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Financial Stability in the Baltics

By Mejra Festiæ and Sebastijan Repina


The authors test the hypothesis of procyclicality of banking sector results in the Baltic economies. Their estimates suggest that a slowdown in economic activity is likely to accelerate the growth of the nonperforming loan (NPL) ratio in the Baltics. They also support the hypothesis that a rapid growth of credit harms loan performance, most likely due to soft-loan constraints and macroeconomic overheating. Higher concentration in banking market coincides with relatively higher nonperforming loans. Compliance with the Basel core principles improves the quality of the loan portfolio.cyclicality, non-performing loans, systemic risk, asset quality

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