Some lessons and prospects for financial
stability in the EU and CESEE
Mauro Grande
European Central Bank
1st Bank of Greece Workshop on the Economies of the Eastern European and
Mediterranean Countries
Athens, 14 May 2010
Outline
• CESEE countries: some facts
• Inter-linkages between EU and CESEE countries
• Possible impact of the new EU supervisory framework
• Conclusions
2
CESEE countries: some facts
Prior to the crisis
•
•
The region’s economic and financial performance was (and still
is) rather heterogeneous
However, some common risks could be identified
–
–
–
–
•
High credit growth in most countries → Risk of credit boom
Overheated financial and real estate markets → Risk of asset price
bubbles
Widening current account deficits → Increased funding liquidity risks
High share of foreign currency loans → Risk of correlated losses (i.e.
market and credit risks) in case of currency depreciation
Overall, systemic risks built up gradually in most
countries in the years preceding the recent crisis
3
CESEE countries: some facts
During the crisis
Economies in CESEE hit by a severe external financial shock
which had material adverse impacts also on the real economies
in the region
–
–
–
–
–
Substantial decline in GDP growth
Falling asset prices (housing prices, stock exchange etc.)
Sharp devaluation of currencies in countries with flexible
exchange rate regimes
Deteriorating balance sheet positions of borrowers and banks
Credit contraction (or growth moderation)
Overall, the risks that had built up prior to the crisis
materialised in the last 1.5-2 years
–
Crisis management measures became necessary with the
involvement of the IMF and the EU in some cases
4
Inter-linkages between EU and CESEE countries
• The highly integrated, small open economies of the region pose
certain specific risks to financial stability for the EU via
economic and financial inter-linkages:
– Intense expansion of some EU banks in CESEE
• made their profitability significantly dependant on activities in CESEE.
However, this activity somewhat protected these EU banks from the
impact of complex structured products
• increased risk of contagion from a country-specific shock in the region
through confidence and common creditor channel
• increased risk of correlated losses (i.e. market and credit risks) in case of
currency depreciation
• Despite deteriorating profitability and material losses suffered by
banks in the region, there was no substantial spill over from
CESEE countries to the euro area/EU
EU banking system exposures vis-à-vis CESEE and
the quality of the portfolio
Exposures of EU banking systems
to the CESEE countries
Non-performing loan (NPL) ratio
and provisioning rate (% of loans)
(% of 2008 lending country’s GDP)
60
Bulgaria
Estonia
Lithuania
Poland
Other
50
Czech Republic
Latvia
Hungary
Romania
90
18
end-2007 (LHS)
end-2008 (LHS)
mid-2009 (LHS)
Provisioning rate (RHS)
euro area end-2008 average NPL ratio (LHS)
16
14
40
80
70
12
60
10
50
8
40
6
30
4
20
2
10
0
0
30
20
10
0
AT
BE
SE
GR
NL
IT
FR
DE
Source: BIS.
Note: Largest three exposures for each particular CEE country are
shown in the graph, smaller exposures are combined under other
countries.
BG
EE
LT
LV
CZ
HU
PL
RO
Source: IMF FSI, CBD 2008, June 2009 BSC/WGMA survey.
Note: For some countries data for mid-2009 refers to end-March.
Provisioning rate is a ratio of provisions to NPLs; for RO
provisioning rate refers to Dec 2008 and allows for collateral.
Contribution of CESEE subsidiaries to selected EU
banks’ profits
Contribution of CESEE subsidiaries to “most
exposed” EU banks’ profits, pre-crisis
(% of group profits)
Contribution of euro area banks’ subsidiaries
in the CESEE countries to the profits of
selected EU banking groups (% of group assets)
2007
0.60
90
2006
2007
H1 2008
percentage of total assets in 2007
80
70
2008
H1 2009 (annualised)
0.40
0.20
60
50
0.00
40
-0.20
30
20
-0.40
10
0
Source: individual bank reports
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Source: individual institutions’ financial reports
7
Inter-linkages between EU and CESEE countries
• The close financial inter-linkages pose certain risks also to the
financial stability of CESEE economies:
– provision of high risk products (e.g. foreign currency loans) to customers
who may not be aware of the associated risks (un-hedged position)
– tendency to retrench during the crisis in case the activity is not relevant for
the group as a whole (but could be so for the host country)
– increased funding liquidity risks, due to high concentration of bank funding
sources to a specific country/group of countries
• However, parent banks have recently committed themselves to maintain
business activities in host countries and to provide liquidity for
subsidiaries
– The “Vienna initiative” is a good example of cooperation between banks and
authorities in home and host countries
• In sum, both stabilizing and de-stabilizing forces could be observed
during the crisis, therefore it is difficult to draw firm conclusions as
regards the overall impact
CESEE banking sector funding vulnerabilities:
Reliance on external funding: high and concentrated
Share of external funding in total
banking sector funds
(%)
CESEE countries’ reliance on
borrowing from EU large banks
(% of 2008 borrowing country’s GDP)
180
70
60
2005
2006
2008
Apr-09
Sweden
Belgium
Greece
Italy
Other
2007
160
140
Austria
Germany
France
Netherlands
50
120
40
100
30
80
20
60
10
40
20
0
LV
EE
LT
RO
HU
BG
PL
CZ
Euro
area
avarage
Source: ECB, BSC/WGBD
Note: Share of external funding = (External liabilities)/
(Total liabilities – Capital&Reserves - Remaining liabilities)
0
EE
LV
LT
CZ
HU
RO
BG
PO
Source: BIS.
Note: Largest three exposures for each particular CEE
country are shown in the graph, smaller exposures are
combined under other countries.
Inter-linkages between EU and CESEE countries
• Given the close inter-linkages and the existing contagion channels,
risks between euro-area/EU and CESEE countries should be
identified, analysed and assessed in a more effective and timely
manner
– Availability and accessibility of data should be improved
– Analytical tools and modelling techniques need to be enhanced
• Effective and coordinated policy response is necessary
– Home-host cooperation is key in developing and implementing policy
measures efficiently
– Regulatory arbitrage should be avoided. Risks of circumvention of
rules through
• Branches or cross-border provision of services
• Non-regulated entities
New EU supervisory framework should help address these
issues
Possible impact of the new EU supervisory
framework: ESRB
A new EU framework for macro-prudential supervision is
being set up
•
A new body – the European Systemic Risk Board (ESRB) – will be
set up in the EU to oversee systemic risk
– The ESRB will monitor developments within the EU financial
sector and in the interplay between the financial sector and
the real economy
– It will identify systemic risks at the EU level and assess the
impact of their materialisation on financial stability
– It will issue risk warnings and policy recommendations mainly in
the regulatory and supervisory field
– It will collaborate closely with the IMF and the FSB on macroprudential issues
– The ECB will provide the analytical, statistical, logistical and
administrative support to the ESRB
11
Possible impact of the new EU supervisory
framework: ESRB
The ESRB could have an important role to play also in
relation to financial stability inter-linkages between EU and
CESEE countries
– The ESRB will promote better data availability and analytical
tools for identifying and assessing systemic risks
– The ESRB will monitor potential sources of risks originating
from outside the EU having an impact on the EU financial
system and the other way round
– The ESRB might issue recommendations concerning individual
countries or set of countries in the EU that can have a bearing
on financial stability in non-EU countries
– The ESRB, together with the ESA, could promote cooperative
arrangements among banks in light of macro-prudential
considerations
12
Possible impact of the new EU supervisory
framework: ESFS
An enhanced EU framework for micro-prudential
supervision is being pursued
•
A new supervisory system – the European System of Financial
Supervision (ESFS) – will be set up in the EU
– The ESFS will consist of a network of national financial
supervisors working in tandem with new European
Supervisory Authorities (ESAs)
– The ESAs will have the power to adopt binding supervisory
standards and possibly take binding decisions in some
supervisory areas leading to enhanced convergence in
supervisory requirements and practices
– The ESAs will have a strong coordination role concerning
the functioning of the colleges of supervisors
13
Possible impact of the new EU supervisory
framework: ESFS
The ESFS is also likely to have an important role on the
financial stability inter-linkages between EU and CESEE
countries. In particular, the ESAs - through their
coordination role - could:
–
–
–
promote a more effective monitoring by the colleges of
supervisors of risks incurred by the individual financial groups
as a whole and therefore contribute to their stability
favour enhanced cooperation between home and host
supervisors including in terms of balanced assessment of
relevant risks for home and host (including non EU)
countries
promote avoidance of regulatory arbitrage by banks
14
Conclusions
•
•
•
The are financial stability inter-linkages between euro
area/EU and CESEE countries that need to be identified,
analysed and assessed more effectively
The new supervisory architecture in the EU is expected to
contribute positively to this objective, thus having a positive
effects with regard to the overall financial stability
This needs to be seen in conjunction with:
–
–
the necessary improvement of risk management practices to be
pursued by banking groups in Europe
the enhancement of capital and other prudential requirements
being considered by the BCBS that will be reflected in EU
legislation
15