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István P. Székely

is a country director at the European Commission, Directorate General for Economic and Financial Affairs. Prior to joining the European Commission, he worked at the Corvinus University of Budapest, where he is currently an honorary Professor, the University of Bonn, the UN Secretariat, the National Bank of Hungary and the International Monetary Fund. He is an economist by training with a PhD from the University of Cambridge.

For his publications, see ideas.repec.org/e/psz7.html.

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Banking in Central and Eastern Europe after the start of the banking union

The start of the banking union will bring about major changes not only in the euro area but more broadly in Europe. The impact on Central and Eastern Europe will be particularly strong as in many countries the banking sector is dominated by the subsidiaries of euro area banking groups, and the financial system in turn is dominated by banks even more than in the euro area. As the ECB’s Comprehensive Assessment showed, the core of the region (PL, SK, CZ, Baltics), has very solid banking sectors, with capital strengths (fully loaded core CET1 ratios) among the strongest in Europe and the necessary deleveraging has been largely completed. That is, the banking sector in this part of the region is ready to fully support a recovery. Moreover, these countries have fundamentally healthy economies, so banking sectors in this part of the region have strong growth potentials. In fact, with the SSM CA over and a pressure on European groups to produce earnings, the push to seek out new business opportunities in catching up economies is likely to strengthen.  

The periphery of the region however shows a rather different and diverse picture. Slovenia went through a full-scale banking crisis a year ago. Albeit with a long delay, the authorities took decisive actions and the rehabilitation of the banking sector is in progress. While private credit overall is relatively small, an important part of the corporate sector, one that is struggling to adjust, is highly dependent on bank financing. Moreover, a delayed policy reaction to the crisis leaves a significant part of the economy with a need for a major restructuring. The developments in Bulgaria during the crisis took a rather unique direction. While at the beginning of the crisis, like in most CEE countries, the banking sector was dominated by subsidiaries of euro area banking groups, the crisis brought about a meteoric rise in the share (and absolute size) of domestically-owned banks. Five years into the crisis, however, the two largest domestically-owned banks experienced severe distress and required large state supports. Romania went through the crisis with the support of a series of EU-IMF programs which quickly restored macroeconomic stability and ensured capital strength of banks. But NPL ratios increased uninterrupted and across the board and following the first round of the Vienna initiative, a fast deleveraging started.

Rebalancing of the balance sheets of foreign-owned subsidiaries in the region is a general trend resulting from the unwinding of the pre-crisis business model of European banking groups, but its impact varies greatly across the region depending on the initial positions of the countries in this regard. Except for the countries that are in the euro area, this has not only impacted strongly aggregate lending but also has had a strong impact on composition, particularly what concerns the currency of denomination, but also maturity. While future trends in the region will undoubtedly be driven by the overall global and European trends in banking, the different groups identified above are bound to follow diverse patterns depending on their current positions and perhaps even more importantly on their future policies. 

Last modified: 2018.11.30.