Early Birds, Late Risers, and Sleeping Beauties: Bank Credit Growth to the Private Sector in Central and Eastern Europe and the Balkans

One-Size-Fits-One: Tailor-Made Fiscal Responses to Capital Flows

“…These economies account for a sizable share of the G-11 countries. Indeed, a few years ago, empirical studies estimated that the potential future equilibrium capital inflows for Central and Eastern European countries could exceed their GDP by several times (Lipschitz et al, 2002), while bank credit would rise rapidly relative to GDP from a low base (Cottarelli et al, 2003). Updated estimates of the equilibrium bank credit to the private sector suggested that most G-11 countries still had considerable room to expand, provided that global liquidity conditions remained favorable (Figure 3).…”

Czech Republic, Republic of Estonia, Hungary, Republic of Latvia, Republic of Lithuania, Republic of Poland, Slovak Republic, and Republic of Slovenia: Export Structure and Credit Growth

“…These macroeconomic variables reflect the risks faced by a bank and, hence, might affect its soundness. Although all of these variables were found to affect bank loan growth, only GDP per capita was found to be an important determinant of distance to default, suggesting that bank soundness is positively correlated with the level of economic and 23 Schadler and others (2004); Coricelli and Masten (2004); Cottarelli, Dell'Ariccia, and Vladkova-Hollar (2005); and Égert, Backé, and Zumer (2006).…”

“…Credit to the private sector is generally expected to grow faster than nominal GDP in emerging market and transition countries as their financial systems develop. The levels of bank intermediation in the NMS in the early years of transition indeed were significantly below what would have been expected, given their levels of economic development, and macro-level studies agree that an increase in credit-to-GDP ratios in the NMS is needed to bring these ratios to the levels consistent with the countries' incomes (Schadler and others, 2004;Cottarelli, Dell'Ariccia, and Vladkova-Hollar, 2005;and Hilbers and others, 2005). Such an equilibrium adjustment manifests itself in credit growth being higher in those NMS with lower initial ratios of bank intermediation (Figure 3).…”

“…Many macrolevel studies have found that bank intermediation in the NMS is still below the equilibrium levels consistent with the levels of economic development of these countries and the structural characteristics of their banking sectors. Adjustment toward equilibrium is expected to continue in the coming years, but, if it occurs at an excessively rapid pace, it can lead to macroeconomic and financial instability (Schadler and others, 2004;Coricelli and Masten, 2004;Cottarelli, Dell'Ariccia, and Vladkova-Hollar, 2005;and Égert, Backé, and Zumer, 2006). 15 So far rapid credit growth in the NMS has not resulted in a deterioration in financial soundness indicators, but prudential risks appear to be rising in some countries (Hilbers and others, 2005;and Iossifov and Khamis, 2006).…”

Credit Growth in the Middle East, North Africa, and Central Asia Region

“…Similarly, with Latin America, after the fact examination of crises (Gourinchas, Valdes, and Landerretche 2001) are more common than analyses of recent credit growth. In Eastern Europe, however, where high rates of private sector credit growth have raised stability concerns, economists have been looking to assess the risks of high credit growth before a crisis emerges (Duenwald et al 2005, Cottarelli et al 2003, Hilbers et al 2006.…”