The Role of Banks

Credit has grown at a rapid pace in emerging markets (EMs) over the last 10 years. Banks have played a major role in the extension of credit and have continued to be its main source. Domestic banks have taken over business from foreign banks since 2008. However, developments across EMEs have been heterogeneous, with non-bank financing playing a greater role in the faster growing economies. Important changes have occurred in the composition of bank assets over this period. While the banking sector leverage generally has not increased, banks’ sources of funding and recipients of their credit have changed. Bank credit is increasingly flowing to households, in particular, in the form of mortgage loans. Corporate deposits have gained share relative to household deposits, potentially making banks rely on a less stable source of funding. In some EMs, non-core funding (liabilities other than equity and deposits) are playing a greater role in sustaining credit growth by banks. Forward-looking measures point to increased credit risk in many EMs. Interest rate risks remain in many cases with customers, as, for instance, as large share of mortgage loans are variable rate contracts. But interest rates could feed back to credit and funding risks, if defaults on loans rise and corporates respond by discontinuing their supply of deposits. Full publication: What Do New Forms of Finance Mean for EM Central Banks?