Is Lending in Central and Eastern Europe Developing Too Fast?

Abstract

Credit growth in Central and SouthEastern European countries has accelerated in recent years. While low starting levels of financial intermediation help to explain the speed of credit growth, the fast pace of credit growth raises concerns from a financial and macroeconomic stability perspective. Yet, there is only a limited empirical literature on the determinants of these episodes of fast credit growth. This paper provides an econometric analysis of the macroeconomic determinants of the growth of credit for Bulgaria, Croatia, Romania and the 8 transition countries that joined the EU in May 2004. In the absence of a generally-accepted way of determining what rate of credit growth may be deemed to be "excessive," the paper proposes a new approach to address this question. The contribution of this paper is to provide a measure of the excessiveness of credit growth while explicitly accounting for the catching up process in incomes associated with the transition from planned to market economies. To do so we model credit growth as a function of both macroeconomic fundamentals and the gap between the actual credit-to-GDP ratio and an equilibrium level. This simple model allows us to derive short-run credit elasticities as well as estimates of expected credit growth. We then compare the latter with actual credit growth, which provides us with a test to determine its "excessiveness." Due to data availability we undertake two sets of estimates of the short-run credit elasticities, based on a group of benchmark countries and on the countries of the region respectively. Although tentative, the conclusions that emerge suggest that credit growth in a number of countries in the region cannot be fully explained by their fast economic growth, declining interest rates or the catching-up in incomes. In particular, countries with fixed exchange rate regimes seem to have experienced credit growth well above what would have been expected given its main determinants. * The views expressed here are those of the authors and do not necessarily represent the views of the European Central Bank or the Eurosystem. The authors would like to thank Arnaud Mehl, Adalbert Winkler and participants at the IMF-National Bank of Romania conference on rapid growth of banking sector credit to the private sector held in Sinaia on 7-8 October 2005 for useful comments. The authors are also grateful to Evan Kraft, Croatian National Bank, for his assistance with Croatian data on loans in foreign currency and to Calin Arcalean for the dataset on loans and deposits in foreign currency.

Credit, Debt, and Everyday Financial Practices: Low‐Income Households in Two Postsocialist Cities

“…The dissolution of the dominant state banks and the establishment of an efficient financial system more suited to the demands of a market economy were seen to be essential to the creation of new economies in the region. In a wealth of literatures on corporate restructuring and bank development, the region's financial landscapes became a key focus of economic research in both the East and the West (Balcerowicz and Bratkowski 2001; Kokoszczyński 2001; Boissay, Calvo‐Gonzalez, and Kozluk 2006; Euromonitor International 2007). In all these debates, however, little attention has been paid to the everyday engagements of households with these new financial structures, the ways in which household economies are differentially positioned in relation to access to formalized financial provisioning, and the extent to which households and individuals draw on other resources—such as kinship and friendship networks and alternative market provisioning—to manage credit and debt, to strive toward financial stability, and to achieve social reproduction (although see Strebkov 2005; Guseva 2008; Rona‐Tas 2009).…”

Post-crisis credit slowdown in South-East Europe: return to normality?

“…Hence, we may say that our estimates do not seem to be imprecisely estimated. Boissay et al (2006), Table 2 0.53 Kiss et al (2006), Table 1 0.51 Coudert and Pouvelle (2010), Table 7 0.24-0.54…”

“…The same approach is used by Boissay et al (2006), Kiss et al (2006), Égert et al(2006), Coudert and Pouvelle (2010), Geršl and Seidler (2011). The only differences are in the terms of countries and time period analyzed, the estimation technique used, the sample of countries on which the regression is estimated, and the variables included.…”

Credit determinants and their impact on firm’s growth in Colombia

“…Studies like those of B. Égert, P. Backé and T. Zumer (2006) and F. Boissay, O. Calvo-Gonzales and T. Kozluk (2005) focused their analysis on the recent lending boom episode in Central and Eastern Europe (CEE) examining whether credit growth in this period was supported by the countries of this region in the long term. The authors proposed two econometric models which found the equilibrium level of the portfolio as a percentage of GDP consistent with macroeconomic determinants.…”

“…In this section, we propose an econometric model to explain the equilibrium level of credit-to-GDP ratio. We based on F. Boissay, O. Calvo-Gonzales and T. Kozluk (2005) where they explain credit-to-GDP as function of real interbank rate and a variable that captures the effect of financial liberalization on credit supply. However, our interest is focused on macroeconomic determinants that affect the indicator, therefore our contribution is to explain the effects of other different variables to the traditional interbank rate, which can affect the credit-to-GDP ratio in development countries.…”