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Note: Natalia Aivazova has provided me with valuable research assistance, elaborating on all the statistics.
In early 2009, the International Monetary Fund (IMF) and the European Bank of Reconstruction and Development (EBRD) raised a cry of despair. They feared that several of the 15 Western European banks that dominated the banking system of Central and Eastern Europe (CEE) would withdraw from the region because of their problems at home. In fact, the CEE banking sector had many advantages. Leverage was limited, and toxic assets were unknown. The main concern was that the three Baltic states (Estonia, Latvia, and Lithuania) suffered from severe overheating, because their credits expanded far too fast in 2005 and 2006, and they were financed with foreign bank credits, which drove up their inflation.
Four years after the crisis, it is instructive to check on what has happened to banking assets, leverage, and the balance between foreign and domestic banks in the ten CEE countries that joined the European Union in 2004 and 2007, respectively (Estonia, Latvia, Lithuania, Poland, the Czech Republic, Slovakia, Hungary, Slovenia, Romania, and Bulgaria.). The statistics come from the European Central Bank (ECB), at the end of 2007, which was at the peak of the boom before the bust, and at the end of June 2012, which are the latest statistics available.
These countries had very different experiences during the crisis. The three Baltic countries suffered a big output decline in 2008–09. Latvia, Hungary, and Romania required IMF/EU programs at this time, since they were cut out from international market financing, while Slovenia may need an IMF/EU program soon. Bulgaria, the Czech Republic, and Slovakia had no particular crisis but performed as the European Union has in general, while Poland was the only EU country that did not suffer from any crisis.
Table 1 Total banking assets (billions of euros) | |||||
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End 2007 | June 2012 | Change (percent) | |||
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Bulgaria | 29 | 41 | 40.0 | ||
Czech Republic | 139 | 175 | 26.1 | ||
Estonia | 36 | 20 | -44.6 | ||
Hungary | 109 | 111 | 1.8 | ||
Lithuania | 28 | 23 | -18.4 | ||
Latvia | 33 | 27 | -18.1 | ||
Poland | 222 | 318 | 43.4 | ||
Romania | 39 | 84 | 115.6 | ||
Slovenia | 47 | 53 | 11.9 | ||
Slovakia | 49 | 55 | 12.6 | ||
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Source: ECB and national central banks | |||||
Eurostat Statistical Database (accessed on February 28, 2012) | |||||
A first examination of the total banking assets measured in euros reveals great differences. The three Baltic countries were the only ones to see a fall in total banking assets, and it was huge for Estonia (45 percent). Hungary, Slovakia, and Slovenia saw a minor increase in their banking assets. Bulgaria, the Czech Republic, and Poland all experienced a substantial increase in their banking assets of 26 to 43 percent. The anomaly is Romania, which experienced a serious crisis. Even so, Romania's banking assets more than doubled from 2007 to 2012 (table 1). The spread of the outcomes is baffling.
The more relevant measure is the evolution of leverage—that is, banking assets as a ratio of GDP at current prices. Estonia is most astounding. Its leverage fell by almost half. Leverage fell by about a quarter in Latvia and Lithuania, and significantly also in Slovakia, although it belonged to the euro area. Bulgaria, the Czech Republic, Hungary, Poland, and Slovenia experienced minor increases in leverage. The surprise is that Romania's leverage more than doubled (table 2).
Table 2 Banking assets as a percentage of GDP | |||||
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2007 | 2012 | Change (percent) | |||
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Bulgaria | 94.2 | 102.5 | 8.8 | ||
Czech Republic | 105.4 | 115.0 | 9.2 | ||
Estonia | 224.0 | 118.0 | -47.3 | ||
Hungary | 109.6 | 112.2 | 2.3 | ||
Lithuania | 97.4 | 70.2 | -27.9 | ||
Latvia | 156.9 | 122.3 | -22.1 | ||
Poland | 71.4 | 83.8 | 17.5 | ||
Romania | 31.3 | 64.1 | 104.9 | ||
Slovenia | 135.9 | 147.0 | 8.2 | ||
Slovakia | 89.4 | 76.3 | -14.7 | ||
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Source: ECB and national central banks | |||||
Eurostat Statistical Database (accessed on February 28, 2012) | |||||
The greatest change lies in the differences in leverage before and after the crisis. In 2007, leverage ranged from 31 percent of GDP in Romania to 224 percent of GDP in Estonia. By 2012, the discrepancy had contracted from 64 percent of GDP in Romania to 147 percent of GDP in Slovenia—that is, from 7.2 times to 2.3 times difference, quite a radical change. The implication is that the Estonian economy was really overleveraged, and so was the Latvian economy. The Romanian economy, by contrast, was heavily underleveraged, which explains why its leverage has doubled in the midst of the financial crisis. The crisis helped both countries to come closer to a sensible level of leverage. The average leverage decreased little—from 112 percent of GDP to 101 percent of GDP in 2012, which seems just right. Unlike the situation before the crisis, no CEE nation stands out as particularly over- or underleveraged. Compared with the small island banking countries—Iceland, Ireland, and Cyprus with banking assets 8 to 10 times their GDP—this is a very reasonable level. Only Slovenia looks overleveraged.
A third question is what happened to the number of banks. Usually, financial crises are connected with bank collapses and a consolidation of the banking system, but no consolidation has taken place. Seven out of the ten CEE countries have actually more banks than before the crisis (table 3). The only big bank failure was the domestically owned Parex Bank in Latvia, which possessed 15 percent of the country's bank assets in 2007.
Table 3 Number of banks June 2012 (end 2007) |
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Total number of banks | Domestic banks | Foreign-controlled banks |
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Bulgaria | 31 (29) | 9 (8) | 22 (21) | ||
Czech Republic | 38 (29) | 5 (3) | 33 (26) | ||
Estonia | 17 (13) | 4 (2) | 13 (11) | ||
Hungary | 169 (204) | 139 (171) | 30 (33) | ||
Lithuania | 17 (13) | 4 (4) | 13 (9) | ||
Lativa | 29 (25) | 13 (11) | 16 (14) | ||
Poland | 639 (645) | 586 (592) | 53 (53) | ||
Romania | 39 (42) | 7 (6) | 32 (36) | ||
Slovenia | 21 (20) | 10 (9) | 11 (11) | ||
Slovakia | 28 (26) | 4 (5) | 24 (21) | ||
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Source: ECB and national central banks | |||||
Eurostat Statistical Database (accessed on February 28, 2012) | |||||
Common concerns during and after the crisis have been that foreign banks may withdraw from, or not be sufficiently aggressive in, their lending. But foreign banks are not running away from the region, as they did in East Asia during the crisis in 1997–98. So far, the number of foreign-owned banks in CEE is virtually the same as before the crisis. In no country have more than four foreign banks departed (as was the case in Romania), while their number has increased in six countries and stayed the same in two (table 3). Most of the foreign banks are West European, and they look upon the CEE countries as an extension of their domestic market. CEE has benefited from the deep integration in the European Union.
A more accurate measure of the balance between domestic and foreign banks is their share of bank assets. Here the expected pattern is apparent: The foreign share has declined in eight of the ten countries (table 4). Leaving aside Slovenia, which has never privatized its three big and dominant state banks, the foreign share varied from 61 to 100 percent of bank assets in the other nine countries in 2007, and it declined to 59 to 94 percent in 2012. Even if their share shrunk by 3 percentage points, it is most striking how limited the change has been.
Table 4 Share of total assets, percent June 2012 (end 2007) |
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Domestic banks | Foreign-controlled banks |
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Bulgaria | 25 (17) | 75 (83) | ||
Czech Republic | 6 (3) | 94 (97) | ||
Estonia | 6 (0) | 94 (100) | ||
Hungary | 40 (39) | 60 (61) | ||
Lithuania | 10 (18) | 90 (82) | ||
Lativa | 41 (36) | 59 (64) | ||
Poland | 37 (32) | 63 (68) | ||
Romania | 19 (13) | 81 (87) | ||
Slovenia | 72 (74) | 28 (26) | ||
Slovakia | 11 (8) | 89 (92) | ||
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Source: ECB and national central banks | ||||
Eurostat Statistical Database (accessed on February 28, 2012) | ||||
The reluctance of commercial banks to give loans to marginal customers, notably small- and medium-sized enterprises, has raised complaints especially about foreign-owned banks. Poland, which retains a large state bank, is now establishing a new state development bank, which is supposed to offer long-term loans for big infrastructure projects.
The main conclusion from these observations is that the CEE banking system has gone through the financial crisis amazingly well and looks quite sound. It took all the blows from the crisis with only one single significant bank failure (Parex Bank in Latvia), which is quite extraordinary in comparison with both the United States and the old European Union. The main change is that the leverage of various CEE countries evened out, being reduced in the overheated Baltics and increased in the under-banked Southeastern Europe. Apart from the odd failed bank (Allied Irish Bank in Poland), the Western European banks have stayed in the region, which they look upon as an extension of their home market. The foreign banking share has declined only marginally. With more banks than before the crisis, the CEE bank sector seems to be in need of bank consolidation.
Slovenia stands out as an exception in every regard. It has the greatest leverage, and as the only post-communist state, its bank system is still dominated by big state banks. Unlike almost all post-communist countries (except for Poland), Slovenia never had a bank crisis in its early transition. Today, the three big state banks are in apparent trouble and they need to be restructured. The questions are only how and when that will be done and whether Slovenia will need international assistance.