Crises, Financial Contagion and the Real Economy: Intraregional Evidence from Transition Economies

In this paper, we investigate how financial contagion affects lending to the broader economy in the Transition region in the aftermath of the global financial crisis and the sovereign debt crisis in the euro area. Our analysis reveals that during the global financial crisis, bank lending in the Transition region declined significantly in countries with high joint tail dependence with Western markets, highlighting the sensitivity of lending to both negative and positive extreme market comovements. Foreign-owned banks were particularly exposed, with sharper reductions in credit supply observed in more financially integrated subregions such as the Baltics and the Visegrad Four. In contrast, the sovereign debt crisis showed a weaker overall relationship between market comovement and lending, with only limited vulnerability observed among banks in the Balkan region. Overall, this study provides valuable insights for policymakers in effectively managing financial contagion and crisis transmission in the Transition region.