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World Economic and Financial Surveys

Central, Eastern and Southeastern Europe

Financing Future Growth: The Evolving Role of Banking Systems in CESEE

April 2013
©2013 International Monetary Fund

This is the first issue of a new publication “Central, Eastern and Southeastern Europe—Regional Economic Issues.” This new series, produced by the IMF’s European Department, contains analytical, one-off pieces on issues of interest to the CESEE region. We hope this new series will enrich the economic debate within this important region, and prove useful for policy makers, academics, and the broader public alike.

This issue takes up the topic of “Financing Future Growth: The Evolving Role of Banking Systems in CESEE.” It discusses the important role that foreign banks, mainly from Western Europe, have played in the banking systems of CESEE, both in terms of ownership and funding, and raises the question to what extent banking in CESEE will change as a result of the global economic and financial crisis. This paper was prepared for a joint IMF/Czech National Bank Conference on the same topic, which took place on April 26th in Prague.


Contents
EXECUTIVE SUMMARY
I.  CONTEXT
II.  THE BOOM-BUST OF FOREIGN BANK FLOWS INTO CESEE
  The Boom Years: 2003–08
  The Reversal of Bank Flows: 2008–12
  Were Funding Developments Demand or Supply Driven?
  Did Foreign Banks Behave Differently?
III.  STRUCTURAL FACTORS SHAPING BANKS’ NEW FUNDING MODELS
  Lessons Learned from the Boom-Bust Cycle in CESEE
  New Global Market and Regulatory Forces on Parent Banks
  Banking Union
  Attractiveness of the CESEE Banking Markets
IV.  POLICY IMPLICATIONS
BOXES
1. The BIS Banking Statistics
2. The Vienna Initiative and the Vienna 2 Initiative
3. The Evolving Global Regulatory Agenda and Its Impact on CESEE
FIGURES
1. CESEE: Foreign Ownership and Foreign Funding of the Banking System
2. CESEE: Credit Growth and Funding from BIS-Reporting Countries' Banks to Banks in CESEE, 2003-08
3. CESEE: Asset Share of Foreign Banks in 2008 and Increase in Funding of BIS-Reporting Countries' Banks to CESEE Banks during 2008–08
4. CESEE: Funding from BIS-Reporting Countries' Banks to Banks and Nonbanks in CESEE during Boom Years
5. CESEE: The Building Up of Imbalances
6. CESEE: The Boom in Foreign Currency Loans, 2003–08
7. CESEE: Change in External Positions of BIS-Reporting Countries' Banks, 2008:Q4– 2012:Q3
8. CESEE: Debt-Funding from BIS-Reporting Countries' Banks and GDP Growth
9. CESEE: External Position of BIS-Reporting Countries' Banks vis-à-vis CESEE, 2003:Q1– 2012:Q3
10. CESEE: Change in External Positions of BIS-Reporting Countries' Banks vis-à-vis CESEE, 2003:Q1– 2012:Q3
11. CESEE: Growth of Credit to Households and Enterprises
12. Selected CESEE Countries: Nonfinancial Private Sector Saving-Investment
13. CESEE: Funding by Western Banks and Their Funding Costs, 2010:Q1–2012:Q3
14. CESEE: Real GDP Growth
15. Decomposition of Credit Growth Slowdown in 2008–11
16. Credit Growth by Subsidiaries of Raiffeisen, 2005–07
17. CESEE: Average Annual Credit Growth by Banks, 2001–11
18. Why Foreign Banks Credit Growth Slowed Down More than that of Domestic Banks during 2008–11
19. Profitability of Western Banks' Operations in CESEE and at a Group Level, 2003–11