The Causes and Nature of the Rapid Growth of Bank Credit in the Central, Eastern and South-eastern European Countries

TLDR: In Central, Eastern, and South-eastern Europe (CEE), credit growth has taken center stage in the policy arena in the past few years as mentioned in this paper, and stability issues related to strong credit growth have become a key policy challenge, with the 2004 Transition Report warning of financial and macroeconomic risks posed by the substantial increases in domestic bank lending witnessed in many transition countries.

Abstract: Credit growth has taken center stage in the policy arena in Central, Eastern, and South-eastern Europe (CEE).2 To some extent, this has not been a surprising development. Indeed, given the under-development of the financial sector at the beginning of the transition, and particularly with regard to lending to the private sector, financial deepening in the region was to be expected. In 1998, the EBRD Transition Report, with a special focus on the financial sector in transition, had already raised the question of whether financial sector development would be a stable process.3 Six years later, stability issues related to strong credit growth have become a key policy challenge, with the 2004 Transition Report warning of financial and macroeconomic “risks over the medium term” posed by the “substantial increases in domestic bank lending” witnessed in many transition countries.4