Financial Stability Challenges in EU Candidate Countries - Financial Systems in the Aftermath of the Global Crisis

86 Pages Posted: 26 Jul 2010

See all articles by Thierry Bracke

Thierry Bracke

European Central Bank (ECB)

Eva Katalin Polgar

European Central Bank (ECB)

Kristel Buysse

European Central Bank (ECB)

Desislava Rusinova

European Central Bank (ECB) - Directorate General International and European Relations

Alexandre Francart

affiliation not provided to SSRN

Corinna Knobloch

Deutsche Bundesbank - Economic Research Centre

Nikolaos Stavrianou

affiliation not provided to SSRN

Pavel Diev

Banque de France

Emidio Cocozza

Bank of Italy

Jon Frost

Bank for International Settlements; University of Cambridge - Cambridge Centre for Alternative Finance

Sandor Gardo

Oesterreichische Nationalbank (OeNB)

David Farelius

Sveriges Riksbank - Research Division

Date Written: July 26, 2010

Abstract

This paper reviews financial stability challenges in the EU candidate countries: Croatia, the former Yugoslav Republic of Macedonia and Turkey. It follows a macro-prudential approach, emphasising systemic risks and the stability of financial systems as a whole. The paper recalls that the economies of all three countries experienced a recession in 2008-09 and shows how this slowed the rapid process of financial deepening that had been taking place since the beginning of the last decade. The deteriorating economic and financial conditions manifested themselves, first and foremost, through a marked deterioration in asset quality. These direct credit risks were compounded by the transformation of exchange and interest rate risks through a widespread use of foreign exchange-denominated or indexed loans and variable or adjustable interest rate loans. Moreover, funding and liquidity risks also materialised to some extent, although fully fledged bank runs were avoided, and none of the countries experienced a sharp reversal in external financing. Overall, the deterioration in asset quality has so far been managed well by the banking systems of the candidate countries, facilitated by large capital buffers, pro-active macro-prudential policies pursued by the authorities both before and during the crisis and the relative stability of exchange rates. Looking ahead, although uncertainties remain high regarding credit quality, the shock-absorbing capacities of the banking systems are fairly robust, as also evidenced by their relative resilience so far. Nevertheless, as the economic recovery sets in, the central banks should return to and possibly reinforce the implementation of measures to avoid a pro-cyclical build-up of credit (asset) boom-bust cycles. Furthermore, given the relevance of foreign-owned banks in two of the three countries, a continued strengthening of home-host cooperation in the supervisory area will be crucial to avoid any kind of regulatory arbitrage.

Keywords: Europe, banking sector, vulnerability indicators, macro-prudential approach, emerging markets

JEL Classification: F32, F41, G21, G28

Suggested Citation

Bracke, Thierry and Polgar, Eva Katalin and Buysse, Kristel and Rusinova, Desislava and Francart, Alexandre and Knobloch, Corinna and Stavrianou, Nikolaos and Diev, Pavel and Cocozza, Emidio and Frost, Jon and Gardo, Sandor and Farelius, David, Financial Stability Challenges in EU Candidate Countries - Financial Systems in the Aftermath of the Global Crisis (July 26, 2010). ECB Occasional Paper No. 2010/115, Available at SSRN: https://ssrn.com/abstract=1629757 or http://dx.doi.org/10.2139/ssrn.1629757

Thierry Bracke (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Eva Katalin Polgar

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Kristel Buysse

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Desislava Rusinova

European Central Bank (ECB) - Directorate General International and European Relations ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

Alexandre Francart

affiliation not provided to SSRN ( email )

Corinna Knobloch

Deutsche Bundesbank - Economic Research Centre ( email )

Wilhelm-Epstein-Strasse 14
Frankfurt/Main D-60431
Germany

Nikolaos Stavrianou

affiliation not provided to SSRN ( email )

Pavel Diev

Banque de France ( email )

Paris
France

Emidio Cocozza

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Jon Frost

Bank for International Settlements ( email )

Basel
Switzerland

University of Cambridge - Cambridge Centre for Alternative Finance ( email )

10 Trumpington Street
Cambridge, CB21QA
United Kingdom

Sandor Gardo

Oesterreichische Nationalbank (OeNB) ( email )

Otto-Wagner-Platz 3
1090 Vienna
Austria

David Farelius

Sveriges Riksbank - Research Division ( email )

S-103 37 Stockholm
Sweden

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