Thank you very much. Let me start my remarks in a light way and perhaps a somewhat unusual approach, as Hungarians sometimes do, even in economics. On my way to Ljubljana, I stopped to buy a book—The Alchemists—which was named business book of the year. The book is about three famous central bankers, calling themselves alchemists without adding a question mark. I think the difference between an alchemist and a central banker is that alchemists never managed to produce gold, which was their main target. However, central bankers today try to use several new tools and facilities with the objective of supporting economic recovery, which is why I think it is an interesting book to read, even though the title may not be very adequate.
I thought about my role in this important meeting of highly respected representatives, politicians, and academics. It is perhaps a bit of a special one because I represent an international financial institution that directly invests in the real economy, while here we are talking a lot about the national banks’ role, the central banks’ role, the banking sector in general, and the special case of foreign-owned banks, etc. The role of EIB in the European economy is therefore somewhat different.
But first let me ask a question. I always begin with a question. I follow J.F. Kennedy’s way of thinking, who once suggested not seeking the Republican or Democratic answer, but simply the
right answer. But I think that before doing that we first have to think about the right questions!
What are the prospects for credit growth?
I think discussing the prospects for credit growth is indeed important, but the more fundamental issue concerns the revitalization of economic growth in Europe and all around world, as was mentioned earlier by the Croatian Governor. So what is the macroeconomic situation in the world, and what is the macroeconomic situation in the countries that we have mentioned? Let me highlight only one figure about these countries––GDP growth. Several countries have not reached the level of economic growth and economic performance that they had before the crisis, e.g., Hungary and some other countries. At the same time, we cannot generalize. Poland is absolutely different because the Polish economy is in a sustainable economic situation and faces comparably few problems in the banking sector, which supports its economic growth and sustainable public finances.
Where are we then? Are we in the middle of the crisis, after the crisis, or before the next crisis? Well, I know that—in regard to the economy—we are always before a crisis, and we never know when the new crisis will begin.
I think the last crisis was not a normal cyclical crisis, and that’s why I propose quite different tools to be used for the management of the consequences of the crisis.
The situation is quite controversial, and I think it is important to make clear this distinction when we discuss the problems in and outside the eurozone. There are some very important economies outside the eurozone as well (e.g., Great Britain) and some of them are actually not candidates to join the eurozone. So it is important to see the whole banking sector, not only the part of it that is in the eurozone. The banking regulation and the ECB must observe it as a single sector.
In the CEE region, the foreign-owned banks have a special role.
The parent companies of these foreign-owned banks settled mainly, but not exclusively, in the eurozone. That’s why many of them can be regarded as banks of the eurozone, but others not.
Furthermore, there is a very significant, active, and consequently very important financial institution in this region, which comes from outside the EU.
In summary, I think there are new challenges and we have to find new answers for new challenges.
I mention the phrase “global metamorphosis’” because—as you may know—Zeus had several metamorphoses, but always with the same aim, yet it was not a politically correct one. We have a politically correct aim because we want to increase the investment capacity of governments, economies, and by extension the competitiveness of the EU. The current global economic situation is a big challenge for the European countries and EU member states. The investment bank’s tools and opportunities are different from those of the central banks. EIB has several special activities, and the most important ones are its lending, blending, and advising activities, which are well known.
Advising capacity and advising activity are quite important for the creation of new investment projects that are bankable for the commercial banking sector. The impact of such projects on the economy is good, not only for economic growth, but also for the employment situation. Furthermore, I think one of the key challenges for the future of Europe is the issue of youth unemployment, because the level of youth unemployment is very high in several countries and we will have to do everything we can to reduce it. Besides project finance and investment advice, we operate our advisory services for these dedicated goals as well.
The EIB is not only a single bank, but also a banking group. This is important because of the opportunities for investing offered by the European Investment Fund (EIF), the EIB Group’s equity subsidiary, which also provides guarantees for SMEs. It is quite
important when, in this region and also in other regions of Europe, companies are partially undercapitalized.
By way of conclusion, I would like to mention that when we are working together with the commercial banking sector, we also cooperate with the other international financial institutions.
Our cooperation with other international financial institutions, the national promotional banks, and the commercial banks is excellent. I would point out that the cooperation with the national promotional banks (even though some countries don’t have such an institution, e.g., Slovenia and Poland), but where they exist, the cooperation is highly appreciated and fruitful.
There is enough liquidity available in the markets and the funding is cheaper than previously. The question should be posed differently; because the real question is not who should provide the financing, but rather what can be financed in a responsible manner to increase growth? That is the question for the future.
C. Discussions
Following the presentations, participants from the floor raised a number of issues, mainly centered on the relative importance of foreign- and state-owned banks in explaining the credit boom and its eventual bust.
One participant noted that banks had had differing experiences with the growth of NPLs after the credit boom, with some being more successful than others in maintaining credit quality. He suggested that western banks, in particular, had benefited from better risk management during the boom years, which—in turn—
had helped insulate them when the bubble burst. He also wondered whether state-controlled banks had been subject to insufficiently rigorous governance and risk management.
Another participant acknowledged these differences, but suggested that it was the banks’ business models rather than their ownership that was the more important factor.
In his experience, more important factors were the fact that banks that had entered the region as green-field investors, versus having partnered with an established entity, and the quality of management ownership. And private ownership was also no guarantee of proper risk management. Moreover, he questioned whether European rules for state aid could be applied easily in the region, given the already heavy involvement of the public sector in the financial sector.
Another comment was that public ownership of banks could be helpful in times of crisis, since it facilitated the crisis response. While there were legitimate concerns about the inefficiency of public banks, state control of banks was less of an issue in determining the efficiency and stability of the financial sector than the quality of public institutions and their policies.
A contrasting view was that public sectors were tempted to direct credit in ways that delayed corporate restructuring and the recognition of losses, which created inefficiencies in the allocation of credit and the economy more generally. These problems were compounded by shortcomings in bankruptcy law, tax law, and the efficiency of credit allocation.
Another participant argued that the improvement in corporate governance brought by foreign-owned banks was immense, especially given that they were less subject to vested interests. However, he cautioned that foreign banks tended to share common risk methodologies, often based on historical data and relationships that were not attuned to the specificities of the CESEE region. This created the risk of an overly procyclical reaction to a crisis.
Panelists’ responses to questions
Resource mobilization. One panelist suggested that a key issue in the region was the dearth of funding for investment, and for this reason he viewed as significant the Juncker Plan and a similar proposal by the Polish Finance Minister, which promised to mobilize resources from the public and private sectors, as well as from international institutions. He viewed prospects for a European consensus on these proposals as encouraging.
Bank ownership. Several panelists expressed their views on this issue:
One panelist stressed the critical importance of high-quality corporate governance and management, which needed a proper balance between foreign headquarters and local staff. At the same time, the domestic supervisory framework could play an important role in ensuring that (i) foreign investors in the banking sector took an appropriately long-term view of their participation, and (ii) there was healthy competition between domestic and foreign-owned banks. This emphasis helped explain the relatively favorable experience of the foreign banks in Poland. For example, to help encourage this longer-term perspective, the Polish supervisor had insisted that foreign-owned banks be quoted on the Warsaw stock exchange, which helped improve local capital markets and the transparency of bank operations. Another key to success was an effective deposit guarantee scheme, which in Poland was solely bank funded, helping to avoid the transfer of risk to the public sector. The Polish authorities’ conservative response to bank stress—the central bank was not asked to provide liquidity to insolvent banks—had also encouraged strong risk management and corporate governance.
Another panelist strongly disagreed with the notion that state ownership was irrelevant for the quality and health
of the banking sector. In his view, it was not sufficient to simply appoint strong managers, because the experience of the crisis illustrated clearly that state-owned banks had performed the worst. Indeed, the relatively high costs of state-ownership of banks could be seen not just in the region but globally.
A third panelist agreed, but also noted that strong competition was needed to ensure efficiency, either on the funding side or the lending side. The experience in Austria illustrated that public ownership was particularly problematic when the bank operated in a niche market and was not subject to healthy market forces. He also cautioned that the recently agreed rules on bank resolution could impair the ability of authorities to respond quickly to banking sector stress, since the consultation processes appeared to be cumbersome. He suggested that these rules still needed to be fine-tuned to enable a quick and effective response to crises.
The final panelist agreed that the response of the state-owned banks in the crisis had tended at times to be unhelpful, especially given their reluctance to write off loans. He also viewed the deleveraging process as a natural response to the excessive inflow of capital that had occurred during the boom years, and was not something that could be resisted.