1 © european bank for reconstruction and development 2010 | financial systems and economy -...
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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
© 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:
• 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
© European Bank for Reconstruction and Development 2010 | www.ebrd.com
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)
© European Bank for Reconstruction and Development 2010 | www.ebrd.com
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
© 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
• 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
* Data refer to 2011 or latest available. Source: Central banks
© European Bank for Reconstruction and Development 2010 | www.ebrd.com
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)
* Data refer to 2011 or latest available. Source: Central banks
• 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
© European Bank for Reconstruction and Development 2010 | www.ebrd.com
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 BankerFinancial InstitutionsWestern Balkans, Croatia, Belarus, Moldova GTC building, Bulevar Zorana Djindjica 64a, 11070 Belgrade, SerbiaTel: +381 11 2120638Email: [email protected]
www.ebrd.com