Prague Economic Papers 2006, 15(4):315-349 | DOI: 10.18267/j.pep.291

Procyclicality of Financial and Real Sector in Transition Economies

Mejra Festić
Faculty of Economics and Business, University of Maribor, Razlagova 14, Maribor Slovenia (mejra.festic@uni-mb.si).

Financial sector is prone to cyclical movements and procyclicality of the financial system may endanger financial stability, which depends on asset prices and loan losses due to the fact that the deterioration of bank assets through non-performing loans is characteristics of banking distress. This was the case during Japan's lost decade and the Nordic banking crises. Even the classic banking panics of the Great Depression are being revised in the light of new evidence on the fundamental deterioration of bank assets.

Much empirical evidence supports the view that balance sheet variables, such as net worth affect investment and produce business cycle dynamics. In an upswing, the greater availability of credit leads to higher asset prices, which then serve as collateral for more borrowing.

Relatively unstable development of share prices on the capital market increases equity risk. This paper is based on the presumption that the stability of macro economic environment, less pronounced cyclical movements and insignificant procyclicality between GDP and equity (used as collaterals for credit insurance) lower equity risk. There was proved no significant procyclicality between collaterals and GDP according to low stock market capitalization. And due to the relation that equity risk (as a part of market risk) is determined by unstable development of shares prices, I accepted the hypothesis of low equity risk in the analysed transition economies on the basis of tested procyclicality.

Keywords: macro environment, collaterals, procyclicality, credit risk, equity risk, banking sector
JEL classification: E31, E37, E61, G15

Published: January 1, 2006  Show citation

ACS AIP APA ASA Harvard Chicago IEEE ISO690 MLA NLM Turabian Vancouver
Festić, M. (2006). Procyclicality of Financial and Real Sector in Transition Economies. Prague Economic Papers, 15(4), 315-349. doi: 10.18267/j.pep.291
Download citation
  • BibTeX (.bib)
  • Bookends (.ris)
  • EasyBib (.ris)
  • EndNote (.enw)
  • EndNote 8 (.xml)
  • ISI WoS (.isi)
  • Medlars (.medlars)
  • Mendeley (.ris)
  • MODS (.xml)
  • Papers (.ris)
  • RefWorks (.txt)
  • RefManager (.ris)
  • RIS (.ris)
  • MS Word (.xml)
  • Zotero (.ris)
    • Open full article

    References

    1. Abel, B.A. (1988), "Stock Prices Under Time-Varying Dividend Risk: an Exact Solution in an Infinite-Horizon Equilibrium Model." Journal of Monetary Economics, 22(3), November, pp. 375-393. Go to original source...
    2. Amato D.J., Craig H.F. (2003), "Are Credit Ratings Procyclical?" Basel: BIS Working Papers No. 129, pp. 8-12. http://www.bis.org/publ/work129.pdf. Go to original source...
    3. Bangia, A., Diebold, F.X., Kronimus, A., Schagen, Ch., Schuermann, T. (2002), "Ratings Migration and the Business Cycle with Application of Credit Portfolio Stress Testing." Journal of Banking and Finance, 26(3), pp. 445-474. Go to original source...
    4. Barsky, B.R. (1989), "Why Don't the Prices of Stocks and Bonds Move Together? American Economic Review 79(5), pp. 1132-1145.
    5. Barsky, B. R., De Long, B.J. (1993), "Why Does the Stock Market Fluctuate?" Quarterly Journal of Economics, 108(2), Mai, pp. 291-311. Go to original source...
    6. Beloglavec, S. (2004), "Nove bančne storitve z vidika izboljšave poslovnih procesov in zadovoljstva komitenta" [New Banking Services from the Point of View of the Satisfaction of Bank Commitments]. Maribor: Faculty of Business and Economics, Masters Degree, p. 160.
    7. Bernanke, B. (1983), "Nonmonetary Effects of the Financial Crisis in Propagation of the Great Depression." American Economic Review, 73(3), pp. 257-76. Go to original source...
    8. Bernanke, B., Gertler, M. (1989), "Agency Costs, Net Worth and Business Fluctuations." American Economic Review, 79(1), pp. 14-31.
    9. Bernanke, B., Gertler, M. (1995), "Inside the Black Box: the Credit Channel of Monetary Policy Transmission." Journal of Economic Perspectives, 9(4), Fall, pp. 27-48. Go to original source...
    10. Bernanke, B., Gertler, M. (1999), "Monetary Policy and Asset Price Volatility." Federal Reserve Bank of Kansas City Economic Review, 84(4), pp. 17-51. Go to original source...
    11. Bernanke, B., Gertler, M., Gilchrist, S. (1999), "The Financial Accelerator in a Quantitative Business Cycle Framework," in Taylor, J.B., Woodford, M.(eds), Handbook of Macroeconomics. Elsevier Science, North-Holland, Handbooks in Economics, Vol. 15, pp. 1341-1393. Go to original source...
    12. BIS (2004), "Basel Committee on Banking Supervison", in International Convergence of Capital Measurement and Capital Standards. Bank for International Settlements, July, pp. 14-36. http.//www.bis.org.
    13. BIS (2005), "Bank Restructuring in Practice." BIS Policy Papers No. 6, August, pp. 25-34. http.//www.bis.org.
    14. BIS (2005), "The 75 th Annual Report." Bank for International Settlements, June, pp. 41-63. http://www.bis.org.
    15. Borio, C., Claude, E., Lowe, P. (2002), "Asset Prices, Financial and Monetary Stability: Exploring the Nexus." Bank for International Settlements, BIS Working Papers, No 114, July, pp. 3-45. Go to original source...
    16. Borio, C., Furfine, C., Lowe, P. (2001), "Procyclicality of the Financial System and Financial Stability: Issues and Policy Options", in Marrying the Macro and Micro-Prudential Dimension of Financial Stability. Bank for International Settlements, March, No. 1, pp. 24-31. http.//www.bis.org.
    17. Boršič, D. (2005), "Exchange Rates in Some New EU Member States." Bančni vestnitk, 54(11), November, pp. 9-14.
    18. Brennan, M., Yihong Xia (2001), Stock Prices Volatility, Learning and the Equity Premium. Los Angeles: Anderson Graduate Scholl of Management, University of California. http://repositories.cdlib.org/anderson/fin/19-01org/anderson/fin.
    19. Calomiris, Ch. (1995), "Financial Fragility: Issues and Policy Implications." Journal of Financial Services Research, 9(3-4), December, pp. 241-57. Go to original source...
    20. Canova, F., Pina, J. (1998), "Monetary Policy Misspecification in VAR Models." Basel: Bank for International Settlements, CEPR.
    21. Cecchetti, S., Genberg, H., Lipsky, J., Wadhwani, S. (2000), "Asset Prices and Central Bank Policy. London: International Center for Monetary and Banking Studies, pp. 42-56.
    22. Charemza, W.W, Deadman, D.F. (1997), New Directions in Econometric Practice. Cheltenham: Edward Elgar, pp. 176-179, 190-192, 228-230.
    23. Chen, Nan-Kuang (2001), "Bank Net Worth, Asset Prices and Economic Activity." Journal of Monetary Economics, 48(2), 2001, pp. 415-436. Go to original source...
    24. Chen, Y.P., Popovich, P.M. (2002), "Correlation: Parametric and Nonparametric Measures", in Series Quantitative Applications in the Social Series. CA Thousand Oaks, Sage University Publications, Paper No. 139, pp. 13-45. Go to original source...
    25. Crouhy, M., Galai, D., Mark, R. (2000), "A Comparative Analysis of Credit Risk Models." Journal of Banking and Finance, 24(1-2), pp. 57-117. Go to original source...
    26. Davis, E.P. (1999), Financial Data Needs for Macro-Prudential Surveillance: What Are the Key Indicators of Risks to Domestic Financial Stability? London: Bank of England, Centre for Central Banking Studies, 2, 2, May, pp. 8-15. Go to original source...
    27. Diamond, D., Dybvig, P. (1983), "Bank Runs, Deposit Insurance and Liquidity." Journal of Political Economy, 91(3), pp. 401-19. Go to original source...
    28. Diamond, D., Rajan, R.G. (2001), "Liquidity Risk, Liquidity Creation and Financial Fragility: a Theory of Banking." Journal of Political Economy, 109(2), pp. 287-327. Go to original source...
    29. Dickey, A.D., Fuller, W.A. (1979), "Distribution of the Estimators for Autoregressive Time Series with Unit Root." Journal of American Statistical Association, 74, June, pp. 427-431. Go to original source...
    30. ECB (2001), "Capital Volatility and Pro-Cyclicality in the New Accord." Credit Suisse First Boston, European Central Bank, pp. 13-19. http://www.ecb.int.
    31. ECB (2005), "Banking Structures in the New EU Member States." European Central Bank, January Report, pp. 9-16, 15-28, 32-41. http://www.ecb.int.
    32. Eichenbaum, M. (1992), "Comment on Interpreting the Macroeconomic Time Series Facts: The Effects of Monetary Policy." European Economic Review, 24(6), pp. 310-331. Go to original source...
    33. Engle, F.R., Granger, C.W.J. (1978), "Co-Integration and Error Correction Representation Estimation and Testing." Econometrica 46(2), pp. 251-276. Go to original source...
    34. Englund, P. (1999), "The Swedish Banking Crisis: Roots and Consequences." Oxford Review of Economic Policy, 15(3), pp. 80-97. Go to original source...
    35. European Commission (2004), "Convergence Report." Brussels: European Commission. http://europa.eu.int/scadplus/leg/en/lvb/l25057.htm.
    36. European Commission (2004a), "Commission Recommendation on the 2004 Update of Broad Guidelines of the Economic Policies of the Member States and the Community - for the Period 2003-2005." Brussels: European Commission. http://europa.eu.int/scadplus/leg/en/lvb/l25078.htm.
    37. European Commission (2005), "Convergence Report." Brussels: European Commission, Autumn Forecast. http://europa.eu.int/scadplus/leg/en/lvb/l25057.htm.
    38. Eurostat (2005), "Economy and Finance Data." http://epp.eurostat.cec.eu.int/portal.
    39. Eviews 4.0 Instructions (2003), "Econometric Program for Windows and Macintosh." Irvine, CA: QMS - Quantitative Micro Software, pp. 166, 213, 260, 297-303, 257-260, 312-324, 364-366, 489-498, 504-511, 519-520.
    40. Fisher, I. (1933), "The Debt-Deflation Theory of Great Depressions." Econometrica, 1(4), October, pp. 337-57. Go to original source...
    41. Friedman, M., Schwartz, A. (1963), A Monetary History of the United States, 1867-1960. Princeton: Princeton University Press.
    42. Fry, M. (1997), Emancipating the Banking System and Developing Markets for Government Debt. London, Routledge, Bank of England, Centre for Central Banking Studies, pp. 37-49. Go to original source...
    43. Frye, J. (2000), "Depressing Recoveries." Chicago: Federal Reserve Bank of Chicago, Emerging Issues Series, S&R, October, No. 8, pp. 3-14.
    44. Fuller, A.W. (1976), The Introduction to Statistical Time Series. New York: John Willey and Sons, pp. 78-81.
    45. Gerard, C., Klingebiel, D. (2003), "Episodes of Systemic and Borderline Financial Crises 1970s2002." World Bank. http://econ.worldbank.org/programs/finance/datasets.
    46. Gertlei, R.M., Aiyagari, R.S. (1999), "Overreaction of Assets Prices in General Equilibrium." Review of Economic Dynamics, 16(2), 3-35. http://www.idealibrary.com on. Go to original source...
    47. Gertler, M., Goodfried, M., Issing, O., Spaventa, L. (1998), "Asset Prices and Monetary Policy: Four Views." Basel: Bank for International Settlements, CEPR, pp. 5-14.
    48. von Goetz, P. (2004), "Asset Prices and Banking Distress: a Macroeconomic Approach." Basel: BIS Working Paper, No. 167, pp. 23-26.
    49. Golin, J. (2005), The Bank Credit Analysis Handbook, a Guide for Analysts, Bankers and Investors. London: Wiley Finance.
    50. Goodhart, Ch., Danielsson, J. (2001), "The Inter-Temporal Nature of Risk", in Société Universitaire Européanne Recherches Financiéres. 23rd SUERF Colloquium on Technology and Finance: Challenges for Financial Markets, Business Strategies and Policymakers. Brussels, October, pp. 26-59. Go to original source...
    51. Gordy, B.M. (2000), "A Comparative Anatomy of Credit Risk Models." Journal of Banking and Finance, 24, January, pp. 199-249. Go to original source...
    52. Grossman, J.S., Shiller, R.J. (1981), "The Determinants of the Variability of Stock Market Prices." American Economic Review, 71(2), Mai, pp. 222-227.
    53. Hamilton, D.J. (1994), Time Series Analysis. New York: Princeton University Press, pp. 53-69. Go to original source...
    54. Hansen, J. (2003), "Financial Cycles and Bankruptcies in the Nordic Countries." Stockholm: Central Bank of Sweden, Sveriges Riksbank, Working Paper Series, No 149. http://www.riskbank.com/templates/Document.aspx?id=8230.
    55. Hauptman, L. (2004), "Skupinska obdavčitev >>Group taxation<<", in Turk, I. (ed.), Publication from the Conference, Ljubljana, Slovenian Institute for Revision, pp. 61-83.
    56. Hong, Y. (2001), Estimating Uncertainty and the Equity Premium. Austin: Texas University, pp. 87114. HYPERLINK "http://www.mccombs.utexas.edu/faculty/hong.yan/research/EP1.pdf" http://www.mccombs.utexas.edu/faculty/hong.yan/research/EP1.pdf..
    57. Hoshi, T., Kashyap, A. (1999), "The Japanese Banking Crisis: Where Did it come From and How Will It End?" National Bureau of Economic Research, Macroeconomics Annual, pp. 129-201. http://www.ideas.repec.org/p/nbr/nberwo/7250.html. Go to original source...
    58. Issing, O. (2005), "The Monetary Pillar of the ECB." Revised Paper Initially Prepared for the Conference on the ECB and Its Watchers. Financial Stability Review, VII(3), June. http://www.ecb.int/press/key/date/2005/html.sp050531.en.html.
    59. Jordan, J., Peek, J., Rosengren, E. (2002), "Credit Risk Modelling and the Cyclicality of Capital," in Federal Reserve Bank of Boston. Changes in Risk through Time, Measurement and Policy Options, March. http://www.bis.org/events/conf020306.htm.
    60. Kiyotaki, N., Moore, J. (1997), "Credit Cycles." Journal of Political Economy, 105(2), pp. 211-48. Go to original source...
    61. Lopez, A.J. (2002), "The Relation Between Average Asset Correlation, Firm Probability of Default and Asset Size," in Conference on Economic Assessment. Basel: BIS, pp. 18-23. http://www.bis.org. Go to original source...
    62. Mehra, R., Prescott, E.C. (1985), "The Equity Premium: a Puzzle." Journal of Monetary Economics, 15(2), March, pp. 145-161. Go to original source...
    63. Mishkin, F., White, E. (2003), "U.S. Stock Market Crashes and Their Aftermath: Implications for Monetary Policy", in Hunter et al. (eds.), Effects on Monetary Policy, NBER, Working Papers No. 8992, Chapter 6. http://ideas.perec.org/p/hut/ruters/200208.html. Go to original source...
    64. Mishkin, S.F. (1999), "Global Financial Instability: Framework, Events, Issues." Journal of Economic Perspectives, 13, Fall, pp. 3-20. Go to original source...
    65. Mlinarič, F. (2000), "Ali bo zakon o finančnem poslovanju podjetij res opravil s finančno nedisciplino?" [Financial Law and Its Possibilities For Improving Financial Discipline]. Review For Revision and Finance, 27(6), pp. 15-37.
    66. Moody's (2005), "Ratings Performance 2004," Special Report. http://www.moodys.com.
    67. Oplotnik, J.Ž. (2003), "Capital Flows Adjustment in Slovenia: Assessment of Design and Efficiency." Post-Communist Economies, 15(2), pp. 209-225. Go to original source...
    68. Rajan, G.R. (2005), "Has Financial Development Made the World Riskier?" Paper Presented at the Jackson Hole Conference, August. http://neweconomist.blogs.com/new_economist/2005/papers_from_the-html. Go to original source...
    69. Ramsey, B.J. (1969), "Test for Specification Error in Classical Linear Least Squares Residuals Regression Analysis." Journal of Royal Statistical Studies 31(2), pp. 350-371. Go to original source...
    70. Rostowski, J. (2005), "How to Reform the Stability and Growth Pact," in Dabrowski, M., Rostowski, J. (eds.), The Eastern Enlargement of the Eurozone. Boston: Kluwer Academic Publishers, pp. 185-198.
    71. Rubinfeld, L.D., Pindyck, R.S. (1991), Econometric Models and Economic Forecasting. New York, McGraw-Hill, International editions, pp. 250-252.
    72. Sargent, J.T. (1981), "Interpreting Economic Time Series." Journal of Political Economy 89(2), pp. 213-248. Go to original source...
    73. Saunders, A., Allen, L. (2003), "A Survey of Cyclical Effects in Credit Risk Measurement Models." Basel: BIS, Working Paper No. 126, January, pp. 19-26.
    74. Sigbjørn, B. (1998), "Bank Failures in Scandinavia", in Caprio et al. (eds.), Preventing Bank Crises - Lessons from Recent Global Bank Failures, Chapter 11. Washington: World Bank, pp. 57-88.
    75. Timmerman, A. (1996), "Excess Volatility and Predictability of Stock Prices in Autoregressive Dividend Models with Learning." Review of Economic Studies, 63(4), pp. 523-557. Go to original source...
    76. Veronesi, P. (2000), "How Does Information Quality Affect Stock Returns?" Journal of Finance, 55(6), pp. 807-837. Go to original source...
    77. Vihriala, V. (1997), "Banks and the Finnish Credit Cycle 1986-1995." Central Bank of Finland Research Department, Bank of Finland Studies E:7, pp. 26-33.
    78. Wall, E.M., Rechtsteinerk A., Rocha, L.M. (2003), "Singular Value Decomposition and Principal Component Analysis," in Practical Approach to Microarray Data Analysis. Kluwer, Norwell, pp. 22-24. http://public.lanl.gov/mewall/kluwer2002.html.
    79. Weill, L. (2005), "On the Relationship between Competition and Efficiency in the EU Banking Sector." Kredit und Kapital, 37(3), pp. 329-332. Go to original source...
    80. White, R.W. (2006), "Procyclicality in the Financial System: Do We Need a New Macrofinancial Stabilisation Framework?" Basel, BIS, Working Paper No. 193, January, pp. 6-24. Go to original source...
    81. White, R.W. (2004), "Are Changes in FInancial Structure Extending Safety Nets?" Bank For International Settlements, BIS Working Papers No. 145, January, pp. 14-19. Go to original source...
    82. http://dsbb.imf.org/Applications/web/sddsnsdppage
    83. http://www.cnb.cz/en/statistics/sdds/
    84. http://www.lbank.lt/Eng/Statistics/nsdplt.htm
    85. http://www.ksh.hu/pls/ksh/docs/eng/imf/nsdp.html
    86. http://www.stat.gov.pl/english/sdds/dane.htm
    87. http://www.statistics.sk/webdata/mmf/nssu.html
    88. http://www.bsi.si/imf/
    89. http://www.statistischedaten.de/ISAPI/DBDemo.dll/Sources?DB=EU&File=EU&Txt=Eurostat+Statistics
    90. http://www.statistischedaten.de/ISAPI/DBDemo.dll/Sources?DB=WELT&File=WELT&Text=World+Statistics

    This is an open access article distributed under the terms of the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License (CC BY NC ND 4.0), which permits non-comercial use, distribution, and reproduction in any medium, provided the original publication is properly cited. No use, distribution or reproduction is permitted which does not comply with these terms.


    Return to the content