Determinants of credit risk in the Bulgarian and the Romanian banking systems and the role of the Greek crisis

The global financial crisis of 2007-8 and the ensuing manifestation of the Greek debt crisis in the euro area have abruptly ended the credit-fuelled boom in the South East Europe (SEE). The crisis episodes have also reignited the interest of researchers and policy makers on the determinants of credit risk and the impact of crisis on the stability of the SEE banking sectors. The contribution of this thesis lies in the fact that it provides the first systematic assessment of the relationship between credit risk and macroeconomic shocks in the Bulgarian and Romanian banking systems with an explicit role for the Greek debt crisis and the spillover effects transmitted through the Greek banks’ subsidiaries in the thesis’ focal countries. The empirical research uses a comprehensive dataset spanning from 2001 to 2010, thus covering a significant part of the boom-bust cycle, as well as advanced modelling approaches that have not been used before in the focal banking systems. The results indicate that credit risk plays a central role in the linkages between banking systems and macroeconomic vulnerabilities. The determinants of credit risk in Bulgaria and Romania are macroeconomic, bank-specific and institutional. The evidence on the spillover effects from the Greek debt crisis, manifested through the strong banking linkages, differs between the two countries. The data generate evidence of a Greek crisis spillover effect on Romania but not on Bulgaria, given the pronounced differences in the economies and banking systems of these two countries. The results of the empirical research are country-specific, suggesting that the region does not form a homogeneous block, thus each country merits research on its own. The implications of the research support the view that banking stability should be at the core of central banks’ policymaking, while strong regional cooperation and coordination among regulators would be beneficial in safeguarding banking systems from crisis contagion.