The Evolution of Bank Credit Quality in Transition: Theory and Evidence from Romania
AbstractThe paper develops a simple theoretical framework of financial discipline during the stabilization of a transition economy, from which it derives an empirical measure to assess whether the banking sector has started to act as a source of financial discipline, or just as a temporary buffer for enterprise losses. The model suggests that in the presence of active bank monitoring the correlation between bank lending and arrears should be decreasing over time, while it would increase if banks rolled over bad loans in the expectation of a bailout. We run the test on balance sheet data from a sample of Romanian state-owned enterprises over 1991-1994. We find evidence that, contrary to the findings of Pinto and van Wijnbergen for Poland, credit criteria used by Romanian banks show few signs of improvement. Most worrisome is the stability of the relation between bank credit and financial arrears, which seems to increase in strength over the period and remains very significant both statistically and in terms of economic impact. Bank credit appears negatively correlated with profitability; however, there is evidence that this is the result of better firms reducing their demand for credit as real rates rise. Reassuringly, credit to these firms depend positively on their receivables, while bank arrears have a insignificant impact. However, firm size was a significant determinant till 1993 and trade arrears become a strong determinant of credit in 1994. Banks appear to particularly soft towards the worse performing firms, particularly towards larger and more insolvent enterprises. There is evidence of a structural policy shift in 1993-1994 with banks refinancing trade arrears, perhaps following IMF pressure against further central bank bailouts of such arrears. Overall, the evidence suggests a largely passive attitude of banks towards the worse borrowers and only limited reallocation of credit to better users.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Centre for Economic Reform and Transformation, Heriot Watt University in its series CERT Discussion Papers with number 9702.
Date of creation: 1997
Date of revision:
Other versions of this item:
- Enrico C. Perotti & Octavian Carare, 1996. "The Evolution of Bank Credit Qulity in Transition: Theory and Evidence from Romania," William Davidson Institute Working Papers Series 49, William Davidson Institute at the University of Michigan.
- NEP-ALL-1998-10-19 (All new papers)
- NEP-EEC-1998-10-19 (European Economics)
- NEP-FMK-1998-10-19 (Financial Markets)
- NEP-PKE-1998-10-19 (Post Keynesian Economics)
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page. reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Professor Mark Schaffer) The email address of this maintainer does not seem to be valid anymore. Please ask Professor Mark Schaffer to update the entry or send us the correct address.
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.