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The overheating of five EU new member states and cyclicality of systemic risk in the banking sector

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  • Mejra Festić
  • Sebastijan Repina
  • Alenka Kavkler

Abstract

Rapid credit growth has been one of the most pervasive developments in recent years in Central and Eastern Europe. We tested for the significance of macroeconomic and banking sector variables that condition non‐performing loan ratios and the hypothesis of procyclicality between economic activity and improving banking‐sector results in the Baltic States, Bulgaria and Romania. The theory of procyclicality between economic activity and the non‐performing loan ratio was proven. The increased economic activity improved the loan portfolio quality of the banking sector, as indicated by a lower NPL ratio. Due to a high share of loans denominated in a foreign currency and the fact of productivity gains in the tradable sector, the appreciation of the real exchange rate contributed to an improvement in loan portfolio quality. The procyclicality of banking sector performance and high economic activities growth could be a signal of an economy overheating and therefore a slowdown in economic activity is likely to accelerate the growth of the non‐performing loan ratio in the Baltic States, Bulgaria and Romania.

Suggested Citation

  • Mejra Festić & Sebastijan Repina & Alenka Kavkler, 2009. "The overheating of five EU new member states and cyclicality of systemic risk in the banking sector," Journal of Business Economics and Management, Taylor & Francis Journals, vol. 10(3), pages 219-232, May.
    • Handle: RePEc:taf:jbemgt:v:10:y:2009:i:3:p:219-232
    DOI: 10.3846/1611-1699.2009.10.219-232
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    Cited by:

    1. Petros Golitsis & Athanasios P. Fassas & Anna Lyutakova, 2019. "Credit Risk Determinants: Evidence from the Bulgarian Banking System," Bulletin of Applied Economics, Risk Market Journals, vol. 6(1), pages 41-64.
    2. Kashif Abbass & Abdul Aziz Khan Niazi & Abdul Basit & Tehmina Fiaz Qazi & Huaming Song & Halima Begum, 2021. "Uncovering Effects of Hot Potatoes in Banking System: Arresting Die-Hard Issues," SAGE Open, , vol. 11(4), pages 21582440211, December.
    3. Martin Macháček & Aleš Melecký & Monika Šulganová, 2018. "Macroeconomic Drivers of Non-Performing Loans: A Meta-Regression Analysis," Prague Economic Papers, Prague University of Economics and Business, vol. 2018(3), pages 351-374.
    4. Abdul Aziz Khan Niazi & Suleman Aziz Lodhi & Abdul Basit & Tehmina Fiaz Qazi, 2020. "Tacit Knowledge Sharing Model For Banks: Remedial Measure Of Likelihood Of Default," Bulletin of Business and Economics (BBE), Research Foundation for Humanity (RFH), vol. 9(1), pages 32-50, March.
    5. repec:prg:jnlpep:v:preprint:id:656:p:1-24 is not listed on IDEAS
    6. Nurboja, Bashkim & Košak, Marko, 2017. "Banking efficiency in South East Europe: Evidence for financial crises and the gap between new EU members and candidate countries," Economic Systems, Elsevier, vol. 41(1), pages 122-138.

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