Abstract
The banking landscape in the European transition economies (TEs) provides an excellent laboratory for evaluating the net benefit of foreign bank penetration in emerging market economies. The speed and depth of foreign bank entry into these countries is without historical precedent; high growth rates in retail lending, fuelled in some cases by foreign-exchange (FX)-denominated loans, preceded the global financial crisis in many TEs. The hybrid organisational form created by foreign banks acquiring controlling shares of formerly state-owned domestic banks during the bank privatisation process is a crucial ingredient to any analysis. A selective review of the empirical literature on banking in TEs indicates that parent banks treat greenfield subsidiaries as parts of an international portfolio, whereas they make a long-term commitment to their hybrids. In about half of the 10 countries considered in this article, some risk of contagion via the banking channel is identified from a structural analysis. Nonetheless, preliminary evidence suggests that the parent foreign banks maintained their commitment to the region in the midst of the recessions brought on by the global financial crisis.
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Notes
Details on the evolution of the banking sectors and the privatisation programmes in these 10 countries are found in Bonin et al. (2010). Barisitz (2008) provides a comprehensive analytical history of the first decade and a half of banking sector development in a somewhat larger group of transitioning economies.
In the literature, different terms are used for this type of foreign-owned bank, for example, takeover or acquisition. I use the term hybrid to distinguish this foreign-bank type from foreign greenfield banking operations. Bonin, Hasan and Wachtel (2005) distinguish foreign greenfield banks and privatized banks with strategic foreign owners to investigate the impact of privatization on bank efficiency in TEs.
A related concern was expressed regarding the bank privatization process, namely that foreign banks would buy up only the best-performing banks in TEs leaving the weaker banks to remain as wards of the state. Although some evidence of such cherry picking by foreign acquirers is found in early acquisitions, an endogenity problem makes this result difficult to establish because governments were offering the financially better state-owned banks earlier in their privatisation programmes.
Although Slovakia also appears to be ahead of the field in this respect, the number reported for 1995 includes the remaining vestiges of Czech bank holdings after the Velvet Divorce, hence it is not comparable to measures in the other countries.
All eurozone averages reported in this section are taken from RZB (2009).
Comparisons between TEs and eurozone averages ignore considerable differences in levels of economic development. To make a relative comparison among TEs, a correlation between the ratio of household loans to GDP and GDP per capita in 2008 is presented in RZB (2009, p. 12). In addition to the 10 countries considered in this article, the correlation exercise includes Ukraine, Albania, Bosnia and Hercegovina, and Belarus. In all, 4 of the 10 countries in Table 1, namely, Bulgaria, Croatia, Hungary, and Poland, lie above the correlation line indicating high retail financial depth relative to GDP per capita with respect to other TEs. Of the remaining six that fall below the line, Russia exhibits the lowest level of relative depth. Three of the EU5, namely Czech Republic, Slovakia, and Slovenia, also lie below the line, thus indicating less retail financial depth than would be expected given their levels of overall economic development.
Author's computations from country tables in RZB (2009); no data on mortgage loans are provided for Slovenia.
In 2008, the average ratio of mortgage loans to GDP was 16.9% in the EU5 compared to a eurozone average of 37.8% (RZB, 2009, p. 13). Hence, relative to overall economic activity, the mortgage market is considerably underdeveloped in all TEs compared to European countries.
These data were taken from RZB (2009, pp. 46ff). Ranked by total assets held in TEs, the Hungarian Orszagos Takarekpenztar es Kereskedelmi Bank (OTP) banking group would come in sixth, slightly above the Intesa Group, but the majority of its assets are in the parent bank in Hungary so that I have adjusted its total accordingly. As the first note to the table explains, I subtracted the home-country assets for OTP (and also for those of a Slovenian bank) from the total of foreign assets in preparing the shares reported in Table 2. OTP's major acquisition outside Hungary is DSK, the former state-owned savings bank in Bulgaria, with assets valued at 4.4 billion euros in 2008.
The UniCredit Group includes two formerly independent Austrian banks, namely Bank Austria and Creditanstalt, along with a former German bank, namely Hypervereins. These three banks had been early entrants into TE banking sectors as greenfield operations before their own acquisition by the Italian-based mother bank.
KBC acquired a minority ownership stake in Nova Ljubljanska Banka (NLB), the largest bank in Slovenia, in a privatisation tender. In 2008, KBC announced its intentions to sell its shares because the Slovenian government was unwilling to allow the Belgian bank to increase its stake to gain control of the bank. However, it still retains its stake in NLB, which was the only Slovenian bank to participate in recent European stress tests. According to a recent news release (Reuters, July 30, 2010), the bank passed the test narrowly but has plans to seek additional capital. The same source claims that the Slovenian government has not yet decided whether to inject the capital itself or sell some of its shares. However, based on a Slovenian newspaper citing unofficial government sources, the article reports that Goldman Sachs has an interest in acquiring NLB and that the Slovenian government would now approve a takeover by KBC. Perhaps a bidding war is in the offing.
The increase in Bulgaria was smaller as 48.2% of total loans were denominated in FX in 2004. In Croatia, FX lending as a proportion of total loans actually decreased somewhat in 2008; this ratio was 69.5% for 2006, which is the first year of reported data in RZB (2009).
Poland did experience about a 40% increase in the proportion of FX lending over the 4-year period as this measure was 24.2% in 2004. Neither exposure ratio is high in the Czech Republic. Slovakia joined the eurozone in 2009 mitigating concerns about its FX exposure.
During this period, the Croatian National Bank imposed restrictions on credit growth. In addition, Croatia was able to raise capital successfully in international markets twice in 2009 (Sanfey, 2010, p. 10), thus indicating that its high FX exposure may be manageable.
Two countries, Slovakia and Slovenia, are now members of the eurozone; as such, they are left out of this discussion.
The relatively high level of FX reserves in Bulgaria support its currency board monetary arrangement making any interpretation of FX risk for this country more complicated.
The increase in the fiscal deficit as a percent of GDP is relatively small in Hungary because of an austerity programme required by the IMF support package of 2008.
In early 2009, Serbia and Romania received considerable IMF support.
I am indebted to Paul Wachtel for calling this point to my attention.
Regarding the overall structure of these banking sectors, the five-bank concentration ratio, computed as the top five banks holdings of total banking assets, ranges from 45% in Russia to 74% and 72% in Croatia and Slovakia, respectively with six of the countries having a measure between roughly 50 and 60%.
In Hungary, the largest bank (OTP) is a widely held bank with foreign portfolio investment but no strategic (controlling) foreign owner; in Poland, the largest bank Powszechny Kasa Oszczednosci – Bank Panstwowy (PKO) remains a state-owned bank.
These authors also investigated both a home country's exposure to the region relative to its total foreign claims and the overall importance of such cross-border banking in TEs to the home (rather than the host) country. They found that Austria is the most important creditor country to the region with an exposure equal to 49% of total foreign claims constituting a remarkably high 70% of own GDP. For non-Baltic TEs, the results in descending order of exposure to the region (with the percentage of home-country GDP in parentheses) are Italy 13.6% (9.1% of GDP); Germany 13.1% (6% of GDP); France 8.9% (5.3% of GDP); and Belgium 7.5% (26.3% of GDP). Their analysis confirms the Baltic ring fence with Sweden. As an additional concern, they found that home country portfolios are relatively undiversified with usually more than 50% of claims found in only three host countries. Austria, the largest creditor to the region, has the most diversified portfolio with only 46.5% in the top three host countries.
The UniCredit analysts present a correlation between the ratio of non-performing loans to the minimum GDP growth rate (maximum contraction) both for past financial crises with their resulting recessions and for the current recession in a group of emerging market economies and TEs. They conclude that credit quality held up reasonably well in the recent crisis (UniCredit, 2010, p. 9).
Popov and Udell (2010) have a more pessimistic view of the situation based on their analysis of the other side of the credit market. Using EBRD survey data for 2008 from companies in 14 TEs (EU10 plus Albania, Croatia, Macedonia, and Montenegro), these authors found evidence that SMEs, in particular, are severely credit-constrained. Moreover, their empirical analysis showed that foreign banks are more apt to transmit financial shocks to the real sector than are domestic banks. I thank Paul Wachtel for bringing this article to my attention.
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Acknowledgements
For many useful discussions and for their valuable contributions to my thinking about this material over the past year, I am extremely grateful to Istvan Abel, Ralph De Haas, and Paul Wachtel. I thank Julia Kiraly, Evan Kraft, Roman Matousek, and Koen Schoors for their helpful comments and suggestions along the way. An earlier version of this work was presented as the Keynote Address at the conference ‘20 Years of Transition in Central and Eastern Europe: Money, Banking and Financial Markets’ sponsored by London Metropolitan University in September 2009. This article is based on my Presidential Address to the Association for Comparative Economic Studies at the annual meeting in Atlanta, GA, USA in January 2010. I have incorporated questions and comments from participants at both presentations in this final version; I am grateful for their contributions. All remaining errors of commission and omission are my sole responsibility. Finally, I express my sincere gratitude to the editors for their encouragement to complete this article and their patience with and understanding of my delays.
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Bonin, J. From Reputation amidst Uncertainty to Commitment under Stress: More than a Decade of Foreign-Owned Banking in Transition Economies. Comp Econ Stud 52, 465–494 (2010). https://doi.org/10.1057/ces.2010.22
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DOI: https://doi.org/10.1057/ces.2010.22