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Credit Growth and Instability in Balkan Countries: The Role of Foreign Banks

Predrag Ćetković

Discussion Papers from Research on Money and Finance

Abstract: The present paper seeks to examine the role played by foreign banks in the credit growth in Bosnia and Herzegovina, Croatia and Serbia. Fast credit expansion was the main contributor to economic growth in these countries prior to the financial and economic crisis of 2007-2010. This development is associated with the entry of foreign banks, particularly banks from EU-15 countries. In addition, the Balkan countries faced large capital inflows from parent banks located in old EU member states. It is argued that the rising profit orientation and the increase in the risk proclivity of European banks, which have been the result of the financialisation of the European Union banking sector, was the main driver behind the fast credit growth rates in the Balkan countries. With the outbreak of the recent financial and economic crisis, concerns about the quality of outstanding loans have materialized. The global economic crisis and the increase in bad loans then led to a breakdown of the debt-led growth model in the region.

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