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Perils of excessive credit growth: evidence from 11 new EU member states

Author

Listed:
  • Laivi Laidroo

    (Department of Finance and Economics, Tallinn University of Technology, Tallinn, Estonia)

  • Kadri Männasoo

    (Department of Finance and Economics, Tallinn University of Technology, Tallinn, Estonia)

Abstract

We investigate the association between banks' credit expansion and loan loss reserves on a panel of banks from 11 new EU member countries from Central and Eastern Europe during 2004–2010. Unused committed credit lines capture the decline in banks' risk aversion being associated with a supply shift. As the existence of loan commitments may lead to overlending, we expect that banks with a higher share of unused committed credit lines are more prone to subsequent increase in loan loss reserves. The system and difference GMM estimations as well as pooled OLS and panel fixed effects estimations confirm that an excessive credit supply, reflected in overextension of committed credit lines, predicts increase in bank loan loss reserves two years ahead while controlling for bank asset returns, real growth in loan portfolio, country GDP, inflation and EBRD banking sector reform index. This stresses the importance of credit lines monitoring by regulatory and supervisory authorities for timely recognition of credit overextension episodes. The negative association between loan loss reserves and real GDP growth was affirmed.

Suggested Citation

  • Laivi Laidroo & Kadri Männasoo, 2014. "Perils of excessive credit growth: evidence from 11 new EU member states," Baltic Journal of Economics, Baltic International Centre for Economic Policy Studies, vol. 14(1-2), pages 17-34.
    • Handle: RePEc:bic:journl:v:14:y:2014:i:1-2:p:17-34
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    File URL: http://www.tandfonline.com/doi/pdf/10.1080/1406099X.2014.942541
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    Citations

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    Cited by:

    1. Piotr Krajewski & Agata Szymanska, 2019. "The effectiveness of fiscal policy within business cycle-Ricardians vs. non-Ricardians approach," Baltic Journal of Economics, Baltic International Centre for Economic Policy Studies, vol. 19(2), pages 195-215.
    2. Segun Thompson Bolarinwa & Richard Olaolu Olayeni & Xuan Vinh Vo, 2021. "Is there a nonlinear relationship between nonperforming loans and bank profitability? Evidence from dynamic panel threshold," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 42(3), pages 649-661, April.
    3. Segun Thompson Bolarinwa & Olawale Akinyele & Xuan Vinh Vo, 2021. "Determinants of nonperforming loans after recapitalization in the Nigerian banking industry: Does efficiency matter?," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 42(6), pages 1509-1524, September.
    4. Kadri Männasoo & Heili Hein, 2017. "Are R&D companies credit-constrained? Credit frictions during and post-crisis," TUT Economic Research Series 29, Department of Finance and Economics, Tallinn University of Technology.
    5. Zuzana Košťálová & Eva Horvátová & Štefan Lyócsa & Peter Gernát, 2022. "New Credit Drivers: Results from a Small Open Economy," Eastern European Economics, Taylor & Francis Journals, vol. 60(1), pages 79-112, January.
    6. Kadri Männasoo & Heili Hein, 2017. "Capital investments and financing structure: Are R&D companies different?," TUT Economic Research Series 26, Department of Finance and Economics, Tallinn University of Technology.
    7. Laidroo, Laivi & Männasoo, Kadri, 2017. "Do credit commitments compromise credit quality?," Research in International Business and Finance, Elsevier, vol. 41(C), pages 303-317.
    8. Nguyen, Canh Phuc & Su, Thanh Dinh, 2021. "Easing economic vulnerability: Multidimensional evidence of financial development," The Quarterly Review of Economics and Finance, Elsevier, vol. 81(C), pages 237-252.

    More about this item

    Keywords

    banks; Central and Eastern Europe; committed credit lines; credit growth; credit quality;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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