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From credit crunch to credit boom: transitional challenges in Bulgarian banking, 1999-2006

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  • Erdinç, Didar

Abstract

New econometric evidence is provided to identify the determinants of the rapid credit growth in Bulgaria and evaluate whether the credit boom has increased bank fragility, based on a panel data analysis of 30 Bulgarian banks over the 1999-2006 period. Employing Fixed effects and GMM estimation techniques to explore the link between credit and capital base in a partial adjustment framework, the study provides evidence for the growing risks of credit expansion and assesses the potential for banking distress in Bulgaria. The paper argues that after a period of severe credit crunch during 1997-1999, foreign-owned Bulgarian banks have financed a credit boom, especially since 2003 but this indicated growing risk in lending and increasing vulnerability to a systemic banking crisis as banks reduced their capital base and registered an increase in non-performing loans. Aggressive lending by less-capitalized banks without appropriate loan loss provisioning has also been verified empirically in a number of panel specifications. While well-capitalized banks have tended to expand credit in proportion to their capital base, banks with weak capital base engaged in excessive risk taking, and expanded credit despite growing ratio of non-performing loans. Hence, the credit boom has come at the expense of increased banking fragility in Bulgaria, raising the probability of bank failure in the event of a downturn in global financial flows which became a disturbing reality in 2008.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 10735.

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Date of creation: Apr 2009
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Handle: RePEc:pra:mprapa:10735

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Keywords: Bulgarian banking; GMM estimation; credit boom; credit crunch;

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  1. Richard Blundell & Steve Bond, 1999. "GMM estimation with persistent panel data: an application to production functions," IFS Working Papers W99/04, Institute for Fiscal Studies.
  2. R. Glenn Hubbard, 1990. "Asymmetric Information, Corporate Finance, and Investment," NBER Books, National Bureau of Economic Research, Inc, number glen90-1.
  3. Gergely Kiss & Márton Nagy & Balázs Vonnák, 2006. "Credit Growth in Central and Eastern Europe: Convergence or Boom?," MNB Working Papers 2006/10, Magyar Nemzeti Bank (the central bank of Hungary).
  4. 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, vol. 29(1), pages 83-104, January.
  5. Aggarwal, Raj & Jacques, Kevin T., 2001. "The impact of FDICIA and prompt corrective action on bank capital and risk: Estimates using a simultaneous equations model," Journal of Banking & Finance, Elsevier, vol. 25(6), pages 1139-1160, June.
  6. Graciela Kaminsky & Saul Lizondo & Carmen M. Reinhart, 1998. "Leading Indicators of Currency Crises," IMF Staff Papers, Palgrave Macmillan, vol. 45(1), pages 1-48, March.
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