1 © european bank for reconstruction and development 2010 | financial systems and economy -...

1© European Bank for Reconstruction

and Development 2010 | www.ebrd.com

Financial Systems and Economy - Responses to The Challenges of CrisisBusiness Info Group

Hyatt Regency Hotel, Belgrade

2nd November 2012

Heading for Financial Stability in Western Balkans

Aleksandra Vukosavljević, Principal Banker

© European Bank for Reconstruction and Development 2010 | www.ebrd.com

Heading for Financial Stability in Western Balkans

A. Financial Stability in Euro area – Snapshot– Restoring confidence

B. Financial Stability in Western Balkans– So far so good– Need to Guard Against Further Shockwave

C. The Complete Policy scenario

D. Banking System Outlook in Western Balkans


Financial stability in Euro Area - Snapshot

• Regulatory reforms to make the financial system safer

• Financial systems still play a dominant role in spreading stress due to:– very tight funding markets – worsening asset quality– intense deleveraging pressures

• Experiences with previous financial crises especially those involving deleveraging:

• Even then, recovery is likely to be slow and relatively weak !1) Global Financial Stability Report, Restoring Confidence and Progressing on Reforms, OCTOBER 2012, IMF2) From Recession to Recovery: How Soon and How Strong By Prakash Kannan, Alasdair Scott, and Marco E. Terrones *

Coherent and Coherent and Comprehensive Comprehensive

ActionAction

Restore Health Restore Health in the Balance in the Balance

SheetsSheets

Remove Remove Uncertainty Uncertainty

about Fundingabout FundingRECOVERYRECOVERY

- NPLs- Resolution- Recapitalization

- Sovereign/Bank link- Banking union


Financial stability in Euro Area – Restoring Confidence

• Remains the key policy challenge to reverse fragmentation within the Euro area1

• Fragmentation: evident via rising spreads particularly in peripheral countries difficult because member states can’t relay on:

– independent monetary policy– floating exchange rate regime as a shock absorber– captive domestic investors base in LCY

• Liquidity oriented policies (LTROs, OMT2) can buy time•

• Additional safety control devices are needed: Banking union harmonising national prudential regulations bank resolution and deposit insurance

• Legal, technical and political challenges remain

• Timing is important!

1) Global Financial Stability Report, Restoring Confidence and Progressing on Reforms, OCTOBER 2012, IMF2) Long-term refinancing operations and Outright Monetary Transactions Program

Source: Bloomberg, IMF staff estimates Note: CDS data are weighted by bank assets, 20-day moving average

Periphery Minus Core CDS Spreads (in bps)


1) The Steering Committee of the Vienna Initiative 2 proposes enhancements in cross-border supervision to European authorities, these focus on critical aspects of home-host cooperation. The EBRD, EIB, IMF, World Bank, and European Commission are members of the Steering Committee as well as Italy and Romania

Financial stability in Western Balkans: - So Far So Good!• So far relatively smoothly navigated through global shocks

• Thanks to large capital and liquidity buffers in place before the crisis

• Banking systems are struggling with deleveraging pressures, worsening asset quality and slow growth

• WB Countries are most vulnerable because of:

– direct exposure to the euro area

– similarities they bear to the countries in the euro area periphery

• Cross border connections:

– beneficial most of the time

– but during a crisis may be associated with instability1

Share of banks owned by Eurozone-based banks

* Data refer to 2011 or latest available. Source: Central banks


Financial stability in Western Balkans: - Need to Guard Against Further Shocks

• Guard against potential further shockwaves while managing a slowdown in growth•

• Past credit and asset price booms: – external debt burdens – limited space for expansionary macroeconomic policy

• The scope to provide fresh policy stimulus is constrained which underlines the need to cleverly manage country specific challenges

• Low interest rate environment is crucial for now

• Flexible exchange rates facilitate the necessary adjustment of economy

• Function is constrained due to high level of FCY bank loans 0

20

40

60

80

100

Albania Bosnia andHerzegovina

Bulgaria Croatia FYRMacedonia

Romania Serbia

FCY loans in total bank loans



A Leap to ...- The Complete Policies Scenario 1

• Joint efforts on the euro area and national level

I. Measures at the euro zone level:

– restore confidence

– reverse capital flight

– reintegrate the euro zone

II. Measures at the national level:

– growth-friendly fiscal consolidation

– structural reforms

– banking sector clean up

1) Global Financial Stability Report, Restoring Confidence and Progressing on Reforms, OCTOBER 2012, IMF*

Non-performing loans (% of total credit)


• Efficient Clean up:

– Full loss recognition

– Adequate capitalisation

– Write off &restructuring

– Full protection of banks liabilities on the sovereign level can cause more harm than good!

• Trade-off Between Growth and Safety

State-ownership (% of total assets)

* Data refer to 2011 Source: Central banks


Banking Systems Outlook in WB– Not Much of a Growth

• No stunningly high credit growth:

– deleveraging is likely to continue going forward

– parent banks are targeting lower L/D ratios and less cross border funding

– outlook for a medium-term profitability will remain low

• Increasing efficiency:

– pressure to deliver some shifts in their operational policies and efficiency

– big banking groups with advantages of scale

– markets could become more concentrated

• Focus on:

– Banking system reform

– Capital markets development

• Room remains for IFIs

Real GDP growth (per cent)

Source: EBRD


Thank you!

Aleksandra Vukosavljevic

Principal BankerFinancial InstitutionsWestern Balkans, Croatia, Belarus, Moldova GTC building, Bulevar Zorana Djindjica 64a, 11070 Belgrade, SerbiaTel: +381 11 2120638Email: [email protected]

www.ebrd.com

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