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Banking

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.

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