Has private sector credit in CESEE approached levels justified by fundamentals? A post-crisis assessment

We analyze private sector credit developments in CESEE EU countries by calculating the credit-to-GDP ratios that are in line with macroeconomic and financial fundamentals and by comparing them with actual levels. In contrast to previous work in this area, we add cross-border credit to domestic bank credit and take care of global factors and cross-country spillovers. We derive three main findings from our analysis: First, countries featuring positive credit gaps at the start of the global financial crisis (GFC) have managed to adjust their credit ratios downward toward levels justified by fundamentals, but the adjustment is apparently not yet complete in all countries. Second, in most countries characterized by credit levels close to or below the “fundamental” levels of credit at the start of the GFC, negative credit gaps have emerged or widened. Third, the inclusion of cross-border credit matters considerably for credit gap assessments as it results in larger gaps in most cases. As part of the policy discussion, we also relate our findings to recent efforts in setting countercyclical capital buffers depending on credit gaps.