Financial Markets: Banks and Capital Markets

Abstract

This chapter provides an overview of the financial markets in the Emerging European Economies. The financial systems of these countries are less deep and less advanced than those of the more developed countries of the European Union. Generally, the lag is more substantial in capital markets. Nevertheless, due to the significant foreign ownership of all eight countries’ financial sectors, they are highly integrated into the EU’s financial markets. As the activity of financial market participants seriously contributed to the Global Financial Crisis (GFC), and several financial institutions failed during this period, after the crisis, the approach to and the tools of banking and capital markets regulation, as well as the business practice of financial institutions changed significantly. The capital base and the funding structure of banks became significantly more robust. However, the process of re-regulation and the strengthening of the financial system had not yet been fully completed when the Covid-induced financial crisis hit the financial system. On the one hand, this means that the banking system was not fully equipped with all the necessary tools to be able to absorb shocks. On the other hand, the Covid-related crisis management, which included the widespread use of the loan repayment moratorium, regulatory forbearance, direct state grants to non-financial companies and private persons, and monetary easing, significantly relieved the banks’ burdens and contributed to the fast recovery of capital markets. The chapter analyses the post-GFC structural changes to financial intermediation in the EEE, and the main regulatory changes, risks, and vulnerabilities of the financial systems of the region in two periods: between the GFC and Covid, and during the Covid pandemic.We find that besides similarities, country specific factors play a major role, that is, the EEE do not constitute a homogenous region from the point of view of financial markets.