Foreign Banks in the CESE Countries
In for a Penny, in for a Pound?
Author: Ms. Li L Ong and Andrea M. Maechler1
  • 1 0000000404811396https://isni.org/isni/0000000404811396International Monetary Fund

Contributor Notes

Authors’ E-Mail Addresses: amaechler@imf.org; long@imf.org
Publication Date:
01 Mar 2009
eISBN:
9781451872026
Language:
English
Keywords:
WP; bank; Central; Eastern; and South-Eastern Europe; nonbank private sector; private sector; creditor bank; CESE banking systems; funding source; net exposure; claims of LAFBs
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The aim of this paper is to construct a comprehensive and consistent dataset to analyze the potential risks from foreign bank lending, for both the creditor and borrower countries of Central, Eastern and South-Eastern Europe (CESE). We develop a picture of bank claims on 13 CESE countries by combining credit statistics from several sources. Our constructed data suggest that some of these host countries have become more at risk from a sudden withdrawal of short-term external funding, while home countries have significant aggregate exposures to the region. Overall, we find that data on banking activity remain largely inadequate for surveillance and policymaking purposes, and that a concerted effort to improve data collection is needed at the international level.

Abstract

The aim of this paper is to construct a comprehensive and consistent dataset to analyze the potential risks from foreign bank lending, for both the creditor and borrower countries of Central, Eastern and South-Eastern Europe (CESE). We develop a picture of bank claims on 13 CESE countries by combining credit statistics from several sources. Our constructed data suggest that some of these host countries have become more at risk from a sudden withdrawal of short-term external funding, while home countries have significant aggregate exposures to the region. Overall, we find that data on banking activity remain largely inadequate for surveillance and policymaking purposes, and that a concerted effort to improve data collection is needed at the international level.

I. Introduction

The ongoing turbulence in global financial markets has highlighted the need for comprehensive and detailed data to monitor cross-country exposures in an increasingly integrated international financial system. The tightness in global liquidity conditions and sharp revisions in the pricing of risk have increased the possibility of a sudden stop or reversal in foreign-based lending to some emerging market countries.2 In this environment, it has become increasingly crucial that policymakers and supervisors have sufficient information to adequately assess banks’ risk management strategies, and formulate crisis prevention and management policies. In Central, Eastern, and South-Eastern Europe (CESE), rapid credit growth in recent years—largely attributable to the expansion activities of international banking groups and with substantial funding from abroad—has clearly increased the region’s vulnerability to financial risks.3

The presence of foreign banks has typically been considered a positive development in emerging market countries.4 In addition to promulgating more efficient allocation of capital, they also increase competition and improve the quality of financial services. In the CESE region, for instance, many banks are owned by reputable, well-capitalized banks from the EU-15 countries, which should provide banks with a second line of defense—after own financial strength—against potential shocks.5 In deteriorating market environment, for instance, banks with the support of healthy, well-diversified foreign parents may be better-placed than local banks to weather the downturn. Additionally, the reputation risk to these international banks also deters against any damaging actions in a particular country or group of countries.6

However, as the current global financial crisis demonstrates, even the major international banks are not immune to the sharp reversal in the credit cycle and the attendant fallout from the widespread liquidity crunch. In many of the Western countries, governments have had to provide support packages to boost banks’ capitalization and retain confidence in their own financial systems. The banking systems in CESE, which had largely eschewed subprime loans and more exotic credit products, had been able to side-step the problems that befell their Western counterparts until recently. However, some spillovers from the turbulence in international markets have manifested in recent months, in the shape of increasing tightness in liquidity and credit conditions, and rising credit risk.

The latest developments are not surprising given the experience from previous crises which demonstrated the potential for contagion across countries through their exposures to common creditors.7 Although the extent and depth of the impact on CESE remain unclear at this point, increased integration by CESE countries into international financial markets and the high share of foreign ownership in their banking systems may increase their susceptibility to the risk of cross border contagion.8 The concentration of borrowing from a handful of creditor countries has also increased the region’s vulnerability to idiosyncratic shocks from these countries and/or business decisions by individual parent banks. Conversely, the increasing importance of CESE countries in the portfolios of creditor banks has also heightened the risk of a feedback effect on home countries, especially if regional contagion occurs.

In recent years, much of the research on credit growth in CESE has focused on country experiences with the rapid expansion in bank lending, notably by foreign banks. Work in this area has largely centered on the policy measures taken to address this phenomenon, and the roles of supervision and regulation in mitigating the associated risks.9 There has been little empirical work done to quantify the extent of foreign versus local bank lending—and the composition of that lending— in the region’s markets, and the potential impact to both host and home countries of a sudden reversal in foreign bank lending to the region.10 Indeed, shortcomings in existing international credit databases have made it difficult to properly assess the risks and exposures associated with foreign banks in CESE for surveillance and risk management purposes.11

Thus, the objective of our paper is to develop a comprehensive and consistent dataset to analyze the risks associated with bank credit flows in the CESE region. First, we attempt to put together a more comprehensive picture of private bank claims on individual CESE countries using a combination of more standardized international databases.12 Specifically, we use the claims data of foreign banks, as reported in the BIS’ Consolidated Banking Statistics, supplemented with credit data from the International Financial Statistics (IFS) of the International Monetary Fund (IMF).13 Next, we use this derived dataset to demonstrate a simple quantification of the potential maximum losses from a regional contagion, for both home and host countries of CESE. Specifically, we estimate the possible maximum size of a funding shock on host countries, and the maximum possible losses to home country banks from a regional contagion.14 We find that host countries in CESE have become more at risk from a sudden withdrawal of short-term foreign claims, while home countries have significant aggregate “captive” exposures to the region as a whole.

Our paper complements that of Arvai, Driessen, and Otker-Robe (2009). The authors use BIS data to develop simple indices of exposure to regional contagion in order to identify pressure points and assess the magnitude of cross-border exposures between emerging and Western European countries. The authors also describe in detail the possible propagation channels of regional shocks. They show that financial inter-linkages within Europe are economically important, and that even where exposures are well-diversified, potential economic and financial spillovers increases the overall exposure quite considerably.

Our analysis of the constructed dataset highlights the importance of the increasing inter-linkages between home and host countries of CESE, and emphasizes the need for more complete and better quality data for surveillance and policymaking purposes. Although the use of a combination of data sources provides a more detailed picture of the composition of foreign versus local credit for a particular country, discrepancies persist. Issues such as the incompleteness of reporting countries and banks, inconsistencies in the availability of like data series across countries, and differences in the definition and collection of data contribute to their lack of reliability and comparability. The existing international databases are inadequate for cross-border surveillance and policymaking, and a concerted effort is required at the international level to improve data collection.

It should be noted that this paper does not presume to speculate about the ability of home and host countries to absorb shocks and feedback effects to their respective banking systems. The vulnerability of a country to any shock would depend on the strength of its macroeconomic fundamentals, the general soundness of its financial system and institutions, and the capacity of its contingency plans to absorb any sudden and significant stress. Nor do we assess the probability of a shock of any given magnitude or the macroeconomic feedback mechanisms.

The rest of this paper is organized as follows. Section II describes the dataset and provides a brief description as to how it is constructed. Section III discusses the stylized facts on the composition of claims on the CESE countries, followed by a quantification of home and host country “exposures” to each other in Section IV. Section V concludes.

II. The Data

In CESE, the expansion of foreign banks into host countries, and the volume and persistence of credit financing had largely been attributable to positive developments in macroeconomic policy settings, structural reforms, and the strong positive economic outlook for the region. In the early days of transition, the growth in credit had largely been attributable to the public sector. In recent years, however, credit to the private sector has become the dominant component, posting very strong rates of growth to both the corporate and household sectors.

Associated with this changing trend is the expansion in direct cross-border borrowing, notably by creditworthy corporates which are able to access cheaper funding overseas.15 Meanwhile, foreign currency borrowing by households—largely through local affiliates of foreign banks (LAFBs)—has also been growing in some countries, with demand driven by lower foreign interest rates relative to those for local currency loans. Short-term direct cross-border claims (typically in foreign currency) by foreign banks represent an important source of liquidity risk to the local financial system.

A. Derivation of the Components of Bank Claims

In order to better examine the structure of banks’ claims and their implications for financial stability, we first construct a dataset of bank claims on the private sector for selected CESE countries. We supplement the consolidated banking statistics from the BIS with data from the IFS of the IMF to derive the four components of bank claims on a particular country, where “foreign bank claims” are defined as the cross-border claims of foreign banks and the local claims of LAFBs in all currencies (Figure 1):

  • Direct cross-border claims of foreign banks on the host country. This category captures all foreign bank claims that are extended by the parent banks or other third-parties (i.e., unaffiliated) foreign banks on a cross-border basis (“A”).16

  • Local claims of LAFBs in foreign currency. These claims are the foreign exchange component of credit extended by LAFBs in the host country (“B”).

  • Local claims of LAFBs in local currency. This category represents credit extended in local currency by the LAFBs in the host economy (“C”).

  • Local claims of local banks. This category covers loans extended by domestically-owned banks in the host country (“E”).17

Figure 1.
Figure 1.

Components of Bank Claims on a Country

Citation: IMF Working Papers 2009, 054; 10.5089/9781451872026.001.A001

Source: Bank for International Settlements.

In this paper, we focus on the composition of bank claims on the nonbank private sector. These comprise the share of claims on the nonbank private sector that is held by local banks, LAFBs and banks located in the home country. In order to more accurately reflect where the risks associated with foreign claims reside, we use BIS data on ultimate risk basis where available. Where necessary, we apply explicit assumptions to the BIS data on immediate borrower basis to bridge gaps in the ultimate risk data (Box 1).18 The extent to which these claims are funded through (non-parent) inter-bank loans, as opposed to other sources such as domestic deposits or capital markets, are also examined using BIS data. Claims by (non-parent) foreign banks on the banking sector of host countries are also analyzed.

We examine the maturity structure of foreign bank claims to obtain a clearer picture of the potential liquidity risk faced by a particular host country, and the risk to asset quality. To do so, we decompose the claims into short-term (maturity of one year or less) and longer-term maturities (maturity greater than one year). The determination of short-term claims allows us to quantify the host countries’ vulnerability to a sudden withdrawal of funding. Separately, the quantification of longer-term claims helps us to estimate foreign banks’ exposures to credit risk, that is, the deterioration of longer-term “captive” claims of foreign banks on host countries, following the initial liquidity shock of a sharp withdrawal of short-term claims. The full complement of data series derived for our analysis is presented in Figure 2.

Figure 2.
Figure 2.

Bank Claims Dataset Constructed From BIS and IFS Statistics

Citation: IMF Working Papers 2009, 054; 10.5089/9781451872026.001.A001

Source: Authors’ calculations.

Deriving the Components of Bank Claims from BIS and IFS Data

We use a combination of BIS and IFS data to construct the different components of bank claims on a particular country. Within the BIS database, statistics are available on ultimate risk and immediate borrower bases, and a combination of both is applied in our derivations of claims by foreign and local banks on a host country.

For the purposes of our calculations, BIS claims data are available on an ultimate risk basis for (i) total foreign claims; (ii) cross-border claims of foreign banks; and (iii) all local claims of LAFBs; data is available on an immediate borrower basis for: local claims of LAFBs in local currency:

  1. In order to separate the local claims of LAFBs into local and foreign currency series, we make the assumption that the local claims of LAFBs in local currency on immediate borrower basis are equal to the local claims of LAFBs on ultimate risk basis. Thus, we are able to derive the following:

    Local claims of LAFBs in foreign currency = All local claims of LAFBs – Local claims of LAFBs in local currency.

  2. Next, we derive the local claims of local banks on the nonbank private sector. The IFS statistics reports the claims of all depository institutions in the country on the nonbank private sector. The local claims of local banks series are equal to this IFS series less the BIS data on all claims of LAFBs.

  3. Thus, we have the following four components that make up the claims on a particular country:

    (i)cross border claims of foreign banks; (ii) local claims of LAFBs in foreign currency;

    (iii) local claims of LAFBs in local currency; and (iv) local claims of local banks.

As a next step, we calculate the claims on the nonbank private and banking sectors. We apply BIS sectoral data to determine each sector’s amount in each foreign claims component; the data is available for total foreign claims on ultimate risk basis for the banking, nonbank private and public sectors. We make the assumption that each sector’s proportion in total foreign claims is the same as that in each of the components of foreign claims.

We subsequently quantify the short- and longer-term claims of foreign banks on the nonbank private and banking sectors. BIS statistics report total international claims (direct cross-border claims plus local claims of LAFBs in foreign currency) on an immediate borrower basis according to their maturities. We make the assumption that each maturity’s proportion in total international claims on an immediate borrower basis is the same as that for each component of foreign claims on an ultimate basis on each sector, and apply the proportions to derive the short- and longer-term claims amounts.

B. Selection of Home and Host Countries

Our analysis focuses on the main 13 CESE (“CESE-13”) countries which account for around 90 percent of region’s total foreign exposures to BIS-reporting banks (Table 1). Some 75 percent of these exposures are concentrated in five host countries (Poland, 15 percent; Russia, 14 percent; the Czech Republic, 11 percent; Turkey, 10 percent; and Hungary, 9 percent). Foreign banks have their smallest exposures to Bulgaria, Ukraine, and the Baltic countries, each accounting for less than 3 percent of total foreign claims on the region.

Table 1.

CESE: Claims of Foreign Banks on Major Host Countries,

at End-2007

article image
Sources: Bank for International Settlements; International Financial Statistics, IMF; and authors’ calculations.

We select our dataset of BIS-reporting home countries based on their importance as creditors to CESE. To do so, we calculate the share of each home country’s exposure to the CESE countries as a percentage of the former’s total claims on the latter (Table 2).19 We find Austria to be by far the most important creditor country for CESE, accounting for almost 19 percent of foreign bank funding to the region, followed by Germany and Italy. The 13 countries in our sample account for 96 percent of CESE liabilities to BIS-reporting banks.

Table 2.

CESE: Claims of Foreign Banks of Major Home Countries, as at End-2007

article image
Sources: Bank for International Settlements; International Financial Statistics, IMF; and authors’ calculations.

III. Stylized Facts: An Analysis of the Data

The nature of financial intermediation in CESE has changed considerably over a relatively short period of time. There have been noticeable shifts in terms of the origination (foreign versus domestic banks), currency (foreign versus local currency), sector (public versus private) and maturity structure of bank claims. In this section, we present the stylized facts on the total exposures of major creditor (home) countries to CESE, and discuss the extent of the reliance of CESE countries on foreign bank lending, and the maturity structure of these foreign claims. We subsequently focus on developments in foreign bank lending to the private sector in the 13 most important host countries in CESE. All data presented are on an ultimate risk basis, unless stated otherwise.

A. Local and Foreign Banks’ Claims on All Sectors20

The reliance of CESE host countries on foreign banks

The size of foreign bank claims on CESE countries are significant relative to their respective GDPs (see Table 1). Moreover, these countries tend to rely on bank financing from a relatively small number of creditor countries. In all, fewer than a dozen countries account for more than 90 percent of total foreign claims on each CESE country (Table 3). Specifically:

  • Austria is the most important foreign creditor to the region. It accounts for the largest share of total foreign bank claims in 6 of the 13 host (debtor) countries in our sample (Croatia, Czech Republic, Hungary, Romania, Slovak Republic, and Ukraine). In some instances, Austria accounts for more than 35 percent of total foreign bank borrowing by these countries. Austria also figures prominently in Bulgaria, despite being the third largest foreign lender there, accounting for 16 percent of foreign claims on the country.

  • Sweden’s lending to the CESE region is highly concentrated in the Baltic countries. Indeed, Swedish banks have provided over 90 percent of Estonia’s foreign bank funding and account for 78 percent of both Latvia’s and Lithuania’s total foreign borrowings.

  • France, Germany, and Italy are important creditors to most of the CESE banking systems. France is a major lender to almost all CESE countries—Estonia, Latvia, and the Slovak Republic being the exceptions—accounting for between 19 percent of foreign claims on Ukraine and around 1 percent for each of the Baltic countries. The shares of German banks’ claims range from 24 percent of total foreign claims on Hungary, to around 2 percent on Estonia, while Italian banks are important creditors to numerous CEE and SEE countries.

  • Greece is the most important foreign creditor for Turkey and Bulgaria. It accounts for 28 and 20 percent of total foreign claims on each country, respectively. It also has a presence in many countries in the region, albeit small.

Table 3.

CESE: Share of Total Foreign Bank Claims on Select Host Countries, as at End- 2007

(In percent of total foreign claims on host country)

article image
Sources: Bank for International Settlements; and authors’ calculations.

The exposures of home countries to CESE

Correspondingly, the exposures of some home countries to CESE are very significant relative to their total foreign claims and GDP (see Table 2). Overall, home countries tend to be most exposed to the more developed countries in CESE (Table 4).

  • Austria has, by far, the biggest exposure to the region relative to the size of its own economy. Total claims on CESE account for 49 percent of its total foreign claims, and some 70 percent of GDP. For Greece banks, the CESE countries account for almost 77 percent of their total foreign claims worldwide, or the equivalent of 22 percent of the country’s GDP. The exposures of Swedish and Belgian banks to the CESE region represent 12 and 9 of their respective total global claims, and 19 and 26 percent respectively of their own GDP.

  • The Czech Republic, Poland, and Russia are among the most popular destinations for foreign bank lending. The Czech Republic is the most important market for Austria, Belgium, and France, while banks from Germany, Italy, and the Netherlands are the biggest lenders to Poland; Russia is the most important market for Swiss and U.S. banks. For some of these lenders, Hungary also ranks among their largest exposures.

  • There is a concentration of claims by individual home countries. For almost all creditor countries, 50 percent or more of their total claims on CESE are attributable to three host countries (this ratio rises to 80 percent in the case of Greece, Japan, and Sweden). Austria—the most prominent creditor to CESE—has the most diversified loan portfolio among the major home countries, with its three biggest CESE borrowers accounting for less than half of its total claims on the region.

Table 4.

CESE: Share of Total Foreign Bank Claims of Home Countries, as at End-2007

(In percent of total home country claims on region)

article image
Sources: Bank for International Settlements; and authors’ calculations.

The maturity structure of foreign bank claims

The maturity structure of foreign bank claims on the CESE region has changed over time and across countries (Table 5). Between March 2005 and December 2007, maturities continued to lengthen in five of the CESE-13 (Bulgaria, Croatia, Estonia and Lithuania); they shortened in two countries (Czech Republic and Russia); and have remained relatively stable in two others (Hungary and Poland).

Table 5.

CESE-13: Changes in the Maturity Structure of Total Foreign Bank

 Claims on Select Host Countries, March 2005–December 2007

(Longer-term foreign bank claims in percent of total foreign bank claims)

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Sources: Bank for International Settlements; and authors’ calculations.Note: Maturity data are only available on immediate borrower basis; longer-term claims are defined as those with maturities of more than a year.

The onset of the global financial crisis in the summer of 2007 has also played a role in changing the maturity profile of foreign claims in some instances. In some countries, the maturity structure of foreign claims has tended to change directions during this period, some more markedly than others. In Latvia, the maturity of foreign claims lengthened significantly between June 2007 and December 2007 after a sharp retrenchment following the build-up of short-term claims up to June 2007. The opposite is true for Ukraine, with maturities declining since June 2007, having lengthened between March 2005 and June 2007. Romania and Ukraine have the biggest proportion of short-term foreign claims, of more than half, while Estonia and Lithuania have the smallest, at 20 and 22 percent, respectively.

The sectoral structure of foreign bank claims

There has been a marked shift in the balance of foreign banks’ claims between the public and private sectors, and even within the private sector in the 13 main CESE host countries. Between March 2005 and December 2007, foreign banks’ claims on the public sector across these countries fell as a percentage of their total claims on the region (Table 6). The observed shift was, in part, due to improvements in the fiscal position of host countries and the privatization of state-owned enterprises. The exceptions were the Czech Republic, where foreign banks’ claims on the public sector increased, and Estonia and the Slovak Republic, where the share was maintained. Foreign banks’ claims on the public sector are highest in Poland and the Slovak Republic, at 28 percent of their total claims; and lowest in Estonia (3 percent) and in Latvia and Russia (both 6 percent).

Table 6.

CESE-13: Changes in the Sectoral Structure of Total Foreign Bank Claims on Select Host Countries, March 2005–December 2007

(Foreign bank claims on public and private sectors in percent of total foreign bank claims)

article image
Sources: Bank for International Settlements; and authors’ calculations.                 Note: Maturity data are only available on immediate borrower basis.

In general, the proportion of claims on the private sector in CESE has increased. It has remained the same in Estonia and the Slovak Republic, and declined slightly in the Czech Republic. Within the private sector, there has been a clear reallocation of claims between the nonbank private and banking sectors—the proportion of claims on the former, relative to the total, has increased across all countries. The importance of nonparent inter-bank claims has declined, except in Lithuania (from 12 to 21 percent) and Russia (from 27 to 30 percent); the proportion has been maintained in Poland.

B. Local and Foreign Banks’ Claims on the Private Sector

In this sub-section and for the rest of the paper, we focus on banks’ claims on the private sector of the CESE-13. Overall, we find distinct differences in the composition of claims on the private sector across the CESE-13 sub-regions and within each sub-region, in individual countries (Figure3): 21

  • A typical measure of the depth of financial intermediation is total bank credit to the nonbank private sector in percent of GDP. In CESE-13, this metric currently ranges from around 120 percent in the Baltics, to about 60 percent in CEE and 70 percent in SEE, and in other emerging Europe (OEE), just over 40 percent. In particular, total bank claims on the nonbank private sector amount to 162 percent of GDP in Estonia and 126 percent in Latvia, compared to around 46 percent in Russia and 38 percent in Turkey. In Croatia, this figure is also very high, at 119 percent of GDP.

  • The nonbank private sector in CESE-13 is increasingly dependent on foreign bank funding. The share of credit to GDP generated by domestic banks has fallen progressively over time. For example, foreign bank claims on the Baltic countries have increased sharply from about 20 percent of total bank claims to almost 70 percent (or from 10 percent to 80 percent of GDP) over the March 2005– December 2007 period. Specifically, claims on Latvia have posted the steepest rise from 15 percent of total bank claims on the country (9 percent of GDP) in 2005 to 73 percent (92 percent of GDP) as at end-2007. In the Czech Republic, foreign bank claims are at around 80 percent of total bank claims on the country, as a result of the very high share of foreign bank ownership. At the other end of the spectrum, domestic banks have continued to dominate in Russia and Turkey, accounting for more than two-thirds of total claims on the nonbank private sector, although cross-border claims have been increasing.

  • Foreign bank claims on the nonbank private sector are increasingly denominated in foreign currency. While the larger portion of aggregate foreign bank claims on the CEE countries continues to be denominated in local currency, there has been a sharp increase in foreign currency bank lending in the SEE and Baltic countries. The rise is attributable to both a general expansion in cross-border lending, which is typically denominated in foreign currency, and a rise in foreign currency lending by LAFBs. The notable exceptions are in the Czech Republic, Lithuania and the Slovak Republic, and to a lesser extent Romania, where local currency lending by LAFBs have recorded the highest growth rates, up to end-2007.

  • Nonparent bank funding varies in importance as a source of financing for the CESE-13 banking sector. Foreign nonparent inter-bank claims on CESE-13 banking sectors are around 10–30 percent of GDP on average; they are highest in Estonia and Latvia (42 and 34 percent of GDP, respectively) and lowest in Russia and Turkey (less than 5 percent of GDP).

  • Most of the nonparent inter-bank funding tends to be in the form of direct cross-border credit or local currency credit from other LAFBs. In most countries, foreign currency lending by LAFBs to the local banking sector has been the least important, except in Latvia where it has been at least as much as the other components.

Figure 3.
Figure 3.
Figure 3.

CESE-13: Composition of Bank Claims on the Nonbank Private and Banking Sectors, by Sub-Region

(In percent of GDP)

Citation: IMF Working Papers 2009, 054; 10.5089/9781451872026.001.A001

Sources: Bank for International Settlements; International Financial Statistics, IMF; and authors’ calculations.

IV. A Quantification of Home and Host “Exposures”

In this section, we derive the breakdown of short- and longer-term claims of home countries, from the total claims data. Short term is defined as one year or less, and any period greater than one year is considered long term. The aim is to determine:

  • The maximum possible amount of liquidity that could be withdrawn quickly from host countries, in the event of an idiosyncratic shock to the home country or parent bank, a loss of confidence in the CESE region or in the global outlook in general.

  • The maximum possible amount of losses that home countries could incur in the event of a significant shock to the host country, which could result in a swift deterioration in the asset quality of the remaining longer-term claims.

A. Short-Term Exposures

The aggregate short-term claims of foreign banks on CESE-13’s nonbank private sector amount to 9 percent of CESE-13 GDP. 22 Furthermore, the majority share of this funding is in the form of typically more volatile direct cross-border loans (4 percent of the region’s GDP). However, the distinct differences across sub-regions and in the nature of claims should be noted (Figure 4 and Table 7):

  • Among the sub-regions, the Baltic countries appear to have experienced some withdrawal of liquidity by foreign banks. Since mid-2007, the sub-region has experienced some withdrawal of short-term funding from its nonbank private sector. The pullback has been most pronounced in Latvia where short-term funding fell from 45 percent of GDP to 30 percent of GDP, while some withdrawals also occurred in Estonia. However, longer-term claims on these countries increased during this period, suggesting a shift in banks’ maturity profiles. Short-term claims by foreign banks on the nonbank private sector of the Baltic sub-region amount to almost 20 percent of Baltic GDP, almost half of which in the form of direct cross-border loans.

  • The SEE countries are also exposed to the possibility of a sudden withdrawal of short-term foreign bank funding from the nonbank private sector. This funding, which accounts for more than 17 percent of the sub-region’s total GDP, is slightly more than 20 percent of GDP for Bulgaria, Croatia, and Romania.

  • Short-term funding in the CEE countries is largely from LAFBs in local currency. This form of funding amounts to almost 8 percent of host GDP, followed by cross-border funding of around 4 percent of GDP.

  • The OEE group of countries (Russia and Turkey) appears to be least dependent on short-term funding by foreign banks. In aggregate, the total short-term liabilities of the nonbank private sector amount to only 5 percent of GDP, albeit with direct cross-border borrowing making up about two-thirds of this amount.

Figure 4.
Figure 4.
Figure 4.

CESE-13: Composition of Short-Term Foreign Bank Claims on the Nonbank Private and Banking Sectors, by Sub-Region

(In percent of GDP)

Citation: IMF Working Papers 2009, 054; 10.5089/9781451872026.001.A001

Sources: Bank for International Settlements; International Financial Statistics, IMF; and authors’ calculations.
Table 7.

CESE-13: Quantification of Short-Term Foreign Bank Claims on the Nonbank Private and Banking Sectors, by Sub-Region, as at End-2007

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Sources: Bank for International Settlements; International Financial Statistics, IMF; and authors’ calculations.Note: LC LC = local claims of LAFBs in local currency; LC FC = local claims of LAFBs in foreign currency; XBC = cross-border claims.

Overall, the CESE-13 countries do not appear to be as significantly exposed to a sudden withdrawal of short-term (nonparent) inter-bank funding, relative to the nonbank private sector:

  • The banking systems in the Baltic and SEE sub-regions appear most reliant on inter-bank liquidity. Nonparent foreign bank funding represents approximately 7 percent of Baltic GDP. Between mid- and end-2007, the Baltic countries experienced a withdrawal of inter-bank funding; in Latvia alone, short-term inter-bank claims have fallen to 11 percent of its own GDP, from more than 20 percent, with no offset in longer-term claims.

  • Some countries may be less prone to a similar shock because of the composition of their foreign bank claims. For example, while short-term non-parent bank claims on the banking sector in the Slovak Republic amounts to 10 percent of its GDP, 70 percent of these claims are largely by LAFBs and denominated in local currency, which is likely to be more stable. Similarly, inter-bank borrowing by the Czech banking sector is largely from LAFBs and in local currency.

The short-term claims of foreign banks represent the maximum liquidity shock that a sudden withdrawal of short-term funding could impose on CESE countries. An analysis of the short-term exposures of individual home countries to the CESE region shows which home countries could represent important pressure points for the region, in the even that their banks are forced to withdraw short-term funds (see Table 7):23

  • Austria is the most important short-term creditor to the region’s nonbank private sector.

    • Austria’s outstanding short-term claims on the region amount to 1.7 percent of aggregate CESE-13 GDP; Germany and Italy are next, each with short-term claims amounting to 1.1 percent of the region’s GDP. These claims are largely in the form of credit from LAFBs in local currency and in cross-border loans.

    • Conversely, Austria is by far the most exposed in terms of short-term lending to the region, with claims of almost 15 percent of its own GDP. Belgium and Greece follow, with total short-term claims of 5.6 and 5.1 percent, respectively.

  • The importance of individual home countries to the CESE nonbank private sector changes somewhat when viewed from a sub-regional perspective:

    • Sweden is the main short-term lender to the Baltics, with loans accounting for just over 16 percent of Baltic GDP, with the largest proportion coming from cross-border loans. The Baltics are also the most important short-term debtor group for Sweden, accounting for 3.1 percent of its GDP.

    • Austria remains the most important creditor of short-term credit to CEE (loans by LAFBs in local currency) and SEE (loans by LAFBs in local currency and cross-border loans), with short-term loans amounting to about 3 and 6 percent of their respective GDP; its exposure to both sub-regions each represent 6.3 percent of Austrian GDP. Italy is the second most important short-term lender to both the CEE and SEE, having made loans to the amount of 2.3 and 2.5 percent of their GDP, respectively.

  • At the individual host country level, Austria is the most important short-term lender for a host of countries across the region:24

    • In terms of host GDP, Croatia (8.4 percent), Czech Republic, Hungary, Romania (8.8 percent), Slovak Republic and Ukraine receive their largest short-term loans from Austria. In terms of Austria’s own GDP, it is most exposed to Romania (3.9 percent) and Czech Republic (3 percent).

    • Separately, Sweden is the key short-term creditor to each of the Baltic countries, with Latvia having borrowed the equivalent of some 22 percent of its GDP, and Estonia about 20 percent of its GDP, from Swedish banks. These loans amount to 1.3 and 1 percent of Sweden’s GDP, respectively.

  • The trends in home country lending to the banking sector of host countries are similar to the nonbank private sector:25

    • Austria is the key short-term (nonparent) lender to the region, accounting for 0.6 percent of CESE GDP, or 5.6 percent of its own GDP (see Table 7). It plays a more important role for banks in the SEE, with short-term inter-bank lending amounting to 2.4 percent of the sub-region’s GDP, compared to 1 percent of CEE GDP. Austrian banks are the biggest counterparties to banks in the Slovak Republic, lending an equivalent of 4 percent of the latter’s GDP in short-term funds, followed by Romania, at 3.4 percent of GDP.

    • Sweden’s short-term (nonparent) inter-bank lending to the Baltics is largest, at 5.8 percent of Baltic GDP, or 1.1 percent of own GDP. Its claims on the Latvian and Estonian banking sectors amount to around 8 percent of host GDP.

B. Longer-Term Exposures

Given the large exposures of some foreign banking groups to CESE, the asset quality of their longer-term claims could be negatively affected by major negative shocks to their host countries. These longer-term claims are calculated as the difference between the total claims on the region, and the short-term claims discussed above. They represent the longer-term losses on foreign banks’ credit portfolio that is “captive” in CESE countries:

  • When taken in aggregate, home countries’ longer-maturity exposures to the region’s nonbank private sector are substantial. 26 Austria’s exposures to nonbank private sector in the CESE-13 region amount to 23 percent of own GDP, followed by Sweden (11 percent), Belgium (more than 9 percent), Greece (6 percent), and the United Kingdom (4 percent).

  • From a sub-regional perspective, Sweden’s longer-term exposures to the nonbank private sector in the Baltics alone amount to almost 10 percent of its own GDP, while Austria’s exposures to the CEE and SEE nonbank private sectors amount to 12 percent and 9 percent respectively of GDP (Table 8).

  • The “captive” longer-term inter-bank claims of (non-parent) foreign banks are limited in terms of any one CESE-13 country: 27 In each host country, longer-term foreign inter-bank claims amount to around 1 percent of home country GDP or less. Austrian banks have the largest exposures to individual countries’ banking systems, namely, to Hungary and Romania, each amounting to 1.2 percent of Austria’s GDP.

  • However, the longer-term exposures of some home countries to CESE-13, taken in aggregate, are not insignificant. Austrian banks have the largest total inter-bank exposure to CESE, amounting to almost 8 percent of Austria’s own GDP. They have mostly lent to banks in the CEE countries, to the amount of almost 4 percent of Austria’s own GDP, followed by the banking sector in the SEE countries, at around 3 percent of its own GDP. Sweden’s exposure to the CESE-13 banking sectors represents almost 4 percent of its GDP, most of which is concentrated in the Baltic countries (3.5 percent of Sweden’s GDP). Except for Belgian banks, whose aggregate inter-bank exposures to CESE-13 represent 3 percent of its own GDP, the exposures of each of the other home countries are typically below 2 percent of their respective GDP.

Table 8.

CESE-13: Quantification of Longer-Term Foreign Bank Claims on the Nonbank Private and Banking Sectors, by Sub-Region, as at End-2007

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Sources: Bank for International Settlements; International Financial Statistics, IMF; and authors’ calculations.Note: LC LC = local claims of LAFBs in local currency; LC FC = local claims of LAFBs in foreign currency; XBC = cross-border claims.