Disentangling External Flows (External Shocks) and Policy Effects on the Credit Activities of Banks in Three Emerging Countries during the Great Recession

We analyse the effects of bank wholesale and retail funding swings triggered by the real economy and foreign financial flow shocks, as well as the effects of the corresponding policy interventions in three emerging countries (Croatia, Montenegro, and Slovenia) throughout the boom (2007-2008), bust (2009-2010), and recovery (2011-2013) periods of the Great Recession. We find evidence that supply-side factors were crucial for the huge procyclical credit swing, and that the cyclicality of credits to firms was amplified the most. The paper also documents that policy contribution was of a second-rate order compared to funding effects. The effectiveness of macroprudential and other policies (standard macro, structural) in supporting the stability of financial systems is discussed, and external flow, policy, and regulation effects on the credit activities of banks are disentangled.