Does foreign bank ownership in Emerging Europe mitigate or
exacerbate the country risks of these developing economies? A new
report by Standard & Poor’s titled “Friends in High Places?”
has attempted to answer this question.
The report publicised an aggregate measure used by
S&P to differentiate the extent to which, in the even of a
crisis, the parent banks’ financial strength and commitment to
their subsidiaries could offset a country’s contingent
liability.
Go deeper with GlobalData
Access deeper industry intelligence
Experience unmatched clarity with a single platform that combines unique data, AI, and human expertise.
Calling it the “contingent liability moderator (CLM)”, the
measure takes into account the likelihood of parent support and the
financial support of parent banks as indicated by their ratings.
The highest possible CLM factor attainable was 100 per cent.
In applying this, S&P found that Estonia and Czech Republic
both shared the highest factor of 54 per cent, indicating a lower
level of risk that foreign-owned banks could aggravate a situation
of capital flight. Meanwhile, Serbia scored the lowest CLM factor
of 7 per cent (results below).
Since the mid-1990s, foreign direct investment flows from
Western Europe into the region’s financial sector has expanded
dramatically. Banking groups such as Austria’s Unicredit Group and
Belgium’s KBC NV have invested heavily in the emerging economies of
Europe.
“Rapidly burgeoning stocks of domestic credit, fuelled in a
number of countries by subsidiaries of foreign banks, have
significantly increased the level of monetization in emerging
European economies,” S&P’s credit analyst Remy Salters said.
“This phenomenon is welcome, but it comes with an increased
potential cost of bank bailouts in the event of a financial system
crisis.”
US Tariffs are shifting - will you react or anticipate?
Don’t let policy changes catch you off guard. Stay proactive with real-time data and expert analysis.
By GlobalDataAlthough foreign ownership can sometimes restrain credit
expansion, as it did in the case of Poland, there is evidence that,
in some countries, foreign participation in the banking system has
helped fan the flames of already overheating economies and/or
exacerbated inappropriate economic policy mixes by funding
imbalances, S&P commented.
In several sovereigns, related capital account inflows have
partly financed large current account deficits. Should these
inflows from parent banks slow or reverse, a hard landing for the
economy could follow, it added.
“Although we believe the risk of parent bank withdrawal is
remote, a worst-case scenario could include balance-of-payment
difficulties and sharp currency depreciations,” Salters said. “This
in turn, would lead to multiple second-round costs for the
sovereign, including in some countries higher contingent
liabilities as unhedged foreign currency borrowing turns bad.”
CLM of emerging European economies, where 100% is the best CLM
attainable:
Estonia 54%
Czech Republic 54%
Lithuania 41%
Slovak Republic 33%
Croatia 26%
Poland 24%
Romania 22%
Latvia 21%
Hungary 20%
Bulgaria 18%
Serbia 7%
