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Are Weak Banks Leading Credit Booms? Evidence from Emerging Europe

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  • Deniz O Igan
  • Natalia T. Tamirisa

Abstract

This paper examines the behavior of bank soundness indicators during episodes of brisk loan growth, using bank-level data for central and eastern Europe and controlling for the feedback effect of credit growth on bank soundness. No evidence is found that rapid loan expansion has weakened banks during the last decade, but over time weaker banks seem to have started to expand at least as fast as, and in some markets faster than, stronger banks. These findings suggest that during credit booms supervisors need to carefully monitor the soundness of rapidly expanding banks and stand ready to take action to limit the expansion of weak banks.

Suggested Citation

  • Deniz O Igan & Natalia T. Tamirisa, 2008. "Are Weak Banks Leading Credit Booms? Evidence from Emerging Europe," IMF Working Papers 08/219, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:08/219
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Fenech, Jean-Pierre & Yap, Ying Kai & Shafik, Salwa, 2014. "Can the Chinese banking system continue to grow without sacrificing loan quality?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 31(C), pages 315-330.
    2. Korte, Josef, 2015. "Catharsis—The real effects of bank insolvency and resolution," Journal of Financial Stability, Elsevier, vol. 16(C), pages 213-231.
    3. Pomfret, Richard, 2010. "The financial sector and the future of capitalism," Economic Systems, Elsevier, vol. 34(1), pages 22-37, March.
    4. International Monetary Fund, 2013. "Haiti; 2012 Article IV Consultation and Fifth Review Under the Extended Credit Facility," IMF Staff Country Reports 13/90, International Monetary Fund.
    5. Deniz O Igan & Marcelo Pinheiro, 2011. "Credit Growth and Bank Soundness; Fast and Furious?," IMF Working Papers 11/278, International Monetary Fund.
    6. Schich, Sebastian T., 2009. "Challenges Associated with the Expansion of Deposit Insurance Coverage during Fall 2008," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 3, pages 1-23.
    7. Martin Cihak & Wim Fonteyne, 2009. "Five Years After; European Union Membership and Macro-Financial Stability in the New Member States," IMF Working Papers 09/68, International Monetary Fund.
    8. Joseph Crowley, 2015. "Central and Commercial Bank Balance Sheet Risk Before, During, and After the Global Financial Crisis," IMF Working Papers 15/47, International Monetary Fund.
    9. Al-Khouri, Ritab & Arouri, Houda, 2016. "The simultaneous estimation of credit growth, valuation, and stability of the Gulf Cooperation Council banking industry," Economic Systems, Elsevier, vol. 40(3), pages 499-518.

    More about this item

    Keywords

    Europe; Emerging markets; Credit expansion; Credit; Banking sector; Bank credit; Bank soundness; Baltics; Risk management; boom; bank; soundness; transition; equation; net interest margin; statistics;

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