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How to avoid another serious financial crisis:
Harnessing the benefits of financial integration
Manfred Schepers, Vice President Finance, EBRD
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CEE financial integration has supported growth….
Financial integration was a successful growth strategy.
Different for CEE vs other emerging markets where this link has been weak.
EU framework, accession, € area and commitment of foreign banks explain this.
In crisis parent banks supported subsidiaries and maintained exposures and capital coverage.
0
20
40
60
80
100
1998 2000 2002 2004 2006 2008
Per centCEB SEEEEC RussiaTurkey CA
Asset share of foreign-owned banks in total banking system assets
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… though also instigated vulnerabilities.
Foreign banks’ role in the CEE region contributed to macro and financial vulnerabilities especially FX exposures.
Excessive credit growth was linked to global credit growth and competition for market share.
Stock of private sector FX debt currently holds back the recovery today.
0
10
20
30
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60
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Lettla
nd
Estla
nd
Alban
ien
Serbie
n
Kroat
ien
Litauen
Tajik
ista
n
Bulgar
ien
Ungarn
Ukrai
ne*
Kazak
hstan
Mold
avie
n
Polen
Russla
nd
Tschec
hien
Mitte 2004 Mitte 2008
Domestic bank credit in
foreign currency (% of GDP)
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Local Currency and Capital Market Development
To reduce systemic risks associated with FX lending to unhedged borrowers Removes key vulnerability that impacts bank funding and valuation
Enhances monetary policy effectiveness, and scope for counter-cyclical use of exchange rate instrument
Encourages domestic saving and investment Good for sustainable growth
Good for external stability
• less reliance on foreign funding
• less external debt accumulation
Part of the quest for a better “growth model” reliant on more resilient funding and capital structures.
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Opportunity for policy action
Post-crisis convergence across the CEE region
Vulnerabilities resulted from FX lending as well as poor information standards and credit assessment
Unsustainable external imbalances now widely recognised
NOT a detour for eventual euro zone members
Post-crisis macro conditions make local currency a more rational proposition
Narrowing interest rate differential vis-à-vis FX lending rates
Regulators forcefully addressing FX lending
Creates a new demand for LCY lending which cannot be satisfied without domestic capital markets development
Insurance and pensions industry positioned for growth
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Overall coordinated approach is needed
Governments need to focus on all factors that prevent development of local currency & capital markets Histories of inflation volatility and lack of macroeconomic credibility
will take time to redress
Need to address inadequate market CM infrastructure, and lengthen maturity structure and liquidity of sovereign debt markets
Commercial banks: Differentiate lending standards, taking account of FX risk
Engage more actively across all aspects of LCY capital market
International Financial Institutions: To help through lending, investment and funding activities, making
local markets more liquid, transparent and resilient