## Lost & Found in Eastern Europe: Replacing Funding by Western Europe's Banks

_IMF Blog, June 13, 2012_

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## Bibliographic details
- Authors: Christoph Kling
- Published: June 13, 2012

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### Overview
- With Western Europe’s banks under pressure, parent-bank funding for subsidiaries in emerging Europe is no longer guaranteed.
- Parent bank deleveraging—selling off assets, raising capital, and reducing loans, including to their subsidiaries—need not translate into a reduction of bank credit in emerging Europe if other funding sources fill the gap.
- A credit crunch can be avoided as long as parent banks reduce exposures gradually and domestic deposits, other banks, and local financial markets replace the withdrawn funding.

### Dependence of emerging Europe on Western European banks
- Ownership
  - Foreign banks control more than half of the banking systems in most of Central, Eastern, and Southeastern Europe.
  - Their share exceeds 80 percent in Bosnia, the Czech Republic, Croatia, Estonia, Romania, and Slovakia.
  - Only in Russia, Ukraine, Belarus, Moldova, Slovenia, and Turkey do they not dominate.
- Funding
  - Foreign banks have lent up to 60 percent of GDP to countries in the region.
  - The average stands at 27 percent of GDP.
  - Roughly half of it is to banks, and direct cross-border lending to households and firms accounts for the rest.
- Historical impact
  - When western banks were abundant with funding before the crisis, they bankrolled much of the region’s credit-driven domestic demand boom (with exceptions such as the Czech Republic).
  - When the global economic crisis hit in 2008, funding for the region came to an abrupt halt, and most countries fell into deep recessions.

### Recent developments (second half of 2011)
- Context
  - Western banks were under intense funding pressures before the European Central Bank provided relief by launching its 3-year refinancing operations.
- Observed changes
  - Western banks reduced their funding to banks in the region by 8 percent.
  - During the same period, banks in Eastern Europe managed to attract substantial additional domestic deposits.
  - Combined funding from both sources still grew in almost all countries, with the notable exceptions of Slovenia and Hungary.

### Policy recommendations — strengthen domestic buffers and diversify funding
- Promote stable domestic financial systems so depositors continue to entrust savings to banks that intermediate them effectively.
- Maintain high standards for liquidity and capitalization.
- Sort out nonperforming loans, which are still high in much of the region.
- Develop additional funding sources, for example by promoting local currency financial markets.
- Prepare for an escalation of financial tensions at home or abroad by upgrading frameworks for emergency support and bank resolution, and ensuring they would work smoothly in practice.
- Implement contingency planning, tight monitoring of banks, and close coordination between financial supervisors in the banks’ home and host countries.

### Coordination, orderly deleveraging, and cross-border considerations
- Ensure deleveraging remains orderly; sudden large-scale exposure reductions of foreign banks would be difficult to compensate and would pose challenges for the balance of payments.
- Home and host country bank supervisors should work together if a cross-border bank needs support or must be resolved.
- Supervisors should keep each others’ interest in mind and avoid sudden and unilateral actions with adverse consequences for the other.
- The Vienna 2.0 initiative reflects efforts by officials, bankers, and regulators to improve coordination.
- Some gradual and orderly deleveraging of western parent banks could be beneficial by reducing the still high external debt in many countries—but "orderly" and "gradual" are essential.

### Key statistics and facts (verbatim)
- Foreign banks control more than half of the banking systems in most of Central, Eastern, and Southeastern Europe.
- Their share exceeds 80 percent in Bosnia, the Czech Republic, Croatia, Estonia, Romania, and Slovakia.
- Only in Russia, Ukraine, Belarus, Moldova, Slovenia, and Turkey do they not dominate.
- Foreign banks have lent up to 60 percent of GDP to countries in the region.
- The average stands at 27 percent of GDP.
- Roughly half of it is to banks, and direct cross-border lending to households and firms accounts for the rest.
- Western banks reduced their funding to banks in the region by 8 percent in the second half of 2011.
- The European Central Bank launched its 3-year refinancing operations in that period.
- Exceptions where combined funding did not grow: Slovenia and Hungary.
- Nonperforming loans remain high in much of the region.
- Initiative name: Vienna 2.0.

*Source: Lost & Found in Eastern Europe: Replacing Funding by Western Europe's Banks — Christoph Kling, June 13, 2012*

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## References

- [https://www.imf.org/wp-content/uploads/2012/06/deleveraging-chart-2.jpg](https://www.imf.org/wp-content/uploads/2012/06/deleveraging-chart-2.jpg)
- [https://www.imf.org/wp-content/uploads/2012/06/slide2-3.jpg](https://www.imf.org/wp-content/uploads/2012/06/slide2-3.jpg)
- [nonperforming loans, which are still high in much of the region](http://blogs.imf.org/2012/03/29/debt-hangover-nonperforming-loans-in-europes-emerging-economies/)
- [Vienna 2.0](http://www.imf.org/external/np/sec/pr/2012/pr1280.htm)

_Source: https://www.imf.org/en/blogs/articles/2012/06/13/lost-found-in-eastern-europe-replacing-funding-by-western-europes-banks_