Frontmatter Page

Rapid Credit Growth in Central and Eastern Europe

Frontmatter Page

Rapid Credit Growth in Central and Eastern Europe

Endless Boom or Early Warning?

Edited by

Charles Enoch

and

İnci Ötker-Robe

Frontmatter Page

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International Monetary Fund 2007

All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission.

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First published 2007 by

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Library of Congress Cataloging-in-Publication Data

Rapid credit growth in Central and Eastern Europe: endless boom or early warning? / edited by Charles Enoch and İnci Ötker-Robe.

• p. cm.

• Includes bibliographical references and index.

• ISBN-13: 978-0-230-52151-3 (cloth)

• ISBN-10: 0-230-52151-7 (cloth)

• 1. Credit control—Europe, Eastern. 2. Credit control—Europe, Central. 3. Credit control—Former Soviet republics. I. Enoch, Charles. II. Ötker, İnci.

• HG3711.E85R37 2007

• 332.709443—dc22

• 2006051551

10 9 8 7 6 5 4 3 2 1

16 15 14 13 12 11 10 09 08 07

Printed and bound in Great Britain by

Antony Rowe Ltd, Chippenham, Wiltshire

Contents

• List of Tables

• List of Figures

• List of Boxes

• List of Abbreviations

• Preface

• Notes on Contributors

• Part One. Assessing and Managing Rapid Credit Growth—General Framework

• 1. Introductory Remarks: Credit Growth in Central and Eastern Europe

  • Charles Enoch

• 2. The Causes and Nature of the Rapid Growth of Bank Credit in the Central, Eastern, and South-eastern European Countries

  • Calin Arcalean, Oscar Calvo-Gonzalez, Csaba Móré, Adrian van Rixtel, Adalbert Winkler, and Tina Zumer

• 3. Using Fundamentals to Identify Episodes of “Excessive” Credit Growth in Central and Eastern Europe

  • Frédric Boissay, Oscar Calvo-Gonzalez, and Tomasz Koźluk

• 4. Fast Credit Expansion in Central and Eastern Europe: Catching-up, Sustainable Financial Deepening, or Bubble?

  • Peter Backé, Balázs Égert, and Tina Zumer

• 5. Analysis of and Policy Responses to Rapid Credit Growth

  • Paul Hilbers, İnci Ötker-Robe, and Ceyla Pazarbasioğlu

• 6. Rapid Credit Growth—The Role of Supervisors

  • Mats Josefsson

• Part Two. Assessing and Managing Rapid Credit Growth—Country Experiences

• 7. Credit Growth Slowdown: The Experience of Bulgaria

  • Veselka Petkova and Stoyan Manolov

• 8. The Croatian Experience with Rapid Credit Growth

  • Maroje Lang

• 9. Estonia’s Experience with Rapid Credit Growth

  • Raoul Lättemäe

• 10. Latvia’s Experience with Rapid Credit Growth

  • Uldis Rutkaste

• 11. Assessment of Credit Growth in Lithuania

  • Tomas Ramanauskas

• 12. Poland’s Experiences with Rapid Credit Growth—the 1996–97 Episode

  • Piotr Szpunar

• 13. Fast Credit Growth and Policy Response: The Case of Romania

  • Cristian Popa

• 14. Slovakia: Credit Growth in the Household Sector and Response to the Related Risks

  • Marek Ličák

• 15. Too Much of a Good Thing? Credit Booms in Transition Economies: The Cases of Bulgaria, Romania, and Ukraine

  • Christoph Duenwald, Nikolay Gueorguiev, and Andrea Schaechter

• Part Three. Regional Dimensions of Rapid Credit Growth and Perspectives from Euro Convergence Countries

• 16. The Role of Housing Markets and Foreign-owned Banks in the Credit Expansion in Central and Eastern Europe

  • Dubravko Mihaljek

• 17. Regional Dimensions of Dealing with Rapid Credit Growth: Perspectives from Greece, 1998–2005

  • Nicos Kamberoglou and Nikolaos Stavrianou

• 18. Debt Growth: Factors, Institutional Issues and Implications—the Portuguese Case

  • Nuno Ribeiro

• 19. The Growth of Private Sector Debt in Spain: Causes and Consequences

  • Carmen Martinez-Carrascal

• Part Four. Cross-Border Dimension: Supervisory Coordination Between Bank Supervisors

• 20. Cross-border Supervisory Cooperation

  • Karin Zartl

• 21. The Role of Cross-border Supervisory Coordination when Dealing with Rapid Credit Growth in Emerging Countries—Home Country Perspective

  • Linda van Goor

• 22. Home and Host Supervisors’ Relations—a Host Supervisor’s Perspective

  • Piotr Bednarski and Dariusz Starnowski

• Part Five. Concluding Remarks

• 23. Lessons from Country Experiences with Rapid Credit Growth in Europe, and Policy Implications

  • Charles Enoch and İnci Ötker-Robe

• Index

List of Tables

• 1.1 Rates of Growth of Credit in Central and Eastern Europe

• 1.2 Credit to GDP Ratio

• 1.3 Rate of Foreign Bank Ownership in Selected Countries of Central and Eastern Europe

• 3.1 Share of Loans in Total Lending to the Private Nonfinancial Sector in 2004

• 3.2 Estimates of Relation (1)—Total Lending

• 3.3 Average Quarterly Excessive Credit Growth over the Period 2001–04

• 3.4 Average Quarterly Excessive Credit Growth over the Period 2001–04

• 5.1 Components of the Analysis of Rapid Credit Growth

• 5.2 Growth of Private Sector Credit in Selected CEE Countries

• 5.3 Policy Responses to Rapid Credit Growth in Selected CEE Countries

• 5.4 Key Risks Associated with Credit Growth

• 5.5 Prudential and Supervisory Measures to Manage Key Risks of Rapid Credit Growth

• 8.1 Basic Features of the Banking System in Croatia

• 8.2 Domestic Credits by Sector—Croatia

• 8.3 Main Macroeconomic Indicators—Croatia

• 8.4 Total Nonfinancial Private Sector Debt by Creditor—Croatia

• 8.5 Calculation of the Impact of the MRR on the Required Return to Make Profit on Domestic Credit Financed by Borrowing Abroad—Croatia

• 8.6 Currency Structure of Domestic Credits—Croatia

• 11.1 Main Structural Banking Indicators in Lithuania and the Euro Area

• 12.1 Average Quarterly Reserve Requirements—Poland

• 12.2 Personal Deposits at the National Bank of Poland

• 14.1 Sectoral Structure of Loans—Slovakia

• 14.2 Selected Macroeconomic Indicators—Slovakia

• 15.1 Basic Economic Indicators, 2000–05 (Bulgaria, Romania, Ukraine)

• 15.2 Bulgaria, Romania, and Ukraine in Comparison: An Overview

• 15.3 Basic Credit Indicators, 2000–05 (Bulgaria, Romania, Ukraine)

• 15.4 Ownership of the Banking Sector, 2000–05 (Bulgaria, Romania, Ukraine)

• 15.5 Sectoral Composition of Credit, 2000–04 (Bulgaria, Romania, Ukraine)

• 15.6 Impact of Credit Growth on the Trade Balance

• 15.7 Credit to GDP Ratio in Banking-Crisis Countries

• 15.8 Prudential Indicators of the Banking Sector, 2000–05 (Bulgaria, Romania, Ukraine)

• 16.1 Composition of Commercial Bank Lending

• 16.2 Housing Loans and Private Sector Credit Growth, 2003–05

• 16.3 Structure of the Commercial Banking Sector, 2004

• 16.4 Prudential Indicators

• 18.1 Authorization of New Institutions in Portuguese Financial System

• 18.2 Selected Financial Indicators in the Portuguese Banking System

• 18.3 Market Shares in Banking Markets—Portugal

• 18.4 Concentration in the Portuguese Banking Sector

• 23.1 Nature of the Credit Growth (by Country)

• 23.2 Factors Stimulating Credit Growth (by Country)

• 23.3 Risks Associated with the Credit Growth (by Country)

• 23.4 Policy Responses to Credit Growth (by Country)

List of Figures

• 2.1 Change in Ratio of Bank Credit to the Private Sector to GDP, 2000–03

• 2.2 Financial Assets and Liabilities of Households

• 2.3 Financial Assets and Liabilities of Nonfinancial Corporations

• 2.4 Financial Assets and Liabilities of Nonresidents vis-à-vis Residents by Category

• 2.5 Equity and Bonds Outstanding versus Loans to Resident Clients, end-2003

• 2.6 Credit to the Private Sector to GDP Ratio and Per Capita GDP (2003)

• 2.7 EBRD Index of Banking Sector Reform

• 2.8 Share of Assets Held by Foreign Banks in Total Banking Assets

• 2.9 Interest Rate Spreads

• 2.10 Foreign Liabilities to Total Banking Sector Assets

• 2.11 Real GDP Growth

• 2.12 Currency Boards and Tightly Managed Floats Against the Euro: Real Exchange Rate Developments

• 2.13 Managed and Independent Floaters: Real Exchange Rate Developments

• 2.14 Private External Debt and Private Sector Credit to GDP: Correlation of Changes from 2000 to 2004

• 2.15 Share of Foreign Currency Loans in Total Loans

• 2.16 Change in Credit to the Private Sector, Domestic Deposits and Banks’ Net Foreign Liabilities, 2001–04

• 2.17 Return on Equity of Banking Sectors

• 2.18 Capital Adequacy Ratios at end-2004

• 2.19 Ratio of Nonperforming Loans to Total Loans

• 3.1 Credit to the Private Sector to GDP and Per Capita GDP, 2003 (124 countries)

• 3.2 Observed versus Projected Growth Rates of Total Lending

• 3.3 Credit Growth and Foreign Ownership of the Banking System

• 3.4 Mortgage Loans and Real Estate Prices in Bulgaria and Estonia

• 3.5 Evolution of Credit Composition in Croatia and Latvia

• 4.1 Credit Growth to the Private Sector, 1999–2005

• 4.2 Private Sector Credit/GDP Ratios, 1999–2005

• 4.3 Share of Household Lending in Total Domestic Lending, 1999 and 2005

• 4.4 Selected Banking Sector Assets and Liabilities, 1999 and 2005

• 4.5 Share of Foreign Currency Loans in Total Loans to the Private Sector, 1999 and 2005

• 4.6 Deviations from Long-run Equilibrium Private Sector Credit-to-GDP, 1990 to 2004: Baltic Countries, Central Europe, South-eastern Europe

• 5.1 CEE Countries: Real Credit Growth over 2000–04 vs. Credit to GDP in 1999

• 5.2 Is the Rapid Credit Growth in the CEE Countries part of a Catching-up Process?

• 5.3 CEE Countries: Funding of the Credit Growth

• 5.4 Menu of Policy Options in Responding to Rapid Credit Growth

• 7.1 Credits and Banking Assets to GDP—Bulgaria

• 7.2 Annual Growth of Selected Balance Sheet Aggregates—Bulgaria

• 7.3 Growth in Lending and Deposits—Bulgaria

• 8.1 Evolution of Interest Rates in Croatia

• 8.2 Credit to Nonfinancial Private Sector—Croatia

• 9.1 Dynamics of the Estonian Banking Sector

• 9.2 Capital Inflow into the Banking Sector and Annual Increase in Domestic Credit to GDP—Estonia

• 9.3 “Effective” Reserve Requirement and Capital Adequacy Requirement in Estonia

• 9.4 Money Market Risk Premium and Estonian Sovereign Rating

• 9.5 Real Sector Interest Rates vs. EURIBOR Rates—Estonia

• 10.1 Credit Growth in Latvia

• 10.2 Domestic Loan Market Share and Banks’ Liabilities to Foreign Credit Institutions—Latvia

• 10.3 Interest Rates and Income—Latvia

• 10.4 Privatization of Flats and Residential Construction—Latvia

• 10.5 Monetary Policy Measures Taken to Date—Latvia

• 11.1 Contributions of Loans by Type to Growth of Total Bank Loan Portfolio—Lithuania

• 11.2 Recent Dynamics of Nominal Interest Rates—Lithuania

• 11.3 M2 Dynamics—Lithuania

• 11.4 M2 Growth Factors—Lithuania

• 11.5 Dynamics of the Market Value and the Balance Sheet Value of Equity—Lithuania

• 11.6 Nonfinancial Corporate Sector’s Financial Position—Lithuania

• 11.7 Bank Exposure to the Nontradable and Real Estate Sectors—Lithuania

• 12.1 Loans to Enterprises and Households—Poland

• 12.2 Interest Rates—Poland

• 12.3 Households’ Deposits at the National Bank of Poland

• 12.4 Excess Liquidity—Poland

• 12.5 Corporate and Households Lending Growth—Poland

• 13.1 Analysis Ratios for the Banking System—Romania

• 13.2 Total Credit and Nongovernment Credit—Romania

• 13.3 Interest Rates Applied by Credit Institutions—Romania

• 13.4 Foreign Exchange-Denominated Credit as Share to Total Nongovernment Credit—Romania

• 13.5 Household Loans and Deposits—Romania

• 13.6 Total External Debt—Romania

• 14.1 Growth of Housing Loans and Share of Housing Loans in GDP in EU Countries in 2004

• 14.2 Debt Burden and Gross Disposable Income of Households—Slovakia

• 15.1 Selected EBRD Transition Indicators, 2004 (EU-8)

• 15.2 Credit Growth in Transition Economies, 2002–04

• 15.3 Credit and Bank Liabilities, 2000–04 (Bulgaria, Romania, Ukraine)

• 15.4 Bulgaria and Romania: Selected Economic Indicators, 2000–05

• 15.5 Credit Growth in Transition Economies and Banking-Crisis Countries

• 15.6 Transition Economies: Credit-to-GDP Ratio and Institutional Reform, 2005

• 16.1 Bank Credit to the Private Sector, 2002–05

• 16.2 Bank Credit as a Percent of GDP

• 16.3 Real Credit Growth, 2003–05

• 16.4 House Prices and Housing Loans, 1997–2005

• 16.5 Foreign-owned Banks and Credit Growth in CEE, 1997, 2000, and 2004

• 16.6 Commercial Bank Liabilities, 2002–05

• 17.1 Loans to the Private Sector—(annual growth rate, year-end Greece and Euro Area)

• 17.2 Loans to the Private Sector—(annual growth rate, year-end Greece)

• 17.3 Loans to the Private Sector—(as a percentage of GDP Greece and Euro Area)

• 17.4 Loans to Households—Greece and Euro Area

• 17.5 Retail Interest Rates—Greece

• 17.6 GDP Growth Rate—Greece

• 17.7 The Securities Portfolio of Greek Banks

• 17.8 BoG’s Management of Credit Growth

• 18.1 Bank Loans to the Private Sector—Portugal

• 18.2 Household Indebtedness—Portugal

• 18.3 Interest Rates on Loans for House Purchase—Portugal

• 18.4 Regulatory Straitjacket in the 1980s—Portugal

• 18.5 New Banks in Portuguese Banking System

• 18.6 Share of the 20 to 34 Years Old Cohort of the Population-Portugal and EU Area

• 18.7 Indebtedness of Portuguese Households

• 18.8 Indebtedness of Nonfinancial Corporations in Portugal

• 19.1 Private Nonfinancial Sector Indebtedness Ratios—Spain, Euro Area, USA

• 19.2 Domestic Banks’ Loans by Purpose—Spain

• 19.3 Structure of Spanish Household Debt

• 20.1 The Supervisory Review and Evaluation Process: An Illustration

• 21.1 Total Exposure of Dutch Banks: Market Share in CEE Area (per country in billion euro)

• 21.2 Total Exposure of Dutch Banks: Market Share in CEE Area (%)

• 21.3 Foreign Bank Exposure in CEE Countries

• 22.1 Predominant Presence of Foreign Investors in the Banking Sector Assets in the New Member States of the EU

• 22.2 Share of Foreign Financial Groups in the Banking Sectors in CEE Countries via their Subsidiaries

• 22.3 Share of Foreign Subsidiary in the Polish Banking Sector and Share in its Parent Bank

• 22.4 Share of Polish Banking Sector in Parent Institution Assets

List of Boxes

• 2.1 Financial Structure and Economic Growth

• 5.1 Analysis of the Nature of Credit Growth

• 12.1 Problems with the Monetary Transmission Mechanism (MTM)

• 12.2 NBP Collection of Deposits

• 13.1 Measures Taken by the NBR to Deal With the Rapid Credit Growth

• 15.1 Macroeconomic Background

• 15.2 Monetary Policy Frameworks

• 15.3 The Relationship Between Credit Growth and Trade Balance in Bulgaria and Romania

• 20.1 What is the Committee of European Banking Supervisors (CEBS)?

List of Abbreviations

Preface

The chapters in this volume derive from the presentations made at a two-day conference jointly organized by the National Bank of Romania and the International Monetary Fund in Sinaia, Romania on October 7–8, 2005. We would first and foremost wish to thank the National Bank of Romania, in particular Governor Isarescu and Deputy Governor Popa, for hosting the conference. The conference brought together central banks and national supervisory and regulatory authorities of a number of Western, Central, Eastern and South-eastern European (CEE) countries. The conference and discussions were expertly organized, and certainly helped participants in their thinking and work on credit growth issues. We are also grateful to all the authors of the papers and other participants at the seminar for their many contributions and lively discussions.

The timing of the conference and the book is certainly not a coincidence. Rapid credit growth continues to be pervasive across almost the whole of the CEE region, and is recognized as a potentially serious problem. Assessing credit growth and developing an adequate policy response when such growth is viewed as excessive continue to occupy the minds of policymakers in the region. A regional conference on this topic provided an excellent opportunity to exchange information and experiences among the participants. We hope that this volume offers a useful contribution to the ongoing policy debate on these issues in the CEE region as well as in other regions experiencing a similar phenomenon.

We are grateful to many colleagues in the Monetary and Capital Markets Department (MCM) of the International Monetary Fund for working with us on the range of issues associated with the rapid credit growth phenomenon. Our papers are the result of collaboration with, and comments from, many colleagues, as well as several seminars and internal discussions within MCM and more widely within the IMF. The papers have also benefited from the able editorial work of Mr. Graham Colin-Jones. We also thank Maria Delia M. Araneta and Erik William Churchill for their excellent assistance in producing this volume, and Shannon Bui, Hortense N’Danou, and Roxana Nikdjou, for providing back-up support.

Finally, we would like to acknowledge the patience, advice, and general support received from Sean Culhane in the IMF’s External Relations Department, who coordinated the arrangements for publication, and the guidance of the staff at Palgrave Macmillan.

Charles Enoch

İnci Ötker-Robe

Notes on Contributors

Calin Arcalean, Department of Economics, Indiana University, USA

Peter Backé, Head of Unit, Foreign Research Division, Oesterreichische National Bank, Austria

Piotr Bednarski, National Bank of Poland, Poland

Fréderic Boissay, European Central Bank, Germany

Oscar Calvo-Gonzalez, Principal Economist, EU Neighboring Regions Division, European Central Bank, Germany

Christoph Duenwald, Senior Economist, European Department, International Monetary Fund

Balázs Égert, Oesterreichische National Bank, Austria

Charles Enoch, Deputy Director, Monetary and Capital Markets Department, International Monetary Fund

Nikolay Gueorguiev, Senior Economist, European Department, International Monetary Fund

Paul Hilbers, Advisor, European Department, International Monetary Fund

Mats Josefsson, Senior Financial Sector Expert, Monetary and Capital Markets Department, International Monetary Fund

Nikos Kamberoglou, Senior Economist, Statistics Department, Bank of Greece, Greece

Tomasz Koźluk, European Central Bank, Germany

Maroje Lang, Head, Monetary Analysis Division, Research Department, Croatian National Bank, Croatia

Raoul Lättemäe, Head, Monetary Policy Unit, Economics Department, EEST 1 Pank (Bank of Estonia), Estonia

Marek Ličák, Banking Specialist, Banking Supervision, Risk Management, National Bank of Slovakia, Slovak Republic

Stoyan Manolov, Director, Off-Site Supervision & Analysis, Bank Supervision Department, Bulgarian National Bank, Bulgaria

Carmen Martinez-Carrascal, Economist, Monetary and Financial Studies Department, Research Department, Banco de España, Spain

Dubravko Mihaljek, Senior Economist, Bank for International Settlements, Switzerland

Csaba Móré, Senior Economist, Financial Stability, Magyar Nemzeti Bank, Hungary

İnci Ötker-Robe, Deputy Area Chief for TA Europe, Monetary and Capital Markets Department, International Monetary Fund

Ceyla Pazarbasioğlu, Division Chief, Emerging Markets Surveillance Division, Monetary and Capital Markets Department, International Monetary Fund

Veselka Petkova, National Bank of Bulgaria, Bulgaria

Cristian Popa, Deputy Governor, National Bank of Romania, Romania

Tomas Ramanauskas, Macroeconomics and Forecasting Division, Economics Department, Lietuvos Bankas (Bank of Lithuania), Lithuania

Nuno Ribeiro, Head of Financial Stability Division, Research Department, Bank of Portugal, Portugal

Uldis Rutkaste, Chief Economist, Monetary Policy Department, Macroeconomic Analysis Division, Bank of Latvia, Latvia

Andrea Schaechter, Senior Economist, European Department, International Monetary Fund

Dariusz Starnowski, National Bank of Poland, Poland

Nikolaos Stavrianou, Bank Examiner, Department for the Supervision of Credit and Financial Institutions, Bank of Greece, Greece

Piotr Szpunar, Deputy Director of Macroeconomic Analyses Department, National Bank of Poland, Republic of Poland

Linda van Goor, The Netherlands Bank, The Netherlands

Adrian van Rixtel, Principal Economist, Capital Markets and Financial Structure Division, European Central Bank, Germany

Adalbert Winkler, Deputy Head of Division, EU Neighboring Regions Division, European Central Bank, Germany

Karin Zartl, Member of the Secreteriat, Committee of European Banking Supervisors, Great Britain

Tina Zumer, Economist, EU Countries Division, European Central Bank, Germany