Thursday, October 18, 2007

Credit Excess / Baltics

Wow! We have a clear winner in the category "easy credit". beforeThe the following charts and data are just breathtaking. .....The credit explosion explains why the Baltic Real Estate market is so "frothy".

Anschnallen! Wir haben den eindeutigen Gewinner in Sachen "Easy Credit" gefunden. . Die nachfolgenden Charts und Daten verschlagen einen aber wirklich den Atem....... Das erklärt natürlich auch diesen Bericht über den baltischen Immobilienmarkt.


Banking Risks Rise in Eastern Europe
Credit to the private sector has expanded at a fast clip in central and eastern Europe during the past decade, outpacing most other regions of the world.

Rapid credit growth (see Chart 1) reflects a number of factors:

• low levels of financial development and pent-up demand pressures following decades of socialist economic management;

• good macroeconomic discipline and membership in the European Union (EU), which lowered country risk premiums; and

• improved access to foreign capital following the entry of foreign banks and the opening of capital accounts.

Assessing the risks
Rapid credit growth has brought important benefits, helping channel domestic and foreign savings to households and investors and supporting financial sector development and economic growth in the region. But the brisk expansion of credit is raising concerns about macroeconomic and prudential risks (that is to say, whether banks remain sound).


Quantifying these risks is a challenge because countries in central and eastern Europe have not gone through a full credit cycle yet, and financial soundness indicators tend to improve in the upward phase of the credit cycle.

But experience in industrial and emerging market countries suggests that credit booms can be associated with unsustainable domestic demand booms, overheating, and asset price bubbles. Financial sector difficulties also cannot be ruled out—for example, loan losses may occur during a deep recession or following a large exchange rate depreciation if loans are denominated in foreign currency.

> from Baltic blues / Economist

How significant these risks are in central and eastern Europe and what role public policy should play in containing them are key questions facing policymakers.

Banking risks on the rise
On the surface, rapid credit growth in central and eastern Europe does not appear to have weakened banks. (It remains to be seen how the current turmoil in financial markets will affect banks in the region, but so far there have been no signs of a major fallout.) However, the reason financial soundness indicators are not yet pointing to a deterioration in credit quality could be that they are based on systemwide statistics rather than reflecting assessments of data from individual banks and there is a lag before bank data become publicly available.

Our analysis suggests that the granting of credit is becoming increasingly divorced from bank soundness—all banks, including weak ones, seem to be expanding at an equally rapid pace. This suggests that prudential risks are on the rise.

Our findings underscore the importance of forward-looking and risk-based supervision to keep the risks associated with rapid credit growth at manageable levels while maximizing the benefits of credit for financial development and economic growth.

In particular, supervisors need to give more attention to weaker banks that are growing rapidly. This would also be consistent with the risk-based approach to supervision that central and eastern European countries are moving to as they implement the new capital adequacy accord, known as Basel II.

Increased prudential risks are most apparent in the fastest-growing credit markets. These markets include lending to households, foreign currency-denominated or indexed lending, and lending in the three Baltic countries, where weaker banks are expanding at a faster rate than sounder banks (see Chart 2). A stronger policy response is thus warranted in each of these markets. Such a response may involve, for example, higher capital requirements and tighter loan classification and provisioning rules, differentiated on a bank-by-bank basis

But experience in industrial and emerging market countries suggests that credit booms can be associated with unsustainable domestic demand booms, overheating, and asset price bubbles. Financial sector difficulties also cannot be ruled out—for example, loan losses may occur during a deep recession or following a large exchange rate depreciation if loans are denominated in foreign currency.

How significant these risks are in central and eastern Europe and what role public policy should play in containing them are key questions facing policymakers.

Banking risks on the rise
Our analysis suggests that the granting of credit is becoming increasingly divorced from bank soundness—all banks, including weak ones, seem to be expanding at an equally rapid pace. This suggests that prudential risks are on the rise.

Increased prudential risks are most apparent in the fastest-growing credit markets. These markets include lending to households, foreign currency-denominated or indexed lending, and lending in the three Baltic countries, where weaker banks are expanding at a faster rate than sounder banks (see Chart 2). A stronger policy response is thus warranted in each of these markets. Such a response may involve, for example, higher capital requirements and tighter loan classification and provisioning rules, differentiated on a bank-by-bank basis

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