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Даш про aBTopiB
В1ровець Денис Володимирович,
астрант кафедри фЫанав та економки КиТ'вського уыверситету iменi Бoрисa ГрЫченка, м. КиТв, УкраТ'на
ORCID ID: 0000-0003-4934-8377
e-mail: seito@ukr.net
Обушний Серпй Миколайович,
к.е.н., доцент кафедри фЫанав та економки КиТвського уыверситету iменi Бoрисa ГрЫченка, м. КиТ'в, УкраТ'на ORCID ID: 0000-0001-6936-955X e-mail: s.obushnyi@kubg.edu.ua
Данные об авторах Вировец Денис Владимирович,
аспирант кафедры финансов и экономики Киевского университета имени Бoрисa Гринченка, г. Киев, Украина ORCID ID: 0000-0003-4934-8377 e-mail: seito@ukr.net Обушный Сергей Николаевич, к.э.н., доцент кафедры финансов и экономики Киевского университета имени Бoрисa Гринченка, г. Киев, Украина ORCID ID: 0000-0001-6936-955X e-mail: s.obushnyi@kubg.edu.ua
Data about the authors Denys Virovets,
Postgraduate student of the Department for Finance and Economics, Borys Grinchenko Kyiv University, Kyiv, Ukraine ORCID ID: 0000-0003-4934-8377 e-mail: seito@ukr.net Sergiy Obushnyi,
Ph.D. (Economics), docent of the Department for Finance and Economics, Borys Grinchenko Kyiv University, Kyiv, Ukraine ORCID ID: 0000-0001-6936-955X e-mail: s.obushnyi@kubg.edu.ua
УДК: 336.012.23 http://doi.org/10.5281/zenodo.4244285
^-класифка^я: G21, E43, E47, E52, C53
ОЙОЮ-щентифкатор: https://orcid.org/0000-0003-2970-4872 https://orcid.org/0000-0001-9464-0380
KULPINSKY S,V.
KURMAIEV P.Y.
Banks' interest incomes in various inflationary environments
The paper investigates determinants driving the banks to shifts between their interest-based and non interest-based activities under the influence of various monetary regimes and debt policies. Bank sectors of Poland, as low inflationary environment and Ukraine, as high inflation environment, were studied. Our empirical findings suggest that monetary policy regime, risk spreads, different debt loads and magnitudes of inflationary shocks all contribute to changing the ratio of interest to non-interest incomes. Yet, in economy with inflation targeting and lower debt-to-GDP ratio risk spreads, defined as difference between lending rates and relevant government bond yields, are more effective in lowering interest incomes than in more volatile inflationary environment due to risk aversion of banks to new
74 Формування ринкових вщносин в УкраТж №7-8 (230-231)/2020
© KULPINSKYS,V., KURMAIEVP.Y., 2020
lending. Real deposit rates are barely important factors since both economies are banking-based. Rising proportion of government bonds in bank assets negatively impacts interest incomes in relation to total incomes in a more inflationary and indebted economy, while it increases this proportion in a less indebted economy, which we attribute to stable demand for safe assets in low inflation environment. In the meanwhile, narrowing risk spreads resulting from increases in government borrowing, lead to investment crowd-out and more fee-oriented banking sector.
Keywords: interest income, government bonds, risk premium, inflation.
КУЛЬПНСЬКИЙ С.В.
КУРМАБВ П Ю.
Проценты доходи баншв у рiзних шфляцшних середовищах
У статт'1 досл'1джено детерм'шанти, як спонукають банки до переходу вд процентной до непро-центно'1 д)яльност'1 п'щ впливом р'зних монетарних режим'1в та борговоi полтики. Було досл'щжено банювсью сектори Польщ, як прикладу низького 1нфляцйного середовища та Украни, як висо-коЧнфляцйного середовища. Емп'1ричн'1 висновки дали змогу припустити, що режим монетарной полтики, розпод^л ризик'1в, р'зний ступ'шь боргового навантаження та величини 1нфляц'1йних шок'1в сприяють змн сЫввщношення в'щсоткових та нев'щсоткових доходов. Однак в економiцi з режимом 1нфляцйного таргетування та меншим сЫввщношенням боргу до ВВП спред ризику, ви-значений як р'зниця м'ж ставками кредитування та в'щпов'щними доходами державних обл'1гацй, е бльш ефективним у зниженн в'1дсоткових доходов, нж у бльш волатильному 1нфляцйному се-редовищ'1 через несхильн'1сть банюв до нового кредитування. Реальн депозитн ставки виявилися малозначимими факторами. Збльшення частки державних обл'1гацй в активах банюв негативно впливае на процентн доходи по в'щношенню до загальних доходв у бльш 1нфляц'1йнй економ'1Ц1, в той же час збльшуючи дану частку в умовах меншо'1' заборгованост'1, що пояснюеться стабльним попитом на менш ризиков'1 активи в умовах низькоi '¡нфляцн. Зниження спреев на ризик внасл'щок збльшення державних запозичень призводить до нвестицйного витснення та бльшоi ор'ентацп банювського сектору на ком'юйш доходи.
Ключовi слова: процентний дох'щ, державн обл'1гацИ, премiя за ризик, 1нфляц'1я.
КУЛЬПИНСКИЙ С.В.
КУРМАЕВ П.Ю.
Процентные доходы банков в различной инфляционной среде
В статье исследованы детерминанты, которые побуждают банки к переходу от процентной к непроцентной деятельности под влиянием различных монетарных режимов и долговой политики. Было исследовано банковские сектора Польши, как примера низкой инфляционной среды и Украины, как высоко-инфляционной среды. Эмпирические выводы позволили предположить, что режим монетарной политики, распределение рисков, разная степень долговой нагрузки и величины инфляционных шоков способствуют изменению соотношения процентных и непроцентных доходов. Однако в экономике с режимом инфляционного таргетирования и меньшим соотношением долга к ВВП спрэд риска, определен как разница между ставками кредитования и соответствующими доходами государственных облигаций, является более эффективным в снижении процентных доходов, чем в более волатильной инфляционной среде через неподверженность банков к новому кредитованию. Реальные процентные ставки оказались малозначимыми факторами. Увеличение доли государственных облигаций в активах банков негативно влияет на процентные доходы по отношению к общим доходам в более инфляционной экономике, в то же время увеличивая данную долю в условиях меньшей задолженности объясняется стабильным спросом на менее рисковые активы в условиях низкой инфляции. Снижение спредов за риск вследствие увеличения государственных заимствований приводит к инвестиционному вытеснению и большей ориентации банковского сектора на комиссионные доходы.
Ключевые слова: процентный доход, государственные облигации, премия за риск, инфляция.
Introduction
Bank activities are vulnerable to interest rate and exchange rate shocks, inflationary trends, monetary policy and its effects. Their interest incomes are cyclical in relation to loans and net interest margins tend to rise during booms and often causing busts due to excessive and not always prudent lending. Their non-interest incomes, which include trading fees, commission for services like buying or selling fixed income instruments, foreign exchange, fines for payment arrears, and many others, are barely synchronized with business activity. Balance between both types of incomes usually shifts in favor of interest incomes in the periods of high credit demand while it tends to show dominance of non-interest incomes in economies with either more narrow interest margins, or in economies with rising credit risks. In post 2008-crisis period some developing economies have shown high interest incomes, accompanied by rising NPLs in bank portfolios, or uncontrollable inflationary spikes. New factors emerged in that period: abundant issuance of government bonds that ended up in portfolios of banks; frequent rescheduling of loans in arrears and higher incomes from fines imposed on debtors. In some cases the trend of rising demand for safe assets on the side of banks is in line with Basel III framework regulation aimed at balancing risks with capital. Yet, widening government deficits are usually followed by rising inflation, which in turn pushes interest rates up, inducing higher yields on government bonds until it becomes more reasonable for banks to give up their lending and investment activity in favor of safe fixed income papers. Real interest rates tend to be more volatile in such periods and risk premium for lending to corporate customers may shrink due to increased government borrowing, occasionally resulting in vicious circle of higher demand for safe papers and subsequent decline in their yields.
In this respect we deem it appropriate to estimate the impact of traditional factors (risk premiums, real interest rates) and those that emerged recently (massive purchases of government bonds by banks) on the income structure of banks in order to gauge the efficiency of monetary policy in boosting lending. We have chosen two developing economies, both of which were under planning system until 1992 and have experienced hyperinflation. However, one of them managed to introduce inflation targeting and to achieve positive results; another did not manage
to hold inflation in grip prior to crisis and had prolonged inflationary episodes after it. Poland weathered financial crisis relatively well, and despite insignificant surge in inflation in the years following crisis, it returned to stability. Poland displayed relatively high growth rates of GDP accompanied by moderate and temporary devaluation and decline in government debt. It contributed positively to the development of bank sector, which saw rise in its assets by 78% over that period. Noteworthy, that net interest margin of Polish banks tended to grow in recent years (Szczepanska, 2018). Ukrainian bank system, which showed faster growth before 2008 crisis, experienced subsequent stagnation and after political events of 2014 saw its public debt rising, while annual inflation surging to more than 50% after exchange rate shock. Holdings of government bonds in portfolio of banks, despite being initially on a much lower level than in Poland, grew rapidly and substantially exceeded that of Poland. Section 1 provides review of previous literature on the impact of government bond yields on banks' portfolio, cost determinants of bank incomes and banks' preferences to certain types of activities depending on bonds yields or monetary policy regime. Section 2 explains research methodology and Section 3 provides results of empirical study and discussion followed by conclusions.
Literature review
One of recent studies [5] devoted to bank holdings of government bonds showed strong correlation between the share of government bonds in the structure of banking assets and the volume of lending in the period of sovereign defaults. The empirical study analyzed performance of more than 20,000 banks in 191 countries during 1998-2012. The results led to conclusions consistent with the theories of lending discrimination. First, there is a strong negative correlation between the share of government bonds in the structure of bank assets and the volume of lending in the periods of sovereign defaults. Second, share of government bonds in assets is high in countries with underdeveloped financial systems, accounting for more than 12%, especially in banks with weak lending activity. This share goes up in the periods of sovereign defaults. Instead, in advanced countries like OECD government bonds account for some 5% of bank assets. The results also indicate on fact that decrease in bank lending after default is larger in countries
with average levels of economic development than in economically undeveloped countries. The above study facilitates understanding banks' policy related to formation of assets in countries with different levels of economic development.
Another research [30] examines the impact of scheduled banks borrowings on lending to Pakistan's private sector. Authors conclude that 1% increase in government borrowing in this category of banks leads to 8 basis points reduction of lending over 4 months. This is due to the fact that government borrowing leads to crowd out of loans to private sector due to reduced availability of the loan-able funds. On the other hand, 1% increase in lending capacity of banks leads to increase of 87 basis points in the volume of lending to private sector over 4 months. Authors also argue that investment in government bonds increases risk appetites and leads to higher lending to potentially risky borrowers.
The results of the study by Golodniuk [6] devoted to reaction of bank lending to changes in monetary policy in Ukraine during 1998-2003 were quite informative. Author analyzed in detail the situation in banking sector over the specified period, in particular the spreads between interest rate on loans and deposits. The results of comparative study have shown that there are significant differences between similar rates in Europe and Canada. Grouping of Ukrainian banks by assets, capitalization, liquidity and analysis of their performance, contributed to estimating the impact of individual monetary policy decisions. Author provides rationales for assumption that bank capitalization is the most informative indicator of balance sheet strength. The results of the study showed that with increase in the level of bank capitalization, the impact of monetary policy decisions is diminishing.
The study of Stiroh [28] focused on relationship between banking risk and profitability. Empirical estimates of banks' activities over the period of 19972004 have not found correlation between non-interest income exposure and average bank incomes. The results of the above study showed that growth in the share of non-interest income in the structure of US banks' assets increased volatility of banks' profits. That is the reason, as author notes, why the increase in share of non-interest income has not improved risk/return ratio of US banks.
The impact of government bond yields on bank lending rates for new borrowers has been investi-
gated in [4]. The empirical basis of this study was performance of banking sector in 21 EU countries. The results showed that long-term government bond yields exert rather significant impact on long-term lending rates: increase in government bond yields by 100 basis points in the long run leads to increase in lending rates by 50 basis points in France, by 70 bp in Germany and by 100 bp in Italy. Limited influence was observed only in some Central and Eastern European countries, which is explained by structural characteristics of banking sector such as lending in foreign currency. The findings confirm that monetary policy decisions that have direct influence on government bond yields have also significant influence on bank lending rates.
Imbalances in liquidity of term structure on Ukrainian financial market were discussed in [17]. The study concluded that in 2015-2016 short-term liquidity prevailed markedly over long-term liquidity. As a result, yield curve structure of hryvnia loans became inverted. Calculations showed that increase in mid-term bond yield by 1% results in decrease of loan portfolio to the private sector by 0,15% within a year. It causes certain rebalancing of banks' loan portfolio in favor of government bonds. In order to achieve the upward sloping yield curve and to hold down banks' appetites for government paper, purchases of higher volumes of long-term government bonds by central banks compared to short-term ones were recommended.
A detailed study of the influence of low interest rates on the shift between bank interest and non-interest activities was conducted by Brei, Gamba-corta, & Borio [2]. Authors analyzed the data for 113 banks from 14 countries covering the period of 1994-2005. The results of the study indicate that bank non-interest income tends to grow in low interest rate environment. Thus, with decline in interest rates from 3% to 0, the diversification ratio increases by 1.7 percentage points in the short run. Fee-based income, under the same conditions, grows from 14.2% to 1 5.2% in the structure of total income. This process is accompanied by increase in the share of liquid assets and, consequently, by decrease in credit risks. Authors note that low interest rates cause correction in the funding structure with increase in the share of deposits by an average of 2.6 percentage points.
Analysis of the impact of sovereign risk on credit dynamics is discussed in the study of Cantero-
Saiz [3]. Authors note that the level of sovereign risk has direct impact on the cost and availability of bank lending. It concludes that degree of impact of sovereign risk on active and passive banking transactions depends on the type of country's monetary policy. As a result, banks that operate in countries with high risk premiums are more sensitive to restrictive monetary policy.
The study of the impact of monetary policy on bank profitability in the post-crisis period was conducted by Borio, Gambacorta & Hofmann [1]. On the basis of financial statements of 109 international banks for the period of 1995-2012 authors analyze indicators that characterize the structure of assets and interest rates, return on assets, incomes, loan loss provisions etc. The results of the study indicate that there is a strong correlation between interest rates, yield curve and ROA. This is confirmed by the calculated correlation coefficient. The study found that during 20092010, ROA rose by 0.3 percentage points, while in 2011-2014 it dropped by 0.6 percentage points as a result of lower interest rates and change in the yield curve structure.
Methodology
Based on previous literature and analysis of selected banking systems in emerging economies, our research focused on investigation of determinants that cause the shift between interest and non-interest incomes of banks. Our case study covers Polish banking system (low inflationary environment) and Ukraine (high inflationary environment) . Polish monetary policy was successful in inflation targeting introduced in 1998, while Ukrainian bank system, after huge jump in bank assets to GDP up to 95% in 2008, has shown its gradual decrease to 30% in 2018, preceded by halving in number of existing banks, high inflation, exchange rate devaluation and drastic jump in the volume of government borrowings.
The data were obtained from central banks of above-mentioned countries, government statistical agencies. The database covers quarterly data for period from 2009 to 2018 (in case of Poland) and to 2019 (in case of Ukraine). The following variables were created for relevant countries: An endogenous variable Cost_ratio is defined as ratio of bank interest incomes in relation to non-interest incomes (including trading fees, trading-based income, operating income and other incomes not re-
lated to lending or bond-holdings). A set of exogenous variables was created to estimate the factors of bank preferences towards interest or non-interest activities: Risk_premium is defined as spread between 12-month average lending rates and 12-month government bond yields on primary market. Since the latter are available monthly the average for 3 months was calculated for each quarter. Real_ rates is defined as average 12-month retail deposit rate minus annual quarter-to-quarter CPI. Tbills_ assets is defined as percentage share of total domestic government bonds held in bank' portfolio in total assets of banking system.
Cost_ratio=interest income/non-interest income
Risk_premium = 12 month average lending rates - yield on 12 month government bonds
Real_rates = 12 month deposit rates - annual CPI, quarter to quarter
Tbills_assets = government bonds in banks' portfolio/total banking assets
Determinants of rebalancing between interest and non-interest income to be estimated have been specified in the following model: Cit = ai + /?,Risk_premium^ + /?2 Real ratesit +
J33Tbills _ assets it + Dummy _str + juit (1)
where Cit denotes interest to non-interest incomes in time t, ai is constant, and /?, are coefficients, fJ.it is an error term.
The model was analyzed using OLS method with lag impact accounted and causality tests performed, confirming hypothesis of no cost_ratio causing movements in exogenous determinants.
Additional dummy variables (Dummy_str) have been introduced to the model to test the effects of structural shifts in economy, which influenced bank sectors, with 1 for the selected quarter and 0 for the rest. In case of Ukraine, dummy variable for 1Q2016 was selected since it was the quarter when surge in government bond yields was registered followed by their accumulation by domestic banks. In Poland some structural shift occurred in 2012 as inflation went down markedly and domestic and foreign-based banks got rid of some government treasuries in favor of increased lending, which grew by 6,5% in total for that year. Results
The data obtained are presented in Table 3. The results of our estimate have shown a higher negative impact of risk premium on interest income for
Table 1. Variables definitions
Variable Definition
Cost_ratio [Cit) Banks' interest incomes divided by non-interest incomes. It shows the propensity of banks to different incomes resulting from lending and other activities
Risk_premium 12 month interest rates minus 12-month government bond yields on primary market. It indicates on level of risk for lending activity
Real_rates 12-month retail deposit rates minus annual quarter-to-quarter CPI. It serves as a factor driving households' savings and interest-based activity
Tbills_assets share of total domestic government bonds held in bank' portfolio in total assets of banking system
Variable Mean Median Minimum Maximum St.dev.
Poland
Cost ratio 1,73 1,63 1,21 2,41 0,35
Risk premium 1,74 1,68 1,03 2,73 0,37
Real rates 1,32 1,40 -0,50 3,60 1,15
Tbills assets 13,01 12,85 8,90 16,10 2,26
Ukraine
Cost ratio 3,24 2,97 1,24 6,50 1,33
Risk premia 1,96 0,46 -6,46 9,25 3,74
Real rates -1,03 0,56 -41,89 15,83 13,04
Tbills_assets 11,5 6,08 0,77 27,56 9,46
Exogenous variables Dependant variables
C1 C2
Risk premium -0.501*** [-4,344) -0.032* [-1,10)
Real_rates -0.069 [-1,839) 0.0425** [5,22)
Tbills_assets 0.7732** [3,22) -1.109*** [-9,448)
Struct. dummy variable yes yes
R-squared 0,508 0,756
F-statistics 8,78 16,27
p-values 0,000 0,000
Note: C1 stands for Poland, C2 stands for Ukraine. Robust t-statistics in brackets below variables. * indicates statistical significance at 10%, ** indicate significance at 5%, *** indicate significance at 1%. Dummy for C1 is for 2Q2012. Dummy for C2 is for 1Q2016
Table 2. Descriptive statistics of variables
Table 3. Regression analysis results
economy with lower debt-to-GDP ratio and with lower inflation as compared to economy with growing proportion of government debt in both GDP and banks' portfolio. It may result from risk aversion and propensity of banks to be more cautious in lending in the periods of growing risks, thus searching for other sources of income, including trading, or fees to be charged from existing customers. Lower sensitivity of risk premium on the structure of bank incomes in higher inflationary environment may be attributed to banks' willingness to more risky activities in certain periods (NPLs in Ukraine are much higher than in Poland in total loan portfolio) and rel-
atively high government bond yields for a long period of time, which led to a certain degree of substitution of incomes from corporate or retail lending activity to passive holdings of less risky debt. Our assumption is based on drastic surge in the proportion of government bonds in bank portfolios in Ukraine over the period of 2016-2019.
Another determinant - real interest rates on 12-month deposits - has barely shown significant influence on the structure of interest/non-interest incomes in both cases. It was statistically more significant and positive for the economy with higher government debt and higher level of interest rates
as compared to the economy with successful inflation-targeting regime, which can be explained by a number of factors: both are bank-based systems with lower share of stock markets in financial intermediation of savings to investments, so that banks do not much diversify incomes with changes in inflation (retail deposits in bank system of Poland amounted to 39,6% and corporate deposits to 54,8% of GDP in 2018, the same ratios for Ukraine amounted to 14,5% and 11,6% respectively); persistent inflation in Ukraine and real deposit rates being rather volatile, jumping from 15,83% and dropping as low as -42%, whereas low inflationary environment in Poland, stability of interest rates and lower number of bank failures make real rates barely relevant for depositors.
Finally, the proportion of government bonds in bank assets proved to be rather important but not homogenous for the structure of bank incomes in both banking systems. Its negative and stronger impact for interest revenues in economy with higher inflationary environment can be explained by substitution of loans with treasury bills and reorientation of activity to charging fees of customers for bonds' trading, imposing fines on loans in arrears, as a result of higher and more attractive
government bond yields and declining risk premium. Positive coefficient for this proportion in low-inflation economy is in line with expectations of stable demand for safe assets, as evidenced by negative sign for risk premium, and more rational portfolio diversification due to relatively lower and less volatile risk premium compared to high-inflation environment, as seen from Table 2.
One of the reasons for such dissimilarity in signs for coefficients of Tbills_assets is transmission mechanism of monetary policy in Ukraine. Central bank of the country adjusts its main refinancing rate according to inflationary trends. Government bond yields follow the path of central bank rates, as confirmed by correlation between bond yields and key refinancing rate. As a result, banks adjust their margins by lowering or increasing deposit rates, following inflationary path. Incentives to increase long-term lending are destroyed by relatively stable margin between cost of funding in the form of deposits and government bond yields, coupled with above-mentioned low sensitivity of real rates.
Conclusion
Our study of the impact of various factors on the shift from interest-based to non interest-based
v A -♦— Poland
V -■— Ukraine
M U . . f
\
^ A
V*
1Q2009 3Q2010 1Q2012 3Q2013 1Q2015 3Q2016 1Q2018 Figure 2. Ratio of interest to non-interest incomes of banks
Figure 1. Government bonds as percentage of total bank assets
activities of bank sectors in Poland and Ukraine showed mixed results depending on monetary policy regime, debt loads and relevant government bond yields, and magnitudes of inflationary shocks. In addition to previous studies of factors contributing to the shift of balance between trading-based and fee-based incomes to those of interest rate transactions, negative impact of spread between loans and government bonds, or risk premiums, on banks' propensity to earn non-interest income has been found. However, this impact is more pronounced for economy with inflation targeting regime and lower public debt as a percentage of GDP than for economy with implicit foreign exchange targeting accompanied by forex interventions, higher government debt and weaker inflationary control. It can be explained by decline in bank lending as credit rates tend to rise and subsequent shifts to less risky transactions with government bonds to and other incomes, subsequently leading to lending crunch. Real deposit rates, as a factor of savings, showed an insignificant impact on bank interest rates in both cases, which can be explained by bank-based models of financial intermediation in those countries and insufficient alternatives for savings.
The impact of government bond shares in bank portfolios proved to be more significant and positive in economy with higher and rapidly increasing government debt compared to the one with moderate debt, as a result of investment crowd-out. Further studies should take into account the effects of bank concentration and role of central banks in sovereign debt market. We also consider it appropriate to examine the possibility of implementing maximum caps for government bonds in bank portfolios to foster lending activity.
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Даш про авторов
Культнський Серпй В1тал1йович,
д.е.н., професор кафедри фЫансово''' безпеки Чер-нНвського нацюнального технолопчного уыверситету e-mail: skulpinsky@gmail.com Курмаев Петро Юр'йович,
д.е.н., професор кафедри фЫанав, облку та еконо-1Упчно''' безпеки Уманського державного педагопчного уыверситету iм.Павла Тичини
Данные об авторах Кульпинский Сергей Витальевич,
д.э.н., профессор кафедры экономической безопасности Черниговского национального технологического университета e-mail: skulpinsky@gmail.com Курмаев Петр Юрьевич,
д.э.н., профессор кафедры финансов, учета и экономической безопасности Уманского государственного педагогического университета им. Павла Тычины
Data about the authors Sergiy Kulpinsky,
Doctor of Economics, Professor, Chair of Finance, Chernihiv National University of Economics, Ukraine e-mail: skulpinsky@gmail.com Petro Kurmaiev,
Doctor of Economics, Chair of Finance, Accounting and Economic Security, Pavlo Tychyna Uman State Pedagogical University, Ukraine
