Lending Growth and Cyclicality in Central and Eastern European Banks

This paper investigates determinants of lending growth and cyclicality in banks of 15 Central and Eastern European countries during the period of 2004-2010. The results support, as expected, cyclicality in lending growth, but contrary to expectations, the association between GDP growth and lending growth is weaker when economy is below trend than when it is above trend. This result suggests the existence of strong supply-side pressures on lending growth initiated or amplified by large foreign-owned banks prior to the 2008 financial crisis. The same developments may explain lending growth’s unexpected negative association with bank size and positive association with banking market concentration. Coefficients of other macroeconomic and bank-specific variables exhibit the expected signs. However, bank’s equity level, credit risk and size have stronger association with lending growth when the economy is below trend than when it is above, and foreign-ownership matters only when economy is above trend.