Transcript of a Conference Call on the Release of the Deleveraging and Credit Monitor Report
February 14, 2014Washington, D.C.
Friday, February 14, 2014
Aasim Husain, Deputy Director, IMF European Department;
Anna Ilyina, Advisor, IMF European Department;
Silvia Zucchini, Senior Communications Officer, IMF Communications Department.
MS. ZUCCHINI: Good morning. My name is Silvia Zucchini. I'm from the IMF Communications Department.
Good morning and good afternoon if you are dialing in from Europe. We are releasing this morning the Quarterly Deleveraging and Credit Monitor Report (DCM) for Central, Eastern and Southeastern Europe (CESEE). Here with me are Aasim Husain, Deputy Director of the IMF European Department, and Anna Ilyina, Advisor in the European Department of the IMF. They will deliver opening remarks, and then we will open the floor for questions. We have, more or less, half an hour to go. So let me give the floor to Aasim and to Anna for their comments.
MR. HUSAIN: Good morning and good afternoon. A warm welcome from me as well on this cold day in Washington.
Let me just say a few words of background on the DCM and how it fits into the overall work of the Vienna Initiative. Fostering cooperation between the different players in home and host countries has been at the heart of the Vienna Initiative from the outset, when it was first set up at the height of the global crisis in early 2009.
Today, five years later, the DCM continues to keep tabs on developments in cross-border funding provided by Western banks to the CESEE region. The Monitor also analyzes credit growth in the region as well as the strategic repositioning of banks across countries within the region.
The main purpose of the DCM is to inform about developments in cross-border banking operations and credit in the region. The Monitor tries to identify early on possible pressure points in cross-border banking flows and areas where better coordination among banks, policymakers, regulators, supervisors and international financial institutions could be useful.
Let me hand over now to Anna, who has supervised the preparation of this Monitor.
MS. ILYINA: Thank you, Aasim, and good morning, everyone. So I'll jump straight to the summary of the DCM, which covers developments up to third quarter of 2013.
In the third quarter of 2013, BIS reporting banks continued to scale back their cross-border funding to CESEE. This reduction occurred at the same pace as in the previous quarter, by about 0.2 percent of GDP.
Of note is the fact that foreign banks have cut back their funding to Turkey by about 0.6 percent of GDP. For Turkey, this was, in fact, the first substantial drop in claims in about two years.
The foreign banks’ external positions vis-à-vis CESEE, excluding Russia and Turkey, declined at a somewhat slower pace in the third quarter, by about 0.2 percent of GDP compared to 0.4 percent decline in the second quarter. Of course, the impact differed significantly across countries.
This outcome is actually better than one might have expected given that external funding conditions have become much more challenging for emerging markets since May 2013, when the Fed signaled the possibility of earlier than expected unwinding of its unconventional monetary policy.
Indeed, in the third quarter of 2013, the balance of payments for CESEE, excluding Russia and Turkey, registered sizeable outflows, with portfolio flows turning negative for the first time since 2009. Countries with sizeable external and/or fiscal financing requirements were most affected.
Several of the CESEE countries suffered a “double whammy” with portfolio outflows occurring against a backdrop of continued pullback in foreign bank funding. Bank funding reductions (as a percentage of the recipient country GDP) in Q3 2013 were the largest in the case of Slovenia, Hungary, Croatia and Latvia.
Now, turning to credit developments, private sector growth remains subdued in many CESEE countries outside CIS and Turkey. As of end-Q3 2013, the year-on-year credit growth in CESEE, excluding CIS and Turkey, was close to zero. This is when it's measured in nominal exchange-rate adjusted terms.
At the same time, credit to non-financial firms contracted in several countries.
The survey data suggest that supply-side factors may have played a larger role than demand-side factors. This is confirmed, for example, by the Emerging Market Bank Lending Survey conducted by the Institute of International Finance. In particular, the survey found that lending conditions in emerging Europe tightened in the third quarter 2013 on the back of substantial tightening in funding conditions for CESEE banks.
At the same time, loan demand grew though at a slower pace. This once again highlights the importance of addressing the supply side constraints so that they don’t put brakes on growth once credit demand picks up in earnest.
So what to expect going forward?
Economic recovery in CESEE appears to be taking hold, but it is still quite fragile. And the recent episode of volatility in emerging financial markets highlights challenges that will likely persist along a transition path to higher global interest rates.
Prospects for this year are for further tightening in external funding conditions as Fed tapering as well as European bank asset quality review and stress tests proceed. This underscores the need for coherent macroeconomic and financial policies, including addressing crisis legacies such as high level of NPLs, which remains the case in many CESEE countries. And it also calls for continued close monitoring of cross-border bank funding and credit developments in the CESEE region.
MS. ZUCCHINI: Let’s open the floor for questions. Please introduce yourselves and indicate the media organization you work for.
QUESTIONNER: I was wondering if you could comment in general about the evolutions in Romania and what you see as the biggest risks for the country.
MS. ILYINA: I’ll just focus on developments in cross-border bank funding and credit development in Romania. As you know, the banking sector still suffers from a number of weaknesses including high level of NPLs. In addition, in Q3 2013, foreign bank funding to Romania has contracted though not as much as in the case of Slovenia, Latvia, Hungary and Croatia. Of course, this reflects both the combination of supply-side constraints as well as weak demand. In fact, even if we look at credit developments through December in Romania, overall household and corporate loan growth remains negative, which is basically underpinned by continued weakness in domestic demand as well.
QUESTIONNER: You said that the report says ongoing deleveraging and de-risking of European balance sheets will likely continue and may intensify amid the European bank asset quality reviews (AQRs). So I was just wondering how much longer do you expect this de-risking and deleveraging to continue?
MS. ILYINA: That’s a good question. European banks have made a lot of progress in deleveraging and de-risking so far. In fact, the latest December data show that since May 2012 the aggregate balance sheets of euro area banks have shrunk by about 13 percent.
However, if we look back at what the deleveraging goals were, they haven’t really been fully met yet. So there is probably still more to come.
Specifically, while it’s true that funding pressures, for example, have been significantly reduced and many European banks have repaid the LTRO funds, many banks still need to reduce their reliance on wholesale funding, and some are still facing asset quality and profitability pressures and, hence, need to make further adjustments to meet the new capital and liquidity standards. And, in some cases, banks are still very large relative to the size of their home country GDP.
And ahead of AQR/stress tests, weaker banks will certainly be under pressure to accelerate some of their asset disposals. So the concern here for CESEE region specifically is that an AQR/stress tests may provide a new impetus for banks to cut back external assets through run –offs or limits on asset growth including in Eastern Europe, which is not a new concern. The main issue is that banks deleveraging remains a work- in-progress.
MR. HUSAIN: If I can add to this. This is actually just going back to the inception of the Vienna Initiative in the aftermath of the global crisis. One of the concerns that policymakers and international financial institutions had, particularly for the CESEE region, in the aftermath of the crisis, was related to the fact that banks, Western banks generally, had very high loan-to-deposit ratios in the region. This had arisen in the boom years prior to the crisis, when banks had expanded credit rapidly through external funding.
So, during the crisis and immediately afterward, there was concern that this funding might be withdrawn very rapidly. In the event, that didn't happen. The Vienna Initiative, I think, was part of the reason why it didn't happen, but there were other factors as well. For example, banks found that it was profitable to stay in the countries generally.
Now I guess five years on, with global financial market conditions changing and, in particular, with global liquidity starting to tighten and the transition to tighter global liquidity conditions underway, the concern is that this may precipitate a further reduction in exposures, and that the reduction in exposures might be at a more rapid pace than we've seen in the last few years.
So far, that appears not to be the case, and that’s the point in the DCM that in Q3 the pace of funding reductions did continue, but it was broadly at the pace that we had seen earlier.
Some people had been concerned that, as global liquidity conditions tightened, the pace would accelerate. As of the third quarter, that hasn’t happened. But I don't think we're out of the woods yet as the transition to tighter global liquidity is very much still underway and will remain so for quite some time ahead. I think the concern that funding conditions and, therefore, credit conditions in the CESEE region could tighten further very much remains at play.
QUESTIONNER: I wanted to have your judgment on the workings of the Vienna Initiative 2.0. So what has changed, and how is the Vienna Initiative working in your judgment?
MR. HUSAIN: Thank you for this question. This is something that we have been obviously very much interested in. First, the focus of the Vienna Initiative has indeed changed and, in particular, even that of the DCM. It used to be called the Deleveraging Monitor in the early days, and last year we decided to rename it the Deleveraging and Credit Monitor partly to reflect a change in focus, that it wasn’t just funding conditions that we were concerned about and monitoring. But, actually, ultimately, we are even more interested in what was happening in credit in the economies of the CESEE region.
The Vienna Initiative itself has helped, first and foremost, bring policy-makers in host and home countries, as well as banks, the local subsidiaries as well as their parents, together to discuss the impact of any policy changes that they are considering to discuss the impact before implementing the changes. I think, by and large, the process of reduction of external funding to the CESEE region has proceeded in a smooth way.
And, as you may have seen, we did an in-depth study in April of last year—The IMF’s bi-yearly Regional Economic Issues—looking at the banking systems in the CESEE region and what the future might hold for them. One of the conclusions of that study was that increased reliance on domestic funding was probably a good idea, both from the perspective of banks and from the perspective of the home economy policymakers. It was considered a safer and more stable environment.
But the question was that the transition to increased domestic funding needs to happen in an orderly and smooth pace. So far, for the region on average, that has been the case, but what it also means is that it has some further way to run.
And the idea of the Vienna Initiative is to help ensure that it continues at a smooth and orderly pace, that it doesn't go too far, too fast.
MS. ILYINA: Just one thing to add. Aasim mentioned that the loan-to-deposit ratios in banking systems in CESEE countries were very high at the start of the crisis. And they have declined quite a bit, but they still remain high, which means that banks will probably continue reducing parent bank funding and shifting towards more local funding. So this is basically the shift to the new funding model, where lending in those countries is going to be primarily financed by local deposits. So, currently, on average, the loan-to-deposit ratio is still about 115 percent. There is therefore some way to go to complete the adjustment.
MS. ZUCCHINI: Thank you very much for dialing in today and have a wonderful day.