3/2019 Juan Carlos Cuestas, Yannick Lucotte, Nicolas Reigl. The evolution and heterogeneity of credit procyclicality in Central and Eastern Europe

Working Papers of Eesti Pank 3/2019

This paper presents empirical estimates of bank credit procyclicality for a sample of 11 Central and Eastern Europe countries (CEECs) for the period 2000Q1–2016Q4. In the first step we estimate a traditional-type panel VAR model and analyse the evolution of credit procyclicality in the CEECs by comparing the impulse response functions for different business cycle periods. The results confirm the existence of credit procyclicality in CEECs and show that procyclicality is higher during boom periods. Furthermore we observe the heterogeneity of credit procyclicality in the different countries in our sample. To explain the cross-country heterogeneity in credit procyclicality we construct an interacted panel VAR model (IPVAR) and analyse whether bank level competition, proxied by the aggregate Lerner index, constitutes a driving force of credit procyclicality. Our findings indicate that bank competition affects credit procyclicality and explains the differences in credit dynamics across CEECs. Specifically we show that the reaction of credit to a GDP shock is on average higher in a less competitive banking market.

JEL classification: E32, E51, G20, D40, C33

DOI: 10.23656/25045520/032019/0165

Keywords: credit cycle, business cycle, bank competition, interacted panel VAR, CEEC

The views expressed are those of the authors and do not necessarily represent the official views of the Eesti Pank or the Eurosystem.