Central Europe’s Decentralized Bank Planning
The IMF while considering or providing renewed support from emerging sovereigns battered by the Eurozone crisis, has released a strategy paper charting a more localized cross-border banking path after the woes of the past decade’s unified structure. It found that one third of the previous funding “boom” evaporated from 2008-12 on shrunken demand and supply as the “centralized” model faded for both balance-sheet and regulatory reasons. The transition toward more domestic capital and deposit reliance is warranted but may go “too far and fast” in eroding intra-group capacity and skirt legacy challenges of high NPL ratios and securities market underdevelopment, the document believes. Throughout twenty countries covered foreign bank ownership ranges from 50-90 percent, due mainly to post-communist privatization where networks were acquired by West European strategic investors. Their presence brought management, technology and diversification benefits but excess credit which rose fivefold to $1 trillion just before the Lehman crash, with the pace fastest in Bulgaria and Ukraine. Where overseas control was greatest as in the Czech Republic and Estonia domestic supervisors were unable to apply countermeasures as half the region also registered 10-percent plus of GDP current account gaps and euro-borrowing exploded at cheaper cost. With reversal came deep recessions but under the Vienna Initiative signed by headquarters executives with the IMF and EBRD parents agreed to maintain exposure rather than exit although official rescues were still required in Latvia and elsewhere. A second pressure wave began in mid-2011 after pan-European stress tests by a new agency and introduction of stiffer Basel III capital and liquidity rules. From then until the end of last year ex-Russia and Turkey lines were cut another $80 billion or 5 percent of GDP according to BIS statistics. Places like Hungary and Slovenia saw the biggest reductions, as credit growth “ground to a halt.” Outside Ukraine the international presence has stayed intact as asset sales have taken place between no-resident parties, while in Russia smaller retail operations were shed before WTO entry. The analysis concludes that future direction will be guided by self-imposed and external oversight limits to central reach with the post-Cyprus trend toward bondholder bail-in also featuring as unsecured debt expense becomes “permanently higher.”
Serbia may finally be on track for another Fund arrangement after it was recommended for EU membership with an end-April deal on Kosovo relations which will cede police and judicial responsibilities. The stock market rallied on the breakthrough as inflation may also head toward single digits with the central bank on hold after rate hikes over 200 basis points. The FYR-Macedonia, which has a Fund prequalified contingency line, also won political reform praise as it seeks EU entry and tries to emerge from recession. Albania is also in the queue as it copes with a banking NPL number above 20 percent going into mid-June elections with the opposition Socialists in position to again lead the government after a central coalition party defection.
