Cross-border deleveraging constrains credit

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Macroeconomic overview

Foreign banks have continued to withdraw funding from the transition region, but the pace of deleveraging has moderated. The eurozone crisis triggered a sharp reduction in international bank claims in the second half of 2011. Outflows slowed in 2012 as ample global liquidity and the European Central Bank’s monetary policy helped to improve funding conditions for banks, although they picked up temporarily in the first quarter of 2013.¹ According to a Bank for International Settlements (BIS) study,² the main reason for the withdrawal of cross-border funding has been pressure on parent banks. It has also increasingly reflected domestic factors, as the reduction of exposures has been largely confined to countries in recession. Hungary, Slovenia and Ukraine have seen no respite from outflows, while deleveraging has abated elsewhere (see Chart M.10). Compared to the first wave of funding withdrawals that followed the global financial crisis in 2008-09 foreign banks appear to have adopted a more discriminating approach to deleveraging, as funding reductions have been more closely aligned with domestic vulnerabilities. In Ukraine international banking groups are not just reducing their exposures, but exiting the country entirely, which may make the banking system more vulnerable to external shocks in the future.

Accumulated external funding losses continue to affect credit conditions in transition economies, even though banks have made significant efforts to raise domestic deposits. Real credit growth remains depressed in virtually all CEB and SEE countries (see Chart M.11). In the SEE countries a significant drop in credit growth has coincided with an increase in non-performing loans (NPLs). By mid-2013 credit was contracting in real terms in Albania, Romania and Serbia, and continued to contract in Croatia, Hungary and Slovenia. In countries less affected by foreign banks’ deleveraging, the expansion of credit has slowed in line with weakening domestic demand. Armenia, Georgia, Moldova and Russia have all seen decelerations of between 5 and 20 percentage points. Credit growth has accelerated in Turkey, but remains well below the rates seen in the boom years of 2010 and 2011.

In a number of transition economies credit growth remains dampened by balance sheet constraints – an ongoing legacy of the 2008-09 financial crisis. The share of NPLs remains above pre-crisis levels across most of the region, including all CEB and SEE countries. Efforts to resolve bad loans are showing success in the Baltic states and the Kyrgyz Republic, where NPL ratios have declined steadily since 2010. However, they have continued to rise in many of the countries most affected by the downturn, including Hungary, Slovenia and Ukraine, as well as in the SEE region where the average NPL ratio has risen continually since 2007 and now exceeds 17 per cent. Kazakhstan has the highest reported share of NPLs, as continued attempts at resolution have so far failed to address balance sheet weaknesses in one of its largest banks.

1. See Vienna Initiative 2.0, Deleveraging Monitor, 24 July 2013 (www.vienna-initiative.com). [back]
2. See Avdjiev et al. (2012). [back]

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