Update on Financial Stability How the E&E Countries Stack Up

Update on Financial Stability How the E&E Countries Stack Up

Outline

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• About PFS

• Key role of financial sector in economic growtho Access to finance and

investment for SMEs, agriculture, jobs

• Financial stability: Regional news and overview

• What if the European financial crisis worsens?

• Biggest threat to stability, prosperity and democracy in E&E region

• What can be done?

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About USAID’s Regional Partners for Financial Stability Program

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PFS helps countries more effectively address their financial sector challenges focusing on stability, access to finance and growth.

Program Activities and Approach

• Regional training and study tours to mentor countries, bringing together key players in the region

• Crisis related focus: deposit insurance, access to finance, crisis preparedness measures, problem loans

• Research, surveys, publications• Partnerships, leveraging program funds• Strengthening domestic institutions

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Illustrative PFS Activities

Capital Markets Viability in SEE:

Regional Integration and Harmonization

Capital Markets Viability in SEE:

Regional Integration and Harmonization

Problem Loan Workouts:

Series of Workshops for Bankers

Problem Loan Workouts:

Series of Workshops for Bankers

Crisis Preparedness Assessments:

Strategic Plans for Central Banks, Fin.

Ministries

Crisis Preparedness Assessments:

Strategic Plans for Central Banks, Fin.

Ministries

Targeted Bilateral Assistance:

Tactical, Technological

Targeted Bilateral Assistance:

Tactical, Technological

Deposit Insurance Assessments:Zeroing in and

Correcting Weaknesses

Deposit Insurance Assessments:Zeroing in and

Correcting Weaknesses

Examples:E-invoicing, export promotion, online collateral auction

Total Cost: Under $70,000

• Developed a comprehensive financial sector benchmarking system• Enhances Missions’ programming and planning

Albania, Bosnia, Ukraine, Macedonia

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How PFS addresses financial sector gaps and challenges

Complements bilateral financial sector & ATF programs

Financial Sector Benchmarking, Research

Often more efficient / effective than bilateral programsExamples:•Capital markets integration in SEE•Financial crisis preparedness assessments•Deposit insurance evaluations •Banker training on problem loans

Regional Initiatives

• Partnerships with over 150 organizations• Partners’: PFS cost sharing 3.5:1 on regional events

Partnerships

Key Role of Financial Sector in Economic Growth

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Key Role of Financial Sector in Economic Growth

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Economic Growth and Incomes

Providing Credit & Specialized Financial Services

Noncash Payment System

Providing Capital

Savings and Investment Vehicles

Key Role of Financial Sector in Economic Growth

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• Facilitates the exchange of goods and services

• Improves efficiency and volume of private sector activity

• Supports higher growth and rising incomes

• Reduces poverty

Fragile Banking Systems and Lack of Finance lead to:

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• Slower economic growth• Worse competitiveness• Higher unemployment• Youth issues• Political instability• Growth of populism and

nationalism• Tensions with neighbors

The gains made across the board in the late 1990s and early part of the last decade, particularly in access to finance, are threatened.

Financial Stability in SEE and Eurasia: Regional News and Overview

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News from the Region – SEE

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• Emerging Europe: Decline in Bank Lending (4-2012)

• Raiffeisen Group Boosts Liquidity on Fears of Greek Crisis Triggering Bank Runs in Balkan Nations (5-24-2012)

• Serbia’s State-Owned Agrobanka Fails; Deposits are Transferred to a ‘Bridge Bank’ (5-28-2012)

• Serbia: Two Banks Bailed out by the Government (4-23-2012)

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For more news visit: http://www.pfsprogram.com/leslie-sulentas-blog

News from the Region – SEE

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• IMF Considers New Support for Bosnia and Herzegovina (5-29-2012)

• IMF Cautious on Montenegrin Economic and Banking Conditions (5-17-2012)

• Slovenia’s Banking System Under Duress: NLB Bank Seeks Capital, Relies on ECB for Liquidity

• Hungarian Bank Fails (6-7-2012)

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For more news visit: http://www.pfsprogram.com/leslie-sulentas-blog

News from the Region – Eurasia

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• National Bank of Ukraine Tightened Control Over Greek Banks’ Subsidiaries in Ukraine (5-30-2012)

• Investors Again Reject Ukraine’s Hryvnia Bonds (5-20-2012)

• IMF Completes Visit to Ukraine, Warns of Economic and Financial Challenges (5-30-2012)

• Moldova Bank Fails (3-2012)

• U.S. Calls Belarus’ Credex Bank a Money Laundering Hub (5-22-2012)

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For more news visit: http://www.pfsprogram.com/leslie-sulentas-blog

News from the Region – Eurasia

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• Azerbaijan: Largest Bank Bailed Out by Government (5-20-2012)

• Azerbaijan: Banks Expand Lending But are Dogged byHigh Credit Risk (5-14-2012)

• Georgia: Tycoon Organizes Political Protests, Sells Bank in Russia (6-3-2012)

• Russia’s Sberbank Building Its Own Bloc in Eastern Europe (4-13-2012)

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For more news visit: http://www.pfsprogram.com/leslie-sulentas-blog

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E&E Economies Still Weak and Unstable – High Unemployment

Highest Risk Beneficiary Countries: Kosovo, Macedonia, Bosnia, Serbia and

Armenia

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E&E Financial Sectors – Still Reeling from 2009 Shock

Banks have alarming levels of bad loans

across SEE and Eurasia

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Starved for credit: Azerbaijan, Armenia,

Georgia, Kosovo

E&E Financial Sectors are Small and Underdeveloped

Biggest threat to stability, prosperity and democracy in Europe and Eurasia:What if the European Financial Crisis Worsens?

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What if Greek Contagion Spreads to Southeast Europe?

Deposit runs on Greek banks spread to Greek banks in Romania, Serbia,

Albania, Kosovo

Runs spreads to all foreign owned banks in SE Europe

Lending halts, small banks close

Deep recession, democraticbacksliding

• Albanian depositors panic• Many small banks are closed or forced to merge• Montenegro, Kosovo, Bosnia: lack of central

bank liquidity (Euro users / pegged currency)• Instability and quiet, sustained bank runs spread

to other foreign banks• IMF bailouts sought by Serbia, Montenegro• Deposit insurance funds run out: Bosnia• Currencies lose 50% of value across the region;

banks and borrowers take hit from foreign currency loans

• Unemployment passes 30% in Serbia, Macedonia

• Non-performing bank loans 30% across SEE

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Serbia, Bosnia, Montenegro, Macedonia, Ukraine:

Unable to roll over debt

Banks lose 40% of deposits

Recession andInstability in Eurasia

Ethnic tensionsIncrease:

Macedonia,Bosnia

• Major Italian, Austrian, French, and German banks are bailed out / partially nationalized

– Bailouts are messy and unpredictable, feeding uncertainty and panic

• Uncertainty about the Euro leads to full-blown depositor panics

• Parents of Italian and Austrian banks in SEE are not able to provide liquidity to subsidiaries in some cases

• Central banks are pushed to the limit in emergency lending to banks, strained to keep systemic banks open

• Currencies lose 40-50% of value across the region

• Financial instability spreads to Eurasia• Russia bails out the Ukrainian government

What if Greece exits the Euro?

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Eurozone Banks that Dominate E&E Financial System Are Under Pressure

Source: National authorities, Raiffeisenbank, Financial Stability Board.

Foreign Bank Ownership in CEE: Highest of Any Emerging Region

(2009-10)

Foreign Bank Ownership in CEE: Highest of Any Emerging Region

(2009-10)

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Eurozone Banks That Dominate E&E Financial Sector – More E&E Banks Would Collapse, Confidence Would Evaporate

Many of the largest banks in Southeast Europe and, to a lesser extent, Eurasia are owned by foreign banks

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Eurozone Banks Linkages Map – Online Demo

Many of the largest banks in Southeast Europe and, to a lesser extent, Eurasia are owned by foreign banks.

DEMO: http://www.pfsprogram.com/banks-map

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Negative loan growth in CEE due to bank deleveraging

Loan Growth Rate, Q1-2012

Deleveraging of Banks and Access to Finance in Central & Southeast Europe Would Worsen

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Bilateral Trade as Percent of Selected Countries’ GDP

Source: IMF Regional Economic Outlook, October 2011

Italy Spain Greece SubtotalTotal for all EU trade

Albania 16.8 1.4 5.4 23.6 28.8Belarus 1.3 0.2 0.0 14.0 40.1Bosnia and Herzegovina 7.4 0.6 0.4 8.6 23.9Macedonia 5.6 1.3 7.1 8.4 24.1Moldova 7.2 0.4 1.0 8.0 15.0Montenegro 4.4 0.5 3.1 7.2 21.3Serbia 5.7 0.5 1.0 3.8 15.5Ukraine 3.0 0.6 0.2 1.5 18.4

Bilateral Trade With Troubled Eurozone Countries Would Decline

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Remittances from Eurozone Would Decline

Remittances Vulnerability Index

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Most Vulnerable Countries in E&E:

All of Southeast Europe•Especially Montenegro, Serbia, Bosnia, Albania

Eurasia also vulnerable•Georgia, Armenia, Moldova, Ukraine

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Other Donors?

• International Monetary Fund• World Bank

“Time and resources are stretched too thin to make an impact in the financial sector in the E&E region.”“Time and resources are stretched too thin to make an impact in the financial sector in the E&E region.”

• European Union

“Focusing on stability in core member states.”“Focusing on stability in core member states.”

Financial Stability in E&E

What Can be Done

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To Maintain Financial Stability, E&E Countries Need:

• Proactive, informed financial supervision• Stable macroeconomic policies• Sound banks and non-bank financial

institutions• Local capital markets

Good examples: Czech Republic, PolandGood examples: Czech Republic, Poland

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What USAID and PFS Can Do

• Coordinate with other donors• Crisis preparedness assistance for financial

authorities − Example: Kosovo

• Rapid response:• Backing up deposit insurance agencies with

skilled advisors− Example: Albania

• SWAT teams to examine and support resolutions of failing banks

• Provide training to resolve problem loans− Example: PFS training programs, Bosnia early 2000s

• Multi-donor programs to keep some credit flowing

• Coordinate with other donors• Crisis preparedness assistance for financial

authorities − Example: Kosovo

• Rapid response:• Backing up deposit insurance agencies with

skilled advisors− Example: Albania

• SWAT teams to examine and support resolutions of failing banks

• Provide training to resolve problem loans− Example: PFS training programs, Bosnia early 2000s

• Multi-donor programs to keep some credit flowing

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What USAID and PFS Can Do

• Medium term / preventive • Support introduction of new products

and credit underwriting techniques to reduce risk

• Strengthen capital markets as a source of equity and hedging products

− Example: PFS-EBRD market integration in SEE

• Improve cross border supervision and cooperation

• Medium term / preventive • Support introduction of new products

and credit underwriting techniques to reduce risk

• Strengthen capital markets as a source of equity and hedging products

− Example: PFS-EBRD market integration in SEE

• Improve cross border supervision and cooperation

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What USAID and PFS Can Do

• Medium term / opening the markets • Work with financial institutions other donors

to encourage access to finance− Example: Azerbaijan, Armenia, PFS

• Assist in implementing post-crisis financial standards− Basle 3, SIFI supervision, bank resolutions

• Financial education and consumer protection− Example: Ukraine

• Guidance on strengthening deposit insurance funds and systems − Example: Bosnia, PFS

• Medium term / opening the markets • Work with financial institutions other donors

to encourage access to finance− Example: Azerbaijan, Armenia, PFS

• Assist in implementing post-crisis financial standards− Basle 3, SIFI supervision, bank resolutions

• Financial education and consumer protection− Example: Ukraine

• Guidance on strengthening deposit insurance funds and systems − Example: Bosnia, PFS

AnnexFinancial Sector Stability Indicators

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Source: PFS Financial Sector Benchmarking System

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E&E Economies Highly Indebted – No Room for Fiscal Stimulus

Highest Risk Beneficiary Countries: Montenegro, Serbia,

Ukraine, Georgia, Armenia, Moldova,

Bosnia

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Highest Risk Beneficiary Countries:

Kosovo, Serbia, and Georgia (preliminary

data)

Most E&E Governments Have Large Budget Deficit

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Many E&E Economies Have Unbalanced Economies – Imports far Exceed Exports

Highest Risk Beneficiary Countries: Kosovo, Montenegro, Albania, Armenia and Georgia (preliminary

data)

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Lowest 2012 Growth Forecasts: Serbia, Albania, Bosnia,

Macedonia, Montenegro

2012: Slowing E&E Economic Growth Forecasts

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E&E Financial Sectors are Small and Underdeveloped

Capital markets do not support business

growth

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Access to Finance is Weak: Loans are Expensive

Loans are expensive:

Georgia, Armenia, Kosovo … across

SEE & Eurasia

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Access to Finance is Weak – Few Banks and Branches

Lowest bank density: Ukraine, Belarus, Moldova, Serbia

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E&E Financial Sectors – Lower Bank Profits

Banks are still losing money in: Ukraine,

Montenegro, (Romania, Slovenia, Hungary)

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E&E Financial Sectors – High Risk Lending in Foreign Currency Predominates

Lending in foreign currency endangers

banks and borrowers across the region

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E&E Financial Sectors – Many Banks are Not Liquid

Most illiquid (lower bar is better): Belarus, Ukraine,

Azerbaijan, Armenia, Georgia, Montenegro

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How the Countries Stack Up – Financial Sectors are Weak

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Partners for Financial Stability (PFS) 1919 N. Lynn StreetArlington. VA 22209

Phone: +1 571 882 5000Fax: +1 571 882 5100www.pfsprogram.org

David Cowles

COTRUSAID+1 202 567 [email protected] [email protected]

Leslie Sulenta

Chief of PartyDeloitte Consulting LLP+385 98 355 258

[email protected]

Lori Bittner

Engagement DirectorDeloitte Consulting LLP+1 571 882 5330

[email protected]