Microsoft Word Thesis Gent (1). doc

Figure 7. Credit growth increase year-over-year in total bank credit 
Source: Czech National Bank (CNB), Credit growth increase year-over-year in 
total bank credit. % NPL is the share of nonperforming loans on total bank credit 
In Czech Republic, credit growth was the main issue that headed banking sector in 
crisis in late 1997. Studies that have been made to analyze the credit growth and its 
concentration in Czech Republic arise from relationship between economic and 
financial shocks including macroeconomic factors, which occur in credit market. There 
is a widespread believe that in credit market, crucial relationship that affects credit 
concentration are the amount of debt and GDP rather than relationship between money 
supply and nominal GDP, that plays important role in stability of financial markets. 
This relationship can be explained easy because it is based on principle or belief that 
much more we increase expenses on repaying back specific loans, which will imply a 
simultaneous growth in debt volatility similarly to any increase in expenses, (Friedman, 
1993). Idea based on simple relationship of economic cycle and credit growth indicates 
that in credit market regarding to expenses, it is much more efficient to increase 

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investments, rather than to increase other varieties of expenses. According to Fischer 
and Dornbusch (1994), in economic cycle there is an expectation for relationship 
between GDP and amount of credits. 
If we take a look at the case of Czech Republic economy, regarding the relationship of 
GDP and amount of credits, it is quite hard to have explanation based on empirical 
evidence, because domestic economy of Czech Republic has never completed one 
economic cycle yet. This may be prejudiced by appropriate factors, which has been 
included in current empirical evidence and impacts of different factors that were not 
standardized. Consequently, this may make stronger the connection between increase 
and decrease of amount of lending, and increase and decrease of economic growth. 
Even though, Czech Republic has not completed a full economic cycle yet, there are 
studies that show that there could exist a clear link in the relationship among money 
supply, real GDP and amount of nonadjusted credits, (Hampl & Matousek, 2000).