Foreign banks’ funding to emerging Europe increased for the first time since 2011

The fall in funding to countries in eastern Europe may be bottoming out

The fall in foreign banks’ funding to countries in eastern Europe may be bottoming out. A new report from the Vienna Initiative committee released today shows that foreign bank funding to central, eastern and south-eastern Europe (CESEE) countries, excluding Russia and Turkey, rose in the second quarter of 2015 for the first time since 2011.Overall, funding for the group of 21 countries[1] shrunk by 0.3 per cent of GDP in the second quarter, which was less than the 0.5 per cent in the first quarter.

Excluding Russia and Turkey, which have recently undergone significant turbulence, exposure rose by 0.1 per cent of GDP, driven by strong increases in the Czech Republic and Poland (over 1 per cent of GDP for each country).According to banks reporting to the Bank of International Settlements (BIS), inflows also increased in Estonia, FYR Macedonia and Moldova, but fell in the majority of countries. Funding fell sharply for Turkey (by 0.5 per cent of GDP), reflecting rising political uncertainties; and for Russia (by 0.5 per cent of GDP, though the decline is smaller than in the first quarter).A split picture for credit growth continued across the region.

A few emerging European countries, such as the Czech Republic, Estonia, FYR Macedonia, Poland and Turkey, are experiencing positive growth in credit to the private sector, including both non-financial corporations and households. In contrast, credit growth has remained weak or has contracted in the rest of the region. The strength of credit recovery is in part linked to the progress in the private sector balance sheet repair, as reflected in asset quality of loans held by CESEE banks.

The latest CESEE bank lending survey suggests deleveraging at the group level has significantly decelerated: only about a fifth of the banking groups expect a decline in loan-to-deposit ratios, while over 60 per cent plan to selectively expand operations in the region. Subsidiaries and local banks report an increase in demand for credit and almost unchanged supply conditions over the past six months.

The CESEE Deleveraging and Credit Monitor is prepared by the staff of international financial institutions taking part in the Vienna Initiative’s Steering Committee. It is based on the BIS’s International Banking Statistics published on 21 October 2015.

The Vienna Initiative was established at the height of the global financial crisis of 2008-09 as a private-public sector platform to secure adequate capital and liquidity support by Western banking groups for their affiliates in CESEE. It was relaunched as “Vienna 2” in January 2012 in response to renewed risks for the region from the eurozone crisis.

Please read the full report here.

For additional information and the latest publications visit: www.vienna-initiative.com