Comparative Economic Studies

, Volume 50, Issue 4, pp 599–619 | Cite as

Are Weak Banks Leading Credit Booms? Evidence from Emerging Europe

  • Natalia T TamirisaEmail author
  • Deniz O IganEmail author
Symposium Paper


This paper examines the behaviour of weak banks 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 weak banks seem to have started to expand at least as fast as, and in some markets faster than, sound 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.


credit growth bank soundness foreign banks central Europe Baltics 

JEL Classifications

G21 G28 P34 


  1. Arellano, M . 1990: Testing for autocorrelation in dynamic random effects models. Review of Economic Studies 57: 127–134.CrossRefGoogle Scholar
  2. Arellano, M and Bond, SR . 1991: Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. Review of Economic Studies 58 (2): 277–297.CrossRefGoogle Scholar
  3. Cottarelli, C, Dell'Ariccia, G and Vladkova-Hollar, I . 2005: Early birds, late risers, and sleeping beauties: Bank credit growth to the private sector in central and Eastern Europe and in the Balkans. Journal of Banking and Finance 29: 83–104.CrossRefGoogle Scholar
  4. de Haas, R and van Lelyveld, I . 2006: Foreign banks and credit stability in Central and Eastern Europe. Journal of Banking and Finance 30 (7): 1927–1952.CrossRefGoogle Scholar
  5. Gourinchas, PO, Valdes, R and Landerretche, O . 2001: Lending booms: Latin America and the World. Economia 1 (2): 47–99.Google Scholar
  6. Gropp, R, Vesala, J and Vulpe, G . 2006: Equity and bond market signals as leading indicators of bank fragility. Journal of Money, Credit and Banking 38: 399–428.CrossRefGoogle Scholar
  7. Kónya, I and Ohashi, H . 2005: International consumption patterns among high-income countries: Evidence from the OECD data. CIRJE Discussion Papers. CIRJE-F-327, Tokyo: Center for International Research on the Japanese Economy.Google Scholar
  8. Maechler, A, Mitra, S and Worrell, D . 2007: Decomposing financial risks and vulnerabilities in Eastern Europe. IMF Working paper No. 07/248, October 2007, International Monetary Fund: Washington.Google Scholar
  9. Micco, A, Panizza, U and Yañez, M . 2004: Bank ownership and performance. IADB Working paper No. 518, Inter-American Development Bank: Washington.Google Scholar
  10. Schadler, S, Drummond, P, Kuijs, L, Murgasova, Z and van Elkan, R . 2005: Adopting the euro in central Europe: Challenges of the next step in European integration. IMF Occasional paper No. 234, International Monetary Fund: Washington.Google Scholar
  11. Woolridge, JM . 2002: Econometric analysis of cross section and panel data. MIT Press: Cambridge, MA.Google Scholar
  12. Zellner, A and Theil, H . 1962: Three-stage least squares: Simultaneous estimation of simultaneous equations. Econometrica 30: 54–78.CrossRefGoogle Scholar

Copyright information

© Palgrave Macmillan 2008

Authors and Affiliations

  1. 1.International Monetary FundWashington, DCUSA

Personalised recommendations