Berg, Andrew, Eduardo Borensztein, and Catherine Pattillo, 2004, “Assessing Early Warnings Systems: How Have They Worked in Practice?” IMF Working Paper 04/52 (Washington: International Monetary Fund).
Bussière, Matthieu, Marcel Fratzscher, and Gernot J. Müller, 2004, “Current Account Dynamics in OECD and EU Acceding Countries—An Intertemporal Approach,” European Central bank Working Paper No. 311, February.
Chinn, Menzie D. and Eswar S. Prasad, 2003, “Medium-Term Determinants of Current Accounts in Industrial and Developing Countries: A Empirical Exploration,” Journal of International Economics, 59, pp. 47-76.
Cottarelli, Carlo, Giovanni Dell’Ariccia, and Ivanna Vladkova-Hollar, 2005, “Early Birds, Late Risers, and Sleeping Beauties: Bank Credit Growth to the Private Sector in Central and Eastern Europe and in the Balkans,” Journal of Banking and Finance, Vol. 29 pp. 83-104.
- Search Google Scholar
- Export Citation
)| false Cottarelli, Carlo, Giovanni Dell’Ariccia, and Ivanna Vladkova-Hollar, 2005, “ Early Birds, Late Risers, and Sleeping Beauties: Bank Credit Growth to the Private Sector in Central and Eastern Europe and in the Balkans,” Journal of Banking and Finance, pp. Vol. 29 83- 104.
Del Mar Cacha, Maria and R. Armando Morales, 2003, “The Role of Supervisory Tools in Addressing Bank Borrowers’ Currency Mismatches,” IMF Working Paper 03/219 (Washington: International Monetary Fund).
Demirguc-Kunt, Asli, and Enrica Detragiache, 1997, “The Determinants of Banking Crises: Evidence from Developing and Developed Countries,” IMF Working Paper 97/106 (Washington: International Monetary Fund).
Drees, Burkhard, and Ceyla Pazarbasioglu, 1998, The Nordic Banking Crises: Pitfalls in Financial Liberalization? IMF Occasional Paper No. 161 (Washington: International Monetary Fund).
Duenwald, Christoph, and Bikas Joshi, 2004, “Bulgaria’s Credit Boom: Characteristics, Consequences, And Policy Options,” in Bulgaria: Selected Issues and Statistical Appendix, Country Report No. 04/177 (Washington: International Monetary Fund), pp. 6-25.
Eichengreen, Barry, and Carlos Arteta, 2000, “Banking Crises in Emerging Markets: Presumptions and Evidence”, CIDER Working Paper No. C00-115, (Berkeley, California: University of California Center for International and Development Economics Research).
Gavin, Michael, and Ricardo Hausmann, 1996, “The Roots of Banking Crises: The Macroeconomic Context,” in Banking Crises in Latin America, ed. by Ricardo Hausmann and Liliana Rojas-Suarez (Baltimore: Johns Hopkins University Press), pp. 27-63.
Goldstein, Morris, Graciela Kaminsky, and Carmen Reinhart, 2000, Assessing Financial Vulnerability: An Early Warning System for Emerging Markets (Washington: Institute for International Economics).
Gourinchas, Pierre-Olivier, Rodrigo Valdes, and Oscar Landerretche, 2001, “Lending Booms: Latin America and the World”, NBER Working Paper No. 8249 (Cambridge, Massachusetts: National Bureau of Economic Research).
Hardy, Daniel C., and Ceyla Pazarbasioglu, 1998, “Leading Indicators of Banking Crises— Was Asia Different?” IMF Working Paper 98/91 (Washington: International Monetary Fund).
Hilbers, Paul, Inci Otker-Robe, Ceyla Pazarbasioglu, and Gudrun Johnsen, 2005, “Assessing and Managing Rapid Credit Growth and the Role of Supervisory and Prudential Policies,” forthcoming IMF Working Paper (Washington: International Monetary Fund).
Hoelscher, David S., and Marc Quintyn, 2003, “Managing Systemic Banking Crises,” IMF Occasional Paper 224 (Washington: International Monetary Fund).
International Monetary Fund, 2004, World Economic Outlook: Advancing Structural Reforms, World Economic and Financial Surveys (Washington).
Kaminsky, Graciela, and Carmen Reinhart, 1999, “The Twin Crises: The Causes of Banking and Balance of Payments Problems,” American Economic Review, Vol. 89 (June), pp. 473–500.
Schaechter, Andrea, 2005, “Credit Boom in Ukraine: Risks for Banking Sector Stability,” in Ukraine: Selected Issues, Country Report No. 05/20 (Washington: International Monetary Fund), pp. 14-35.
The authors would like to thank Emmanuel van der Mensbrugghe, Hans Flickenschild, Albert Jaeger, and Johannes Herderschee for helpful comments, Cathy Song for valuable research assistance, Thomas Walter for editorial comments, and Tony Torraca for editorial assistance.
IMF (2004) makes a distinction between rapid credit growth and a credit boom. The former can occur as part of financial deepening (trend) and normal cyclical upturns, while the latter represents an excessive and therefore unsustainable cyclical movement. While such a distinction may be sensible for advanced economies, the short time series and likelihood of a structural break in the series make such a distinction less meaningful for economies in transition. We therefore use the terms “rapid credit growth” and “credit boom” interchangeably in this paper.
Due to the financial crisis in Ukraine during which the government had to restructure its debt, banks in Ukraine initially shied away from government securities.
This partly reflects market segmentation, with households and businesses that do not have access to foreign currency loans having to borrow in domestic currency.
Developments in bank credit are probably more closely mirrored in the trade rather than the current account. In Bulgaria, for example, the current account deficit narrowed in 2004 despite an acceleration in credit growth as the invisibles strengthened substantially; the trade deficit, meanwhile, remained at a very high level (14 percent of GDP) despite favorable movements in the terms of trade. Competitiveness does not appear to have been a significant factor in the deterioration of trade balances in Bulgaria and Romania.
As a result, in most countries lending is strongly procyclical: in upswings, lending is extended much faster than real GDP, and in recessions it contracts stronger than output.
The risks for financial sector stability are predominantly linked to the speed of credit growth rather than the stock of credit or money. Nevertheless, the level of financial intermediation may affect the costs for the economy of financial sector distress. See Hoelscher and Quintyn (2003) for an attempt to estimate the costs of financial crises.
Eichengreen and Arteta (2001) find robustness in these results by testing the findings of earlier studies by Gavin and Hausmann (1996), Kaminsky and Reinhart (1999), and Gourinchas, Valdes, and Landerretche (2001). Other papers that support the importance of lending booms for banking crises are, for example, IMF (2004), Drees and Pazarbasioglu (1998), Hardy and Pazarbasioglu (1998), and Demirguc-Kunt and Detragiache (1997).
Cottarelli, Dell’Ariccia, and Vladkova-Hollar (2005) report that, in the years preceding banking crisis, countries’ credit-to-GDP ratios grew by between 5 and 10 percentage points of GDP annually.
The NPL ratio includes loans classified as substandard, doubtful, and loss.
A major revision to the definition of capital was to exclude accrued income and tie the inclusion of revaluation gains of fixed assets to strict auditing procedures.
Given the ongoing structural changes in such transition economies, however, these estimates of equilibrium credit must be taken with a grain of salt. A recent attempt at such estimates is Cottarelli, Dell’Ariccia, and Vladkova-Hollar (2005), who calculate equilibrium credit-to-GDP ratios for a number of CEECs. For Bulgaria and Romania, the estimated ratios are 52.6 percent and 58 percent, compared with ratios of 35.4 percent and 17.9 percent, respectively, at end-2004. These estimates are based on 2002 data and are now somewhat dated.
Aside from medium-term considerations, prudence suggests keeping the current account at manageable levels to reduce vulnerability to sudden reversals in capital. A recent survey of early warning system models by Berg, Borensztein, and Pattillo (2004) reports widespread use of the current account as one of the predictive variables. For instance, Goldstein, Kaminsky, and Reinhart (2000) find the current account deficit to be among the best predictors of currency crises.
In this context, imports related to FDI are often thought to be self-financing as they generate future exports; however, to the extent investment is made in nontraded sectors, this argument cannot be made.
Dynamic provisioning is one technique that has been used to address risks arising from the procyclicality of credit. The main rationale for its use is to address a systematic underpricing of risk during cyclical upswings. Dynamic provisioning links the provisioning rates to the average probability of default for different types of assets over the business cycle (see e.g. Bank for International Settlements, 2001). However, the technique has generated objections from the accounting and tax professions on the grounds that these provisions do not relate to identified risks. Options for provisioning loans in partially dollarized economies are discussed in Del Mar Cacha and Morales (2003).