Heading for Financial Stability in Western Balkans Aleksandra

Heading for Financial Stability in Western Balkans Aleksandra Vukosavljević, Principal Banker Financial Systems and Economy - Responses to The Challenges of Crisis Business Info Group Hyatt Regency Hotel, Belgrade 2 nd November 2012 1 © European Bank for Reconstruction and Development 2010 | www. ebrd. com

Heading for Financial Stability in Western Balkans A. Financial Stability in Euro area – Snapshot – Restoring confidence B. Financial Stability in Western Balkans – So far so good – Need to Guard Against Further Shockwave C. The Complete Policy scenario D. Banking System Outlook in Western Balkans © European Bank for Reconstruction and Development 2010 | www. ebrd. com

Financial stability in Euro Area - Snapshot • Regulatory reforms to make the financial system safer • Financial systems still play a dominant role in spreading stress due to: – very tight funding markets – worsening asset quality – intense deleveraging pressures • Experiences with previous financial crises especially those involving deleveraging: Coherent and Comprehensive Action • 1) 2) Restore Health in the Balance Sheets Remove Uncertainty about Funding - NPLs - Resolution - Recapitalization - Sovereign/Bank link - Banking union Even then, recovery is likely to be slow and relatively weak ! Global Financial Stability Report, Restoring Confidence and Progressing on Reforms, OCTOBER 2012, IMF From Recession to Recovery: How Soon and How Strong By Prakash Kannan, Alasdair Scott, and Marco E. Terrones * © European Bank for Reconstruction and Development 2010 | www. ebrd. com RECOVERY

Financial stability in Euro Area – Restoring Confidence • Remains the key policy challenge to reverse fragmentation within the Euro area 1 • Fragmentation: § evident via rising spreads particularly in peripheral countries § difficult because member states can’t relay on: – independent monetary policy – floating exchange rate regime as a shock absorber – captive domestic investors base in LCY • Liquidity oriented policies (LTROs, OMT 2) can buy time • • Additional safety control devices are needed: Periphery Minus Core CDS Spreads (in bps) § Banking union § harmonising national prudential regulations § bank resolution and deposit insurance • Legal, technical and political challenges remain • Timing is important! 1) 2) Global Financial Stability Report, Restoring Confidence and Progressing on Reforms, OCTOBER 2012, IMF Long-term refinancing operations and Outright Monetary Transactions Program Source: Bloomberg, IMF staff estimates Note: CDS data are weighted by bank assets, 20 -day moving average © European Bank for Reconstruction and Development 2010 | www. ebrd. com

Financial stability in Western Balkans: - So Far So Good! • So far relatively smoothly navigated through global shocks • Thanks to large capital and liquidity buffers in place before the crisis • Banking systems are struggling with deleveraging pressures, worsening asset quality and slow growth • WB Countries are most vulnerable because of: – direct exposure to the euro area – similarities they bear to the countries in the euro area periphery • Cross border connections: – beneficial most of the time – but during a crisis may be associated with instability 1 Share of banks owned by Eurozone-based banks * Data refer to 2011 or latest available. Source: Central banks 1) The Steering Committee of the Vienna Initiative 2 proposes enhancements in cross-border supervision to European authorities, these focus on critical aspects of home-host cooperation. The EBRD, EIB, IMF, World Bank, and European Commission are members of the Steering Committee as well as Italy and Romania © European Bank for Reconstruction and Development 2010 | www. ebrd. com

Financial stability in Western Balkans: - Need to Guard Against Further Shocks • Guard against potential further shockwaves while managing a slowdown in growth • • Past credit and asset price booms: – external debt burdens – limited space for expansionary macroeconomic policy • The scope to provide fresh policy stimulus is constrained which underlines the need to cleverly manage country specific challenges • Low interest rate environment is crucial for now • Flexible exchange rates facilitate the necessary adjustment of economy • Function is constrained due to high level of FCY bank loans FCY loans in total bank loans * Data refer to 2011 or latest available. Source: Central banks © European Bank for Reconstruction and Development 2010 | www. ebrd. com

A Leap to. . . - The Complete Policies Scenario 1 • Joint efforts on the euro area and national level Non-performing loans (% of total credit) I. Measures at the euro zone level: – restore confidence – reverse capital flight – reintegrate the euro zone II. Measures at the national level: – growth-friendly fiscal consolidation – structural reforms * Data refer to 2011 or latest available. Source: Central banks – banking sector clean up State-ownership (% of total assets) • Efficient Clean up: – Full loss recognition – Adequate capitalisation – Write off &restructuring – Full protection of banks liabilities on the sovereign level can cause more harm than good! • Trade-off Between Growth and Safety * Data refer to 2011 1) Global Financial Stability Report, Restoring Confidence and Progressing on Reforms, OCTOBER 2012, IMF* © European Bank for Reconstruction and Development 2010 | www. ebrd. com Source: Central banks

Banking Systems Outlook in WB – Not Much of a Growth • No stunningly high credit growth: – deleveraging is likely to continue going forward – parent banks are targeting lower L/D ratios and less cross border funding – outlook for a medium-term profitability will remain low • Increasing efficiency: – pressure to deliver some shifts in their operational policies and efficiency – big banking groups with advantages of scale – markets could become more concentrated Focus on: – Banking system reform – Capital markets development Room remains for IFIs • • Real GDP growth (per cent) Source: EBRD © European Bank for Reconstruction and Development 2010 | www. ebrd. com

Thank you! Aleksandra Vukosavljevic Principal Banker Financial Institutions Western Balkans, Croatia, Belarus, Moldova GTC building, Bulevar Zorana Djindjica 64 a, 11070 Belgrade, Serbia Tel: +381 11 2120638 Email: Vukosava@ebrd. com www. ebrd. com © European Bank for Reconstruction and Development 2010 | www. ebrd. com