Financial Stability Assessment for EU Candidate Countries and Potential Candidates

68 Pages Posted: 16 Sep 2019

See all articles by Mariarosaria Comunale

Mariarosaria Comunale

Bank of Lithuania - Economics Department

André Geis

European Central Bank (ECB)

Ioannis Gkrintzalis

European Central Bank (ECB)

Isabella Moder

European Central Bank (ECB)

Eva Katalin Polgar

European Central Bank (ECB)

Li Savelin

European Central Bank (ECB)

Date Written: September, 2019

Abstract

This paper reviews and assesses financial stability challenges in countries preparing for EU membership, i.e. Albania, Bosnia and Herzegovina, Kosovo, Montenegro, North Macedonia, Serbia and Turkey. The paper mainly focuses on the period since 2016 (unless the analysis requires a longer time span) and on the banking sectors that dominate financial systems in this group of countries. For the Western Balkans, the paper analyses recent trends in financial intermediation, as well as the two main challenges that have been identified in the past. Asset quality continues to improve, but the share of non-performing loans is still high in some countries, while regulatory, legal and tax impediments are still to be resolved in most cases. High unofficial euroisation is a source of indirect credit risk for countries with their own national legal tender, which calls for continued efforts to promote the use of domestic currencies in the financial system. At the same time, banking systems seem less prone to financial stress from maturity mismatches than certain EU peers. These risks are met with a solid shock-absorbing capacity in the Western Balkans, as exemplified by robust capital and liquidity buffers. Turkey experienced a period of heightened financial stress during 2018 and, while its banking system appears to have sufficient buffers to absorb shocks overall, significant forex borrowing of corporates and high rollover needs of banks in foreign exchange on the wholesale market constitute considerable financial stability risks.

Keywords: Banking sector, credit growth, EU accession, financial stability, foreign exchange lending, non-performing loans, Turkey., Western Balkans

JEL Classification: F31, F34, F36, G15, G21, G28

Suggested Citation

Comunale, Mariarosaria and Geis, André and Gkrintzalis, Ioannis and Moder, Isabella and Polgar, Eva Katalin and Savelin, Li, Financial Stability Assessment for EU Candidate Countries and Potential Candidates (September, 2019). Available at SSRN: https://ssrn.com/abstract=3454510 or http://dx.doi.org/10.2139/ssrn.3454510

Mariarosaria Comunale (Contact Author)

Bank of Lithuania - Economics Department ( email )

Totoriu 4
Vilnius, LT-01121
Lithuania

André Geis

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Ioannis Gkrintzalis

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Isabella Moder

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Eva Katalin Polgar

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Li Savelin

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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