Excessive Credit Growth – An Early Indicator of Financial Instability

Abstract

This article discusses the issue of excessive credit growth, which is generally considered as an early indicator of financial and macroeconomic instability. It focuses methods that should be used in order to evaluate if the level of credit growth is excessively enough in order to start applying “countercyclical capital buffer”, a macro prudential tool proposed in the new regulatory framework of Basel Committee on Banking Supervision. Analysis focused in Central and Eastern European countries experiences with credit growth approach before the global financial crisis, show that the HP filter calculation proposed by the Basel Committee is not a suitable indicator of excessive credit growth for converging countries. A broader set of indicators and methods based in economic fundamentals of each country should be employ to determine a country’s position in the credit cycle.

In emerging economies, the effect of excessive credit growth and non - performing loans on banking crisis

“…Golemi 2015, Antunes et al (2018), Alessi and Detken (2018) emphasize the importance of credit gap as a leading indicator reflecting bank crises in recent experimental studies. Golemi (2015), Alessi and Detken (2018) stated that unsustainable credit developments lead to the accumulation of systemic risks in terms of financial stability. In this regard, Antunes et al (2018), Alessi and Detken (2018) have developed alternative early warning models.…”

Financial solution for balancing global economy, poverty and hunger differences through blockchain secured real time traceability system

“…Some of these factors include asymmetric & incomplete information about borrower (information asymmetry & adverse selection); misuse of funds (moral hazard); negligence in loan management & repayment; uneven & unreliable follow-up of borrower's project progress (no traceability); increased rate of interest with time; and unshared information of fraud borrower along the nancial institutional network (in silos information) (Sinha, 2012). Ultimately the disadvantages of NPA for a nancial institution include (i) a decrease in loan repayment by the borrower, translating into a decrease in net income for the bank; (ii) an overall reduced cash ow, leading to stagnancy in economic growth; and (iii) negative image creation of the respective bank/ nancial institution with high NPA ratio (Rao & Patel, 2015;Golemi, 2015). Hence, it becomes imperative to control the levels of NPA for improving the health of the nancial enterprises, thereby sustaining economic stability.…”

“…Banking enterprises are uncertain about the unsecured lending, unwriting and non-performing assets (NPAs). Most optimum way of effectively mitigating these nancial risks include extracting, transcribing, and reviewing credit information of the borrower's business projects (Golemi, 2015). Banking enterprises assess the credit worthiness of a borrower and his business by analyzing the background, capacity and capital investment associated with the said business project.…”

“…Hence, in such a scenario, fraudulent practices and cases of fund misuse cannot be traced e ciently. Under such circumstances, the need of the hour is to ensure proper evaluation of borrower's nancial pro le, followed by establishment of legitimate regulatory as well as legal advisory before sanctioning of loan to any borrower (Golemi, 2015).…”