Srđan Marinković

Bank net interest margin related to risk, ownership and size: an exploratory study of the Serbian banking industry

The article empirically explores bank-specific, industry-specific and macroeconomic determinants of the net interest margin (NIM) in the Serbian banking industry. The baseline regression results suggest that banks with an above-average equity-to-asset ratio tend to report higher NIMs. The chosen proxy for loan default risk also appears statistically significant, but contrary to what is suggested by theory, indicates that the relation between default risk and the NIM is inverse. Amongst industry-specific determinants, only the proxy for concentration appears significant, as expected, and carries the prefix envisaged. Despite its narrow focus, this article does not ignore other possible determinants of the bank NIM. The type of bank ownership, as well as size effects, are explored further in order to gain insights into the influence of those variables on the NIM. The approach we follow does not include proxies for such determinants, but rather involves testing differences in regression results for banks that belong to different groups (proposed by Angbazo, 1997). Where size is taken into account, results indicate that large banks are better able to insulate books against interest rate risk by managing liabilities, while the superior performance of foreign banks could be attributed to their conservative lending practices and better access to foreign finance.

Determinants of Currency Substitution in Southeast European Countries

Abstract Currency substitution is widespread in less developed countries. Since it increases financial vulnerability and limits the effectiveness of monetary policy, it is often in the focus of scientists and experts. In this paper, we analyze the importance of euroization determinants in Serbia and neighboring countries - Albania, Bosnia and Herzegovina, FYR Macedonia, Romania and Croatia for the period 2003-2014. We examine the impact of domestic inflation, nominal exchange rate of the domestic currency against the euro, interest rate spread on domestic and foreign currency, foreign currency inflow in the form of foreign direct investments and exports, as well as the euroization of banks’financial resources on the degree of loan euroization. The results obtained by multiple regression panel methods confirm the statistical significance and assumed direction of the influence of all analyzed variables except inflation and current account balance.

Exchange Rate and Export Performance: Evidence from Serbia

This chapter contributes to the empirical literature on the role of exchange rate in a country’s trade performance. In particular, we investigate the effects of exchange rate misalignment on long-term export performance of the Serbian economy, by using monthly data for the last decade. International trade theories suggest that a deterioration of export performance should be expected in the conditions of real currency appreciation, while depreciated currency tends to benefit the exporters. However, statistical data on real effective exchange rate and aggregated data of Serbian exports indicate that the ambience of overvalued national currency did not harm export performance. Employing the Engle-Granger test of cointegration, we find no stable long-run relation between the time series data of exchange rate and export, while Granger causality test indicates a unidirectional causality that runs from exchange rate to export. These findings suggest that export dynamics is likely to be affected by a combination of various determinants, both demand- and supply-side variables. By estimating a multiple regression model, we test the potential influence of industrial production index, unit labor costs, fiscal balance, and world demand on aggregate export data. The findings confirm the insignificance of real exchange rate as a determinant of Serbian exports, disregarding the normative theory assumptions, while world demand and industrial achievement significantly impact the export performance. Our study offers potential explanations of export growth in the ambience of real currency appreciation and advocates for a flexible exchange rate policy that would take into account long-term effects on trade performance.

What Drives a Local Currency Away from Banking Markets? Some Southeast Europe Insights

The chapter explores determinants of currency substitution on a sample of countries of Southeast Europe that follow a variety of exchange rate regimes within different monetary frameworks. In the sampled countries, the level of currency substitution remained rather high despite years-long efforts to address the issue. Although the substituting currency (euro) does not undermine the substituted ones in their role of means of payment, it is the pervasive use of foreign currency as the store of value, or choice of currency for financial assets and liabilities, that becomes a persistent feature of all economies in question. Foreign currency loans continue to dominate local loan markets, and broader money aggregates to a large extent consist of foreign currency deposits (financial euroization). The presence of financial euroization makes interest rate channel of monetary transmission inefficient. Moreover, the pervasive level of financial euroization leaves an economy dangerously exposed to external shocks. This is why understanding roots and mechanisms of financial euroization becomes an increasingly important policy issue. We employed multiple panel regression models feed by the official annual data that cover the last decade. In this study, the choice of explanatory variables is firstly based on the so-called portfolio view which considers economic agents’ choice between the classes of domestic and foreign assets driven by risk–return relationship. We have tested the significance of a set of variables pointed out by two international parity conditions, i.e., uncovered interest rate parity and purchasing power parity. The common variable for those international parity relations is exchange rate expectations, or future path of exchange rate. We also included different proxies for external fragility. Those proxies may shape public view of growth and stability prospects, and further on explain puzzling disparities of the international parity relationships, calculated based on current level of exchange rate. Designed that way, econometric models are able to trace wrong policy choices or unsustainable economic policy mix.

Market Volatility and Foreign Exchange Intervention

This paper explores unilateral interventions by National Bank of Serbia on RSD/EUR market, conducted over the period from 2004 to 2010 inclusive. We have employed a Markov-switching model that describes the time-varying nature of the exchange rate volatility. The changing nature of volatility may arise due to the process of information arrivals or being liquidity driven, but can also be a consequence of interventions. We found the probability of switching between high-volatility and low volatility states conditioned upon the intervention. The regime switching model proved to be able to indicate correctly the ex ante identified structural breaks that came from intervention policy. Moreover, our study raises doubts that the central bank intervenes also in response of detrimental past exchange rate trends rather than solely in response to excess volatility.

Testing Uncovered Interest Parity for Structural Breaks: A Developing Country Perspective

This article is a single-country empirical study of uncovered interest parity. Uncovered interest parity (hereafter UIP) is a non-arbitrary condition well-known and widely tested in international finance. This test of UIP is based on high-frequency data. The most promising parts of the evidence are the EGARCH analysis of statistical properties of time series of deviations from UIP, and the Markov Switching model. EGARCH (1,1) delivers a model able to predict future volatility of the tested variable. Moreover, the model also describes the time-varying nature of volatility itself. The changing nature of volatility may arise due to the process of information arrivals or being liquidity driven, but can also be a consequence of some structural breaks. Namely, the time series remains homoscedastic in the short-term while heteroscedasticity appears in long-term horizons. The regime switching model is further employed in order to test if the smoothed probabilities along the sample reflect the main events through which the economy evolved over time. The model proved to be able to indicate correctly the ex-ante identified structural break that came from crisis incident, but failed to differ between pre- and post-liberalisation periods.

THE ECONOMICS OF HOUSING FINANCE IN SERBIA

Abstract The paper presents analysis of the achieved development level of the housing market in Serbia. Various factors that have shaped demand and supply are systematized and their impact over the last decade was analysed and monitored. As important ones demographic, macroeconomic and financial factors are singled out and a special importance is given to the analysis of specific historical and socio-political circumstances that have influenced the development of the housing market during the period of analysis.