Lost & Found in Eastern Europe: Replacing Funding by Western Europe’s Banks


By Bas Bakker and Christoph Klingen

With Western Europe’s banks under pressure, where does this leave Europe’s emerging economies and their financial systems that are dominated by subsidiaries of these very same banks?  There is little doubt that the era of generous parent-funding for subsidiaries is over.  But parent bank deleveraging—selling off assets, raising capital, and reducing loans, including to their subsidiaries—need not translate into a reduction of bank credit in emerging Europe.

A credit crunch can be avoided as long as parent banks reduce exposures gradually and domestic deposits, other banks, and local financial markets fill the void. Policymakers should create the conditions for this to happen.

The ties that bind

The dependence of the banking systems in emerging Europe on Western European banks is well known:

  • Ownership— foreign banks control more than half of the banking systems in most of Central, Eastern, and Southeastern Europe. Their share exceeds 80 percent in Bosnia, the Czech Republic, Croatia, Estonia, Romania, and Slovakia. Only in Russia, Ukraine, Belarus, Moldova, Slovenia, and Turkey do they not dominate.

Imagining If Key Foreign Banks Start Reducing Their Exposure in Asia


By Anoop Singh

European banks play an important role in supplying credit to several Asian economies. What happens if they start reducing their exposure to the region?

The largest borrowers from European banks are Australia, Hong Kong SAR, Korea, Malaysia, New Zealand, Singapore, and Taiwan Province of China, while China, India, and the economies of South East Asia generally have smaller liabilities.

Among European banks, those from the United Kingdom have a particularly significant presence in Asia. For most regional economies, the nonbank private sector—businesses and households—is the main recipient of credit from foreign banks as a whole.

Prominent role

European banks play a prominent role in the areas of trade credit and specialized project financing. In several Asian economies, however, lending by local subsidiaries and branches is funded primarily by local deposits, reducing potential deleveraging pressures.

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Global Financial Stability: What’s Still To Be Done?


By José Viñals

(Versions in Español, عربي)

The quest for lasting financial stability is still fraught with risks. The latest Global Financial Stability Report has two key messages: policy actions have brought gains to global financial stability since our September report; but current policy efforts are not enough to achieve lasting stability, both in Europe and some other advanced economies, in particular the United States and Japan.

Much has been done

In recent months, important and unprecedented policy steps have been taken to quell the crisis in the euro area. At the national level, stronger policies are being put in place in Italy and Spain; a new agreement has been reached on Greece; and Ireland and Portugal are making good progress in implementing their respective programs. Importantly, the European Central Bank’s decisive actions have supported bank liquidity and eased funding strains, while banks are reinforcing their capital positions under the guidance of the European Banking Authority. Finally, steps have been taken to enhance economic governance, promote fiscal discipline, and buttress the “firewall” at the euro area level.

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The Danger Zone: Financial Stability Risks Soar


By José Viñals

(Versions in عربيFrançais日本語, and Русский)

We are back in the danger zone. Since the IMF’s previous Global Financial Stability Report, financial stability risks have increased substantially—reversing some of the progress that had been made over the previous three years.

 Several shocks have recently buffeted the global financial system: unequivocal signs of a broader global economic slowdown; fresh market turbulence in the euro area; and the credit downgrade of the United States.

This has thrown us into a crisis of confidence driven by three main factors: weak growth, weak balance sheets, and weak politics. Continue reading

Toto, we’re not in Kansas anymore: Exploring the Contours of the Financial System After the Tornado


By Laura Kodres

Just as a tornado in Kansas transplanted Dorothy and, her dog, Toto, from familiar comforts to the unknown land of Oz, the global crisis has led many to wonder what has become of the global financial system and, more importantly, what will it look like next. Is the wicked witch of the West—excessive risk taking and leverage—really dead?

But now, as the storm subsides, there is time to speculate about what the future financial sector might look like. My IMF colleague, Aditya Narain, and I have done just that in a new Staff Position Note that attempts to discern the contours of this new financial landscape. What is clear is that the new landscape will be influenced by both the private and public sectors—their reactions to the crisis and to each other.

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Learning from the Crisis: Future IMF Lending Role


By Reza Moghadam

Let’s rewind the tape to October 2008. Barely a couple of weeks have passed since Lehman filed for bankruptcy, and emerging markets are selling off like crazy. The vaunted “decoupling” theories—hailed as visionary only a few months before—lie in tatters as investors flee in droves. With its mandate to foster global economic stability, the IMF comes under the spotlight: many observers question whether the institution has what it takes to stop contagion and help emerging markets cope with global deleveraging.

With strong support from its membership, the IMF did not hesitate to come to the rescue. It provided large and upfront financial assistance to help countries weather the crisis. It overhauled its lending toolkit, notably by establishing the Flexible Credit Line (an instrument allowing countries with very strong policies to tap IMF resources unconditionally). And, importantly, its membership, building on the political momentum of the G-20, committed to tripling its resource base. These actions helped put out the fire, setting emerging market spreads on a downward trajectory.

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