Acerca de los instrumentos de la política de cohesión

Given the importance of foreign-owned banks in CEE banking systems established earlier in this Chapter, we pay particular attention to the behaviour of the parent banks. As the GFC hit Western Europe it was questionable whether the parent banks would manage to support their subsidiaries and branches in CEE countries. Another disadvantage of non-euro area CEE countries was their restricted access to euro liquidity and the ECB’s collateral policy. Namely, the near-paralysis of the euro-area interbank money market after the collapse of Lehman Brothers meant that commercial banks in Central and Eastern Europe were largely cut off from euro liquidity (Darvas, 2009). Finally, the possibility of contagion, i.e. intra- regional spill-overs, was also among the major fears for CEE countries. These concerns will be analysed in this sections.

As shown by Berglöf et al. (2009), Mihaljek (2009) and Takáts (2010), in the first year of global financial crisis, outflows of foreign bank loans in Central and Eastern Europe were quite resilient. In that respect, the presence of mainly foreign-owned banks, especially in smaller economies in CEE (BIS, 2009), appear to have been, less affected by the decline in

100

cross-border loans. Indeed, Berglöf et al. (2009) find that the output drop during the crisis was smaller in countries with a higher share of foreign banks, suggesting that the impact of the crisis would have been even larger without their presence in the region. This finding is also in line with the research of De Haas and Van Lelyveld (2008). They find that “subsidiaries of multinational banks, in sharp contrast to domestic banks, do not tend to reduce their credit supply when the host country is hit by a banking crisis” (p. 27). In contrast, the larger economies of CEE where foreign bank ownership has not been dominant, e.g. Poland, have been confronted with relatively higher contractions in cross-border bank loans (BIS, 2009). Kalusa (2010) explains that the relative large withdrawal of cross-border bank loans from the Czech Republic and Poland, in late 2008, may also have been because of the relatively high level of soundness and liquidity of these countries’ banking systems. However, later studies such as De Haas and Van Horen (2011) find that during the crisis banks foreign bank subsidiaries reduced their lending earlier and faster than domestic banks, whereas domestic banks were a relatively stable credit source. Also, Allen et al. (2011) note that many foreign banks were “locked in” because their local subsidiaries had given long- term loans in the host countries, which could not be recalled. In addition, Popov and Udell (2010) provide evidence that less capitalised Western European banks reduced the credit supply of their Eastern European subsidiaries during the early stages of the global financial crisis.

Comparing CEE to other global emerging regions it becomes evident that in Central and East European countries the post-Lehman decline in cross-border bank lending was relatively mild. In particular, the Western European banks, withdrew less liquidity from the CEE countries than from other regions of the emerging world (Figure 3.23).

101

Source: Cetorelli and Goldberg (2010), Table 1a, 1b.

Figure 3.23 Cross-border flows, % change by source in the global emerging regions in the period before and after the GFC

Notes: This graph indicated the growth of foreign claims (cross-border and foreign exchange claims by local

subsidiaries) over the periods 2006, 3rd quarter to 2007, 2nd quarter, and 2008, 3rd quarter to 2009, 2nd

quarter, from three advanced to three emerging regions, plus growth in loans by domestic banks in the respective emerging region

McCauley et al. (2010) find that local lending by subsidiaries of large international banks was more stable than cross-border lending. This may be due to the European banks’ commitment to the region and the Vienna Initiative. Also, Cetorelli and Goldberg (2010) reveal that countries covered by the Vienna Initiative appear to be associated with mitigated local lending declines. In addition, De Haas et al. (2014) show that foreign banks that participated in the Vienna Initiative were relatively stable lenders than those banks that did not participate. The Vienna Initiative, launched in January 2009, was a coordination effort that brought together international financial institutions, European institutions, regulatory and fiscal authorities and the largest banking groups operating in emerging Europe. Its main goal was to prevent a large scale withdrawal of cross-border banking groups from the region. Bearing in mind the new circumstances and potentially new risks the Vienna Initiative has changed three times since it was launched. The Figure below presents the three phases of Vienna Initiative. -30 -20 -10 0 10 20 30 40 50 60

2006 III - 2007 II 2008 III - 2009 II 2006 III - 2007 II 2008 III - 2009 II 2006 III - 2007 II 2008 III - 2009 II

Emerging Europe Emerging Asia Latin America

102 Figure 3.24 Vienna Initiative improvements

The key objective of Vienna Initiative 1.0 was to preserve financial sector stability in East European markets by maintaining adequate solvency and liquidity in the subsidiaries of western banks. Developed within the context of the “Vienna Initiative” and supported by EBRD, EIB and World Bank, the new Joint International Financial Institution (IFI) provided assistance that enabled banks to maintain their exposure to the region, meet their capital requirements and direct their lending activity to the real sector. For two years, under IFI assistance, the EBRD and World Bank committed to the provision of up to 24.5 billion of financing to financial institutions operating in the CEE and the CIS region, and made available more than €33 billion in crisis-related support for financial sectors in the region (EBRD, EIB, and WB Report, 2011). In Table 3.2 we present for each of the 16 countries of the CEE region the funding commitment, up to a total of €12, 5 billion (column "total signed") and the funding made available, in total more than €17, 5 billion (column "total approved"). Vienna Initiative Vienna Initiative 1.0 (from January 2009 – early 2010) Vienna Initiative plus (from March 2010 – end-2011) Vienna Initiative 2.0(from January 2012onwards) Focus on response to GFC that spilled over to countries of the region Focus on financial crisis prevention Focus on mitigating systemic risk resulting from the

recent EU debt crisis

103 Table 3.2 Delivery on EBRD’s, EIB`s and World Bank`s Commitments under the Joint IFI

Action Plan, up to end 2010 (in millions of Euros)

Source: Joint IFI Action Plan (2011)

The various participants in the Vienna Initiative 1.0 made different commitments. For instance, the host country authorities were responsible for appropriate macroeconomic policies, liquidity support in the local currency irrespective of bank ownership and supporting their deposit insurance schemes (De Hass et al., 2012). Parent bank groups and the home country authorities behind them were responsible for providing funding in foreign exchange and recapitalising subsidiaries where needed (EBRD, 2012). The Vienna Initiative 1.0 successfully achieved its objectives. Banking groups maintained their exposures in the region, continued lending to the production sector, and contributed to the economic recovery in 2010 and 2011.

An interim phase was the Vienna Initiative Plus. In this phase, the Initiative created a platform for public-private cooperation in order to analyse and advice on longer-term issues for future crisis prevention, such as the widespread lending in foreign currencies prevalent in the region. This phase involved group meetings of parent banks, regulators, central banks,

EBRD EIB World

Bank Total approve d Total signed Total disbursed Total approve d Total signed Total disbursed Total approve d Total signed Total disburse d Bulgaria 449 299 181 444 424 224 Hungary 483 467 87 1,596 1,306 851 1043 1 1 Latvia 151 104 127 518 332 147 309 Lithuania 30 30 35 268 213 170 480 10 Poland 585 545 407 2,494 1,918 1,392 218 14 8 Romania 799 431 282 795 700 437 168 90 Slovakia 70 55 35 564 544 363 Slovenia 50 956 791 559 Albania 50 29 25 35 10 0 2 2 Bosnia and Herzegovina 156 154 70 459 334 82 52 12 4 Croatia 159 159 146 913 733 305 141 FYR Macedonia 64 57 10 120 110 75 26 26 24 Montenegro 60 38 6 130 109 56 79 Serbia 447 301 213 664 604 335 139 139 47 Czech Republic 1,349 1,269 995 44 Estonia 155 50 50 Total 3,553 2,669 1,624 11,460 9,447 6,041 2,457 416 176

104

ministries of finance and international institutions in which on-going issues were discussed, such as, NPLs, local currency and capital market development, Basel III etc.

As a response to new dangers to the CEE region, such as Eurozone sovereign debt crisis, in January 2012, the Vienna Initiative moved to a second phase. This time, the crisis affected not only banks but public finances of home countries as well. Vienna 2.0 has a different aim. Namely, instead of external assistance programs, such as Joint IFIs` assistance, the aim is to create sustainable bank business models, involving (i) the deleveraging process of banking groups through cooperation of home and host country supervisors, and (ii) greater reliance on local sources of funding (EBRD, 2012).

The CEE region has also been protected by an additional characteristic that is unique to emerging Europe. Namely, some of the observed countries are members of European Union, while some of them are candidates to European Union. Thus, these countries have developed political ties that produced financial support through European institutions. For example, Hungary, Latvia and Romania received loan packages financed by the EU and IMF. Overall, the strong international crisis response, such as the Joint IFI Action Plan of the EBRD, the EIB Group, and the World Bank Group, played an important role in the restoration of confidence in the European region (EBRD, EIB, and WB Report, 2011).

3.6

Conclusion

By considering both direct macroeconomic influences on financial instability/crisis and the influence of financial/banking structures on the subsequent contagion effects of the global financial crisis, this Chapter will inform the analysis in Chapter 6. Namely, this Chapter provides illustrative statistics and initial analysis of most of the variables that will be used in the CEE model of non-performing loans.

Overall the experience of the global financial crisis suggests that the macroeconomic developments, in particular growth rates, interest rates, exchange rates and excessive credit growth, are important in understanding the impact of the global financial crisis on countries and, correspondingly, in understanding the associated incidence of non-performing loans.

105

Although the GFC resulted in large declines in economic activity, a large slowdown of net capital inflows, higher unemployment and insolvencies, a credit crunch followed by credit quality problems and high ratios of non-performing loans, and bank recapitalizations, full- blown financial crisis was avoided. As noted in section 2.3, the crisis in emerging economies involved currency crises, with large overshooting of exchange rates, runs on banks, and the collapse of systemic banks. However the worst of these outcomes were avoided in the CEE region. While there was a modest credit crunch and high non-performing loans ratios in CEE countries after the GFC, these were of moderate size compared to those in other emerging markets. Namely, the data shows that CEE countries suffered less outflows of bank lending, as a share of existing bank assets, than other emerging regions, and had a share of non- performing loans well below the level seen in several recent crises.

Finally, currently the empirical literature suggests that international bank lending through local branches and subsidiaries is more stable than direct cross-border lending, and indicates that foreign bank subsidiaries reduce their lending during a financial crisis less than domestic-owned banks. That suggests that the impact of the GFC crisis would have been even larger without foreign bank presence in the region and that the same foreign banks that helped create the macroeconomic imbalances and over-indebtedness also helped reduce the impact of the resulting fragility. Those circumstances have indicated why bank lending outflows from emerging Europe were generally more moderate than from other regions (Berglöf et al., 2010). The last section also shows the benefit of private-public co-operation and the role of international financial institutions as coordination mechanisms (Vienna Initiative). This finding suggests that the structure of banking sectors in CEE countries, particularly regarding ownership, had a moderating effect on the transmission of the global financial crisis to these countries. The influence of foreign banks on the quality of loans in these economies will be investigated in Chapter 6.

Amongst researchers there is also a general agreement that the supervision standards and instruments to maintain the banking stability prior to GFC were weak, this argument will be critically assessed in the following Chapter.

106