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Credit Growth and Bank Soundness; Fast and Furious?

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  • Deniz O Igan
  • Marcelo Pinheiro

Abstract

We examine the risks to bank soundness associated with credit booms in a large set of countries. Using bank-level data in 90 countries between 1995 and 2005, we analyze the relationship between credit growth and bank soundness taking into account the potential two-way causality. We find that, while sounder banks tend to grow faster at moderate-growth periods, credit growth becomes less dependent on soundness during booms. These findings shed some light on why credit booms are often associated with financial crises.

Suggested Citation

  • Deniz O Igan & Marcelo Pinheiro, 2011. "Credit Growth and Bank Soundness; Fast and Furious?," IMF Working Papers 11/278, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:11/278
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    References listed on IDEAS

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    1. Alejandro Micco & Ugo Panizza & Mónica Yañez, 2004. "Bank Ownership and Performance," IDB Publications (Working Papers) 1544, Inter-American Development Bank.
    2. Pierre-Olivier Gourinchas & Rodrigo Valdes & Oscar Landerretche, 2001. "Lending Booms: Latin America and the World," ECONOMIA JOURNAL OF THE LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION, ECONOMIA JOURNAL OF THE LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION, vol. 0(Spring 20), pages 47-100, January.
    3. Manuel Arellano, 1990. "Testing for Autocorrelation in Dynamic Random Effects Models," Review of Economic Studies, Oxford University Press, vol. 57(1), pages 127-134.
    4. Giovanni Dell’Ariccia & Deniz Igan & Luc Laeven, 2012. "Credit Booms and Lending Standards: Evidence from the Subprime Mortgage Market," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44, pages 367-384, March.
    5. Fabian Valencia & Luc Laeven, 2008. "Systemic Banking Crises; A New Database," IMF Working Papers 08/224, International Monetary Fund.
    6. 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.
    7. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Oxford University Press, vol. 58(2), pages 277-297.
    8. Stijn Claessens & Luc Laeven & Deniz O Igan & Giovanni Dell'Ariccia, 2010. "Lessons and Policy Implications from the Global Financial Crisis," IMF Working Papers 10/44, International Monetary Fund.
    9. Randa Sab & Stephen C. Smith, 2002. "Human Capital Convergence: A Joint Estimation Approach," IMF Staff Papers, Palgrave Macmillan, vol. 49(2), pages 1-3.
    10. Burcu Aydin, 2008. "Banking Structure and Credit Growth in Central and Eastern European Countries," IMF Working Papers 08/215, International Monetary Fund.
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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. Natalie Tiernan & Pedro Gete, 2014. "Overlending and Macroprudential Tools," 2014 Meeting Papers 379, Society for Economic Dynamics.
    3. Ali Awdeh, 2017. "The Determinants of Credit Growth in Lebanon," International Business Research, Canadian Center of Science and Education, vol. 10(2), pages 9-19, February.
    4. Wagner, Charlotte & Winkler, Adalbert, 2013. "The Vulnerability of Microfinance to Financial Turmoil – Evidence from the Global Financial Crisis," World Development, Elsevier, vol. 51(C), pages 71-90.
    5. Bas B. Bakker & Giovanni Dell'Ariccia & Luc Laeven & Jérôme Vandenbussche & Deniz O Igan & Hui Tong, 2012. "Policies for Macrofinancial Stability; How to Deal with Credit Booms," IMF Staff Discussion Notes 12/06, International Monetary Fund.
    6. 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.
    7. Tanja Markovic-Hribernik & Matej Tomec, 2015. "Bad Bank And Other Possible Banks’ Rescuing Models – The Case Of Slovenia," Annals - Economy Series, Constantin Brancusi University, Faculty of Economics, vol. 1, pages 128-141, January.
    8. Burcu Aydin, 2008. "Banking Structure and Credit Growth in Central and Eastern European Countries," IMF Working Papers 08/215, International Monetary Fund.

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