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Financial fragility or what went right and what could go wrong in central European banking?

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  • Weller, Christian E.
  • von Hagen, Jürgen

Abstract

Despite the fact that banks in Central Europe are burdened by extraordinarily high bad loan ratios, the recent financial crisis in South East Asia and Russia, has not led to a massive failure of banks in the region. In this paper, we study economic trends and policies that may have helped to insulate CEECs from international financial contagion. Answering what went right over the past few years may not only help to further positive developments, but it may also highlight possible weaknesses that could result in future financial instabilities in the banking sectors of CEECs. Using data available from the IMF, and the BIS for nine Central European economies (Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovak Republic, and Slovenia), our results indicate that an economic constellation unique to the early transition period rather than deliberate policy decisions have stabilized the CEECs. Specifically, the lack of recent banking crisis can be attributed to a lack of overly optimistic credit expansion, despite several years of real economic growth, to underdeveloped asset markets, and to a decline of trade relations with the former Soviet Union. Future problems may arise as banks are beginning to extend credit more to an expanding real sector than in the past, as asset markets become more developed, or as export growth to the EU may decline with European growth slowing down. Thus, improvements in bank regulation and bank supervision should receive a high priority among policy makers in CEECs. --

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Bibliographic Info

Paper provided by ZEI - Center for European Integration Studies, University of Bonn in its series ZEI Working Papers with number B 13-1999.

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Date of creation: 1999
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Handle: RePEc:zbw:zeiwps:b131999

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  1. International Monetary Fund, 1992. "Bank Insolvency and Stabilization in Eastern Europe," IMF Working Papers 92/9, International Monetary Fund.
  2. Reinhart, Carmen & Kaminsky, Graciela & Lizondo, Saul, 1998. "Leading Indicators of Currency Crises," MPRA Paper 6981, University Library of Munich, Germany.
  3. Fleming, Alex & Talley, Samuel, 1996. "The Latvian banking crisis : lessons learned," Policy Research Working Paper Series 1590, The World Bank.
  4. Christian Weller, 2001. "The Finance-Investment Link in a Transition Economy: Evidence For Poland From Panel Data," Comparative Economic Studies, Palgrave Macmillan, vol. 43(1), pages 31-52, April.
  5. Weller, Christian E., 1999. "Financial liberalization, multinational banks and credit supply: The case of Poland," ZEI Working Papers B 10-1999, ZEI - Center for European Integration Studies, University of Bonn.
  6. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
  7. Guillermo A. Calvo & Fabrizio Coricelli, 1993. "Output Collapse in Eastern Europe: The Role of Credit," IMF Staff Papers, Palgrave Macmillan, vol. 40(1), pages 32-52, March.
  8. Garber, Peter M, 1996. "Managing Risks to Financial Markets from Volatile Capital Flows: The Role of Prudential Regulation," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 1(3), pages 183-95, July.
  9. Jeffrey A. Frankel & Andrew K. Rose, 1996. "Currency crashes in emerging markets: an empirical treatment," International Finance Discussion Papers 534, Board of Governors of the Federal Reserve System (U.S.).
  10. Daniel C. Hardy & Ashok Kumar Lahiri, 1992. "Bank Insolvency and Stabilization in Eastern Europe," IMF Staff Papers, Palgrave Macmillan, vol. 39(4), pages 778-800, December.
  11. Harald A Benink & David T Llewellyn, . "Deregulation and Financial Fragility: A Case Study of the UK and Scandinavia," Research Papers 94/4, CENTRE FOR RESEARCH IN EUROPEAN ECONOMICS AND FINANCE (CREEF).
  12. Weller, Christian E. & Scher, Mark J., 1999. "Multinational banks and development finance," ZEI Working Papers B 16-1999, ZEI - Center for European Integration Studies, University of Bonn.
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