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The Evolution of Bank Credit Qulity in Transition: Theory and Evidence from Romania

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  • Enrico C. Perotti
  • Octavian Carare

Abstract

The 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.

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Bibliographic Info

Paper provided by William Davidson Institute at the University of Michigan in its series William Davidson Institute Working Papers Series with number 49.

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Length: pages
Date of creation: 01 Oct 1996
Date of revision:
Handle: RePEc:wdi:papers:1996-49

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Cited by:
  1. Herrendorf, B. & Valentinyi, A. & Waldmann, R., 1998. "Ruling out indeterminacy: the role of heterogeneity," Discussion Paper Series In Economics And Econometrics 9803, Economics Division, School of Social Sciences, University of Southampton.
  2. Blackburn, K. & Hung, V.T.Y., 1993. "A theory of growth, financial development and trade," Discussion Paper Series In Economics And Econometrics 9303, Economics Division, School of Social Sciences, University of Southampton.
  3. Hillier, G.H., 1995. "The union of best critical regions: complete classes, p-values, and model curvature," Discussion Paper Series In Economics And Econometrics 9503, Economics Division, School of Social Sciences, University of Southampton.
  4. J. Kornai & E. Maskin & G. Roland., 2004. "Understanding the Soft Budget Constraint," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 11.
  5. Guriev, Sergei & Makarov, Igor & Maurel, Mathilde, 2001. "Debt Overhang and Barter in Russia," CEPR Discussion Papers 2686, C.E.P.R. Discussion Papers.
  6. Klapper, Leora & Sarria-Allende, Virginia & Zaidi, Rida, 2006. "A firm-level analysis of small and medium size enterprise financing in Poland," Policy Research Working Paper Series 3984, The World Bank.
  7. Goerke, L., 1996. "Taxes on payroll, revenues and profits in three models of collective bargaining," Discussion Paper Series In Economics And Econometrics 9603, Economics Division, School of Social Sciences, University of Southampton.
  8. Perotti, Enrico C & Vesnaver, Luka, 2004. "Enterprise Finance and Investment in Listed Hungarian Firms," CEPR Discussion Papers 4194, C.E.P.R. Discussion Papers.
  9. Heidhues, Franz & Davis, Junior R & Schrieder, Gertrud, 1998. "Agricultural Transformation and Implications for Designing Rural Financial Policies in Romania," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 25(3), pages 351-72.
  10. Ulph, A., 1994. "Strategic environmental policy, international trade and the single European market (forthcoming in environmental policy with economic and political integration, Edward Elgar)," Discussion Paper Series In Economics And Econometrics 9403, Economics Division, School of Social Sciences, University of Southampton.
  11. Colombo, E., 1999. "The capital structure of Hungarian firms," Discussion Paper Series In Economics And Econometrics 9903, Economics Division, School of Social Sciences, University of Southampton.
  12. J.R. Davis & P.G. Hare, 1997. "Reforming the Systems of Rural Finance Provision in Romania: Some Options for Privatisation and Change," CERT Discussion Papers 9713, Centre for Economic Reform and Transformation, Heriot Watt University.
  13. James M. Malcomson, 1997. "Contracts, Hold-Up, and Labor Markets," Journal of Economic Literature, American Economic Association, vol. 35(4), pages 1916-1957, December.
  14. Debora Revoltella, 2001. "Financing Enterprises in the Czech Republic: Debt and Firm-specific Variables," Economic Change and Restructuring, Springer, vol. 34(3), pages 231-246, October.

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