The effectiveness of policy interventions in CEE countries

Abstract

This paper assesses the effectiveness of intervention measures adopted by central authorities during 2005-2012 in CEE. We investigate their impact on bank stability in 15 countries from CEE using bank-level data and OLS estimation method. The bank stability is proxied by the natural logarithm of the Z-Score and the non-performing loans to gross loans ratio. Empirical findings suggest that interest rates cuts, as well as domestic and foreign liquidity injections have a significant impact on bank stability in Emerging Europe. Moreover, their effectiveness differs according to several bank characteristics. Policy measures adopted by CEE countries significantly reduced the stability of domestic banks, but increased the stability of banks with a lower level of capitalization. The impact on the Z–score of banking system liquidity policy measures and the policy interest rates cuts is significantly lower in the case of domestic banks, amplified for less-capitalized banks (except for the category regarding banks’ solvency), while their impact on large banks remains statistically insignificant.

Keywords

• crisis
• policy interventions
• bank stability
• CEE