8 March 2016
Mikhail Mamonov (Center for Macroeconomic Analysis and Short-term Forecasting, Moscow): Unbelievable balance sheets: Is it possible to estimate the size and real effects of hidden negative capital in banking?
This paper proposes an empirical framework for estimating the scope of hidden negative capital on banks’ balance sheets and its consequences for the supply of credit to the real sector of economy. Banks operate with hidden negative capital in case they have too aggressive lending strategies to create sufficient amount of loan loss provisions (LLP). To satisfy the official requirements on capital adequacy such banks artificially increase their capital, but eventually they face with license withdrawal. Using the latest bank-level data on Russian banks, we show that this story really happens and reveals growing systemic importance. First, summarizing the data from various issues of the Bulletin of the Bank of Russia over the 2014-2015, we show that the revealed size of hidden negative capital in a sample of 62 credit institutions, whose licenses were withdrawn during this period, amounts to about RUB 770 bln, i.e. it reaches 1.1% of Russia's GDP by the end of 2015. Second, we propose to use the tobit estimation technique to generate out-of-sample forecasts of the scope of hidden negative capital. Our estimations have shown that about 250 of still operating credit institutions in Russia falsify their balance sheets so far and the estimated out-of-sample forecast of their cumulative negative capital amounts to RUB 900 bln. Importantly, if these banks leave the credit market, the non-financial firms and households will lose approximately RUB 4500 bln of credit resources. We suppose these results might be useful for monetary authorities and contribute to the literature on banking stability.
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