In the previous post, I investigated the trend of loans and deposits ratio (LtD) for the period 2003-2014. based on time series published by the central bank of USA. According to the FRED methodology, LtD was constructed based on the ratio of loans to the private sector and total deposits. If LtD does not include total loans and total deposits, or loans and deposits by sector, LtD is transformed into an indicator of the share of loans in deposits, which makes it an insufficiently precise measure of the direction of the banks’ credit policy.
After three and a half years we are here in the June 2018 (see chart). We now have a much more accurate LtD, based on which we can give a more objective assessment of the degree of the expansiveness of the credit policy of banks in the eurozone and in Bosnia and Herzegovina. According to the ECB methodology, LtD is determined without loans and deposits to the general government, so the LtD for BH is calculated in the same way. Loans and deposits also apply to residents and non-residents (households, non-financial corporations, non-banking financial institutions), and identical sectors are located in the numerator and denominator of LtD.
On average, the credit policy of BH banks in 06/2018. is neither expansive nor restrictive, the LtD of our banking sector is 99.8, approximately at the same level as the LtD of Germany. The average LtD in the euro zone is 104, in Austria, it is 106.9, Slovenia has a very low LtD, and Finland is going through a period of a credit boom.
The diversity of the credit policies of countries from the periphery of the euro zone (countries that have passed, or are going through, the public debt crisis) which are popularly labeled PIIGS (Portugal, Italy, Ireland, Greece, Spain) is very interesting. Greece doesn’t give up on a very expansive credit policy, and both Ireland and Spain are above the eurozone average, while Italy and Portugal have normalized their lending policies.
The assessment of the policy direction is made without the loans and deposits of the general government – this must not be forgotten.
Since bank credit is the main source of financing economic activity in BH, any future reduction in LtD would further aggravate the liquidity of our economic system. In order to evaluate the direction of credit policy in BH in relation to individual sectors (population, economy, general government …), it is necessary to perform decomposition of loans and deposits by sectors, which will be the topic of another post (as well as the dynamics of LtD).
Public debt (in relation to gross domestic product) is also closely linked to LtD. These two variables often have the opposite direction of movement.