Heading for Financial Stability
in Western Balkans
Aleksandra Vukosavljević, Principal Banker
Financial Systems and Economy - Responses to The Challenges of Crisis
Business Info Group
Hyatt Regency Hotel, Belgrade
2nd November 2012
1
© 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
© European Bank for Reconstruction and Development 2010 | www.ebrd.com
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:
Coherent and
Comprehensive
Action
•
1)
2)
Restore Health
in the Balance
Sheets
Remove
Uncertainty
about Funding
- NPLs
- Resolution
- Recapitalization
- Sovereign/Bank link
- Banking union
Even then, recovery is likely to be slow and relatively weak !
Global Financial Stability Report, Restoring Confidence and Progressing on Reforms, OCTOBER 2012, IMF
From Recession to Recovery: How Soon and How Strong By Prakash Kannan, Alasdair Scott, and Marco E. Terrones *
© European Bank for Reconstruction and Development 2010 | www.ebrd.com
RECOVERY
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: Periphery Minus Core CDS Spreads (in bps)
 Banking union
 harmonising national prudential regulations
 bank resolution and deposit insurance
•
Legal, technical and political challenges remain
•
Timing is important!
1)
2)
Global Financial Stability Report, Restoring Confidence and Progressing on Reforms, OCTOBER 2012, IMF
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
© European Bank for Reconstruction and Development 2010 | www.ebrd.com
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
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
© European Bank for Reconstruction and Development 2010 | www.ebrd.com
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
•
•
FCY loans in total bank loans
100
80
Flexible
exchange
rates
facilitate
the
necessary
adjustment of economy
Function is constrained due to
high level of FCY bank loans
60
40
20
0
Albania
Bosnia and
Herzegovina
Bulgaria
* Data refer to 2011 or latest available.
Source: Central banks
© European Bank for Reconstruction and Development 2010 | www.ebrd.com
Croatia
FYR
Macedonia
Romania
Serbia
A Leap to ...
- The Complete Policies Scenario 1
• Joint efforts on the euro area and national level
Non-performing loans (% of total credit)
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
* Data refer to 2011 or latest available.
Source: Central banks
– banking sector clean up
State-ownership (% of total assets)
• 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
* Data refer to 2011
1) Global Financial Stability Report, Restoring Confidence and Progressing on Reforms, OCTOBER 2012, IMF*
© European Bank for Reconstruction and Development 2010 | www.ebrd.com
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
© European Bank for Reconstruction and Development 2010 | www.ebrd.com
Thank you!
Aleksandra Vukosavljevic
Principal Banker
Financial Institutions
Western Balkans, Croatia, Belarus, Moldova
GTC building, Bulevar Zorana Djindjica 64a,
11070 Belgrade, Serbia
Tel: +381 11 2120638
Email: Vukosava@ebrd.com
www.ebrd.com
© European Bank for Reconstruction and Development 2010 | www.ebrd.com