towards a new international financial architecture peter sanfey lead economist, ebrd 19 november...
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Towards a new international financial architecture
Peter SanfeyLead Economist, EBRD
19 November 2009
The transition region is in deep crisis
2009 average output decline: 6.3 per cent
Double-digit declines expected in 5 countries (Baltic countries; Ukraine, Armenia).
Crisis is not over: rising non-performing loans and unemployment
Slow recovery expected for 2010
Romania among the countries hardest hit (minus 8% in 2009, plus 1% in 2010)
Output declines were deep, sudden, and heterogeneous…
-15
-10
-5
0
5
10 Q3 2008 Q4 2008
Q1 2009 Q2 2009
Quarter on quarter GDP growth, per cent (seasonally adjusted)
…but no full-fledged “twin crises”. Why?
1. Net capital outflows were less sharp than in previous crises (e.g. Asia) and other regions.
2. Financial systems were comparatively sound (high foreign bank presence, small non-bank financial sectors)
3. Forceful, coordinated and comprehensive crisis response
In most transition countries, net capital outflows were comparatively modest
Percentage changes in external assets of BIS-reporting banks
-3.4
-11.1
-4.4
-7.8
-11.9-15
-10
-5
0
5
10
15
Emerging Europe(excl. UKR, RUS)
Russia &Ukraine
CA andCaucasus
Latin America Emerging Asia
Per centAvg 2007Q4/2008Q1 Avg 2008Q4/2009Q1
Crisis response has been effective
Domestic policies: Massive in western Europe and mature in central and eastern Europe
Forceful & coordinated international support
– IMF resources tripled from $250 to $750 bn
– EBRD investments up more than 50% this year
– EU BOP support quadrupled from €12.5 to €50 bn
Parent banks maintained exposures
New coordination platform – Vienna Initiative
External balance of payments support (Percent of GDP)
International support packages are much larger than in the Asian crisis
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
Q3 1997 Q4 1997 Q1 1998 Q2 1998 Q3 1998 Q4 2008 Q1 2009 Q2 2009 Q3 2009
Korea Thailand Philippines Indonesia Hungary Latvia Romania Ukraine
The Vienna Initiative has helped maintain foreign bank funding
Coordination among banks to maintain exposures Joint IFI (EBRD/EIB/WB) support to bank groups Home country authorities allow parent bank
support of subsidiaries Host country authorities to provide liquidity equally
to foreign and domestic owned banks
The CEB and SEE growth model has three components1. Political, legal-regulatory integration with EU2. Trade integration (particularly with the EU)3. Financial integration, led by EU banks
External assets and liabilities, 1994-2008 Foreign bank asset share, 1998-2008
0
50
100
150
200
250
1994 1996 1998 2000 2002 2004 2006
CEB SEE EEC
Russia Turkey CA
Per cent of GDP
0
20
40
60
80
100
1998 2000 2002 2004 2006 2008
Per cent CEB SEE EEC
Russia Turkey CA
In transition countries, capital inflows are correlated with higher growth
y = 0.1681x + 5.0106
R2 = 0.1201
-2
0
2
4
6
8
10
12
14
-20 -10 0 10
CA/GDP, % (av. 1994-2008)
Gro
wth
GD
P p
er
ca
p,
PP
P
(av
.19
94
-20
08
)
-2
0
2
4
6
8
10
12
14
y = -0.3442x + 5.2813
R2 = 0.2697
02468
101214161820
-15 -10 -5 0 5 10
CA/GDP, % (av. 1994-2008)
Gro
wth
GD
P p
er
ca
p,
PP
P
(av
.19
94
-20
08
)
02468101214161820
… in contrast with the experience in other emerging market regions.
Non-transition sample Transition sample
Financial integration is good for long-term growth in transition economies Financial integration associated with growth
– 1 per cent of GDP in inflows raised annual growth by 0.15-0.4 percentage points per year
– 10 percentage point higher foreign bank share raised growth 0.2-0.4 percentage points per year
Financially dependent firms grew faster in financially integrated transition economies
– 1.5 percentage points per year faster in high capital inflow countries than in low inflow countries
Foreign banks are associated with better output performance in the crisis
ARM
LAT
UKR
SVK
LITEST
ROM
HRVBULTAJ
AZE
BLR
KAZ
TURRUS SLV
MOL
KGZHUN
SRB
MNE
POL
BiH
ALB
GEOFYR
CZE
-25
-20
-15
-10
-5
0
5
0 20 40 60 80 100 120
Share of foreign bank assets in % of total assets, 2007
Ou
tpu
t g
row
th o
ver
2008
Q4
- 20
09 Q
1, q
-o-q
, sa
, %
-25
-20
-15
-10
-5
0
5
But capital inflows fed credit booms and external (over-)indebtedness…
Cross-border debt inflows and domestic credit growth, 2005-08
HUN
SLVBiH
HRVCZEPOL
FYRBUL
RUSTAJ
SER
ALB
LIT
MOL
EST ROM
KAZAZE
UKR
LAT
R2 = 0.2988
0
10
20
30
40
50
60
70
80
90
-20 30 80 130 180 230
Average credit growth between mid-2005 and mid-2007, %
Med
ian
gro
wth
of
BIS
len
din
g b
etw
een
mid
-20
05 a
nd
mid
-20
07, %
0
10
20
30
40
50
60
70
80
90
… and contributed to FX lending in domestic financial systems
Foreign bank asset share and share of FX lending in total lending
UKR
LAT
EST
LIT
MOL
RUS
TUR
ARM
SLV
AZE
KAZ
HRV
BUL
SER
HUN
ALB
POL
FYR
0
10
20
30
40
50
60
70
80
90
100
0 20 40 60 80 100 120Asset share of foreign-owned banks, %
Sh
are
of
fore
ign
cu
rre
ncy
len
din
g in
to
tal
do
me
stic
len
din
g, %
0
10
20
30
40
50
60
70
80
90
100
Financial integration: policy implications
Continue to integrate
– Only region in the world where financial integration mostly worked the way it was supposed to
Manage risks and unintended consequences
– Take away the froth through tougher lending standards, and use of macro-prudential instruments
– Reduce FX liabilities via better macro institutions, local currency market development, regulation.
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