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Update on Financial Stability How the E&E Countries Stack Up.

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Presentation on theme: "Update on Financial Stability How the E&E Countries Stack Up."— Presentation transcript:

1 Update on Financial Stability How the E&E Countries Stack Up

2 Outline 2 About PFS Key role of financial sector in economic growth o 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? 2

3 About USAID’s Regional Partners for Financial Stability Program 3 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 3

4 4 4 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

5 Developed a comprehensive financial sector benchmarking system Enhances Missions’ programming and planning Albania, Bosnia, Ukraine, Macedonia 5 5 How PFS addresses financial sector gaps and challenges Complements bilateral financial sector & ATF programs Financial Sector Benchmarking, Research Often more efficient / effective than bilateral programs Examples: 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

6 Key Role of Financial Sector in Economic Growth 6

7 7 7 Economic Growth and Incomes Providing Credit & Specialized Financial Services Noncash Payment System Providing Capital Savings and Investment Vehicles

8 Key Role of Financial Sector in Economic Growth 8 8 Facilitates the exchange of goods and services Improves efficiency and volume of private sector activity Supports higher growth and rising incomes Reduces poverty

9 Fragile Banking Systems and Lack of Finance lead to: 9 9 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.

10 Financial Stability in SEE and Eurasia: Regional News and Overview 10

11 News from the Region – SEE 11 Emerging Europe: Decline in Bank Lending (4-2012) Raiffeisen Group Boosts Liquidity on Fears of Greek Crisis Triggering Bank Runs in Balkan Nations ( ) Serbia’s State-Owned Agrobanka Fails; Deposits are Transferred to a ‘Bridge Bank’ ( ) Serbia: Two Banks Bailed out by the Government ( ) 11 For more news visit:

12 News from the Region – SEE 12 IMF Considers New Support for Bosnia and Herzegovina ( ) IMF Cautious on Montenegrin Economic and Banking Conditions ( ) Slovenia’s Banking System Under Duress: NLB Bank Seeks Capital, Relies on ECB for Liquidity Hungarian Bank Fails ( ) 12 For more news visit:

13 News from the Region – Eurasia 13 National Bank of Ukraine Tightened Control Over Greek Banks’ Subsidiaries in Ukraine ( ) Investors Again Reject Ukraine’s Hryvnia Bonds ( ) IMF Completes Visit to Ukraine, Warns of Economic and Financial Challenges ( ) Moldova Bank Fails (3-2012) U.S. Calls Belarus’ Credex Bank a Money Laundering Hub ( ) 13 For more news visit:

14 News from the Region – Eurasia 14 Azerbaijan: Largest Bank Bailed Out by Government ( ) Azerbaijan: Banks Expand Lending But are Dogged byHigh Credit Risk ( ) Georgia: Tycoon Organizes Political Protests, Sells Bank in Russia ( ) Russia’s Sberbank Building Its Own Bloc in Eastern Europe ( ) 14 For more news visit:

15 15 E&E Economies Still Weak and Unstable – High Unemployment Highest Risk Beneficiary Countries: Kosovo, Macedonia, Bosnia, Serbia and Armenia

16 16 E&E Financial Sectors – Still Reeling from 2009 Shock Banks have alarming levels of bad loans across SEE and Eurasia

17 17 Starved for credit: Azerbaijan, Armenia, Georgia, Kosovo E&E Financial Sectors are Small and Underdeveloped

18 Biggest threat to stability, prosperity and democracy in Europe and Eurasia: What if the European Financial Crisis Worsens? 18

19 19 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, democratic backsliding 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

20 20 Serbia, Bosnia, Montenegro, Macedonia, Ukraine: Unable to roll over debt Banks lose 40% of deposits Recession and Instability in Eurasia Ethnic tensions Increase: 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?

21 21 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 ( )

22 22 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

23 23 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:

24 24 Negative loan growth in CEE due to bank deleveraging Loan Growth Rate, Q Deleveraging of Banks and Access to Finance in Central & Southeast Europe Would Worsen

25 25 Bilateral Trade as Percent of Selected Countries’ GDP Source: IMF Regional Economic Outlook, October 2011 ItalySpainGreeceSubtotal Total for all EU trade Albania Belarus Bosnia and Herzegovina Macedonia Moldova Montenegro Serbia Ukraine Bilateral Trade With Troubled Eurozone Countries Would Decline

26 26 Remittances from Eurozone Would Decline Remittances Vulnerability Index

27 27 Most Vulnerable Countries in E&E: All of Southeast Europe Especially Montenegro, Serbia, Bosnia, Albania Eurasia also vulnerable Georgia, Armenia, Moldova, Ukraine

28 28 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.” European Union “Focusing on stability in core member states.”

29 Financial Stability in E&E What Can be Done 29

30 30 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, Poland

31 31 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

32 32 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

33 33 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

34 Annex Financial Sector Stability Indicators 34 Source: PFS Financial Sector Benchmarking System

35 35 E&E Economies Highly Indebted – No Room for Fiscal Stimulus Highest Risk Beneficiary Countries: Montenegro, Serbia, Ukraine, Georgia, Armenia, Moldova, Bosnia

36 36 Highest Risk Beneficiary Countries: Kosovo, Serbia, and Georgia (preliminary data) Most E&E Governments Have Large Budget Deficit

37 37 Many E&E Economies Have Unbalanced Economies – Imports far Exceed Exports Highest Risk Beneficiary Countries: Kosovo, Montenegro, Albania, Armenia and Georgia (preliminary data)

38 38 Lowest 2012 Growth Forecasts: Serbia, Albania, Bosnia, Macedonia, Montenegro 2012: Slowing E&E Economic Growth Forecasts

39 39 E&E Financial Sectors are Small and Underdeveloped Capital markets do not support business growth

40 40 Access to Finance is Weak: Loans are Expensive Loans are expensive: Georgia, Armenia, Kosovo … across SEE & Eurasia

41 41 Access to Finance is Weak – Few Banks and Branches Lowest bank density: Ukraine, Belarus, Moldova, Serbia

42 42 E&E Financial Sectors – Lower Bank Profits Banks are still losing money in: Ukraine, Montenegro, (Romania, Slovenia, Hungary)

43 43 E&E Financial Sectors – High Risk Lending in Foreign Currency Predominates Lending in foreign currency endangers banks and borrowers across the region

44 44 E&E Financial Sectors – Many Banks are Not Liquid Most illiquid (lower bar is better): Belarus, Ukraine, Azerbaijan, Armenia, Georgia, Montenegro

45 45 How the Countries Stack Up – Financial Sectors are Weak

46 . Partners for Financial Stability (PFS) 1919 N. Lynn Street Arlington. VA Phone: Fax: David Cowles COTR USAID Leslie Sulenta Chief of Party Deloitte Consulting LLP Lori Bittner Engagement Director Deloitte Consulting LLP


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