in 20 countries we compare the access to bank credit for firms in Eastern Europe to that in selected Western European countries. Our analysis reveals five main results. First, the firm-level determinants of the propensity to apply are similar in Eastern and Western Europe: small and financially opaque firms as well as firms with alternative financing sources are less likely to apply for credit while firms with greater financing needs (exporters) are more likely to apply. The lower rate of loan applications by firms in Eastern Europe compared to Western Europe seems to be partly driven by the stronger presence of foreign banks and the lower level of credit information sharing. Second, while those firms which do apply for credit are rarely denied credit, foreign bank presence is associated with higher loan rejection rates among small firms. The high loan approval rates observed in Eastern and Western Europe result partly from a selection effect: those firms which are more likely to have an application rejected are less likely to apply in the first place. We find evidence that foreign bank presence is associated with higher loan rejection rates among small and government-owned firms. Third, the reasons why firms do not apply for loans differ strongly between the two regions. In Eastern Europe a higher fraction of non-applicants seem to be discouraged by lending conditions, that is, high interest rates and tough collateral requirements, while in Western Europe more firms simply do not need loans. Fourth, credit constraints in Eastern Europe softened in recent years. Firms which were discouraged from applying for credit or denied credit in 2005 were more likely to have a loan in 2008 than to still be credit constrained, especially in countries with better credit information sharing. Finally, credit constraints do affect firm performance in Eastern Europe. In particular, firms which are denied credit or discouraged from applying are less likely to invest in R&D and introduce new products.

Capital Flow Waves to and from Switzerland before and after the Financial Crisis

SummaryThis paper first shows that capital inflows to and outflows from financial centers were disproportionately affected by the global financial crisis. Switzerland was no exception. The paper then identifies waves of capital flows to and from Switzerland from 2000:Q1 to 2014:Q2 by using a simple statistical method. The analysis shows that private capital inflows to and outflows from Switzerland have become exceptionally muted and less volatile since the crisis. Further, strong and long-lasting ‘home bias’ behavior can be observed for both Swiss and foreign investors. By contrast, net private capital flows have shown significantly higher volatility since the financial crisis, frequently registering extreme movements driven by extreme movements in bank lending flows. These findings suggest that the financial crisis generated a breaking point for capital flows to and from Switzerland.

Capital Flows and the Swiss Franc

SummaryThe Swiss franc is known to appreciate strongly during financial market turmoil, demonstrating its status as a typical safe haven currency. One possible mechanism behind this appreciation during times of global turmoil is assumed to be higher capital inflows to Switzerland. This paper attempts to find some empirical evidence for this presumption. The analysis reveals that capital flow variables are not necessarily coincident with the movements of the Swiss franc. Interest rate differentials, a traditional determinant of exchange rates, co-move only weakly with Swiss franc movements. However, a robust and stronger link between variables that capture global or regional market uncertainty and movements of the Swiss franc is observed. Specifically, the information channel rather than new cross-border investment is found to be coincident with the Swiss franc. The weak link between capital flows and the exchange rate is confirmed to some extent for some other countries.

Systemic Risk in Europe Due to Foreign Currency Loans

Foreign currency loans given to the unhedged non-bank sector are remarkably prevalent in Europe. Especially Swiss franc denominated loans, which are widely popular in Eastern European countries, are believed to pose a significant exchange-rate-induced credit risk to the European banking sectors. A sudden depreciation of the domestic currencies in Eastern European countries could trigger simultaneous bank failures, if unhedged borrowers cannot service their foreign currency loans anymore. Therefore they pose a systemic risk from a “common market shock” view. This paper attempts to quantify the systemic risk arising from foreign currency loans in 17 European countries quarterly between 2007:Q1 and 2011:Q3. For that purpose, I use a novel dataset collected by the Swiss National Bank and I build on the method suggested in Ranciere, Tornell, and Vamvakidis (2010). In particular, I calculate to which extent the European banking sectors’ balance sheets would be affected if households and/or non-financial firms cannot pay back their foreign currency loans. I find that the systemic risk in Eastern Europe is substantial, while it is relatively low in the remaining European countries. However, CHF-denominated loans are not the main source behind the systemic risk in Eastern Europe, contrary to what the policymakers and the general public might perceive. I find that loans denominated in other foreign currencies (possibly in euros) contribute to the systemic risk in Eastern Europe significantly more than CHF loans do. Furthermore, systemic risk shows high persistence, and low volatility during the sample period. Last but not least, banks in Europe have been persistently holding more foreign currency denominated assets than liabilities, indicating that they are aware of the exchange-rate-induced credit risk they are facing.

The Asymmetric Effect of International Swap Lines on Banks in Emerging Markets

This paper investigates the impact of international swap lines on stock returns using data from banks in emerging markets. The primary contribution is to analyze Swiss National Bank (SNB) swap lines in providing Swiss francs liquidity to CEE banks during the financial crisis. Conditioning on foreign ownership and capital structure, the bank-level evidence suggests that stock prices of local and weaker capitalized banks responded strongly to SNB swap lines with CEE central banks. This new evidence is consistent with the view that swap lines were not only important in providing liquidity but took on additional functions linked to financial stability.