Addressing Emerging Europes Vulnerabilities: Weak Domestic Markets - - PowerPoint PPT Presentation
Addressing Emerging Europes Vulnerabilities: Weak Domestic Markets and Excessive Forex Exposures A Coordinated Approach Vienna Plus European Bank Coordination (Vienna) Meeting Athens, 19 March 2010 Piroska M. Nagy EBRD
Strong and sustained growth in emerging Europe is in
Time is right to address the region’s twin
There is, again, a collective action and coordination
Call for “Vienna Plus” A road map - let’s do it!
(Per cent) Hungary Slovenia BiH Croatia Czech Rep. Poland FYR Bulgaria Russia Tajikistan Serbia Albania Lithuania Moldova Estonia Romania Kazakhstan Azerbaijan Ukraine Latvia R2 = 0.2988 10 20 30 40 50 60 70 80 90
20 40 60 80 100 120 140 160 180 200 Median growth of BIS lending between mid-2005 and mid-2007 Average credit growth between mid-2005 and mid- 2007 10 20 30 40 50 60 70 80 90
Source: EBRD Transition Report 2009
10 20 30 40 50 60 70 80 90 100 L a t v i a E s t
i a A l b a n i a S e r b i a C r
t i a L i t h u a n i a T a j i k i s t a n B u l g a r i a H u n g a r y U k r a i n e * K a z a k h s t a n M
d
a P
a n d R u s s i a C z e c h R e p .
Percent
End-June 2004 End-June 2008
Source: EBRD Transition Report 2009
ARM AZE BUL EST HUN KAZ LAT LIT MOL POL RUS SER TUR UKR ALB CRO FYRM SLV
0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 0.0 0.2 0.4 0.6 0.8 1.0 1.2
Asset share of foreign-owned banks Share of foreign currency lending in total domestic lending
Source: EBRD Transition Report 2009
Loan-to-Deposit Ratio Source: EBRD Transition Report 2009
50 100 150 200 250 300 350 400 450 L a t v i a K a z a k h s t a n T a j i k i s t a n E s t
i a L i t h u a n i a B
n i a U k r a i n e S l
e n i a A r m e n i a R u s s i a B e l a r u s M
t e n e g r
e
g i a H u n g a r y A z e r b a i j a n R
a n i a B u l g a r i a S e r b i a C r
t i a P
a n d M
d
a M a c e d
i a T u r k e y C z e c h R e p . A l b a n i a Percent
Jun-2004 Jun-2008
Significant post-crisis common ground:
– Large FX exposures have limited use of the exchange rate in crisis response: under-pricing fx risks at the individual level – Need to rely more on domestic sources of funding LC market development can be a source of strength even after euro adoption. – This is thus not a detour on the way to the euro
Macro conditions becoming “local currency-friendly” Regulatory action – albeit still uncoordinated (Hungary,
With recovery underway, it is time to focus on correcting
Regulators/central banks of home and host countries:
Banks operating in the region: fear of market share loss IFIs, EC, ECB: need for coordinated move to make the
There is, again, a collective action and coordination
Call for “Vienna Plus”
credibility
guarantee
internalizing FX social costs
currency markets
Euro exit: manage FX volatility
Improve macro policy; structural
reforms
Regulate or outright limit
borrower exposure
Regulate via capital and/or
prudential measures
Develop/strengthen domestic
markets (LC and forward)
Regulate disclosure Derivatives
Reasons for FX Policy approach
stabilized; often exchange rate targeting
basic bank prudential regulations
Money markets: Interbank market needs transparent reference mechanism; limited management tools (T-bills); No equity markets
Payments system – limited development of securities clearing and depositories
Rudimentary
T=0 T=0 T=1 T=1 T=2 T=2
Identify policy and priorities that move a country from one stage to the other
Right analysis and sequencing:
Involve all stakeholders – collective action
Keep the eye on the ball: a longer term
frameworks
FX lending
currency capital markets; physical infrastructure; instruments
– Issuing LC bonds – Lending in LC – Investing into market structures – Helping with derivatives markets when needed
What can banks do?
a common set of lending standards discontinuing most risky FX asset classes (short
term, unsecured consumer loans) and currencies (non-Euro)