Excessive Credit Growth – An Early Indicator of Financial Instability

Abstract

This article discusses the issue of excessive credit growth, which is generally considered as an early indicator of financial and macroeconomic instability. It focuses methods that should be used in order to evaluate if the level of credit growth is excessively enough in order to start applying “countercyclical capital buffer”, a macro prudential tool proposed in the new regulatory framework of Basel Committee on Banking Supervision. Analysis focused in Central and Eastern European countries experiences with credit growth approach before the global financial crisis, show that the HP filter calculation proposed by the Basel Committee is not a suitable indicator of excessive credit growth for converging countries. A broader set of indicators and methods based in economic fundamentals of each country should be employ to determine a country’s position in the credit cycle.