Big swings in global commodity prices unnerve governments in developing countries reliant on such export revenue, and curb credit growth as banks tighten lending during price volatility.

A look at 1,600 banks from 78 developing countries between 2004 and 2015, a period of large swings in commodity prices, found lenders become more cautious when prices fluctuate because clients may not be able to service loans, eroding the quality of bank assets and capital.

Banks with relatively lower deposits and poor asset quality are particularly vulnerable to commodity shocks and tend to be more aggressive in responding to price movements.

Similarly, banks that are more sensitive to fluctuations in commodity prices, and see a decline in deposit funding and an increase in bad loans in response to a fall in commodity prices, reduce credit supply when asset quality falls.

The data shows that a bank with high exposure to commodities and low deposits curbs lending by as much as 4.1 percentage points when commodity prices fall below expected trends, more if the fall deepens.

Read the transcript

https://bit.ly/2G4VR7O

Read the working paper

https://www.adb.org/publications/international-commodity-prices-and-domestic-bank-lending-developing-countries

About the authors

Isha Agarwal is a PhD student at Cornell University, United States.

Rupa Duttagupta is chief of the Emerging Markets Division, International Monetary Fund.

Andrea F. Presbitero is an economist at the IMF and assistant professor in economics at the Università Politecnica delle Marche, Ancona, Italy.

Know more about ADBI’s work on

Commodities https://bit.ly/2pBo7Yu

Credit https://bit.ly/2FW1n0n