January 2007
Credit boom puts pressure on Balkan banks
Southeastern Europe is experiencing a retail lending boom. Although this credit expansion is helping the region’s economies to grow, there is concern that it is putting pressure on banking systems. Sudip Roy explores the dimensions of that risk and weighs up what the authorities are doing to mitigate it.
| Tightening up |
| Steps taken to deal with rapid credit growth by Balkan countries |
| Measures taken |
Countries |
| Macroeconomic policies |
| Monetary tightening (interest rate hikes and increase in reserve requirements) |
Bosnia, Bulgaria, Romania, Serbia |
| Foreign exchange liquidity requirements |
Croatia |
| Fiscal tightening |
Bulgaria, Croatia, Romania |
| Prudential and supervisory policies |
| Tightening of regulations and supervision (higher/differentiated capital requirements, tighter loan classification and provisioning); tighter collateral rules; lower loan-to-value ratios |
Bosnia, Bulgaria, Croatia, Romania, Serbia |
| Regulations for banks to strengthen risk management and internal controls |
Romania |
| Administrative measures |
| Credit controls (marginal reserve requirement for banks exceeding a certain level of credit growth) |
Bulgaria |
| Direct credit controls (requirement to purchase central bank securities at below market rates when loan portfolio exceeds a certain level of credit growth; marginal reserve requirement on foreign borrowing) |
Croatia |
| Postponement of FX liberalization measures |
Romania |
| Moral suasion |
Bulgaria |
| Strengthening risk awareness |
| Market development measures (credit registry, wider information base) |
Bulgaria, Romania |
| Source: Hilbers, Okter-Robe, Pazarba_io_lu, and Johnsen (2005) |
IT’S A CLASSIC dilemma facing any fast-growing developing economy. When does the growth rate become so hot that it becomes a concern for the authorities? For the central banks of southeastern Europe, most notably those of Bulgaria, Romania and the former Yugoslavia, the growth rate in question is not so much GDP as bank loans to individual customers.
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