Determinants of bank credit growth in Australia: Effects of securitisation and the Global Financial Crisis

Abstract

Global financial markets have changed dramatically over recent decades. One of the most substantial changes is the now widespread use of securitisation in the financial system. Banking institutions are turning from interest-dependent returns or interest-based spread to fee-based activities, including lines of credit and many different forms of credit guarantees, adjusting to the altered financial environment in which they operate. Given the recent Global Financial Crisis (GFC), this study focuses on the benefits and costs of asset securitisation as a funding tool for modern financial institutions. The study addresses the important issue of the financial excesses that resulted in recession and high unemployment rates, not seen for decades in most of the Western world. <br/> This study evaluates the effect of using asset securitisation and other lending determinants on bank credit growth of banking institutions operating in Australia, both local and foreign. The study classifies the determinants into supply-side determinants, which are internal or bankspecific characteristics, and demand-side determinants, which are external or macroeconomic determinants. Credit growth is used as a proxy for operational performance, represented by two key indicators (dependent variables): business credit activity and housing credit activity. Each of these indicators has different measures. Data from a sample of 35 banking institutions was collected over three distinct periods between 2004 and 2012. Of the banks, 10 are domestic banks, of which six securitise assets. None of the 25 foreign banks, a mix of subsidiary and branches, securitise assets. Panel data methods are employed to conduct the analysis. <br/> A random effects regression model is used to analyse the effect of the independent variables on the dependent variables. The business credit activity indicator is measured by credit growth, business loans growth and credit card loans growth. Housing credit activity is measured by housing loans growth, housing loans owned growth, housing loans investment growth and housing loans others growth. The explanatory variables used in this study's regression models are financial and economic indicators; that is, supply-side determinants (bank size, total deposits, liquid ratio and asset securitisation) and demand-side determinants (growth of Gross Domestic Product [GDP], inflation rate, interest rate and unemployment rate). <br/> When examining the determinants on the supply side, the results of the analysis are mixed regarding the effect of securitisation on bank credit growth; but, as expected, most of the empirical results confirm that securitising assets does not have a significant positive effect on credit growth in any of the three GFC periods considered (crisis or no-crisis periods). The proposition was that large banks are likely to be more efficient and able to acquire funds at a lower cost due to the amount of collateral they can provide. However, the empirical results inconsistently support this proposition. Total deposits have a significant effect from the perspective of securitising assets as an alternative and additional funding source that can be used to cover credit demand. Neither the asset securitisation nor liquidity ratio had a significant effect on bank credit growth. In contrast, the results for demand-side determinants show that interest rate and unemployment rate have a significant negative effect on credit growth. The inflation rate has a positive significant effect on credit growth. There is no effect of GDP. <br/> Securitisation activities enable the banking sector to better diversity their financial resources base as well as add flexibility to their financial resources and loan portfolio, enabling them to better cope with challenges arising in their operational environment. However, the random effects estimates in the study show that banking institutions do not, in fact, gain benefits from securitising assets. <br/> Asset securitisation contributes to creating a more integrated market by providing new categories of financial assets that suit investor's preferred investment risk profile by increasing their capacity. If banking institutions know which factors are most likely to enhance their credit growth this could lead to increased competition in the marketplace, assisting in keeping prices low on the supply side of credit and thus encouraging growth in the business sector, which will drive job creation, resulting in a decrease in the unemployment rate.