Download Towards a new international financial architecture Peter Sanfey

Towards a new international
financial architecture
Peter Sanfey
Lead Economist, EBRD
19 November 2009
The transition region is in deep crisis

2009 average output decline: 6.3 per cent

Double-digit declines expected in 5 countries
(Baltic countries; Ukraine, Armenia).

Crisis is not over: rising non-performing loans
and unemployment

Slow recovery expected for 2010

Romania among the countries hardest hit
(minus 8% in 2009, plus 1% in 2010)
Output declines were deep, sudden,
and heterogeneous…
Quarter on quarter GDP growth, per cent (seasonally adjusted)
10
Q3 2008
Q4 2008
Q1 2009
Q2 2009
5
0
-5
-10
ga
ria
C
ro
at
ia
H
un
ga
K
az
r
ak y
hs
ta
n
La
tv
i
Li
th a
ua
ni
a
Po
la
nd
R
om
an
ia
R
us
si
a
Se
rb
ia
Sl
ov
ak
ia
Tu
rk
ey
U
kr
ai
ne
B
ul
B
el
ar
us
-15
…but no full-fledged “twin crises”.
Why?
1. Net capital outflows were less sharp than in
previous crises (e.g. Asia) and other regions.
2. Financial systems were comparatively sound
(high foreign bank presence, small non-bank
financial sectors)
3. Forceful, coordinated and comprehensive
crisis response
In most transition countries, net capital
outflows were comparatively modest
Percentage changes in external assets of BIS-reporting banks
Per cent
15
Avg 2008Q4/2009Q1
Avg 2007Q4/2008Q1
10
5
0
-5
-3.4
-4.4
-7.8
-10
-11.1
-11.9
-15
Emerging Europe
(excl. UKR, RUS)
Russia &
Ukraine
CA and
Caucasus
Latin America
Emerging Asia
Crisis response has been effective

Domestic policies: Massive in western Europe
and mature in central and eastern Europe

Forceful & coordinated international support
– IMF resources tripled from $250 to $750 bn
– EBRD investments up more than 50% this year
– EU BOP support quadrupled from €12.5 to €50 bn

Parent banks maintained exposures

New coordination platform – Vienna Initiative
International support packages are
much larger than in the Asian crisis
External balance of payments support (Percent of GDP)
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
Q3 1997
Korea
Q4 1997
Thailand
Q1 1998
Q2 1998
Philippines
Q3 1998
Indonesia
Q4 2008
Hungary
Q1 2009
Latvia
Q2 2009
Romania
Q3 2009
Ukraine
The Vienna Initiative has helped
maintain foreign bank funding

Coordination among banks to maintain exposures

Joint IFI (EBRD/EIB/WB) support to bank groups

Home country authorities allow parent bank
support of subsidiaries

Host country authorities to provide liquidity equally
to foreign and domestic owned banks
The CEB and SEE growth model has
three components
1. Political, legal-regulatory integration with EU
2. Trade integration (particularly with the EU)
3. Financial integration, led by EU banks
External assets and liabilities, 1994-2008
Per cent of
GDP
250
CEB
SEE
EEC
Russia
Turkey
CA
Foreign bank asset share, 1998-2008
Per cent
SEE
EEC
Russia
Turkey
CA
100
200
80
150
60
100
40
50
20
0
CEB
0
1994
1996
1998
2000
2002
2004
2006
1998
2000
2002
2004
2006
2008
In transition countries, capital inflows
are correlated with higher growth
… in contrast with the experience in other
emerging market regions.
Transition sample
14
14
12
12
y = 0.1681x + 5.0106
R2 = 0.1201
10
10
8
8
6
6
4
4
2
2
0
0
-2
-2
-20
-10
0
10
CA/GDP, % (av. 1994-2008)
Growth GDP per cap, PPP
(av.1994-2008)
Growth GDP per cap, PPP
(av.1994-2008)
Non-transition sample
20
18
16
14
12
10
8
6
4
2
0
20
18
16
14
12
10
8
6
4
2
0
y = -0.3442x + 5.2813
R2 = 0.2697
-15
-10
-5
0
5
CA/GDP, % (av. 1994-2008)
10
Financial integration is good for longterm growth in transition economies

Financial integration associated with growth
– 1 per cent of GDP in inflows raised annual growth
by 0.15-0.4 percentage points per year
– 10 percentage point higher foreign bank share
raised growth 0.2-0.4 percentage points per year

Financially dependent firms grew faster in
financially integrated transition economies
– 1.5 percentage points per year faster in high
capital inflow countries than in low inflow countries
Foreign banks are associated with
better output performance in the crisis
5
Output growth over 2008 Q4 - 2009 Q1, q-o-q,
sa, %
5
ALB
BiH
GEO
MNE
FYR
SRB
CZE
HRV
BUL
ROM
SVK
POL
0
KAZ
KGZ
HUN
BLR
-5
AZE
TAJ
-10
TUR
RUS
MOL
SLV
0
-5
-10
EST
LIT
ARM
-15
-15
LAT
-20
-20
UKR
-25
0
20
40
60
80
100
Share of foreign bank assets in % of total assets, 2007
-25
120
But capital inflows fed credit booms
and external (over-)indebtedness…
Cross-border debt inflows and domestic credit growth, 2005-08
Median growth of BIS lending between mid2005 and mid-2007, %
90
90
UKR
80
AZE
70
ALB
60
EST
80
KAZ
70
ROM
60
LAT
LIT
50
R2 = 0.2988
50
SER
RUS
40
40
TAJ
BUL
FYR
BiH
SLV
HRV
CZE
POL HUN
30
20
MOL
30
20
10
10
0
-20
30
80
130
180
Average credit growth between mid-2005 and mid-2007, %
0
230
… and contributed to FX lending in
domestic financial systems
Foreign bank asset share and share of FX lending in total lending
Share of foreign currency lending in total
domestic lending, %
100
100
90
90
LAT
80
EST
70
ALB
SER
60
HUN
AZE
50
FYR
UKR
MOL
40
KAZ
HRV
LIT
ARM
30
20
RUS
10
10
SLV
0
0
20
60
40
POL
20
70
50
BUL
TUR
30
80
40
60
80
Asset share of foreign-owned banks, %
100
0
120
Financial integration: policy
implications

Continue to integrate
– Only region in the world where financial integration
mostly worked the way it was supposed to

Manage risks and unintended consequences
– Take away the froth through tougher lending
standards, and use of macro-prudential
instruments
– Reduce FX liabilities via better macro institutions,
local currency market development, regulation.