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Are Weak Banks Leading Credit Booms? Evidence From Emerging Europe

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Author Info

  • Deniz Igan
  • Natalia T. Tamirisa

Abstract

This paper examines the behavior of bank soundness indicators during episodes of brisk loan growth, using bank-level data for central and eastern Europe and controlling for the feedback effect of credit growth on bank soundness. No evidence is found that rapid loan expansion has weakened banks during the last decade, but over time weaker banks seem to have started to expand at least as fast as, and in some markets faster than, stronger banks. These findings suggest that during credit booms supervisors need to carefully monitor the soundness of rapidly expanding banks and stand ready to take action to limit the expansion of weak banks.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 08/219.

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Length: 21
Date of creation: 01 Sep 2008
Date of revision:
Handle: RePEc:imf:imfwpa:08/219

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Keywords: Credit; Baltics; Banking sector; Bank soundness; Credit expansion; Emerging markets; Bank credit; Risk management; equation; net interest margin; statistics; bank size; standard deviation; liquidity ratio; banking; correlation; bank loans; bank ownership; dummy variable; correlations; dummy variables; probabilities; bank loan; estimation method; measurement errors; equations; banking sectors; simultaneous equation; covariance; empirical model; financial statistics; standard errors; significance level; probability; autocorrelation; return on assets; bank assets; bank balance sheet; correlation analysis; simultaneous equations; bank stocks; samples; standard deviations; maximum likelihood method; banking systems; statistical tests; bank account; fixed effects estimator; evergreening; outliers; bank fragility; bank risk; credit risk management; banking system; income statement; significance levels; bank data; bank capital; interest expense; statistical analysis; bank profitability; bank default; bank intermediation;

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References

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  1. Alejandro Micco & Ugo Panizza & Mónica Yañez, 2004. "Bank Ownership and Performance," Research Department Publications, Inter-American Development Bank, Research Department 4381, Inter-American Development Bank, Research Department.
  2. Reint Gropp & Jukka Vesala & Giuseppe Vulpes, 2002. "Equity and bond market signals as leading indicators of bank fragility," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, Federal Reserve Bank of Boston.
  3. Ralph de Haas & Iman van Lelyveld, 2003. "Foreign Banks and Credit Stability in Central and Eastern Europe: A Panel Data Analysis," DNB Staff Reports (discontinued), Netherlands Central Bank 109, Netherlands Central Bank.
  4. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 58(2), pages 277-97, April.
  5. Pierre-Olivier Gourinchas & Rodrigo Valdes & Oscar Landerretche, 2001. "Lending Booms: Latin America and the World," JOURNAL OF LACEA ECONOMIA, LACEA - LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION.
  6. Cottarelli, Carlo & Dell'Ariccia, Giovanni & Vladkova-Hollar, Ivanna, 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 & Finance, Elsevier, Elsevier, vol. 29(1), pages 83-104, January.
  7. Arellano, Manuel, 1990. "Testing for Autocorrelation in Dynamic Random Effects Models," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 57(1), pages 127-34, January.
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Citations

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Cited by:
  1. Martin Cihák & Wim Fonteyne, 2009. "Five Years After," IMF Working Papers 09/68, International Monetary Fund.
  2. Richard Pomfret, 2009. "The Financial Sector and the Future of Capitalism," School of Economics Working Papers, University of Adelaide, School of Economics 2009-05, University of Adelaide, School of Economics.
  3. Schich, Sebastian T., 2009. "Challenges Associated with the Expansion of Deposit Insurance Coverage during Fall 2008," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 3(20), pages 1-23.
  4. Deniz Igan & Marcelo Pinheiro, 2011. "Credit Growth and Bank Soundness," IMF Working Papers 11/278, International Monetary Fund.

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