update on financial stability how the e&e countries stack up
TRANSCRIPT
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
Lori Bittner
Engagement DirectorDeloitte Consulting LLP+1 571 882 5330