Financial Stability Challenges for EU Acceding and Candidate Countries: Making Financial Systems More Resilient in a Challenging Environment

86 Pages Posted: 2 Nov 2012

See all articles by Roland Beck

Roland Beck

European Central Bank (ECB)

Daniela Pulst

European Central Bank (ECB)

Gundars Ostrovskis

European Commission, DG MARKT

Sam Langfield

European Central Bank

Stoyan Manolov

Bulgarian National Bank

Stefanie Evdjic

Deutsche Bundesbank

Ramona Jimborean

Banque de France

Emidio Cocozza

Bank of Italy

Mariya Stankeva Hake

Oesterreichische Nationalbank (OeNB)

Piotr Macki

National Bank of Poland

Alexandre Francart

National Bank of Belgium

Horatiu Lovin

National Bank of Romania

Marianna Cervena

National Bank of Slovakia

Date Written: September 12, 2012

Abstract

This Occasional Paper reviews financial stability challenges in countries preparing for EU membership with a candidate country status, i.e. Croatia (planned to accede to the EU on 1 July 2013), Iceland, the former Yugoslav Republic of Macedonia, Montenegro and Turkey. It follows a macro-prudential approach, emphasising systemic risks of financial systems as a whole. After recalling that some EU candidate countries went through a pronounced boom-and-bust credit cycle in recent years, the paper identifies current challenges for the bank-based financial sectors as mainly stemming from: (i) high or rising domestic credit risk; (ii) unhedged borrowing in foreign currencies; and (iii) strains related to the euro area debt crisis, which is impacting the EU candidate countries via a number of channels. The main channels of transmission of the euro area debt crisis to the EU candidate countries operate via: (i) trade and foreign direct investment; (ii) an increased market focus on sovereign risk; and (iii) “deleveraging”, e.g. via a decline of external funding to local subsidiaries of EU parent banks. A macro-stress-test exercise performed by the national authorities of the EU candidate countries in February 2012 suggests that large capital buffers can absorb a shock to credit quality stemming from a drop in economic activity in the EU and renewed strains from the euro area debt crisis. With respect to supervisory practices, the paper finds that the EU candidate countries have made good progress, but some gaps with respect to international and EU standards remain.

Keywords: Europe, banking sector, vulnerability indicators, macro-prudential approach, emerging markets, macro stress test, deleveraging, foreign currency lending

JEL Classification: F32, F41, G21, G28

Suggested Citation

Beck, Roland and Pulst, Daniela and Ostrovskis, Gundars and Langfield, Sam and Manolov, Stoyan and Evdjic, Stefanie and Jimborean, Ramona and Cocozza, Emidio and Stankeva Hake, Mariya and Macki, Piotr and Francart, Alexandre and Lovin, Horatiu and Cervena, Marianna, Financial Stability Challenges for EU Acceding and Candidate Countries: Making Financial Systems More Resilient in a Challenging Environment (September 12, 2012). ECB Occasional Paper No. 136, Available at SSRN: https://ssrn.com/abstract=2145433

Roland Beck (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Daniela Pulst

European Central Bank (ECB)

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Gundars Ostrovskis

European Commission, DG MARKT ( email )

Rue de la Loi 200
Brussels, B-1049
Belgium

Sam Langfield

European Central Bank ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Stoyan Manolov

Bulgarian National Bank ( email )

str "St. Sofia" 5
Sofia, 1040
United States

Stefanie Evdjic

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Ramona Jimborean

Banque de France ( email )

Paris
France

Emidio Cocozza

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Mariya Stankeva Hake

Oesterreichische Nationalbank (OeNB) ( email )

Otto-Wagner-Platz 3, PO Box 61
Vienna,
1010 Vienna, A-1011
Austria

Piotr Macki

National Bank of Poland ( email )

00-919 Warsaw
Poland

Alexandre Francart

National Bank of Belgium ( email )

Brussels, B-1000
Belgium

Horatiu Lovin

National Bank of Romania ( email )

Bucharest
Romania

Marianna Cervena

National Bank of Slovakia ( email )

Imricha Karvasa 1
813 25 Bratislava
Slovakia

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