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Can Banking Intermediation in the Central and Eastern European Countries Ever Catch up with the Euro Area?

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Abstract

This paper focuses on the private credit flow-to-GDP ratio for measuring and comparing the degree of banking intermediation, which complements the widely used stock-flow measure. The authors find that, on the basis of this flow-flow measure, the current degree of banking intermediation in most Central and Eastern European countries (CEECs) is significantly closer to the euro area average than suggested by the traditional stock-flow measure. Nevertheless, the longer-term average of annual figures of the recent past indicates that most CEECs still have some way to go to catch up with intermediation in the euro area in a persistent manner, even on the basis of the flow-flow measure. Furthermore, the authors analyze the implications of the different concepts of convergence in the degree of banking intermediation. According to simulations, maintaining a flow-flow ratio in the CEECs equal to the euro area average of the past ten years (i.e. given full convergence in the flow-flow ratio) will also lead to convergent stock-flow ratios. However, this will only be the case at a rather late point in time, i.e. not before the end of this century, and will thus come considerably later than convergence in GDP per capita at purchasing power parity (PPP). On the other hand, for the CEECs to simultaneously achieve convergence in the stock-flow ratio and in per capita income levels, the flow-flow ratios would have to significantly and persistently exceed the euro area average of the period from 1994 to 2003 for a period of between 15 and 50 years, depending on the respective country. Drawing on the experience of major catching-up economies in the past 50 years worldwide, the authors do not completely exclude, but take a rather skeptical view on, the possibility of realizing in a sustainable manner the high level of the flow-flow ratio that would be required for the simultaneous convergence in the stock-flow ratio and in per capita income levels.

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  • Markus Arpa & Thomas Reininger & Zoltan Walko, 2005. "Can Banking Intermediation in the Central and Eastern European Countries Ever Catch up with the Euro Area?," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 2, pages 110-133.
    • Handle: RePEc:onb:oenbfi:y:2005:i:2:b:3
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    References listed on IDEAS

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    1. Cottarelli, Carlo & Dell'Ariccia, Giovanni & Vladkova-Hollar, Ivanna, 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 & Finance, Elsevier, vol. 29(1), pages 83-104, January.
    2. Pierre-Olivier Gourinchas & Rodrigo Valdes & Oscar Landerretche, 2001. "Lending Booms: Latin America and the World," Economía Journal, The Latin American and Caribbean Economic Association - LACEA, vol. 0(Spring 20), pages 47-100, January.
    3. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
    4. Donato Masciandaro (ed.), 2004. "Financial Intermediation in the New Europe," Books, Edward Elgar Publishing, number 3532.
    5. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
    6. Michael W. Klein & Giovanni Olivei, 1999. "Capital Account Liberalization, Financial Depth and Economic Growth," NBER Working Papers 7384, National Bureau of Economic Research, Inc.
    7. Asli Demirgüç-Kunt & Ms. Enrica Detragiache, 1997. "The Determinants of Banking Crises: Evidence From Developing and Developed Countries," IMF Working Papers 1997/106, International Monetary Fund.
    8. Khan, Mohsin S. & Senhadji, Abdelhak S. & Smith, Bruce D., 2006. "Inflation And Financial Depth," Macroeconomic Dynamics, Cambridge University Press, vol. 10(2), pages 165-182, April.
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    Cited by:

    1. Thomas Reininger & Zoltan Walko, 2020. "A sleeping beauty or a dead duck? The state of capital market development in CESEE EU Member States," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue Q3/20, pages 7-35.
    2. Peter Backé & Balázs Égert, 2006. "Credit Growth in Central and Eastern Europe: New (Over)Shooting Stars?," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 1, pages 112-139.
    3. repec:onb:oenbwp:y:2006:i:2:b:1 is not listed on IDEAS
    4. Peter Backé, 2006. "Bank Intermediation in Southeastern Europe: Depth and Structure," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 2, pages 48-68.
    5. Martin Feldkircher & Thomas Gruber & Isabella Moder, 2014. "Using a Threshold Approach to Flag Vulnerabilities in CESEE Economies," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 3, pages 8-30.
    6. Zsófia Arvai & Karl Driessen & Ínci Ötker-Robe, 2009. "Regional Financial Interlinkages and Financial Contagion within Europe," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 59(6), pages 522-540, December.
    7. repec:onb:oenbwp:y:2006:i:11:b:1 is not listed on IDEAS
    8. Thomas Reininger & Zoltan Walko, 2006. "The Financial Situation and Financing of Nonfinancial Corporations in the Ten New EU Member States – A First Empirical Orientation," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 2, pages 134-151.

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