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CEE financial integration has supported growth….

How to avoid another serious financial crisis: Harnessing the benefits of financial integration Manfred Schepers, Vice President Finance, EBRD. CEE financial integration has supported growth…. Asset share of foreign-owned banks in total banking system assets.

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CEE financial integration has supported growth….

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  1. How to avoid another serious financial crisis: Harnessing the benefits of financial integrationManfred Schepers, Vice President Finance, EBRD

  2. CEE financial integration has supported growth…. Asset share of foreign-owned banks in total banking system assets • Financial integration was a successful growth strategy. • Different for CEE vs other emerging markets where this link has been weak. • EU framework, accession, € area and commitment of foreign banks explain this. • In crisis parent banks supported subsidiaries and maintained exposures and capital coverage.

  3. … though also instigated vulnerabilities. Domestic bank credit in foreign currency (% of GDP) • Foreign banks’ role in the CEE region contributed to macro and financial vulnerabilities especially FX exposures. • Excessive credit growth was linked to global credit growth and competition for market share. • Stock of private sector FX debt currently holds back the recovery today.

  4. Local Currency and Capital Market Development • To reduce systemic risks associated with FX lending to unhedged borrowers • Removes key vulnerability that impacts bank funding and valuation • Enhances monetary policy effectiveness, and scope for counter-cyclical use of exchange rate instrument • Encourages domestic saving and investment • Good for sustainable growth • Good for external stability • less reliance on foreign funding • less external debt accumulation • Part of the quest for a better “growth model” reliant on more resilient funding and capital structures.

  5. Opportunity for policy action • Post-crisis convergence across the CEE region • Vulnerabilities resulted from FX lending as well as poor information standards and credit assessment • Unsustainable external imbalances now widely recognised • NOT a detour for eventual euro zone members • Post-crisis macro conditions make local currency a more rational proposition • Narrowing interest rate differential vis-à-vis FX lending rates • Regulators forcefully addressing FX lending • Creates a new demand for LCY lending which cannot be satisfied without domestic capital markets development • Insurance and pensions industry positioned for growth

  6. Overall coordinated approach is needed • Governments need to focus on all factors that prevent development of local currency & capital markets • Histories of inflation volatility and lack of macroeconomic credibility will take time to redress • Need to address inadequate market CM infrastructure, and lengthen maturity structure and liquidity of sovereign debt markets • Commercial banks: • Differentiate lending standards, taking account of FX risk • Engage more actively across all aspects of LCY capital market • International Financial Institutions: • To help through lending, investment and funding activities, making local markets more liquid, transparent and resilient

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