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Impact of Foreign-Owned Banks on Financial Stability

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Foreign-Owned Banks

Part of the book series: Studies in Economic Transition ((SET))

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Abstract

This chapter characterizes the stability of banking sectors in the CESEE countries before, during, and after the global financial crisis, while focusing on the role played by foreign-owned banks. The starting point is the analysis of the impact of the crisis in the region, as well as the policy and regulatory responses aimed at containing the effects of materialization of systemic risks and contagion from parent banks. Further, focus is put on potential measures of financial stability in the banking sector from both theoretical and empirical perspectives of the CESEE countries. The last part of the chapter includes an empirical investigation of the factors which determine banking sector’s stability in the CESEEs and the potential role of foreign-owned banks.

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Notes

  1. 1.

    Impavido et al. (2013) also notes that excessive euroization of the economy may impair the conduct of monetary policy and emergency liquidity assistance function of the central bank, so it needs to be accompanied by a large volume of foreign reserves to prevent balance of payment crises.

  2. 2.

    Net foreign assets are the sum of foreign assets held by monetary authorities and deposit money banks, less their foreign liabilities.

  3. 3.

    Loan-to-Value—the ratio of the amount of the loan to the value of the collateral.

  4. 4.

    Debt-to-Income—the ratio of the amount of debt arising from loans to disposable income (e.g. expressed in monthly terms).

  5. 5.

    For example, Belarus, Bosnia and Herzegovina, Hungary, Latvia, Romania, Serbia, and Ukraine.

  6. 6.

    In Hungary and Poland, Latvia and Estonia.

  7. 7.

    The IMF and European Commission in 2008–2009 offered stabilization programmes to countries that were worst-hit by the financial crisis, that is, Latvia, Romania, Serbia, Bosnia and Herzegovina, Hungary, Belarus, Ukraine. The main aim was to enable those countries to continue servicing external debt when faced with increasingly unbalanced external position and significant current account deficits. The rollover of their external debt during the GFC came under pressure, as a major part of this debt was held by multinational parent banks. Some of the parent banks agreed—via commitment letters—to maintain their exposures and capitalize the subsidiaries over the programmes’ effective periods.

  8. 8.

    CESEEs with floating, managed float or crawling peg include, for example, AL, PL, CZ, MD, RO, SR, HU, and HR.

  9. 9.

    CESEEs with pegs or currency boards include, that is, LT, BG, EE, LV, Bosnia-Herzegovina and Montenegro, Macedonia. LV and LT joined the euro zone in 2014 and 2015, respectively.

  10. 10.

    The list provided in De Haas et al. (2015).

  11. 11.

    CAR (capital adequacy ratio)—ratio of bank’s capital to risk-weighted assets.

  12. 12.

    ROA (return on assets)—ratio of banks net profit to total assets.

  13. 13.

    NPL (non-performing loans) —ratio of NPL to total loans.

  14. 14.

    Those include the ratio of banks’ claims on the economy to GDP; the ratio of average price of a square metre of residential real estate in the city of Minsk to average wages; the ratio of ruble money supply M2 to gold and foreign exchange reserves; the ratio of foreign trade turnover to domestic foreign exchange market turnover; terms of lending (the indicator calculated as the ratio of the average term of lending to average interest rate); bank leverage; the ratio of value of shares issued by organizations to the revenues from sale of products produced thereby; the ratio of value of government securities circulating in the domestic market to the consolidated budget revenues; and the ratio of banks’ interest revenues under transactions with natural persons to households’ monetary incomes.

  15. 15.

    We collected the bank-level data from the Bankscope database. For the panel modelling, we use country-level data collected from the World Bank database, central bank websites, the IMF database and hand-collected data.

  16. 16.

    We do not calculate the indices for banks or banking groups operating in several CESEE countries because we are not able to grasp intragroup transactions, especially with the parent company; therefore, each bank is included separately.

  17. 17.

    An attempt to assign different weights (ranging from 0.1 to 0.25) to the five financial ratios yields comparable results.

  18. 18.

    We use country-level groups of variables which we assume are linearly correlated, while we assume that the proportion of variance described by each extracted factor is time-constant. We differentiate each group by the type of bank ownership. Following Kaiser-Guttman’s rule, we retain only those characteristics with eigenvalues greater than 1. The authors would like to thank Karol Rogowicz for his valuable assistance.

  19. 19.

    In additional estimations we also included a crisis dummy. Its impact on both dependent variables was not statistically significant. Those results are available from the authors on request.

  20. 20.

    The FSN index methodology is available as attachment to Iwanicz-Drozdowska et al. (2017).

  21. 21.

    Subsidiaries often sold were the ones which accounted for significant shares in their groups’ profits. Examples include the sales of (or sale of stakes in): JSC Swedbank (UA) by Swedbank in 2013; BZ WBK (PL) by KBC/Santander in 2013; KBC Serbia (RS) by KBC and Societe Generale in 2013; NLB (SI) by KBC in 2013; Erste Bank Ukraine (UA) by Erste in 2013; Santander Consumer Bank (PL) by Santander in 2014; Nordea Bank Polska S.A. (PL) by Nordea in 2014; Sberbank Slovensko (SK) by Sberbank Europe AG in 2015; CitiBank HU (HU) by CitiBank in 2015; Volksbank Romania S.A. (RO) by Österreichische Volksbanken-AG in 2015; Raiffeisen Banka (SK) by Raiffeisen Bank International AG in 2016; Splitska banka (HR) by Societe Generale in 2017; Bank Pekao (PL) by UniCredit in 2017; VS Bank (UA) by Sberbank Europe AG in 2017; Bancpost S.A.(RO) by Eurobank Group in 2018.

  22. 22.

    Among the CESEEs, Estonia, Latvia, Lithuania, Slovakia and Slovenia are members of the euro area, while Kosovo and Montenegro have officially adopted the euro as their sole currency through euroization (in 2002).

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    Małgorzata Iwanicz-Drozdowska, Paweł Smaga & Bartosz Witkowski

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Iwanicz-Drozdowska, M., Smaga, P., Witkowski, B. (2018). Impact of Foreign-Owned Banks on Financial Stability. In: Foreign-Owned Banks. Studies in Economic Transition. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-01111-6_5

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