29 April 2013

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

This paper discusses the important role that foreign banks, mainly from Western Europe, have played in the banking systems of CESEE, in terms of both 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.

1. Foreign banks, mainly from Western Europe, play an important role in the banking systems of CESEE, both in terms of ownership and funding.
2. Benefits and pitfalls from the prevalence of foreign banks were very evident in CESEE. The incidence of banking crises fell sharply, banking practices improved, foreign banks helped absorb local shocks, and access to credit rose dramatically. However, the region’s economies became closely exposed to the large swings in funding from foreign banks.
3. Overall, strong foreign ownership seems to have served the region rather well and the associated key benefits are likely to persist.
4. Since late 2008 foreign banks have been rebalancing their funding toward domestic sources. This reflects banks’ frustration with “centralised” funding models since the 2008/09 crisis. A shift toward more “decentralised” funding model in CESEE is hence well underway.
5. Pushing ahead with establishing the envisaged integrated European financial architecture would remove many of the drawbacks of “centralised” banking, thereby diminishing the need for a large change in the composition of funding. Improving home-host cooperation more generally to better manage cross-border banking, including through more coordinated use of macro-prudential policies, would do so too.

Full article

Press release, 26.4.13

See also Transcript of a Conference Call on the Launch of the IMF’s New Series "Central, Eastern and Southeastern Europe—Regional Economic Issues” 25.4.13

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