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Last week's request by two Greek banks for a €5 billion emergency assistance from the European Central Bank rang alarm bells. Not just in Greece, where the economy has barely gotten off the ground after six consecutive years of falling GDP, but also across several Eastern European countries, where Greek banks have a significant share of assets.
Even before this latest scare, issues with foreign ownership of banks in Eastern Europe arose in 2011 and again in 2013. In 2011, it was worries about the Greek banks. These constitute a significant share of assets in Albania, Bulgaria, Macedonia, and Romania. The banks' troubles at home created fears of a credit crunch in these neighboring countries. In 2013, worries arose around Austrian banks after the Austrian National Bank announced tougher capital adequacy requirements for its commercial banks. Those had previously expanded tremendously across Eastern Europe and have presence in virtually every country, including several former Soviet Union countries like Russia and Ukraine.
These worries bring two questions to mind. First, is foreign ownership of banks indeed too high in Eastern Europe? And second, does it endanger the functioning of Eastern European economies? The answer to both questions is: yes.
The first question is answered in recent research by Stijn Claessens and Neeltje van Horen at the International Monetary Fund. In their paper Foreign Banks: Trends, Impact and Financial Stability, Claessens and van Horen document the share of banking assets in foreign hands in 2009. In countries in the Organization for Economic Cooperation and Development, this share was 12 percent, in East Asia—3 percent, South Asia—8 percent, the Middle East—24 percent, Eastern Europe—28 percent, and Latin America—31 percent. The average for Eastern Europe, albeit already high, masks a disparity between EU member states and countries in the former Soviet Union and the former Yugoslavia. In the first group, the share of foreign bank ownership was over 80 percent. For example, in 2009 it was 91 percent in Croatia, 86 percent in the Czech Republic, 85 percent in Romania, 79 percent in Bulgaria and 68 percent in Poland. On the other hand, the share of foreign bank ownership in Russia was only 12 percent.
As to the second question, Claessens and van Horen show that in emerging markets the share of foreign banks is generally associated with less credit creation. However, as their dataset ends before the recent financial crisis in Europe, it is not clear whether this negative correlation was exacerbated or not once the banks' home markets fell under duress. My experience as finance minister of Bulgaria during the euro area crisis tells me that this was indeed the case—both because banking regulators at home demanded higher capital adequacy, as the Austrian example suggests, and because of political pressures to support the domestic corporate sector. If so, the Eastern European host countries experienced an even more acute credit crunch.
There are, of course, good reasons to encourage foreign ownership of banks, particularly banks from other EU countries. Such ownership boosts trade and investment across the European Union and brings much-needed capital to Eastern Europe. Whether it can be made more responsive to the needs of the corporate sector in the host countries remains to be seen.
