Determinants of long‐ versus short‐term bank credit in EU countries

• Published date: 01 October 2017
• Date: 01 October 2017
• DOI: http://doi.org/10.1002/ijfe.1583

RESEARCH ARTICLE

Determinants of long‐versus short‐term bank credit in EU

countries

Haelim Park Anderson

1

| Claudia Ruiz‐Ortega

2

| Thierry Tressel

3

1

Office of Financial Research, U.S.

Treasury, Washington, D.C. 20220, USA

2

The World Bank, Washington, D.C.

20433, USA

3

International Monetary Fund,

Washington, D.C. 20431, USA

Correspondence

Haelim Park Anderson, Office of Financial

Research, U.S. Treasury, Washington, D.C.

20220, USA.

Email: haelim.anderson@ofr.treasury.gov

JEL Classification: G21; E44; E51

Abstract

This paper empirically examines the determinants of credit at different

maturities across countries of the European Union during the last decade. We

document the lengthening of maturities since the early 2000s and whether

these patterns were driven by similar factors in advanced and emerging market

economies. Before the 2008 crisis, long‐term credit expanded faster than short‐

term credit in most countries of our sample and contracted less than short‐term

credit after 2008. We find that foreign liabilities were more important sources of

funding in emerging market countries than in advanced economies. In

addition, aggregate demand mattered less for credit extension to firms in

emerging market countries than in advanced countries.

KEYWORDS

bank credit, creditmaturity, emerging markets, EU countries, financialcrisis, long‐term finance

1|INTRODUCTION

During the last decades, many advanced and emerging

market economies (EMEs) experienced “credit boom‐bust

cycles”(Claessens, Ayhan Kose, & Terrones, 2011).

Among emerging economies, developing countries from

Central and Eastern Europe (CEE) experienced a

significant growth of credit after the restructuring of their

banking systems and in the run‐up to the global financial

crisis (Bakker & Gulde, 2010; Cottarelli, Dell'Ariccia, &

Vladkova‐Hollar, 2005). Interestingly, in the run‐up to

the crisis, the maturity composition of credit to enter-

prises in the EU was also changing. In particular,in

CEE countries, whereas short‐term credit was on average

growing at an annual rate of 21%, medium‐and long‐term

credit were growing at 24% and 36%, respectively.

1

Although the aggregate cyclical patterns of bank credit

and the determinants of banking system deepening have

been well studied in the literature (Djankov, McLiesh, &

Shleifer, 2007; Gozgor, 2014; Levine, 2005; Tressel &

Detragiache, 2008), there is little empirical evidence

analysing the composition of bank credit at different

maturities and its determinants. Even though there are

studies that consider the impact of institutional factors

on the maturity of bank debt (Bae & Goyal, 2009; Qian

& Strahan, 2007), few papers have examined the macro-

economic determinants of the maturity composition of

bank credit over time.

2

Studying the determinants of the maturity composi-

tion of credit provides a new perspective on economic

growth because short‐and long‐term loans do not serve

the same purpose and thus may have different impacts

on the productive capacity of an economy. For example,

it is a well‐established fact that firms strive to match the

maturity of their assets and liabilities (Booth, Aivazian,

Demirgüç‐Kunt, & Maksimovic, 2001; Hart & Moore,

1995; Rajan & Zingales, 1995). Short‐term credit, which

includes commercial paper, lines of credit, and overdrafts,

is typically used by firms to finance working capital for a

limited time, usually less than a year. This type of credit

The views expressed in this paper are those of the authors and do not

represent those of the Office of Financial Research, the U.S. Treasury,

the World Bank, the International Monetary Fund or their policies. All

errors are our own.

Received: 18 August 2015 Revised: 4 April 2017 Accepted: 24 August 2017

DOI: 10.1002/ijfe.1583

274 Copyright © 2017 John Wiley & Sons, Ltd. Int J Fin Econ. 2017;22:274–295.wileyonlinelibrary.com/journal/ijfe

allows firms to finance current expenditures and under-

take investments that both take relatively little time to

build and generate output relatively fast. In contrast,

long‐term credit is suitable for fixed investments in plants,

machinery, and equipment and in high‐return projects

that require a continuing commitment of capital for years.

Those investments take time to complete but may contrib-

ute more to long‐term productivity growth than short‐

term investments (Aghion, Bacchetta, Ranciere, & Rogoff,

2009). Hence, a growing importance of long‐term credit

may indicate that the structure of the banking system is

becoming more geared toward financing long‐term

investments and sustaining economic growth.

The goal of this paper is to determine the factors that

drive the growth of short‐, medium‐, and long‐term bank

credit to nonfinancial corporations in EU member coun-

tries during the 2003–2014 period, both in advanced coun-

tries and emerging countries, and during the precrisis and

postcrisis periods. We compare the experience of the

advanced EU countries to that of emerging EU countries.

By comparing EU countries at different income levels, we

can mitigate the concerns that the evolution of credit

growth was influenced by the evolution of institutional

characteristics since these characteristics have generally

remained stable in EU countries during the period stud-

ied. The region was nevertheless characterized by the

existence of a new currency during this period, the euro,

and achieved very high levels of economic and financial

integration (Eichengreen & Park, 2003; Laeven & Tressel,

2013). The financial integration supported convergence

forces as capital flew from the relatively rich countries

to the relatively less developed countries (Abiad, Leigh,

& Mody, 2007). However, since the global financial crisis,

many countries have experienced reversals of capital

flows, and commentators have raised questions on the

sustainability of the precrisis convergence of income

levels. This context provides us with a unique environ-

ment to study the evolution of the maturity composition

of bank credit when the institutional environment is

broadly stable.

We show that, on average, credit growth accelerated

for all groupings of credit maturity (less than 1 year, 1 to

5 years, above 5 years) in advanced EU countries and in

emerging EU countries before the crisis. Although there

are differences across countries, credit growth was, in

most countries, stronger in the categories of credit with

longer maturities, particularly at maturities exceeding

5 years. This occurred both in advanced EU countries

and in emerging markets of CEE. After the crisis, credit

contracted significantly in both groups of countries. A

notable pattern is that long‐term credit contracted moder-

ately in advanced economies, whereas it contracted

sharply in emerging market countries.

We find that the cyclical determinants of the growth of

credit at different maturities differed significantly

between emerging markets and advanced economies in

the EU. In the emerging markets of the EU, both domestic

funding and foreign funding were significant drivers of

bank credit to enterprises at all maturities. In particular,

foreign funding served as an important funding source

for the growth of long‐term (above 5 years) bank credit.

3

Countries with less deep banking systems also experi-

enced faster growth of credit with longer maturities.

These patterns suggest that a self‐sustaining process of

financial deepening and increased use of long‐term credit

for fixed investments was at play. Credit growth at short

and long maturities was also significantly positively asso-

ciated with the inflation rate and with trade openness,

suggesting that countries with booming demand condi-

tions and with growing links to world trade experienced

TABLE 1 Variables and data sources

Variable Description

Database/

source

Private credit Credit to enterprises IFS, ECB

Short‐term

credit

Credit to enterprises with

maturity up to 1 year

ECB

Medium‐term

credit

Credit to enterprises

with maturity 1–5 years

ECB

Long‐term

credit

Credit to enterprises

with maturity over 5 years

ECB

Foreign

liabilities

Liabilities to non‐residents/

Foreign Liabilities, based

on domestic residence

for euro area countries

IFS

Domestic

deposits

Transferable/demand

deposits; Other/Time

and savings deposits,

based on domestic

residence for euro

area countries

IFS

Inflation CPI inflation IFS

Real GDP GDP Index, constant local

currency

IFS

EONIA rate EONIA rate ECB

Deposit rate Interest rate on deposits ECB

Trade

openness

Exports plus imports to

GDP ratio

IFS

Private credit

to GDP

Credit to the private

sector by depository

credit institutions to

GDP

IFS

Note. EONIA = euro overnight index average; GDP = gross domestic product.

Source: International Financial Statistics (IFS) and European Central Bank

Statistical Data Warehouse (ECB).

ANDERSON ET AL.275