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Why did Czech Banks Switch From Loans in 1995?

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Author Info
Jeffrey H. Nilsen () (Studienzentrum Gerzensee and Exon. Dep't, Copenhagen Business School)

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Abstract

The Czech banking system is seen by many observers to be the most successful of all former socialist economies’. But have Czech banks successfully provided worthy enterprises with sufficient credit from the funds made available to them? Using data from the Czech National Bank and data on individual Czech banks, I find evidence that in 1995 banks are provided with more deposits, but do not transform them into enterprise loans. I investigate the possible causes of this great portfolio switch and find that the central bank instituted a monetary tightening during a regime of fixed exchange rates and mobile capital. The central bank sterilized the continuing capital inflows. The resulting higher interbank interest rates and competition from foreign funds made the loan interest margin too narrow for Czech banks to profitably lend. The tight money strategy likely contributed to the bank failures in the following year and may have lead to greater concentration in the Czech banking system.

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Publisher Info
Paper provided by Swiss National Bank, Study Center Gerzensee in its series Working Papers with number 98.03.

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Length: 24 pages
Date of creation: Apr 1998
Date of revision:
Handle: RePEc:szg:worpap:9803

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Related research
Keywords: Banking; Capital Flows; Capital Mobility; Central Banking; Economy in Transition; Fixed Exchange Rates; Monetary Policy;

Find related papers by JEL classification:
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
P34 - Economic Systems - - Socialist Institutions and Their Transitions - - - Finance

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This page was last updated on 2009-12-16.

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