The Boom in Household Lending in Transition Countries: A Croatian Case Study and a Cross-Country Analysis of Determinants

Bank lending, and particularly lending to households, grew rapidly after the restructuring of transition countries' banking systems. While lending booms raise concerns about credit quality and the current account, a Croatian case study suggests that the credit quality issue may not be so severe in transition countries. Cross-country regressions show that transition countries displayed lower levels of household lending than non-transition countries with similar characteristics before 2005. Indicators of good policies, including recent low inflation and successful banking reform, are significant in explaining the ratio of household lending to GDP in transition countries. However, weak enterprise reform also leads to higher levels of household lending, pointing to a danger of unbalanced reforms resulting in unsustainable consumption and problems with external balances.