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Home arrow Political science arrow A New Model for Balanced Growth and Convergence: Achieving Economic Sustainability in CESEE Countries

CESEE banks deleveraging or rebalancing? Lessons from the EIB bank lending survey

Luca Gattini and Debora Revoltella

INTRODUCTION

Following a boom-bust cycle, lending growth has been stalling in the Central, Eastern and South-Eastern Europe (CESEE) region. This represents a potential drag on economic recovery. Consequently, understanding the determinants of credit growth becomes key to the definition of effective policy actions. The last fifteen years since the mid-1990s have seen an impressive development of the banking market in the CESEE region. Starting from the mid-1990s, a process of deep transformation allowed banks to gradually become real intermediaries of resources, with access to finance substantially increased in both the retail and the corporate sector. A privatization process allowed several international players to enter the region and to engage in regional growth strategies. These large players became market leaders in almost all countries of the region, carrying fresh capital and new banking practices. Lending was growing fast before the 2008-2009 crisis. Large market potential and banks’ access to funding from parents fuelled growth, supported by a general underestimation of risks. In turn internal demand started to accelerate, with both consumption and investment growing fast. The 2008-2009 crisis changed the picture. External demand collapsed and the correction of capital inflows was rather sharp, leading to negative economic growth all over the region. Concerns about potential spillovers, via the parent-subsidiary channel, from the international financial crisis to the region increased. Against this background, the so-called Vienna Initiative (see below) has functioned as an anchor, strengthening confidence in the financial markets and preserving banking activities. The European Commission and the International Monetary Fund (IMF) provided financial support to countries in need, while the international banks active in the region committed to remain supportive to their subsidiaries, providing capital and funding. International financial institutions engaged in a Joint Action Plan. The initiative strategically contributed to preserving financial stability in the overall CESEE region. Indeed tail risks disappeared and fully fledged bank runs were avoided.

Following a recovery in 2010, growth has slowed down again at the international and regional level and recessionary signals have appeared in some countries. The higher the pre-crisis imbalances were, the longer economic activity is taking to recover. Potential growth for the region has been reassessed and it has been linked more closely to the underlying country fundamentals - that is, productivity and export performance capacity. At the same time, the euro area sovereign debt crisis, new international regulation and a reassessment of local market opportunities are leading to a rethinking of the operational strategies for the crossborder banks active in the CESEE region. The strategic commitment to the region does not seem to be at stake, albeit a progressive reduction of parent-subsidiary funding. In cumulated terms, the reduction in cross-border lending to banks reached some 4 per cent of regional GDP1 in the Q3 2011 - Q2 2012 period, with some countries hit harder. In other words, the banking model is changing. A focus on sustainability is becoming a fundamental drive in global banks’ strategic decisions. Global banks are calling for their subsidiaries to adopt a more selfsustained model, with lending financed mostly via domestic funding - for example deposits. At the same time, weak economic growth affects demand for lending, while non-performing loans (NPL) are weighing on banks’ portfolios. Lending growth has been stalling in most of the countries in the region, representing a drag to recovery. In such a context a proper assessment of the current situation is key to the design of effective policy actions.

In October 2012, under the umbrella of the revived Vienna Initiative 2,2 the European Investment Bank (EIB) designed a bank lending survey for the CESEE region, to disentangle demand and supply factors as well as the underlying domestic and international components affecting lending activity in the region. This chapter presents and discusses the results of the survey. The chapter is structured as follows. Following this introduction, section 6.2 presents some facts on the banking markets in CESEE today. Section 6.3 explains the background for the survey. Section 6.4 presents the results at the parent banks’ level, while section 6.5 focuses on results at the subsidiary level. Section 6.6 includes a simple analysis to test the reliability of the survey results against recent macroeconomic developments. Section 6.7 concludes.

Nominal year-on-year credit growth

Figure 6.1 Nominal year-on-year credit growth

 
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