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Lending cycles in Estonia

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  • Märten Kress

Abstract

The objective of this paper is to examine possible cyclical patterns in the lending behavior of Estonian commercial banks. Furthermore, the degree of cycle synchronization between the business cycle and the credit cycle and how much one cycle is behind the other in the case of Estonia is of particular interest. The paper uses data from between January 1994 and February 2004 to identify the Estonian business and credit cycles and compare their features. A Markov regime-switching technique was used in dating both business and credit cycles. Variables of interest in terms of the credit cycle include the total amount of loans provided by commercial banks, household loans, corporate loans, and the share of overdue loans in the total portfolio. Both, monthly and quarterly data was utilized to double-check the results and the business cycle was dated using the Industrial Production Index (IPI) and GDP, respectively. The share of overdue loans in the total portfolio appeared to be counter-cyclical as expected. Changes in the IPI seemed to cause changes in corporate loans with a two-quarter lag on average. Asymmetries between the credit and business cycles were found for Estonia. That is, it takes approximately five months from the beginning of an economic slowdown before corporate loans move into a contraction regime. However, it takes approximately eight months for corporate loans to recover their expansionary growth rate. Changes in household loans seemed to precede changes in economic activity by approximately one quarter.

Suggested Citation

  • Märten Kress, 2004. "Lending cycles in Estonia," Bank of Estonia Working Papers 2004-3, Bank of Estonia, revised 10 Oct 2004.
    • Handle: RePEc:eea:boewps:wp2004-03
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    References listed on IDEAS

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