manfred schepers presentation

How to avoid another serious financial crisis:
Harnessing the benefits of
financial integration
Manfred Schepers, Vice President Finance, EBRD
1
CEE financial integration has
supported growth….
 Financial integration was a
successful growth strategy.
 Different for CEE vs other
emerging markets where this
link has been weak.
 EU framework, accession, €
area and commitment of
foreign banks explain this.
 In crisis parent banks
supported subsidiaries and
maintained exposures and
capital coverage.
Asset share of foreign-owned banks
in total banking system assets
Per cent
100
80
CEB
EEC
Turkey
SEE
Russia
CA
60
40
20
0
1998
2000
2002
2004
2006
2008
2
… though also instigated vulnerabilities.
 Foreign banks’ role in the CEE
region contributed to macro
and financial vulnerabilities
especially FX exposures.
Domestic bank credit in
foreign currency (% of GDP)
100
90
80
70
60
50
40
30
20
10
Mitte 2008
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 Stock of private sector FX debt
currently holds back the
recovery today.
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 Excessive credit growth was
linked to global credit growth
and competition for market
share.
3
Local Currency and
Capital Market Development
 To reduce systemic risks associated with FX lending to
unhedged borrowers
 Removes key vulnerability that impacts bank funding and valuation
 Enhances monetary policy effectiveness, and scope for countercyclical use of exchange rate instrument
 Encourages domestic saving and investment
 Good for sustainable growth
 Good for external stability
•
less reliance on foreign funding
•
less external debt accumulation
 Part of the quest for a better “growth model” reliant on
more resilient funding and capital structures.
4
Opportunity for policy action
 Post-crisis convergence across the CEE region
 Vulnerabilities resulted from FX lending as well as poor information
standards and credit assessment
 Unsustainable external imbalances now widely recognised
 NOT a detour for eventual euro zone members
 Post-crisis macro conditions make local currency a more
rational proposition
 Narrowing interest rate differential vis-à-vis FX lending rates
 Regulators forcefully addressing FX lending
 Creates a new demand for LCY lending which cannot be satisfied
without domestic capital markets development
 Insurance and pensions industry positioned for growth
5
Overall coordinated approach is needed
 Governments need to focus on all factors that prevent
development of local currency & capital markets
 Histories of inflation volatility and lack of macroeconomic credibility
will take time to redress
 Need to address inadequate market CM infrastructure, and
lengthen maturity structure and liquidity of sovereign debt markets
 Commercial banks:
 Differentiate lending standards, taking account of FX risk
 Engage more actively across all aspects of LCY capital market
 International Financial Institutions:
 To help through lending, investment and funding activities, making
local markets more liquid, transparent and resilient
6